Active Management - an Alternative to "Buy & Hold"

Market performance at the mid-point of 2013 has seen a continuation of the cyclical bull market which began in 2012, driving the market (once again) to all time highs.  The most important question that investors need to be asking themselves is whether or not their portfolio is ready for another 2008.  During a recent CNBC interview, John Bogle (founder of Vanguard Funds) made a prediction that the equities market will see two or more declines of 25% to 30%, perhaps as much as 50%, during the next decade.  The mere possibility of this taking place (again) underscores the importance of our approach of using tactical managers for the liquid components of our clients portfolios.

ACTIVE EQUITIES MANAGEMENT

Our use of Howard Capital Management as the primary equities manager began in Q2 of 2012, and the performance of their Viper 2 portfolio (a tactical, sector rotation strategy) has delivered 6.76% year to date, and 15.45% for the 12 months ending June 30th, 2013.

ADDITIONAL PORTFOLIOS WITH GREATER TAX SENSITIVITY

A search for actively managed portfolios with greater tax sensitivity began in late 2012, and concluded with the addition of two portfolio management platforms in Q2 of 2013.

In October of 2012, Howard Capital Management introduced the ILP (Investor Lifestyle Portfolio) Aggressive DFA (Dimensional Fund Advisors), which has lower turnover from both a manager and a fund level perspective.  The ILP-DFA portfolio has delivered 10.01% net of fees year to date (as of 6-30-2013), slightly exceeding the portfolio benchmark of 65% US stocks, 25% foreign stocks, and 10% bonds.

Also new to IFSG in 2013 is the Power Dividend Index Strategy from W. E. Donoghue & Co. (WEDCO).  While this strategy began operation in December of 2012, the underlying Power Dividend Index has an inception date of 12/31/99.  Further, an understanding of WEDCO's tactical overlay (described in the online presentation) provides some insight on how the combination of the Power Dividend Total Return Index and WEDCO tactical management potentially protects during significant market downturns, while participating when the market advances.  Year to date (as of 6-30-13) performance is +17.74%, vs. the S&P Index performance of 13.84%.

One of the primary characteristics that led us to add this strategy to our lineup is the potential for greater tax efficiency.  Due to the direct ownership of high dividend yielding stocks across the ten predominant asset classes in the S&P 500 Index, most if not all of the dividends generated will potentially enjoy treatment as "qualified dividends", resulting in taxation no higher than 15%.  As well, the track record of the Donoghue Tactical Management movement into and out of equities generally results in a holding period, when invested, of twelve months or longer.  Thus, the majority of gains realized should potentially be afforded favorable Long Term Capital Gains treatment.

As a result of the anticipated favorable tax treatment of dividends and gains generated by this strategy, we feel that, outside of a Roth IRA, that the best use of this strategy is within non-qualified accounts (this does not mean that this strategy should not be used within traditional IRA accounts).  Potential tax efficiency is one area where the other managers utilized by IFSG have been lacking, due to the potential for turnover within the accounts when invested, as well as the greater potential for more frequent moves out of the asset classes which they invest in (when managers exit equities and go to the safety of cash or short term Treasuries).

Over the coming year, as part of our annual client reviews and "liquidity event" discussions, we will be reviewing this strategy and determining if, where and how much is appropriate for each client.  Should you wish to schedule a time to review this program sooner than our next meeting, please contact either  This e-mail address is being protected from spambots. You need JavaScript enabled to view it or  This e-mail address is being protected from spambots. You need JavaScript enabled to view it at 972-312-1337.

ACTIVE INCOME MANAGEMENT

Hanlon Investment Management continued to deliver with their Managed Income Portfolio, posting a 10.12% total return for 2012, well exceeding our target of 5% to 7% for this "leg" of our clients' financial tables.  Full investment in the underlying asset class (High Yield Bond Funds) and steady returns are expected going forward, as long as the "quantitative easing" by the Federal Reserve continues.  Year to date performance as of 6-30-2013 is 1.49% (net of all fees).

ACTIVE MANAGEMENT SUMMARY - AS OF 6-30-2013

Below is a summary of the annual average returns (net of all fees) of the primary active management platforms in use for our clients.  ADV Disclosure forms for Howard Capital Management, W.E. Donoghue & Co. Inc., Hanlon Investment Management and VFG Securities may be reviewed in the ADV Disclosure PagePlease keep in mind that past performance is no guarantee of future results.  This table is updated periodically.  Most recent manager retail performance may be viewed by clicking the portfolio title in the far-left column.  These reports include additional detail and disclosures specific to each manager.

