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Exceeding Your Expectations

500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000

Managing Risk (Hint: It’s Not What You Think)


For Internal Use Only.

Agenda

• Investment Risks

• Business Risks

• Risk – Redefined?

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Today’s Presenters Robert A. DiMeo, Managing Director and Senior Investment Consultant • 25 years industry experience; co-author 3 investment books, numerous articles & whitepapers

• Previously directed Midwest institutional consulting effort for Kidder, Peabody

• Catholic Charities Advisory Board; previous Board of Directors for Investment Management Consultants Assn. and Governance Board Notre Dame High School

• Bradley University, BS; Wharton Business School IMCA Accreditation Program, CIMA®, College of Financial Planning, CFP

• Email – [email protected]

Adam Newell, CFA, CFP™, Director of Consulting – The Wealth Office™

• 13 years industry experience; 9 years with DiMeo Schneider

• Previously Senior Financial Planner with The Ayco Company of Goldman Sachs

• Provides investment counseling services to nonprofits, corporate executives, family trusts, and other substantial investors

• Member of DiMeo Schneider & Associates, L.L.C.’s Investment Committee as well as the Asset Allocation & Hedge Fund Research Sub-Committees

• Member of CFA Society of Chicago and Financial Planning Association

• Purdue University, BS; Chartered Financial Analyst (CFA); College of Financial Planning, CFP

• Email – [email protected]

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About DiMeo Schneider & Associates, L.L.C. Founded in 1995

• Based in Chicago, IL • $40 Billion + Assets Under Advisement • Conflict-Free Consulting

• 250+ Institutions • 200+ Wealthy Families

60 Professionals

•8 Partners •29 Investment Consultants •25+ Professionals Participate in Research Efforts •Numerous CFA Charterholders, CIMAs, and CFPs •10 Member Investment Committee

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Large Enough to Serve, Small Enough to Care

4 As of December 31, 2012



Firm Recognition and Expertise

Top 40 Worldwide Consultants – Pension & Investment Special Report**

Top 10 Endowment/Foundation Consultants – Plan Sponsor Magazine*

Top 20 Fastest-Growing Registered Investment Advisors – Forbes***

*Top 10 Consultants by number of reported endowment/foundation consulting clients 2010 **Top 40 Consultants ranked by worldwide, institutional tax-exempt advisory assets under advisement as of November 2012 *** Top 20 Registered Investment Advisors in 2011, ranked by the most assets added since 2008

Client Survey Results (excerpt)

•95% of respondents believe we provide exceptional value for the fees we charge •98% rank the firm as above average/superior •98% of clients would recommend our services Details of 2012 survey available upon request

New Book!

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Representative Client List

http://www.mayerbrown.com/



Investment Risks

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Investment Risk – Rising Rates

• Are we in a bond bubble?

• Perhaps, but let’s take a closer look at how bonds

react in rising rate environments…

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Rates Periodically Rise…

Dec 76

Oct 82

Oct 86

Oct 92 Oct 98

Jan 04

May 81

Aug 84

Mar 89Feb 95 Nov 00

Feb 07

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Yiel

d

Date

Interest Rate History (Jan 1976 - May 2012)

3 Month T-Bill5-Year Treasury10-Year TreasuryBeginning PeriodEnding Period

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…With Surprisingly Positive Results

Dec 76 - May 81 Oct 82 - Aug 84 Oct 86 - Mar 89 Oct 92 - Feb 95 Oct 98 - Nov 00 Jan 04 - Feb 07Price Impact -7.6% -0.4% -3.0% -2.1% -2.7% -1.0%Yield Impact 10.2% 12.3% 9.2% 6.9% 6.9% 5.1%Net Impact 2.6% 11.9% 6.2% 4.8% 4.2% 4.1%

10.2% 12.3%

9.2%6.9% 6.9%

5.1%

-7.6%

-0.4% -3.0% -2.1% -2.7%-1.0%

-10%

-5%

0%

5%

10%

15%

Ann

ualiz

ed T

otal

Ret

urn

Price Impact on Barclays Aggregate Bond Returns(assumes monthly coupon reinvestment in the index)

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Investment Risk – Tracking Error

