© 2008 Morningstar, Inc. All rights reserved. 3/1/2008 Managing the Investment Process D C V D C VOSS & OSS & C COMPANY, LLC OMPANY, LLC David C. Voss
Dec 20, 2015
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Managing the Investment Process
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLC
David C. Voss
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCLearning Objectives
• Overview of the investment management process
• Historical risk and return characteristics of investments
• Management of investment risks
• Advantages and disadvantages of investment vehicles
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInvestment Management Process
• Quantify investment goals and objectives
• Develop asset allocation policy
• Identify appropriate investment vehicles
• Implement asset allocation
• Monitor performance
• Make ongoing adjustments
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCExamples of Investment Objectives
• Meet current and future pension liabilities
• Accumulate sufficient assets for retirement
Be able to retire at age 62
Generate $100,000 of income per year (increasing by inflation) from investments
Ensure sufficient funds to provide for potential 30-year retirement
90 percent or higher probability of success
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCTypes of Asset Classes
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Stocks/Equities Large stocks Small stocks International stocks
Bonds Government bonds Corporate bonds Municipal bonds High-yield bonds International bonds
Cash equivalents Money market funds Treasury bills Certificates of deposit
Real assets Real estate Commodities Gold
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCTypes of Risk
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Market timing Inflation
Risk
Credit
Industry/company
Market
Interest rateCall/reinvestment
Liquidity
Political/economic
Currency
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCMeasuring Historical Investment Performance
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Compound annual return (geometric mean) The average performance of an asset that measures the change in wealth over more
than one period.
Arithmetic mean Simple average of returns
Risk (standard deviation) The fluctuation of returns around the arithmetic average return of the investment. The
higher the standard deviation, the greater the variability (and thus risk) of the investment returns.
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCSummary Statistics 1926–2007
Past performance is no guarantee of future results. *The 1933 small company stock total return was 142.9%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Compoundannualreturn
Arithmeticannualreturn
Risk(standarddeviation)
Large stocks
Small stocks*
Governmentbonds
Treasurybills
Inflation
10.4%
12.5%
5.5%
3.7%
3.0%
12.3%
17.1%
5.8%
3.8%
3.1%
20.0%
32.6%
9.2%
3.1%
4.2%
–90 0 90
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCStock Selection Risk
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
1 2 4 6 8 16 30 50 100 1000
Risk
• Company risk• Market risk
Number of stocks in portfolio
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCMarket Timing RiskHypothetical value of $1 invested from 1988–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$9.33
$2.36 $2.41
0
2
4
6
8
$10
Stocks Stocks minus best 18 months Treasury bills
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCMarket Timing RiskThe effects of missing the best month of annual returns
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
–40
–30
–20
–10
0
10
20
30
40% Return
1988 1994 2000 2006198219761970
• Annual return• Annual return minus best month
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInterest Rate RiskWhen yields increase, bond prices decrease
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
2
4
6
8
10
12
14
16%
0
0.20
0.40
0.60
0.80
1.00
1.20
1.40
$1.60
1996 20061986197619661956194619361926
• Bond prices ($)• Bond yields (%)
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInflation Erodes Purchasing Power Over TimeEffects of 3% inflation on purchasing power
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$100k
80
60
40
20
0
0 Years 5 10 15 20 25 30
$73,742
$63,325
$54,379
$46,697
$40,101
$85,873
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInflation Risk1926–2007
Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
10.4%
7.1%
5.5%
2.4%
3.7%
0.7%
Stocks Bonds Cash
0
2
4
6
8
10
12%
Before inflation After inflationBefore inflation After inflation Before inflation After inflation
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLC
Asset Class ReturnsHighs and lows: 1926–2007
Past performance is no guarantee of future results. Each bar shows the range of annual total returns for each asset class over the period 1926–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Compoundannual return:12.5% 10.4%
5.5% 5.3% 3.7%
Smallstocks
Largestocks
Long-termgovernment bonds
Intermediate-termgovernment bonds
Treasury bills
150%
100
50
0
–50
–100
142.9%
–58.0%
–43.3%