INTEGRATED FINANCIAL ACTIVE MANAGEMENT PLATFORM PERFORMANCE SUMMARY

All returns reflected are retail, net of each manager's maximum annual management fee

INSTITUTIONAL / FAMILY OFFICE / NCF DONOR ADVISED FUNDS - ADD 1% to the returns shown

Manager / Index / Inception 2013 (through 6-30-2013) 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 3 year 5 year 10 year Since Inception Annual Average

Hanlon Investment Management (Managed Income Portfolio)

10/01/2001

1.49% 10.12% .59% 6.21% 30.28% (.95%) 5.52% 9.21% 3.78% 8.84% 29.30% 12.43% .46%* 5.88% 9.35% 8.29% 9.58%

HCM-Viper 2

09/01/2007

6.76% 14.03% (3.2%) 10.44% 13.59% 2.65% 5.65%* N/A N/A N/A N/A N/A N/A 10.11% 8.86% N/A 8.42%

HCM-ILP Aggressive (DFA)

10/01/2012

10.01%                               14.07%
W.E. Donoghue Power Dividend Index Strategy 17.74% 10.22% .79% 17.98% 39.13% (.51%) (.73%) 18.38% 3.4% 15.26% 30.28% -6.83% 12.10% 16.7% 16.11% 13.53% 11.31%

HCM 401(k) Optimizer

05/01/2008

9.00% 14.51% (7.21%) 10.12% 22.95% 4.46%* N/A N/A N/A N/A N/A N/A N/A 7.7% 9.81% N/A 9.85%
S&P 500 Index** 13.65% 15.77% 2.1% 14.88% 26.45% (37.0%) 5.42% 15.78% 4.91% 10.89% 28.66% (22.1%) (11.91%) 18.45% 7.0% 7.29% n/a

* Year of inception / partial year returns  ** You cannot invest directly in an index. Even though the index value for 2011 was unchanged, the returns reflected in each year are inclusive of dividends.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  PLEASE REFER TO EACH INVESTMENT MANAGER'S COMPLIANCE DISCLOSURES BY CLICKING ON THE LINK PROVIDED (PORTFOLIO TITLE ABOVE LEFT COLUMN).

WHERE DO THEY FIT? 

In our view, performance should be viewed in light of what happens over time, as well as how a particular manager performed during times of market stress. Thus, we do not consider 2011 to be a "stress" year, rather one that was driven by headlines vs. fundamentals. While 2011 was a difficult year for most active managers, including ITS, 2008 was the last "stress" year in equity markets, with the S&P posting a loss of almost 37%. During this year ITS was down 8.6%, Hanlon down less than 1 percent (.95%). Howard Capital Management's Viper 2 ETF portfolio actually posted a gain of 2.64% (all figures net of maximum fees). While 2011 was a difficult year for any manager or individual whose decisions were based on market fundamentals (as a result of "headline risk" driving the markets), 2012 saw exceptional gains in most equity sectors as market fundamentals, combined with greater certainty in the U.S. economy took hold.

Howard Capital Management was added to the line-up in March 2012.  While Howard Capital Management has multiple portfolios, the following are presently in use by IFSG clients:

  • The Viper 2 ETF Portfolio provides a more stable, smoother ride, as indicated above.  Although audited performance is only tracked back to September of 2007 (just prior to the last "peak" in the equities markets), it is important to note that this portfolio delivered a 2.64% POSITIVE return in 2008, while only giving up 3.2% in 2011, an otherwise challenging year for active management strategies.  Both years saw "trigger" exits from equities as a result of Howard Capital Management's "Buy-Line" mechanism at work.
  • Investor Lifestyle Portfolio (ILP) Aggressive using Dimensional Fund Advisors (DFA), was initiated by Howard Capital Management in October of 2012, and added to the IFSG lineup during the second quarter of 2013.  Greater tax sensitivity, due to lower turnover, makes this portfolio more appropriate for individual (non-IRA) accounts.
  • Howard Capital management also provides a subscription based service, the "HCM-401K Optimizer".  This service provides guidance to participants in 401k, 403b, and 457 plans.  More details may be found by clicking on the title.

Hanlon Investment Management also has four managed portfolios.  Our use of the "Managed Income Portfolio" (MIP) is a strategic substitute for what would normally be comprised of bonds or bond funds in a client's portfolio.  While we are extremely pleased with Hanlon's MIP performance in 2012, the annual average returns over time, while not realized by our clients (Hanlon was added to our financial workbench in November 2010), say a lot about this portfolio being a cornerstone of "Capital Preservation" in a client's holdings.  Our objective for Hanlon is net average returns of 5% to 7%.  We must adjust our expectations here, relative to the returns above, due to the exceptional performance of this portfolio in 2003 (29.3%) and 2009 (30.28%), on the heels of the market declines which preceded these years specifically.  These exceptional years, however, do speak highly of the value of active management, in light what took place just prior in 2002 and 2008, while the market experienced steep declines.

ADV Disclosure forms for Howard Capital Management, Hanlon Investment Management, W.E. Donoghue & Co. and VFG Securities may be reviewed in the ADV Disclosure Page.

TRUE ASSET CLASS DIVERSIFICATION

Market volatility during 2011, as well as the continued rise to new heights in the equities market (what goes up must come down?) underscores for us the importance of "True Asset Class" Diversification in a client's portfolio.  More so, it highlights the benefits of having an "Endowment Style" approach, with a  portion of one's portfolio invested in various non-market correlated "legs" under the financial table.  During 2011, the majority of these programs experienced little, if any, price volatility, while delivering solid annualized income distributions ranging from 6% to as much as 20%.  To review the entire list of investment affiliates in use by Integrated Financial and VFG Securities, Inc. please visit our Investment Affiliates page.

More detail on the appropriate use of these strategies may be found within the presentation, "The March of a Different Drumbeat" found in our "Core Concepts" page.