THE BLOG

30
Nov

The Third P: Process

Cropped shot of four designers in a business meetinghttp://195.154.178.81/DATA/i_collage/pi/shoots/784296.jpg

Content provided by Rusty Vanneman CFA, CMT, CLS Chief Investment Officer

In previous commentary, I wrote about the “Five Ps” of the money manager’s due diligence process: People, Philosophy, Process, Positioning, and Performance — in that order.

Each of the Five Ps should be addressed by the person selecting an investment advisor. Ultimately, it’s about understanding and being comfortable with how a portfolio or strategy should behave over time (recognizing, of course, that no strategy works all the time). The key is to never be surprised.

Before I came to CLS in 2012, I spent my career in Boston either on or managing high-performing teams building global, multi-asset portfolios of mutual funds (and ETFs). To do my job, I interviewed portfolio managers (PMs) from across the country. So far, I have conducted well over 2,000 interviews during my career.

My task was to identify managers and funds that could be confidently used for clients and shareholders. After doing the due diligence, did I trust the managers? Respect them? Like them? In that order. As a side note, liking them was the least important, although we did need to have a decent working relationship. Ultimately, the question I asked myself was: Did I understand how the portfolios they managed should behave?

As the Chief Investment Officer of CLS, I recognize the importance of each P and the consistent messaging to our clients and shareholders about what we do and how we do it. Like me, and the managers I selected, my clients shouldn’t be surprised by what we’re doing.

In past articles on this blog, I discussed People and Philosophy. Here I will address the next P: Process, and how CLS conducts its investment process.

The investment process is essentially about these elements:

  1. What is the investment universe?
  2. How are portfolios built?
  3. How are securities selected?
  4. How is risk managed?
  5. How are our thinking and actions communicated?
  6. What’s the edge to perform and help investors succeed?

Let’s briefly review each of these questions as they pertain to CLS.

What is Our Investment Universe?

At CLS Investments, we build a variety of portfolios using all kinds of securities. Our preference is to use exchange traded funds (ETFs) due to their low costs and dependable market exposures. ETF analysis and management is our core analytical competency. We are indeed one of the largest ETF strategists (a money manager that builds portfolios with at least 50% ETFs) in the country.

That said, we have also managed mutual fund portfolios for nearly three decades, including American Funds’ portfolios for the last nearly 20 years. Lastly, we construct portfolios using individual stocks and bonds. As a global, multi-asset money manager with 13 people on staff, half with Chartered Financial Analyst ® credentials, we have the capabilities to cover every investment universe.

How are Portfolios Built?

At CLS, we put tremendous effort into portfolio construction. At the heart of our portfolio management process is Risk Budgeting, which means that we build all portfolios to a risk target. This qualifies CLS as a strategic manager since we manage to a target. The way we differ from other strategic managers, however, is that we manage to a target risk level instead of a target asset allocation (how much should be invested in stocks, bonds, or cash).

Though we are strategic, we are not a buy-and-hold manager. We are an active manager, meaning our portfolios will differ from the overall market as we adjust for changes in risk and return expectations.

Many strategies at CLS are managed by checklists, i.e., some portfolio management teams manage funds using a checklist to ensure the portfolios are achieving certain attributes versus various benchmarks and peer groups. It also means portfolios are being monitored and managed by factor-based analysis, which is another overlay of risk management on top of Risk Budgeting.

How are Securities Selected?

Securities are selected by examining various risk and return characteristics. Risk statistics we monitor include beta, relative risk, drawdown risks, and correlations. These are important inputs in the Risk Budget scores, but we also look at additional risk characteristics.

As for return expectations, we look at a variety of statistics that fall under five categories: economics, fundamentals, valuations, technicals, and quantitative. Each plays a role in the formation of the CLS Score, which is our proprietary expected return methodology.

Lastly, in an effort to improve overall investment team efficiency, and yet provide deeper research, we have split the entire investment team into four analytical teams called BACE (Broad Asset Class ETFs), which cover: domestic equities, international equities, fixed income, and alternatives. The PMs therefore no longer have to be responsible for deep research on each and every ETF selection in their respective portfolios. Instead, they can now lean on the BACE team to pick the most appropriate ETFs. Each BACE team creates a buy list to help facilitate ETF selections.

How is Risk Managed?

