2. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
WORLD VIEWS OF INVESTMENT MANAGEMENT
2
The World is Flat
Prudent Man Rule
The World is Round
MPT and 60/40 Allocation
3. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
MODERN PORTFOLIO THEORY
3
Traditional
60/40 Allocation
A popular 1986 study
found that the policy mix
or asset allocation
explained 93.6% of the
portfolio variation. Most
advisors built their advisor
practice around the study.
MPT (Modern Portfolio
Theory) was developed in
the 1950’s. The emphasis is
on diversification, combining
different non-correlating
asset classes and assets are
mixed for the best risk and
return trade-off.
MPT - Harry Markowitz won a Nobel Prize for its acceptance
Asset Allocation - Brinson, Singer Bebower Study 1986
4. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
PROBLEM 1: RECENT INVESTOR EXPERIENCE
-50% -56%
+100%
+80%
Secular Bear Market Example 1999 - Present
A static 60% Asset Allocation to
Stocks is Hard to Maintain and has
NOT Provided Success to Investors
Why have the Same
allocation to Stocks when
the PE ratio is 20X versus
12X?
4
5. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
Internet
Bubble
Cumulative returns of Russell 1000 from January 1, 1995
Growth Stocks
THE PAST HAS NOT FAVORED LONG
ONLY,
INDEX BASED INVESTING
And
Bust
PROBLEM 1: RECENT INVESTOR EXPERIENCE
0
50
100
150
200
250
300
350
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
5
6. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
Loss Aversion
Keeps People Invested
For Their Long Term Goals
Loss Gain
Pleasure
Pain
Small
Pleasure
Big
Pain
People React Emotionally to
Losses Twice as Much
as they do to Gains
PROBLEM 2: HUMAN BEHAVIOR
We are wired to think differently about gains and losses
Source: Amos Tversky and Daniel Kahneman, 1992 – Nobel
Prize Awarded in 2002
6
7. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
11.9%
3.0%
3.9%
9.7%
1.8%
Barclays U.S.
Aggregate
Bond Index
Average
bond-fund
investor
Investors have under-performed benchmarks
Index returns are not investor returns as timing and emotion play a large part
Average
stock-fund
investor
InflationS&P 500
Source: DALBAR
Annualized Returns
1986–2005
PROBLEM 2: HUMAN BEHAVIOR
7
8. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.8
0.50
0.92
0.83
Correlation to S&P 500
High correlation 1.0
GSCI Commodity Index
Source: International Traders Research
Data thru 2009
3 Year Correlation
0.09
0.53
0.72
20 Year Correlation
PROBLEM 3: INVESTMENTS ARE BECOMING MORE CONNECTED
A Better Balance is Needed
EAFE – International Stocks
Real Estate Investment Trusts
No correlation 0.0
8
9. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
Most of the portfolio movement is not caused by asset allocation but by the market
movement itself. In the Ibbotson analysis, upwards of three quarters (75%) of a fund’s
variation is caused by market movements.
If we know now that both the friend and enemy to investing is market movements, then
that is where we should be focusing our efforts and energy.
Solution – Become More Flexible with Asset Allocation.
Hire managers that demonstrate ability to move
between sectors within their discipline.
"The time has come for folklore to be replaced with reality“
Roger G. Ibbotson
Source of Study: The Importance of Asset Allocation,
Roger G. Ibbotson, Financial Analysts Journal, Volume
66, Number 2
9
10. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
Source: Yale Endowment, 2007
Where can I find
non-correlating
investments?
MODERN ASSET ALLOCATION
So what is an investor to do?
Institutional
Investors have
fared MUCH
better during
the recent
Bear Market
10
11. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
The World is Not Flat
It is Not Round
The post-modern asset allocation is one third each:
one third long-only stock, one third long-only bond and one third flexible
(absolute return, long-short, commodity and alternatives)
Source: John Mauldin
11
12. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
ASSET ALLOCATION IN THE NEW ORDER OF THE WORLD
American Independence Product Offerings
One Third: Long-Short, Flexible, Non-Traditional Strategies
One Third:
Long-Only
Equity
One Third:
Long-Only
Fixed Income
American Independence
Total Return
Fixed Income
American Independence
Large – Cap Value
Large – Cap Growth
Target Date “Nest Egg”
American Independence
Bull/Bear Fixed Income, Fusion Fund, TIPS Fund
12
13. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
HOW CAN WE HELP YOU AND YOUR PRACTICE?
Experienced Investment Teams and Firm Management
Active Management Return Oriented in both Fixed Income and Equity
Consistent Alpha Production in Key Asset Classes
Transparent, High Quality and Liquid Portfolios
Traditional Core and Non-traditional programs
What are the Largest Questions in Investment Management Today?
Where are Interest Rates Going? Inflation / Deflation
How Do I Analyze and Value Financial Stocks?
American Independence has solutions to these questions!
13
14. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
AMERICAN INDEPENDENCE
• Assets under management are approximately $1 billion
• American Independence Fund family is currently comprised of 15 funds featuring the Stock Fund:
Morningstar’s July 11, 2010, “Large Cap Funds on Winning Streaks”, lists the
Stock Fund as one of 9 funds that have beaten the S&P 500 Index in successive years since 2005.
First in its Morningstar category for 3 year performance (1241 managers), second for
5 year (1153 managers) and first for ten year (839 managers) as of July, 2010
• Nest-Egg Target Date Funds and Traditional Core Disciplines
• Alternative Fixed Income and Equity Strategies
• AIFS has a strong SMA business featuring the Total Return Bond, Absolute Return Bull/Bear
tactical fixed income strategies, Value and Growth portfolios.
14
15. FOR INVESTMENT PROFESSIONAL USE ONLY.
NOT TO BE USED WITH THE GENERAL PUBLIC.
THANK YOU FOR YOUR INTEREST IN AMERICAN INDEPENDENCE
15
PEOPLE
PHILOSOPHY
PROCESS
PEOPLEPERFORMANCE
Contact:
American Independence
Financial Services
335 Madison Avenue, Mezzanine
New York, NY 10017
Direct: 646.747-3477
Toll-Free: 800.985.8984
www.americanifs.com
There’s a related complication that combines a bit of narrow framing with information overload.
Here’s a textbook example of tunnel vision, with a focus on the one asset class that people thought couldn’t be beat.
In the late 1990s, technology stocks soared and we heard from everyone around us that technology was it.
The news media saturated us with it. Look at this headline—GetRich.Com. That about sums it up, doesn’t it.
It seemed the only things people wanted to own were technology and telecom…
…Of course, we know how that cycle turned out.
The way information is presented really matters. Its frequency, authority, and repetition has enormous implications. And it can make us obsessive, and it can make us forget all about our portfolio construction rules.
Let’s start with the facts.
This slide shows that the average investors in stock funds and bond funds have done pretty poorly over the last 20 years, a time when both stocks and bonds each experienced periods of historically high returns. More specifically:
The average stock-fund investor earned an annualized return of 3.9%, dramatically below the 11.9% return for the broad stock market.
The average stock-fund investor’s return was less than half the 9.7% generated annually by the broad bond market, and only a bit more than the 3.0% average annual inflation rate.
The average bond-fund investor did even worse. His 1.8% average annual return was a bit less than half the average stock-fund investor’s 3.9%, meaning that it also underperformed the broad stock market, the broad bond market, and inflation.