–9.2% –5.1%0.0%
14.7%
29.1%
40.4%
54.0%
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCStock Market Contractions and Expansions1973–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
0
1
10
$100
200520011997199319891985198119771973
• Contraction• Expansion• Stocks
–42.6% –14.1% –16.9% –29.5% –14.7% –15.4% –44.7%0
200
400%
85.9% 86.5%
281.5%
71.2%
354.8%
62.6%98.3%
–200
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCMarket Downturns and Recoveries1926–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
–83.4%
–21.8%
–10.2%
–15.0%
–22.3%
–15.6%
–29.3%
–42.6%
–14.1%
–16.9%
–29.5%
–14.7%
–15.4%
–44.7%
% Loss
34 months
6 months
7 months
5 months
6 months
8 months
19 months
21 months
14 months
20 months
3 months
5 months
2 months
25 months
Downturn
151 months
35 months
5 months
7 months
10 months
6 months
9 months
21 months
5 months
3 months
18 months
4 months
49 months
3 months
Recovery
Sep 1929–Jun 1932 Jul 1932–Jan 1945
Jun 1946–Nov 1946 Dec 1946–Oct 1949
Aug 1956–Feb 1957 Mar 1957–Jul 1957
Aug 1957–Dec 1957 Jan 1958–Jul 1958
Jan 1962–Jun 1962 Jul 1962–Apr 1963
Feb 1966–Sep 1966 Oct 1966–Mar 1967
Dec 1968–Jun 1970 Jul 1970–Mar 1971
Jan 1973–Sep 1974 Oct 1974–Jun 1976
Jan 1977–Feb 1978 Mar 1978–Jul 1978
Dec 1980–Jul 1982 Aug 1982–Oct 1982
Sep 1987–Nov 1987 Dec 1987–May 1989
Jun 1990–Oct 1990 Nov 1990–Feb 1991
Jul 1998–Aug 1998 Sep 1998–Nov 1998
Sep 2000–Sep 2002 Oct 2002–Oct 2006
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPeriods of Consecutive Negative Stock Returns1926–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
20%
37%
29%
54%
–25%
–12%
–0.4%–10%
–26%
–8%
–43%
–8%
–15%
–9%–12%
–22%
Average stock market return from 19262007 was 10.4%
–50
–40
–30
–20
–10
0
10
20
30
40
50
60% Return
1939 1940 1941 1942 2000 2001 2002 20031973 1974 19751929 1930 1931 1932 1933
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCAsset Class Performance – Past 10 Years1998–2007
Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1998. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
.80
1
3
$5
1998 2000 2002 2004 2006
$1.30
$1.42
$1.78
$2.02
$2.73
Compound annual return
• Small stocks 10.6%
7.3• Large stocks
• Government bonds
• Treasury bills
• Inflation
5.9
3.5
2.7
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCAsset Class Performance – Past 20 Years1988–2007
Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1988. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
1988 1993 1998 2003
1
10
$20
.60
$2.41
$1.82
$5.89
$9.33
$12.54Compound annual return
• Small stocks 13.5%• Large stocks
• Government bonds
• Treasury bills
• Inflation
11.8
9.3
4.5
3.0
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCAsset Class Performance – Past 82 Years1926–2007
Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1926. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
0.10
1
10
100
$10,000
1,000
1926 1946 1966 19861936 1956 1976 1996 2006
$15,091
$3,246
$79
$20
$12
Compound annual return
• Small stocks 12.5%• Large stocks
• Government bonds
• Treasury bills
• Inflation
10.4
5.5
3.7
3.0
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCLong-Term Asset Class Performance1926–2007
Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Annual
12-monthrollingperiods
Compound annual return
Standard deviation
Highest return
Lowest return
Average positive return
Average negative return
Percent periods positive
Percent periods negative
12.5%
32.6%
316.4%
–75.9%
31.3%
–18.5%
72.9%
27.1%
10.4%
20.0%
162.9%
–67.6%
21.7%
–13.7%
74.5%
25.5%
5.5%
9.2%
54.4%
–17.1%
8.5%
–3.8%
77.8%
22.2%
3.7%
3.1%
15.2%
0.0%
3.8%
0.0%
98.4%
1.6%
Smallstocks
Largestocks
Governmentbonds
Treasurybills
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCStocks, Commodities, Real Estate and Gold1988–2007
Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1988. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$1.72
$5.36
$4.48
$6.98
$9.33
11.8%10.28.87.82.8
Compound annual return$10
.50
1
1988 1993 1998 2003
• U.S. stocks• Commodities• Real estate• International stocks• Gold
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCTime Narrows the Range of Investment Returns1926–2007
Past performance is no guarantee of future results. Each bar shows the range of compound annual returns for each asset class over the period 1926–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Small stocks Large stocks Government bonds Treasury bills
–60
–30
0
30
60
90
120
150%
1-year
Holding period
5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year
Compound annual return:12.5% 10.4%
5.5% 3.7%
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPower of CompoundingHypothetical investment in stocks
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Years contributing: 10Annual amount contributed: $2,000
Years contributing: 10Annual amount contributed: $4,000
Investor BInvestor A
$40,000
$55,138
$20,000
$104,555
• Total amount invested• Compounded value at year-end 2007
0
20
40
60
80
100
120
$140k
1988–2007 1998–2007
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWhat is Asset Allocation?
