Our Investment Philosophy: How We Manage Money

Tab 1

November 11, 2015

One test of an investment philosophy is whether it can adapt to predictable economic cycles — and some not so predictable. John De Clue, Dan Farley, Jeff Kravetz and Tim Dreiling, investment leaders within The Private Client Reserve, recently sat down to discuss The Private Client Reserve’s wealth management approach and how it helps clients work toward their unique goals.


A Steady Hand in Challenging Markets


In an era of unprecedented central bank intervention and low worldwide growth, investors are looking for guidance from professionals with wide-ranging experience and constructive insight.


DE CLUE: The most unusual aspect of the environment we’re in today is the degree to which central banks have intervened in the financial markets, beginning after the Great Recession. In my career, I’ve never seen anything like it. One thing most of us are asking ourselves is, what does the other end look like? What does it look like when the Federal Reserve begins normalizing interest rates and when the European Central Bank begins withdrawing its massive supports?

KRAVETZ: Another thing that challenges investors these days is that we’re in an environment of very low global growth. Europe is growing at a very slow pace.


We’re picking up the pace in the United States, but we’re still sub-3 percent. Asia is slowing down too. Also, emerging markets such as the BRIC (Brazil, Russia, India and China) countries — which used to be growing at a high level — are facing big headwinds. In places like Brazil and Russia, growth has ground to a halt. It’s a question mark: Where do we find growth potential in the future?

Tab 2

November 11, 2015

DE CLUE: Demographics are changing too. Millennials and younger people are coming into the investment markets, and they tend to make different choices than their parents might have made. Institutions are working to get ahead of that to continue to meet their clients’ needs. In my father’s day, and then continuing through the early part of my career, most people naturally leaned on an individual as a trusted advisor. People still value that, but first they want you to give them facts. Clients are now far better informed because of access to the news.


KRAVETZ: Millennials came of age for investing during the financial crisis. They may have seen their parents lose a lot of money in real estate, and they saw the stock market go down precipitously. We may have a generation of investors who are somewhat skeptical about markets because of their most recent experiences.


A Solid Foundation, a Customized Approach


We believe a wealth management organization that combines developed strategies with customized recommendations is equipped to help meet the particular needs of each investor. We can offer clients the enhanced access and low fees of a national organization combined with a carefully

tailored portfolio designed by a local advisor.


FARLEY: We ground our investment approach in three pillars: We set a foundation, we execute and we customize.


1. Foundation: We believe strongly in Modern Portfolio Theory, which seeks to diversify risk to help create a more consistent pattern of long-term returns. We also believe in strategic asset allocation — understanding past relationships of risk and return for each asset class. We spend time and effort studying these over the long term so we can provide what we believe are the most appropriate recommendations to help meet our clients’ needs. We want our clients' potential for a strong return to correspond more closely to the level of risk they are comfortable taking in their investing.


2. Execution From an Investment Platform: We have an investment platform that is very extensive. We can offer investment opportunities that range from exchange-traded funds to very sophisticated investments, such as private placements for clients when it’s applicable and appropriate for their unique circumstances.


3. Customization: The third and most important part is customization, which is where we believe we can offer the most differentiation between The Private Client Reserve and other companies. Our clients are all unique.

Tab 3

November 11, 2015

Each has a different set of circumstances. In The Reserve, our clients are assigned an individual portfolio manager, who is backed by a national presence and process, which is a very powerful combination driving portfolios and investment strategies.


KRAVETZ: Our size and national presence give us three advantages: access, information, and in some cases, fees.


Access: We can provide our clients access to funds that otherwise wouldn’t be accessible to them individually. Of the 196 funds currently on our platform, 98 percent of them have eliminated or significantly lowered the minimum investment for our clients.


Information: For a new manager to be approved for our platform, we require direct access to the portfolio manager so we can perform extensive due diligence to help ensure we have the information we need to make decisions on behalf of our clients. Only a very small percentage of all available funds have been approved for admission on our platform.

Fees: We are able to negotiate very competitive fees for our clients. We need to pay managers for their intellectual capital and prowess, of course, but what we pay is generally less than a retail investor would pay over time. We call this “fee alpha” — adding value through lower fees — which can be a significant accretion to clients’ portfolios over time.


DREILING: The principle of correlation helps us identify assets that, when working together, have potential to generate strong returns with less volatility.


Correlation: Correlation is what we refer to as “the only free lunch in investing.” We can measure and monitor assets known to behave differently from one another in a market cycle. The concept of correlation allows us to reduce the variability of the portfolios we’re constructing and provides us with more conviction in the outcome. That helps create the potential for a higher probability of meeting our goals.


Much of the work in correlation is backward looking, but correlation is dynamic. There have been measurable periods of enormous stresses to the market and the economy.

Tab 4

November 11, 2015

We know from history that during those periods, the correlations between asset classes, which in “normal markets” are generally less than 1.0, begin to increase toward 1.0, which means different asset types begin to behave very much like one another. They begin to move more similarly rather than differently. We have the ability to model for that, so even when we experience stresses in the market, we can build portfolios that are designed to accommodate for those stresses.


Potential Benefits of Global Diversification


Given that about 50 percent of the world’s market capitalization is outside the United States, global diversification can be very important in helping investors capture different rates of growth in a variety of international markets.


DE CLUE: Many people misunderstand diversification. When the Internet bubble was forming before 2000 and valuations of stocks were skyrocketing, I would examine clients’ portfolios and talk about needing points of diversification. They would respond, “I am diversified. I own

IBM, Cisco, Microsoft, maybe 25 different tech stocks.” I would say, “We probably need to talk about this.” Those stocks, of course, tend to move together.


KRAVETZ: Diversifying globally is really important, and we think that emphasis is a unique aspect of our approach. If you go back 20 years, much of the world’s market cap was in the United States. Today, about 50 percent is overseas.


And while diversification (or asset allocation) does not guarantee returns or protect against loss, we think there are tremendous opportunities for clients to invest internationally, which can provide the potential to help them capture different rates of growth in a variety of markets.


Currently, U.S. and international markets are a little more correlated, but you still can gain the potential benefits from diversification. Another possibility of international investing can be through foreign currencies, but currency investing can work for you or against you. Coming out of the financial crisis, we saw emerging-market currencies appreciate against the U.S. dollar.

Tab 5

November 11, 2015

Now, the U.S. dollar is strengthening versus the euro and other currencies. As a global investor, there are investments to hedge the currency risk. We personalize our approach not only to each investor but to changes in the capital markets or the global economy. We believe that to be appropriately diversified, you need to have a global focus throughout all asset classes.


Tailored Approach for Individual Client Needs


DE CLUE: The one thing we hold dear is tailoring our approach to our clients’ needs. That includes making sure we contribute to our clients having a good night’s sleep. No investment program is worth pursuing if the client is not comfortable. That doesn’t mean we don’t attempt to leverage the best possible advice; we think every day about our discipline, our national process and all of our capabilities. We focus on how that applies to each individual. We’re very proud that we’re doing something that is specific to each client.


Please see important information below.