Financial Advisor Magazine names Meghan Pinchuk as one of their 10 young advisors to watch.

FA_May2015_Megan-Pinchuk-10Meghan Pinchuk has known former pro baseball pitcher/financial advisory founder Lon Morton since she was 12 years old. He managed money for her grandfather and later hired Pinchuk’s father at his firm Morton Capital Management as COO in the 1990s. “He recruited me rather young,” she says. A great student without a clear direction (she started as an English major at UCLA), Pinchuk was encouraged by Morton to intern for him in college and see if she liked finance. She passed her CFP test while she was still an undergrad, graduated summa cum laude and hit the ground running, later on getting her CFA mark.

Nine years out of college, Pinchuk is now co-president of the firm, which has 700 to 800 client relationships (the average client size is $1.5 million to $2 million and the firm has almost $1.5 billion under management). Her rise came swiftly after Morton bought his firm back from a bank in 2013 and Pinchuk found herself promoted. Though Lon Morton is still CEO and has veto power, he has let Pinchuk and co-president Jeff Sarti drive strategy at the newly liberated firm, she says.


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FT 300 Top Registered Investment Advisers

FA_May2015_Megan-Pinchuk-10NEW YORK, June 18, 2015 – The Financial Times (FT) today released the Financial Times Top 300 Independent Registered Investment Advisers (RIA) of 2015. The ranking of top U.S. RIAs was developed in collaboration with Ignites Research, a subsidiary of the FT that provides business intelligence on the investment management industry.

The average FT 300 firm has been in existence for 23 years and manages $2.6 billion in assets.

They hail from 34 states and Washington, D.C. FT 300 advisers represent many wealth managers; high net worth individuals ($1 million to $10 million to invest) account for 36% of the assets managed and ultra-high net worth clients (more than $10 million) account for another 27% of assets managed.

This was the second annual FT 300 ranking, and it illustrated the maturing of the RIA industry. “The FT 300 research revealed a trend towards larger and more corporate RIA firms, said Loren Fox, Director of Ignites Research and head of the FT 300 ranking. “While in 2014, 89 percent of the FT 300 firms worked in teams, in 2015 94 percent of the FT 300 advisors work in teams. The growth of the team-based approach also means larger staffs, as the average FT 300 firm had 20 staffers this year, up from 14 staffers last year.”

This year, Betterment LLC became the first pure robo-adviser to earn a spot in the FT 300 — marking the arrival of the “robo-adviser.” The use of computerized interfaces and algorithms to create portfolios for investors has already spawned several robo organizations and attracted billions of dollars in assets. Industry observers wonder; however, if robo-advisers will put many RIAs out of business or will expand the reach of traditional RIA firms.

Ignites Research created the methodology and ranked the advisers. Advisory practices reporting $300 or more in assets under management were allowed to apply. The FT then scored candidate firms on six criteria: assets under management (AUM), AUM growth rate, years in existence, advanced industry credentials, online accessibility and compliance records.

“The competition, as always was fierce,” added Fox. “Dozens of high quality advisers just barely missed the list this year, edged out by peers with slightly better profiles. Sometime the difference was a few more years of experience or a slightly more impressive growth rate. Because AUM and AUM growth together comprise a large segment of our internal scoring, there can be a considerable turnover in the list from one year to the next. Only half of the firms that made the FT 300 in 2014 also made the list in 2015.”

Among the investments used by FT 300 advisers, 35% of the assets they advise are in long-term mutual funds, followed by individual stocks and bonds (30%), ETFs (11%) and SMAs (8%).

Roughly 98% of FT 300 advisers have advanced industry designations, such as the Certified Financial Planner (CFP), Chartered Financial Analysts (CFA) and Chartered Financial Consultants (ChFCs). These credentials are important as advisers need to differentiate themselves from the competition and the growing use of robo-advisers.

The FT 300 is one in a series of rankings that the Financial Times has developed in partnership with Ignites Research providing a snapshot of the very best advisers across the U.S. The series includes: FT 401 (retirement plan advisers who service DC plans), FT 400 (financial advisers from traditional broker-dealer firms), and FT 100 (female advisers from brokerages, private banks and RIAs).

“90% of what passes for brilliance or incompetence in investing is the ebb and flow of investment style.” – Jeremy Grantham, GMO

The U.S. equity markets have far outpaced the international markets over the last few years. There are several reasons to explain the drivers behind this divergence in performance. The main driver, in our opinion, has been the aggressive monetary policies of the Federal Reserve (Fed) which has helped the U.S. economy recover faster than those in other developed nations. The other global central banks led by the European Central Bank (ECB) and Bank of Japan (BoJ) have also started on this path of balance sheet expansion, but they have obviously lagged the U.S. Fed’s pace. In the table below, we summarize the annualized total returns for the S&P 500, MSCI EAFE, and MSCI Emerging Market (EM) indices since January 2009, and compared those returns for the previous 12 years prior to the credit crisis. The U.S. equity markets have led dramatically in the past 7 years. This divergence has been especially pronounced in the last two years. The annualized returns, however, were much closer in the previous 12 years, and the MSCI EM Index actually led all the indices, mainly due to the rapid growth in the Chinese economy.