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Asset allocation is theprocess of combining assetclasses such as stocks,bonds, and cash in aportfolio in orderto meet your goals. Stocks Bonds
Cash
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPotential to Reduce Risk or Increase Return1970–2007
Past performance is no guarantee of future results. Risk and return are measured by standard deviation and compound annual return, respectively. They are based on annual data over the period 1970–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Lower risk portfolio Higher return portfolioFixed income portfolio
Return: 8.2%Risk: 5.5%
Return: 9.1%Risk: 7.5%
Return: 8.2%Risk: 7.5%
15%
85%
21%30%
43%
20%
36%
50%
• Stocks• Bonds• Cash
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCStocks and Bonds: Risk Versus Return1970–2007
Past performance is no guarantee of future results. Risk and return are measured by standard deviation and arithmetic mean, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
13% Return
12
11
10
9
10% Risk 11 12 13 14 15 16 17
Maximum risk portfolio:100% Stocks
80% Stocks, 20% Bonds
60% Stocks, 40% Bonds
50% Stocks, 50% Bonds
100% Bonds
Minimum risk portfolio:25% Stocks, 75% Bonds
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLC
10.1
9.1
6.8
5.5
Diversification Reduces the Impact of Market Swings
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
11.2% 1.3 37.4 23.1 33.4 28.6 21.0 12.6 7.6 12.9 28.7 10.9 4.9
11.0 –0.3 32.0 17.6 26.9 24.4 15.1 7.0 2.9 3.6 21.8 8.7 4.1
10.7 –1.9 26.8 12.3 20.5 19.9 9.3 1.5 –2.0 –5.3 15.1 6.6 3.2
10.3 –3.5 21.7 7.1 14.4 15.1 3.7 –3.9 –6.9 –13.9 8.6 4.4 2.3
10.0 –5.1 16.8 2.1 8.4 10.2 –1.8 –9.1 –11.9 –22.1 2.4 2.3 1.4
15.8
12.5
9.3
6.2
3.1
2007
Highest return
Lowest return
(100% Stocks) (75% Stocks, 25% Bonds) (25% Stocks, 75% Bonds) (100% Bonds)(50% Stocks, 50% Bonds)• Portfolio 1 • Portfolio 2 • Portfolio 4 • Portfolio 5 • Portfolio 3
8.0
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCThe Case for Diversifying
Past performance is no guarantee of future results. Time period illustrated is from 1956–1962. This time period was chosen as a dramatic illustration of stock and bond return behavior and how their often opposite movements reduced portfolio volatility. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
50% Return
40
30
20
10
0
–10
–20
Year 1 2 3 4 5 6 7
Compound annual return
1.9
• Stocks
• 50/50 portfolio
• Bonds
8.5%
5.8
Stocks
50/50 portfolio
Bonds
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCDiversification in Up and Down Markets
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$3,000
Bull market
2,500
2,000
1,500
1,000
500
1996 1997 1998 1999 2000 2001 2002
250
500
750
1,000
1,250
$1,500
Bear market
$1,484
$985
$624$1,181
$1,763
$2,555
• Stocks
• 50/50 portfolio
• Bonds
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCCorrelation Can Help Evaluate Potential Diversification Benefits1926–2007
Past performance is no guarantee of future results. Correlation ranges from –1 to 1, with –1 indicating that the returns move perfectly opposite to one another, 0 indicating no relationship, and 1 indicating that the asset classes react exactly the same. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Smallstocks
Largestocks
LT corporatebonds
LT govtbonds
IT govtbonds
Treasurybills
Small stocks
Large stocks
LT corporate bonds
LT govt bonds
IT govt bonds
Treasury bills
1.00
0.79
0.08
–0.02
–0.07
–0.10
1.00
0.19
0.12
0.04
–0.02
1.00
0.93
0.89
0.20
1.00
0.90
0.23
1.00
0.48 1.00
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInvesting in Stocks
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Ownership in a corporation Voting rights Historically higher returns More risk
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLC
–20
–10
0
10
20
30
40
50%
19961998
20032005
19611963
19681970
19751977
19821984
19891991
19261928
19331935
19401942
19471949
19541956
Small and Large Stock Returns Tend to Be Cyclical36-month rolling period returns 1926–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
• Small stock excess return
JanDec
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCDo Stock Winners Repeat?Top ten performing stocks 1986–2007
Past performance is no guarantee of future results. Annualized returns of an equally weighted portfolio of top 10 stocks by three-year return and return in subsequent three-year period (excluding the smallest 20% of the market). This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
–50
0
50
100
150
200
250
1995 1996 1997 1998 1999 2000 2001 2002 20041990 1991 1992 1993 19941986 1987 1988 1989
150.9%4.7
Average return
• First 3 years• Subsequent 3 years
300% Annualized return
2003
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCBenefits of Bonds in a Portfolio
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Potential growth Historically lower risk Diversification benefits Income generation Expand efficient opportunities
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCBonds Produced Greater Income1970–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Stocks Bonds
• Capital appreciation
• Income
27%
71%
2%
80%
15%5%
• Reinvestment of income
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCBonds Expand the Efficient Frontier1970–2007
Past performance is no guarantee of future results. Risk is measured by standard deviation. Risk and return are based on annual data over the period 1970–2007. Portfolios presented are based on modern portfolio theory. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
5% Risk 7 9 11 13 15 17 19 21 23 25
17% Return
16
15
14
13
12
11
10
9
8
• Stock portfolios
• Stock and bond portfolios
Small stocks
Large stocks
Bonds
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCAdding a Bond Allocation to Diversify1970–2007
Past performance is no guarantee of future results. Risk is measured by standard deviation. Risk and return are based on annual data over the period 1970–2007. Portfolios presented are based on modern portfolio theory. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
55%
40%
5%
Return 10.4%Risk 10.0%
Lower risk portfolio
30%
70%
Return 10.4%Risk 11.7%
Original portfolio
• Stocks• Bonds• Cash
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCIntroduction to Sector Investing
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Sector An area of the economy in which businesses have the same or related products and
services.
Sector funds An investment fund that makes investments solely in businesses that operate in
a particular industry or sector of the economy. Common industries include financial services, technology, health care, energy, and
utilities.