Risk management is crucial in managing today’s investment portfolios. We implemented Risk Budgeting more than 15 years ago, but we conduct much more risk management these days, including the aforementioned factor-based analysis and various stress tests. We also constantly monitor the portfolios on a variety of risk measures to make sure we’re seeing them from every angle.

How Do We Communicate?

Helping investors succeed requires more than manufacturing a rate of return. It also requires communication. At CLS, we create commentary on a daily basis. We write commentary not only for our internal audiences to make sure everybody is confident and consistent in our messaging, but also in various external outlets, including, of course, clsinvest.com and various industry publications. Our social media efforts are also strong, ranking tops among ETF strategists. We create podcasts, videos, and webinars, and we often go on the road to talk to advisors and investors. All of this is done to explain the markets and our thinking. We also need to explain the whys and hows of our portfolio behavior. Investors need to understand how their investment portfolios are going to behave. Again, surprises aren’t good.

What’s the Edge?

At CLS Investments, we believe we have various edges:

  • Risk Budgeting not only helps us manage global, multi-asset portfolios more effectively, we think it’s a great way to help manage investor long-term return expectations. For example, a portfolio with a Risk Budget score of 50 not only means its risk should be 50% of a globally diversified equity portfolio but its long-term returns should approximate that too.
  • Our portfolios asset allocations are not only managed differently than most of our competition, our holdings look different as well. We are one of the industry’s leading users of smart beta ETFs.
  • We are known for accessibility to senior management and to the portfolio management teams. The Investment Team, for instance, spends about 25% of its time dedicated to communication, education, and client service. And again, as an ETF strategist, our social media efforts are usually at the top, or near the top, within our field.
  • We’ve been around since 1989. We have decades of experience.
  • Our investment team is made up of 13 people, which includes seven that hold the CFA®.

In summary, we believe the way we manage money and communicate what we’re thinking and doing gives us an edge to perform and provides the necessary confidence for our clients to succeed.

Thanks for reading. Stay balanced.

 

The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change.  No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report.  You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed here and should understand that statements regarding future prospects may not be realized.  You should note that security values may fluctuate and that each security’s price or value may rise or fall.  Accordingly, investors may receive back less than originally invested.  Past performance is not a guide to future performance.  Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.

A client’s Risk Budget is derived from the client’s specific answers to CLS’s Confidential Client Profile questionnaire, which establishes the client’s financial goals, ability to handle risk, and overall investment time horizon. The individual client Risk Budget is expressed as a percentage of the risk of a well-diversified equity portfolio.

An ETF is a type of investment company whose investment objective is to achieve the same return as a particular index, sector, or basket. To achieve this, an ETF will primarily invest in all of the securities, or a representative sample of the securities, that are included in the selected index, sector, or basket.  ETFs are subject to the same risks as an individual stock, as well as additional risks based on the sector the ETF invests in.

2537-CLS-10/24/2016

29
Nov

How to Enhance Your New Account Workflow

enhance your new account workflow

It's simple to enhance your new account workflow in Orion Connect when you implement the right integration setup for paperless account opening.

The post How to Enhance Your New Account Workflow appeared first on Orion Advisor Services.

23
Nov

California Dreaming… About American Funds

A group of young and old malibu (longboard) surfers about to go surfing at sunrise.

Content provided by Grant Engelbart, CFA, CAIA, CLS Portfolio Manager

Sunny Southern California: surfers, palm trees, mountains, ocean views – hardly the setting you would expect to find one of the oldest money managers in the U.S. But, tucked away in a tall, downtown Los Angeles office building bearing the name of a different U.S. financial institution resides Capital Group. Sound familiar now? Not likely. Notoriously private, Capital Group is the parent company for the American Funds family of mutual funds. Capital Group’s influence doesn’t end there. The 85-year-old company was nearly the first to launch a mutual fund and has had a huge influence on the mutual fund industry, (for example, it helped create 12(b)-1 fees to encourage long-term investing). Capital has spawned such top-notch entities as Sequoia Capital (a private equity firm backing just about every top-notch technology company), PRIMECAP Odyssey Funds (one of the advisors for Vanguard’s actively managed funds), and MSCI (Capital International (CI), developed the EAFE index).

