Fundamentals of Investments July 2013. Current events move markets Domestic: – Effects of Sequester – U.S. Debt International: – Global Debt – Chinese.

Fundamentals of Investments

July 2013

Current events move markets

• Domestic:– Effects of Sequester– U.S. Debt

• International:– Global Debt– Chinese GDP– Japanese Recovery

Economic Indicators move markets

• Key U.S. Indicators:– Gross Domestic Product – Unemployment– CPI (Inflation)– Consumer Sentiment– Retail Sales– Housing Starts– ISI Company Surveys

The Federal Reserve moves markets

• Monetary Policy– Easing or Tightening?– Fed Funds Rate– Open Market Operations

• Commentary/Outlook on:– Unemployment– GDP– Inflation– Future policy decisions

Investment Basics

• Assets may be held for many reasons:– A stream of income through dividends or pre-

defined payments (REITs, MLPs, dividend stocks, preferred shares, oil & gas royalties, fixed income instruments)

– Appreciation potential (long positions in stocks, discount bond, mutual or exchange-traded funds)

– Depreciation potential (short positions in stocks)

Investment Basics

• An investment represents partial ownership in an asset.– Liquid assets (easily convertible into cash)• Publically traded companies are registered with major

exchanges (NYSE, NASDAQ, LSE, etc.)

– Illiquid assets (not easily convertible into cash)• Bonds• Equity shares in private companies

Mutual Funds

• Ownership in a “basket” of individual assets• Potential Advantages:– Broad diversification– Active management– Specific strategies, methods

• Potential Disadvantages:– Over diversification– Management fees and initial fees– NAV calculated at the end of each day

Exchange Traded Funds (ETFs)

• Managed to mirror the returns of a specific index, sector, or asset class– Gold (GLD)– S&P 500 (SPY)– Global Autos (CARZ)

• Advantages:– Access “pure-plays” on specific asset classes– Generally have smaller management fees

• Disadvantages:– May be illiquid, thinly traded– Difference in supply/demand for an ETF’s shares may vary

from the underlying asset, resulting in a price difference.

Investments in individual securities (assets)

• Advantages:– Targeted investments have potential to

outperform peer groups and benchmarks’ returns– May have terminal values (bonds)

• Disadvantages:– Lack of diversification– May be illiquid depending on daily trading volume

Equities – Broad Classifications

• American Depository Receipts (ADRs)– International stocks traded on domestic

exchanges, denominated in U.S. dollars.– May trade differently than similar issues that trade

on foreign exchanges– May be either preferred or common stock

Equity Styles

• Growth stocks– Usually have higher P/E multiples and do not pay

dividends; however, have high future earnings expectations

• Value stocks– Trading at a discount to historic multiples or other

valuation metrics• Blend stocks– A blend of growth and value, with no tilt towards

either style

Equity Classifications

• Market Capitalization – the total value of a company’s shares in the marketplace

• Large Cap (Big companies) – Market Cap over $10 billion (Ford, Google, DuPont)

• Mid Cap (Medium sized companies)– Market Cap between $2-$10 billion (Frost)

• Small Cap (Small Companies)– Market Cap between $0-$2 billion (O’reilly’s)

Fixed Income Instruments

• Government Debt (Treasury Bills)• Corporate Debt– AAA (least risky, lowest yield)– AA (more risky, higher yield)– A (most risky, high yield) – Junk Bonds (rated lower than BB by S&P, highest

yields)• Municipal Debt (Localities)– Taxable– Tax Exempt

Equities – Broad Classifications

• Preferred Stock– Bond-like characteristics– Senior to common stock, but junior to Bonds in the

event of company default– May be cumulative or non, provisions for participation

in certain earnings distributions • Common Stock– Only pay dividends if announced by company– Junior to both preferred stock and bonds– Represent ordinary part-ownership of a company

Case Study – Client XYZ

• Scenario:– $2.5 million available for investment– 1 portfolio– Time horizon >5 years– Risk tolerances differ between family members– Liquidity needs to be approximately $3,000/month

Case Study – Client XYZ

• Scenario (ctd.)– Multiple family members with multiple objectives:• Charitable giving• Growth• Income for retirement• Stability

• Problem solve: How do you structure their portfolio to meet their objectives?

Client Considerations

• It’s necessary to consider the client’s personal needs– Short-term needs • Liquidity• Return

– Long-term needs• Income• Stability• Return in excess of inflation

Client Considerations• It’s also necessary to consider the client’s risk

profile, comprised of their:– Ability to take risk • current stage of life• dependence on the portfolio’s long-term value (is it

their life savings or an amount roped off for discretionary/speculation?)

– Willingness to take risk• How much potential decline are they comfortable with

in a given year?• Are they trying to significantly increase wealth, grow it

modestly, or generate monthly income?

Case Study – Client XYZ

• Based on the client’s considerations, their portfolio’s assets will be allocated towards a certain model to fulfill their specific investment objectives.

Optimum Asset Allocation ModelsInvestment Objective Asset Class Minimum % Current Mix % Maximum %

Cash Equivalent Cash Equivalents 100 100 100

Capital Preservation Cash EquivalentsFixed Income Assets

55

8020

9595

Diversified Fixed Income Cash Equivalents Fixed Income Assets

180

1090

2099

Conservative Income Cash EquivalentsFixed Income AssetsEquity Assets

5405

404515

507515

High Current Income Cash EquivalentsFixed Income AssetsEquity Assets

100

107515

1009520

Income with Growth Cash EquivalentsFixed Income AssetsEquity Assets

13020

36730

207040

Balanced Growth & Income Cash EquivalentsFixed Income AssetsEquity Assets

14040

34750

206060

Long-term Growth Cash EquivalentsFixed Income AssetsEquity Assets

12050

33265

205080

Capital Appreciation Cash EquivalentsFixed Income AssetsEquity Assets

10

70

31780

252590

Diversified Equity Only Cash EquivalentsEquity Assets

190

397

1099

ALLOWABLE ALLOCATION RANGES

Frost’s Investment Team

• Professional investment team with many years of experience– Portfolio Managers– Internal Research team– Traders– Operations & Compliance personnel– Marketing/Administrative staff

Frost’s Investment Team

• Investment team members are comprised of:– CFA Charterholders– Certified Financial Planners– Certified Public Accountants– MBA & other graduate degrees– Staff with high levels of industry experience

Firm Overview• 2008 - Filed with SEC as Registered Investment

Advisor• July 2013 - $9.16 billion assets under

management• July 2013 - Adviser to $2.89 billion in mutual

fund assets• Areas of expertise:– Management of mutual fund family– Management of separate accounts for institutional,

high net worth clients, and trust portfolios.

Firm Overview

• Frost Managed Strategies include:– Growth (FICEX)– Value (FIDVX)– Fixed Income (FIJEX)– Diversified Strategies (FDSFX)– Natural Resources (FNRFX)

Highlights through 2013

• Barron’s named Frost one of their top family of mutual funds (2010-2012)

• Growth of funds (thru 6/30/2013)– Retail share ownership has increased to 39.3

million– Institutional share ownership has increased to

236.9 million

Highlights through 2013

• Clients have grown to include:– Frost Wealth Advisor Clients– WinTrust – Chicago– SWBC – San Antonio– Southern Wealth Consultants– Great West Retirement Platform– Qualcomm Inc.