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPros and Cons of Sector Funds
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Owning sector funds may be an alternative to traditional investments or individual stocks
Potential benefits
Concentrated exposure to a single industry increases overall investment risk
Potential risks
Sector funds offer more diversification across an industry than individual securities
Different funds focused on the same industry can have widely varying strategies
Investing in sectors that have low correlation to each other may reduce the overall risk of a portfolio
Individual sectors may be heavily affected by world, political and economical forecasts
Sector funds allow investors to take advantage of changes in business cycles, thereby potentially targeting growth, income, or a blend
Sector funds can have high management fees
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCSector Risk and Return Comparison1992–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
5
9
13
17% Return
5% Risk 15 20 25 30 35 4010
Telecom
Media
Software
Hardware
Financial services
Business services
Health care
Consumer services
Utilities
Industrial materials
Energy
Consumergoods
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCAnnual Sector Winners and LosersHigh and low returns 1998–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
–4.5% –3.8%
–60
–40
–20
0
20
40
60
80
100%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Financialservices
Energy Utilities
Software
Hardware
Hardware
Telecom
Hardware
Healthcare
Media
Software
Software
Utilities
Consumerservices
Consumergoods
Hardware
EnergyEnergy Telecom Energy
–11.2%
–46.2%
–32.9%
–41.3%
9.0%
–11.0%
7.9%
66.9%
97.0%
55.5%
10.4%
–4.1%
65.3%
33.0% 34.4% 35.6%
–15.9%
37.2%
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCBull Market PerformanceSector performance relative to the overall U.S. market
Past performance is no guarantee of future results. Time period represented herein is Oct 1996 to Jul 1998. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Businessservices
Energy
Health care
Telecom
Financial servicesMedia
Software
Utilities
Industrialmaterials
Consumergoods
Consumerservices
Hardware
U.S. market: 33% return
• Underperformers• Outperformers
0
10
20
30
40
50% Return
15% Risk 20 25 30 35 40
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCBear Market PerformanceSector performance relative to the overall U.S. market
Past performance is no guarantee of future results. Time period represented herein is Feb 2001 to Jul 2002. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Consumer goods
Consumer services
Financial services
Energy
Industrialmaterials
Health care
Utilities
Media
SoftwareTelecom
Hardware
Business services
U.S. market: –23% return
–50
–40
–30
–20
–10
0% Return
10% Risk 15 20 25 30 35
• Underperformers• Outperformers
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCHistorical View of Returns by Industry1992–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Percentage of positive/negative 12-month returns
Range of 12-month rolling returns
• Positive• Negative
0
50
100%
–50
0
50
100
150%
Consumergoods
Business Industrialmaterials
Consumerservices
Healthcare
Utilities Energy Financial Telecom Media Software Hardware
19% 24% 17% 24% 23% 22% 21% 19%28% 27%
19%26%
–19.6%–32.0% –28.3%
–20.5%–22.5% –19.4%
–46.0%–60.0%
–68.3%
39.7% 40.4%47.7%
55.5%55.3%70.2% 74.2%
97.0%
124.9%
–27.2%
55.0%
–28.6%
55.5%
–56.9%
70.6%
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCReal Estate Beyond Your Home
© 2008 Morningstar, Inc. All rights reserved. 7/1/2008