Recently, several of us at CLS had the privilege to visit this prestigious organization to learn more about its philosophy and culture. Capital Group focuses on achieving excellent results over the long term for three key constituencies: clients, associates, and owners. These three often blend together as many associates and managers invest in their own funds (often enormously) and have ownership stakes in the business. Over the past 15-years, more than 60% of the American Funds rank in the top 25% of their respective categories, with more than a third of the funds in the top 10%. Over longer periods of time, the results are even better.

Our experience further validated what we already knew: We are partnering with one of the most elite fund managers out there.

At CLS, we strive to diversify clients across the wide variety of American Funds available, beyond just those that are well known or have been sold to investors previously. There are many great American Funds available, and we like to take advantage of all of them rather than just the largest. We also want to maintain a similar long-term focus that the analysts and portfolio managers at Capital take, and ensure that our trading and turnover is a complement rather than a deterrent.

CLS’s operational value-add is extensive as well. From supporting systematic withdrawals, required minimum distributions, Risk Budget changes, statements, client reviews, and now transitioning certain low cost basis assets, we are available in a number of ways to help clients. Most importantly, we keep risk consistent across portfolios even if the risk of the American Funds we utilize changes. Our proprietary Risk Budget system has been in place for more than 15 years, and we couple our methodology with a vast array of additional statistics.

We build portfolios of Capital Group’s funds – the American Funds – however, Capital Group should serve as a model for all investment managers to strive for excellence in all areas of their business.

Charles Ellis’s excellent book “Capital: The Story of Long-Term Investment Excellence” had a strong influence on the content and message of this blog post.

 

CLS is not affiliated with any of the companies listed above. While some CLS portfolios may contain one or more of the specific funds mentioned, CLS is not making any comment as to the suitability of these, or any investment product for use in any portfolio.

2609-CLS-11/2/2016

23
Nov

Take the Billing Checkpoint Ascent Course Now

Up your education with this week's blog on the Bill Generator app, and then take the Billing Checkpoint Ascent course now in Orion Connect.

The post Take the Billing Checkpoint Ascent Course Now appeared first on Orion Advisor Services.

22
Nov

Look into the Future with the Bill Generator app

Bill Generator app

Run your own advisory fee billing in Orion, and look ahead with the new forecast bills feature. It's all available in the Bill Generator app.

The post Look into the Future with the Bill Generator app appeared first on Orion Advisor Services.

18
Nov

Financial Psychology 101

Shot of a young male teacher giving a lesson to his students on the lecture hall

Content provided by Kostya Etus, CFA, CLS Portfolio Manager

Psychology and human behavior are some of the most interesting and challenging aspects of financial management. Understanding the motivations behind a client’s behavior and how to effectively encourage him or her to develop healthy financial habits can mean the difference between success and failure for our clients — and ourselves.

Recently, I attended a wealth management conference and picked up a few tips on financial psychology. While most of these deal with client and financial advisor interactions, they can be used in other situations. I have actually tested some out on my wife in our conversations about finances (which in the past have not ended well), and they work!

  • Create a relaxed atmosphere.

A desk between you and a client creates stress, so use a living-room-type setting for a better conversation. Also, scrolling tickers (such as those on CNBC or ticker boards) create anxiety, so turn them off.

  • Develop an open rapport.

This can be facilitated through body language: an open posture, smiling, eye contact, mirroring (do what they do, talk like they talk). Basically, do what you would do while flirting at a bar (well, not exactly what you would do).

  • Remember, people don’t change.

Those who are married know this pretty well. Don’t try and force people to change their spending and saving habits. Telling someone they spend too much is discouraging. And, they probably already know they spend too much, which is why they are talking to you. Help them adapt, and guide them to want to do it themselves (e.g. help them visualize something to save for).

  • Don’t pepper people with questions.

Questions can sound like accusations (“Why did you spend so much last month?”) and create more stress and resistance. Use “tell me more” statements to decrease resistance. For example, if someone says, “I spend too much, and I don’t think I save enough for the future” (the two most common client concerns), you respond with: “Tell me…

  • …what happened to make you feel things need to change.”
  • …about a time when you have successfully faced a challenge like this.”
  • …what you are ready to do now.”

These statements help convey a sense of importance, confidence, and readiness.