Index Jan. ’09-Feb. ’15 Jan. ’96-Dec. ’07
S&P 500 +16.7% +9.4%
MSCI EAFE +10.4% +8.5%
MSCI EM +12.0% +11.2%

Source: Bloomberg

Given the lackluster performance in the last few years, many investors are questioning whether geographic diversification adds any value to a portfolio anymore. Furthermore, some of our domestic equity managers also invest in international companies, which have contributed to their performance lagging the domestic indices. We would take a contrarian view in answering the above question. As we pointed out in our year-end Client Letter, we view the valuations in the U.S. equity markets to be stretched relative to history. We also believe, regardless of the recent underperformance, the case for investing in international and emerging market equities remains a compelling one. Therefore, we have favored managers with global mandates who can source opportunities regardless of where a company is domiciled. Furthermore, the run up in the U.S. markets over the last few years has resulted in much higher valuations relative to the international markets. In the table below, we compare the relative valuations of the global equity indices.

Index Price/Earning Price/Book Dividend Yield
SPX 18.6x 2.9x 1.9%
MSCI EAFE 17.7x 1.7x 3.3%
MSCI EM 12.4x 1.5x 2.7%

Source: Bloomberg

Many of the leading global companies in technology, healthcare, industrial, media and other sectors are domiciled in the U.S. Also, the U.S. companies have been very fast to adapt to a changing macro environment following the credit crisis. Nevertheless, we believe there are excellent companies overseas as well. Our job as fiduciaries is to hire managers with deep research teams and expertise whom we believe can best uncover those hidden values over time.

Sasan Faiz
Co-Chief Investment Officer

“If the policy is in error, expect a policy error.” – Tad Rivelle, CIO – TCW

On several occasions in the past, we have articulated our belief that the U.S. equity and bond market valuations are stretched. We have also argued that Zero Interest Rate Policies (ZIRP), practiced by the U.S. Federal Reserve (Fed) and other global central banks since the credit crisis, have led to investors chasing higher yields and risk assets without much regard to risk. The Fed’s balance sheet has experienced tremendous expansion since the onset of the credit crisis. According to Guggenheim’s global CIO Scott Minerd, the Fed’s balance sheet now represents roughly 26% of the U.S. economy. While the Fed just recently concluded its bond buying or “quantitative easing” program, it is still not clear how or when the Fed will start to drain some of this liquidity or raise short-term interest rates. Other global central banks have also experienced similar balance sheet expansions relative to the size of their economies. In a recent presentation, CIO of TCW Tad Rivelle shared some of his concerns that the Fed’s monetary policies have distorted valuations in the credit markets. He also stated that the US is currently in a late stage credit cycle, and a rise in volatility should be interpreted as a warning signal in this environment.

As fiduciaries, we believe it is our responsibility to point out such risks in the global financial markets and try to take appropriate steps to protect our clients’ portfolios. For over a year, we have believed that a small allocation to gold or gold mining shares represents an important hedge against super-accommodative monetary policies and the resulting erosion in the value of the US Dollar (USD). According to Bloomberg, the USD Index has lost over half of its value relative to a basket of foreign currencies since the mid 1980s. Nevertheless, the USD has been relatively strong lately versus other reserve currencies (The Euro and Japanese Yen). In our opinion, this is mainly due to the perceived diverging monetary policies in the US and other developed nations.

Focusing on risk adjusted returns and protecting against the downside in a portfolio require us to be contrarian investors at times. This means trimming our allocation in riskier assets that have appreciated and raising our allocation in assets that have lagged and are out of favor. It is no secret that an allocation to gold mining shares has not worked well in the past year. In a properly-diversified portfolio, we do not expect all parts to move in the same direction at the same time. This, however, has not changed our view that gold serves as true “global currency” and the need for such a hedge has never been stronger. While short-term market volatility is never a welcome addition to a portfolio, we believe the true risk in a portfolio is the risk associated with the permanent impairment of capital. By introducing this hedge or slightly increasing our allocation in some portfolios, we are attempting to somewhat mitigate this risk.

If you would like to discuss the rationale behind this move or your portfolio in more detail, please do not hesitate to contact us.
Sasan Faiz
Co-Chief Investment Officer