Traditionally, investing in real estate has been synonymous with buying a home. For years, opportunities in commercial real estate, either indirectly through real estate investment trusts (REITs) or directly through private transactions, were classified as alternative opportunities that were mostly available to institutional investors.
Today, real estate investing has gained more popularity among investors around the globe. With increased access to commercial real estate through REITs, competitive historical performance, potential diversification benefits, and the increased globalization of commercial real estate, this once alternative sector now has a place in a diversified portfolio.
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCConsistent Long-Term PerformanceCompound annual returns 1972–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 7/1/2008
8.7%
11.2%
13.0%
14.3%
15%
10
5
0
Bonds Large stocks Equity REITs Small stocks
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCReliable Income ReturnsEquity REIT annual returns, past 20 years
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 7/1/2008
–30
–20
–10
0
10
20
30
40%
1988 1993 1998 2003
53
Price return
Income return
% of total return from income
20-year averages (%)
7.2
6.1
• Price return
• Income return• Average annual income return
Total return 13.7
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPotential to Reduce Risk and Increase ReturnStock and bond investors 1972–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 7/1/2008
Stocks and bonds With 10% REITs With 20% REITs
Return: 10.6%Risk: 10.7%Sharpe ratio: 0.42
Return: 10.9%Risk: 10.5%Sharpe ratio: 0.47
Return: 11.3%Risk: 10.4%Sharpe ratio: 0.50
10%
45%
40%
10%
10%20%
10%50%
35%
40%
30%
• Stocks• Bonds• T-bills• REITs
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCDirect Commercial Real Estate
© 2008 Morningstar, Inc. All rights reserved. 7/1/2008
Unlike REITs, direct investment in real estate is not traded on an exchange
Traditionally part of the asset-allocation strategy for pension funds and large institutional investors
Direct control Ability to select individual properties
Investment performance characteristics Competitive risk-adjusted returns Low volatility of returns Low correlation with other investments
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCDiversification Through Global Real Estate
© 2008 Morningstar, Inc. All rights reserved. 7/1/2008
For most of the past 36 years, the United States and Australia have provided investors with the majority of opportunities for investing in publicly traded equity REITs and listed property companies
Introduction of REITs and publicly traded real estate in Europe and Asia has created new investment opportunities abroad
Global real estate investments have low correlations to other asset classes
May provide additional diversification benefits
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCGlobal ReturnsStocks, bonds and real estate 1990–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 7/1/2008
9.6%
8.1%
7.4%
0
2
4
6
8
10%Return
Global real estate Global stocks Global bonds
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPotential to Increase Return and Maintain Risk1990–2007
Past performance is no guarantee of future results. *Global real estate portfolio composition—North American Real Estate 8%, European Real Estate 1%, Asian Real Estate 1%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 7/1/2008
Return 9.7%Risk 11.1%Sharpe ratio 0.50
Sample portfolio
Return 10.3%Risk 11.1%Sharpe ratio 0.55
Sample portfolio with 10% RE
• Stocks
• International stocks• Bonds• Global real estate
33%
33%
33%
10%
30%
30%
30%
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWhy Invest Outside Your Home Country?