  • Other best practices:
    • Wear glasses: They make you look smarter and build confidence.
    • Lower your voice tone: A higher tone is perceived as aggressive.
    • Give a drink and take a drink (water, of course): It helps people relax.
    • Show and tell: Use pictures and graphs (preferably ones that start at the bottom left and end at the top right), use stacks of coins or dollars to represent growth, and use real numbers to show outcomes (exact dollar amounts that need to be saved and at what age).
    • Visualization: Help the client visualize an ideal retirement that is personalized to him or her (the dream is not a drink with an umbrella on a beach for everyone). Effective visualization can lead to more saving.

The conference had loads of other useful insights. Here are a few of the most helpful:

  • Count your cash.

People feel better when they are counting how much money they have (give it a shot, take out your cash and count it) but worse when counting expenses. A useful application here might be: Don’t try to figure out how to reduce expenses by counting up credit card transactions.

  • “Save more” might make us spend more.

Marketing slogans and signs that highlight saving actually promote spending. For example, Walmart’s “Save Money. Live Better.” slogan encourages customers to spend more because they believe they have saved. So simply telling clients to “save more” is not going to be very effective.

  • Don’t trust your primal brain.

99% of brain function is automatic; it works off primal instincts. For example, when people go to conferences, they typically sit as far to the back as possible. That is a subconscious decision, which has been engraved in our DNA over thousands of years: we want to be closest to the exit in case a predator appears. But when handling money, we shouldn’t rely on our instincts. We should use the logical portion of our brains. Well, the logical portion of our brains shuts down when we are stressed. So, don’t discuss finances after a hard day.

  • Watch out for the tribal effect.

The follow-the-herd mentality can be a powerful urge. Our primal instincts tell us if we are away from the herd too long, we will die. So if investors see their friends making money on a hot stock or by flipping houses, they might think they should be doing the same thing — another example of when it’s not a good idea to trust our instincts (especially when dealing with investments).

  • Be your own person.

Most people manage money the way their parents did. For example, if someone lived through the Great Depression and lost all their money in the bank, they would have a strong aversion to putting money in the bank, and that could be passed down to their children. As times change, we all need to be open to new ideas and not tied down by old beliefs.

  • Cash decreases spending.

Credit card companies have gone above and beyond to ensure that nobody uses cash anymore. When you have cash, it is something physical that you can use up; credit cards (or mobile phone transactions) make you feel like you have no limit. That said, the decrease in the use of cash seems to have contributed to a decrease in crime over the last two decades.

I hope you found this useful and can utilize some of these tips and tricks in your personal and professional lives. Thanks for reading.

2668-CLS-11/15/2016

17
Nov

Can Technology Help You Scale?

It's a big question: Can technology help you scale? We think so, and in today's Orion Weekly we look at ways it can help, including our new billing app.

The post Can Technology Help You Scale? appeared first on Orion Advisor Services.

15
Nov

Summer Doldrums?

Woman relaxing with music in hammock

Content provided by Marc Pfeffer, Senior Portfolio Manager

In a weekly back in June I wrote about how the Fed would be on hold until at least September. Brexit was still fresh in everyone’s minds, and the payroll data had turned surprisingly weak at least for a month.

Although the markets never sleep, the summer doldrums were setting in. For me, it was a great time to catch up on some of the musical acts that I loved as a kid. I got to see Billy Joel, Dave Matthews, Paul McCartney, and Bruce Springsteen. What made those shows even more fun was my kids loved them too. Watching my daughter’s face during the classic songs, some of which are older than I am, and then analyzing them like I would an ETF was really cool. Another thing I appreciated was the musicians’ passion to do what they love. None of them need the money, yet they continue to travel the world and please audiences because being a musician is part of their identity.

It’s the same for me and the markets. Nothing pleases me more than the first Friday of every month when the payroll numbers are released or a juicy CPI number comes out to get the juices flowing. The economic essential becomes my playlist, and hopefully that excitement stays with me as long as the music stays inspiring for someone like Paul McCartney.

While I hate to see the end of the warm weather, I am more excited for the market activity to pick up again and continue my playlist as long as possible.

2591-CLS-11/1/2016

15
Nov

Using Technology to Grow Your Business

technology to grow your business

Using technology to grow your business can be one of the best ways to scale and prepare for future growth. Today's blog covers ways you can plan ahead.

The post Using Technology to Grow Your Business appeared first on Orion Advisor Services.

15
Nov