• Common belief is high tracking error is bad

• Not necessarily, though we need to help clients understand

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Category Number of funds

with 10-year records1,2

Number of 10 year top quartile funds

Number of 10 year top quartile funds

below median for a 3-year period

Percent of 10 year top quartile funds


Median consecutive years spent in bottom half

Percent of 10 year top quartile funds


Intermediate Bond 238 60 51 85% 1.00 60% High Yield Bond 94 24 21 88% 1.00 67% International Bond 186 47 41 87% 1.25 45% Large Cap Value 204 51 48 94% 1.50 65% Large Cap Core 334 83 78 94% 1.00 61% Large Cap Growth 716 179 159 89% 1.25 74% Mid Cap Value 52 13 12 92% 1.00 69% Mid Cap Core 95 24 21 88% 1.25 63% Mid Cap Growth 158 40 38 95% 0.75 63% Small Cap Value 63 16 16 100% 1.13 63% Small Cap Core 133 33 29 88% 1.00 61% Small Cap Growth 154 39 36 92% 1.25 59% Real Estate 51 13 10 77% 0.50 31% International Value 67 17 17 100% 1.00 76% International Core 203 51 45 88% 0.75 49% International Growth 42 11 11 100% 0.75 55% Emerging Markets 64 16 13 81% 1.25 50%

Total 2854 717 646 Weighted Average 90% 1.00 63%

Good Managers Can (& Will!) Look Bad 10-year top quartile funds1,2 (ending December 31, 2011) that fell below median during one or more 3- and 5-year periods

[1]Distinct Portfolio Only: Many fund families offer multiple versions of the same fund, but with variations on the fees that are charged and investor qualifications. The "distinct portfolio only" feature removes all duplicate options. Morningstar normally designates the oldest share class as the distinct portfolio. [1]Morningstar mutual fund data was used as it is less prone to biases compared to other databases. While the Morningstar data is not immune to survivorship bias, each mutual fund that survived the ten-year stretch was captured regardless of performance. In addition, the Morningstar data generates returns net of expenses.

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Is Indexing the Easy Solution?

• OK – So just index!

• Not so fast…

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Indexing Isn’t a “No-Brainer”!

Category 10 year index return

10 year index peer group rank

Median fund return

Median fund alpha

Top quartile fund return

Top quartile fund alpha

Intermediate Bond 5.8% 32% 5.4% -0.3% 5.9% 0.1% High Yield Bond 8.7% 8% 5.4% -3.3% 6.1% -2.5% International Bond 8.4% 15% 6.8% -1.6% 7.9% -0.5% Large Cap Value 3.9% 41% 3.5% -0.4% 4.5% 0.6% Large Cap Core 2.9% 41% 2.8% -0.2% 3.5% 0.6% Large Cap Growth 2.6% 44% 2.3% -0.3% 3.4% 0.8% Mid Cap Value 7.7% 16% 6.1% -1.6% 7.3% -0.4% Mid Cap Core 7.0% 13% 5.6% -1.3% 6.6% -0.4% Mid Cap Growth 5.3% 42% 4.6% -0.7% 6.3% 1.0% Small Cap Value 6.4% 61% 7.2% 0.8% 8.3% 1.9% Small Cap Core 5.6% 56% 6.0% 0.3% 7.4% 1.7% Small Cap Growth 4.5% 55% 4.7% 0.2% 6.1% 1.7% Real Estate 10.2% 32% 9.6% -0.6% 10.7% 0.5% International Value 5.0% 54% 5.2% 0.2% 6.8% 1.8% International Core 4.7% 33% 4.1% -0.5% 5.0% 0.4%

International Growth 4.3% 67% 5.7% 1.4% 7.0% 2.7% Emerging Markets 13.9% 37% 12.9% -0.9% 14.7% 0.9%

Index[1] returns compared to median and top quartile funds (10 years ending December 31, 2011)

Owning an index fund ≠ owning the index! [1] Indices: Barclays Aggregate Bond, Citigroup High Yield, Citigroup Non U.S. WGBI, Russell 1000 Value, S&P 500, Russell 1000 Growth, Russell Mid Cap Value, Russell Mid Cap, Russell Mid Cap Growth, Russell 2000 Value, Russell 2000, Russell 2000 Growth, Dow Jones Wilshire RESI, Citigroup PMI Value World ex U.S. , MSCI EAFE, Citigroup PMI Growth World ex U.S. , MSCI Emerging Markets.

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Range and average 3-year index6 peer group ranking for each asset class (Rolling three-year periods between January 1, 2002 and December 31, 2011

[1] Indices: Barclays Aggregate Bond, Citigroup High Yield, Citigroup Non U.S. WGBI, Russell 1000 Value, S&P 500, Russell 1000 Growth, Russell Mid Cap Value, Russell Mid Cap, Russell Mid Cap Growth, Russell 2000 Value, Russell 2000, Russell 2000 Growth, Dow Jones Wilshire RESI, Citigroup PMI Value World ex U.S. , MSCI EAFE, Citigroup PMI Growth World ex U.S. , MSCI Emerging Markets.

Where Does Indexing Make Sense?

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Investment Risk – False Diversification

• “Diversification is dead”

• “2008 proved diversification doesn’t work”

• Are the skeptics right?