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Additional investment opportunities Growth potential Diversification benefits Expand efficient range
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWorld Stock Market CapitalizationYear-end 2007
Capitalization calculated at year-end 2007. Total market capitalization is $39.1 trillion. Estimates are not guaranteed. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
• United States
43%
27%
11%
9%6%
4%
• Other Europe• Japan• United Kingdom• Other Pacific• Canada
International:
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCGDP by Region Five-year average annual percentage change 2003–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
India8.5%
Japan2.0%
Canada2.7%
United States2.8%
United Kingdom2.8%
China10.6%
Australia3.3%
Brazil3.6%
South Africa4.5%
U.A.E.9.4%
Russia6.9%
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCGlobal Household Names
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Health care Merck & Co (US) GlaxoSmithKline (UK) Novartis (Switzerland) Roche (Switzerland) Bayer (Germany)
Technology Microsoft (US) Samsung (Korea) Fujitsu (Japan) Nokia (Finland) LG Electronics (Korea)
Financial services Citigroup (US) HSBC Holdings (UK) Allianz (Germany) Deutsche Bank
(Germany)
Automobiles Hyundai (Korea) Ford (US) Honda (Japan) Toyota (Japan) Volkswagen (Germany)
Telecoms AT&T (US) Deutsche Telekom
(Germany) BT Group (UK) NTT (Japan)
Consumer non-durables Procter & Gamble (US) Nestlé (Switzerland) L’Oréal (France) Colgate-Palmolive (US) Unilever (UK)
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCGlobal Stock Market ReturnsHighest and lowest historical annual returns 1970–2007
Past performance is no guarantee of future results. Each bar shows the range of annual total returns for each region over the period 1970–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
–– –
–
11.0%12.3%11.6%
Compound annual return:11.1%
26.5%23.2% 22.8%
34.3%
107.5%
79.8%
69.9%
37.4%
Annual ranges of returns
120%
100
80
60
40
20
0
–20
–40
PacificEuropeInternationalUnited States
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCGlobal Investing1970–2007
Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1970. All values in U.S. dollars. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$5.60
$25.53
$33.70
$54.05$64.03
$100
10
1
0.10
1970 1975 1980 1985 1990 1995 2000 2005
11.6%11.19.78.94.6
Compound annual return
• International stocks• U.S. stocks• International bonds• U.S. bonds• U.S. inflation
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWorld Stock Markets Exhibit Different PerformanceHigh and low returns 1998–2007
Past performance is no guarantee of future results. Returns expressed in U.S. dollars. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
FinlandSpain
Finland
Finland
Switzerland
NewZealand
Greece Austria
CanadaNewZealand
Japan
Belgium
Greece FinlandGermany
Finland
FinlandIreland
Norway
Ireland
175%
125
75
25
0
–25
–75
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
4.9% 5.5%U.S.annualreturn
28.6%21.0%
–9.1% –11.9%
–22.1%
28.7%
10.9%15.8%
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCComparing U.S. and International Stock PerformanceAverage returns over 10-year holding periods
Past performance is no guarantee of future results. Based on data from 1974–2007. Calculated using rolling 10-year average returns. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
0
5
10
15
20
25%
1983 1986 1989 1992 1995 2007
• U.S. stocks• International stocks
1998 2001 2004
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCThe Risks of International Investing
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Currency risk Economic/political risk Market liquidity risk Differences in accounting standards Costs of investing internationally
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCThe Impact of Currency Fluctuation2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Return to local investors
Currencyimpact
Return toU.S.investors
United States
Pacific region
Japan
European region
United Kingdom
International composite
5.5% 0.0% 5.5%
–1.4% 7.0% 5.6%
–10.1% 6.1% –4.0%
6.5% 7.9% 14.4%
6.6% 1.5% 8.1%
4.0% 7.6% 11.6%
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCDifferences Between Developed and Emerging Markets
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Developed countries Established and stable economies with strong consumption activities and ample
resources. Ex. Australia, Canada, Japan, Germany, U.K., U.S.