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Large Cap Core Equity55%Domestic Core

Fixed Income30%

International Equity15%

Generic Diversification

Volatility Reduction Through Diversification

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Large Cap Core Equity

14%

Domestic Core Fixed Income

12%

Fund of HedgeFunds10%

InternationalEquity

9%U.S. TIPS8%

Foreign Developed

Bonds8%

Commodities8%

High YieldBonds

7%

Real Estate6%

Emerging Market Debt5%

Master Limited Partnerships

5%

Small CapCore Equity

4%

Emerging MarketsEquity

4%

Frontier Engineer™ Diversified Portfolio

Cumulative Return (Jan '96 - Jun '12) 191.6%Annualized Return 6.7%Annualized Standard Deviation 11.2%Sharpe Ratio 0.33

Cumulative Return (Jan '96 - Jun '12) 247.4%Annualized Return 7.8%Annualized Standard Deviation 9.0%Sharpe Ratio 0.54

Outcomes of modeling will vary with each use and over time and may not take the entire universe of available investments into consideration. IMPORTANT: The projections or other information generated by Frontier Engineer regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results

Past performance is no guarantee of future results. For illustrative purposes only. Not to be construed as a recommendation.


What Have You Done for Me Lately?

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Traditional Model Frontier Engineer Model

Last Ten Years:

Last Five Years:

vs.

Volatility Reduction: 1.4% per year

Volatility Reduction: 1.2% per year

Return Enhancement: 2.2% per year

Return Enhancement: 1.8% per year

Cumulative Return (Jul '02 - Jun '12) 78.5%Annualized Return 6.0%Annualized Standard Deviation 11.4%Sharpe Ratio 0.37




Past performance is no guarantee of future results. For illustrative purposes only. Not to be construed as a recommendation.


Investment Risk – “Madoff” • Traditional manager research is easy…or is it?

Securities lending during 2008 crisis Artio Global

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Due Diligence Can Prevent Being Fooled!

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Due Diligence More Crucial with Alternatives

Prime Brokers Counterparty Risk Disaster Recovery Key Man Provisions Liquidity Terms Legal Counsel

Ownership Structure Risk Management Back Office Cash Management Auditors NAV Calculation

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Practice Management/Business Risks

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RISK: Not Growing Your Practice

Growth is Not Optional in a People Business

• Recruit • Retain

• Reward

• Stimulate

• Promote

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And it’s just more fun!


RISK: Bogged Down by Your Practice

1. Where do you add value?

2. What are your energy zappers?

3. What are your energy creators?

4. Do you regularly invest time working on, rather than in, your business?

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What pressure points can you relieve today, this month, this year?


Stop Being Bogged Down by Your Practice

1. Staffing – time for an Executive Assistant, COO???

2. Research – can you truly add value?

3. Structure – partners (actual or strategic)

4. Mindset – think BIG Extrapolate growth and factor into decisions • Hire • Train • Manage • Procure

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RISK: Ignoring Business You Can Land

All of us know corporate CFOs or sit on nonprofit boards/committees.

Recurring revenues for life of relationship!

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High Net-Worth: Advisor introduces $300 million private client Nonprofit: Advisor introduces $15 million religious institution Retirement Plan: Advisor introduces $100 million 401(k) plan


Add Revenues!

Under $10mm Solution - Streamlined: Disciplined Portfolio Advisor™

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Disciplined Portfolio Advisor™

Disciplined Portfolio Advisor™

Institutional-Quality Management -Proprietary Asset Allocation and Portfolio Rebalancing Methodology -Depth & Breadth in Manager Research and Selection -Objective & Conflict-Free Investment Consulting for over 15 years

Broadly Diversified Portfolios -12 distinct asset classes (traditional, non-traditional, and alternatives) focusing on risk management -Efficient blend of active and passive (index) managers -“Best of Breed” multiple money manager approach – no proprietary investments/products

Model Line-up Characteristics

-10 Models (5 taxable and 5 tax exempt) across an array of risk/return objectives -Combination of Institutional share class mutual funds and low-cost ETFs -Extremely competitive fee structure -Access to premier fund managers at low minimums

Resources and Communication for You

-Quarterly conference calls address portfolios, economic issues, and future strategy -Portfolio ‘Fact Sheets’ and DPA Guide detailing portfolio metrics, performance, allocations, and fees -Flash Memos and Client Conferences

Disciplined Portfolio

Advisor™


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Add Revenues!

Over $10mm Solution - Customized: High Net Worth Solution


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Comprehensive & Customized

Our Approach Combines:

Investment Expertise…

Client

CPA

Estate Attorney

Insurance

Investment

… with Wealth Management

IPS

Manager Research

Asset Allocation

Alternatives

DiMeo Schneider & Associates, LLC. does not provide tax or legal advice.


Meaningful Recurring Revenue

Annual Aggregate

DSA Referral Referral

YE New Assets AUM @ YE Gross Fees Revenues Revenues

1 $ 50,000,000 $ 50,755,013 $ 157,820 $ 47,346 $ 47,346

2 $ 50,000,000 $ 103,570,882 $ 418,004 $ 125,401 $ 172,747

3 $ 50,000,000 $ 158,531,288 $ 688,751 $ 180,991 $ 353,738

4 $ 50,000,000 $ 215,723,306 $ 970,492 $ 223,252 $ 576,990

5 $ 50,000,000 $ 275,237,550 $ 1,263,673 $ 267,229 $ 844,219

6 $ 50,000,000 $ 337,168,311 $ 1,568,759 $ 312,992 $ 1,157,211

7 $ 50,000,000 $ 401,613,709 $ 1,886,231 $ 360,613 $ 1,517,824

8 $ 50,000,000 $ 468,675,848 $ 2,216,595 $ 410,167 $ 1,927,991

9 $ 50,000,000 $ 538,460,979 $ 2,560,373 $ 461,734 $ 2,389,726

10 $ 50,000,000 $ 611,079,667 $ 2,918,109 $ 515,395 $ 2,905,120

$ 500,000,000 $ 14,648,808 $ 2,905,120

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Risk Redefined?

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Our Challenge to You

• What is Risk? • Volatility….that’s NOT risk!

• The risk is how you react!

Magnitude of Decline Average Frequency -5% or more 3X/year

-10% or more 1X/year -15% or more 1X every 2 yrs -20% or more 1X every 3.5 yrs

Source: The unmanaged Dow Jones Industrial Average 1 Assumes 50% recovery of lost value Past results are not predictive of results in future periods.


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Remember: There is Always a Crisis 1/5/11: Republicans assume control of the House of Representatives

1/14/11: Arab Spring begins as riots collapse Tunisia’s government

2/22/11: Fighting rages in Libya and Moammar Gadhafi refuses to resign

3/11/11: 9.0 magnitude earthquake strikes Japan and causes deadly tsunami

5/1/11: U.S. Special Forces kill Osama Bin Laden

7/31/11: After coming within hours of a technical default on U.S. Treasuries, Congress and the President reach a deal on raising the U.S. debt ceiling

S&P 500 Index: 2011 Performance

8/6/11: Standard & Poors downgrades U.S. Treasury debt to AA+ from AAA

9/17/11: ‘Occupy Wall Street’ protests begin in Manhattan, NY

10/5/11: Apple, Inc., founder Steve Jobs dies

10/27/11: European leaders agree to a framework for a coordinated Greek bailout

11/30/11: Global Central Banks announce coordinated efforts to relieve funding pressures in Europe

Source: www.yahoo.com/finance

http://www.yahoo.com/finance


Thank You & Next Steps

More Information: Bob DiMeo – [email protected] Adam Newell – [email protected] Kevin Koykar – [email protected]

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mailto:[email protected]




Appendix –Index Definitions

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Cash - Citigroup 90 Day T-Bill TIPS - Barclays US Treasury TIPS Aggregate Bond - Barclays US Aggregate Bond Index; High Yield – Citigroup High Yield Foreign Bond - Citigroup WGBI (Non-US) Emerging Debt - JPMorgan GBI-EM Global Diversified Unhedged Index Large Value - Russell 1000 Value Large Core - S&P 500 Large Growth - Russell 1000 Growth Small Value - Russell 2000 Value Small Core - Russell 2000 Small Growth - Russell 2000 Growth International - MSCI EAFE Emerging Markets - MSCI EM REITs - FTSE NAREIT Equity REITs Commodities - DJ UBS Commodity MLP - Alerian MLP Balanced - 30% Barclays US Aggregate Bond Index, 35% S&P 500, 15% Russell 2000, 15% MSCI EAFE, 5% FTSE NAREIT Equity REITs


Disclosure

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This presentation is intended to provide general information and does not purport to make any recommendations regarding your particular investment objectives, financial situation, or specific needs. Prior to making any investment decision, you should assess or seek advice on whether any part of this presentation is appropriate to your individual financial circumstances and investment objectives. DiMeo Schneider & Associates, L.L.C. does not provide legal or tax advice. The information in the presentation is deemed reliable but DiMeo Schneider & Associates, L.L.C. does not guarantee its accuracy.

2013 NFP STRATEGY SUMMIT INTERNAL USE ONLY. Not for public distribution.

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managing risk - nfpinternal.nfp.com/webfiles/public/2013/meetings/ess/... · top 20 fastest...

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