Emerging countries Countries that are starting to participate globally by implementing reform programs and
undergoing economic improvement. Ex. Brazil, China, Mexico, Thailand, Russia, Israel.
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCEmerging Market PerformanceRisk and return 1998–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
EmergingLatin America
EmergingAsia
EmergingMideast and Africa
EmergingEurope
0
40%
30
20
10
• Risk• Return
39.9% 39.7%
27.7%
19.9%19.0%
16.5%
32.6%
16.5%
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCEmerging Markets Are More Volatile1988–2007
Past performance is no guarantee of future results. All values are expressed in U.S. dollars. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
0.9%
13.7% 11.9% 12.4% 10.6%
25.0%
9.4% 7.2% 7.6% 8.3%
Developed markets Emerging markets150%Return
125
100
75
50
25
0
–25
–50
–75
Australia U.S. Germany U.K. Japan Mexico Korea Taiwan Jordan Philippines
* compound annual return
*
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCUndeveloped Opportunities1988–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Returns as of December 2007
0
40%
10
20
30
1yr 5yr 10yr 20yr
$206,400
$93,296
• Emerging markets
• United States
39.8%
5.5%
37.5%
12.8%14.5%
5.9%
16.3%
11.8%
Growth of $10k
80
$240k
2003199819931988
0
160
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCInvestment Vehicles
• Index versus active management
• Mutual funds
• Exchange Traded Funds (ETFs)
• Private investment managers
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPros and Cons of Active and Passive Management
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Active
Passive(Index)
Potential to outperform Professional management
expertise May add more value in less
efficient asset classes
Lower cost Lower turnover/more tax
efficient
Tend to have higher fees and expenses
Majority do not outperform benchmark
Upside potential is limited to index performance
Limited selection of index funds in some categories
Pros Cons
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCMany Mutual Fund Investment Categories Exist
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Domestic-stock funds Large-/Mid-/Small-cap Growth/Blend/Value Specialty Target Date
Taxable-bond funds Domestic/International Corporate/Government Short-/Intermediate-/
Long-term High/Medium/Low quality
Municipal-bond funds Single state/National Short-/Intermediate-/ Long-
term
International-stock funds
Foreign World Regional Emerging market
Money market funds
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWhat are Exchange-Traded Funds?
© 2008 Morningstar, Inc. All rights reserved. 7/1/2008
Index fund
Track one specific index
Buy/sell like stocks
Price set by underlying index
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCWhat Kinds of ETFs are Available?
© 2008 Morningstar, Inc. All rights reserved. 7/1/2008
Track a variety of indexes Domestic and global Sectors or industry groups Style-specific such as growth and value Equity and fixed income
May focus on market capitalization (small-, mid- and large-cap)
May concentrate on characteristic based diversification (dividend income)
D C VD C VOSS &OSS & C COMPANY, LLCOMPANY, LLCPros and Cons of ETFs
© 2008 Morningstar, Inc. All rights reserved. 7/1/2008
Cons
Brokerage costs
Market pricing
Relatively new with limited track record
Limited selection in certain asset classes. For example: fixed-income ETFs