Ms. Anand,

As I mentioned in my introduction to you last month (forwarded below), my firm is an advisor with a new approach to investing clients’ assets – an approach that is valuation-based, well diversified, and has performed extremely well.  I am reaching out to you today in regards to your article from yesterday’s Journal entitled “More Cash, Less Anxiety”.  Below are some of my thoughts about the piece and I would be interested in your reaction.  If either our firm’s approach or my perspective on your article hold any interest for you, I look forward to following up.

1.       Mr. Leonetti favors momentum investing.  While that is an established approach to trading, you do highlight several of the challenges of this strategy; namely, determining the timing of trades and having the ability to distinguish short-term volatility from shifts in momentum.  In any event, Mr. Leonetti openly admits that he doesn’t use this methodology “because (he) think(s) it’s giving long-term better results”, but rather he prefers it for managing his clients’ emotions.  At Holos we believe that investors are becoming more sophisticated all the time and that if you explain a) what the strategy is, b) why it’s an intelligent methodology, and c) how important discipline is even in times of turmoil, that clients will understand.  They will also appreciate that you are managing their accounts in an way based on reason and which is likely to generate superior returns over the long-term.

2.       Mr. Leonetti charges $1M clients 1.1% of AUM per year as a management fee, which does NOT include financial planning advice – more than 1% of AUM as a management fee is steep when it DOES include planning services.  We believe that clients are increasingly understanding fee structures and that regulatory changes are going to further aid in that education.  We value transparency and are proud of the 0.75% of AUM we charge for our investment advisory services; rates are lower for accounts greater than $1M.

3.       Mr. Leonetti’s methodology and fee structure netted clients of his approach 0.8% of annualized return for three years as of March 31, 2011, gross of fees.  Our model returns for that same period were 9.8% annualized (NET of fees and transaction costs).

4.       The model portfolio presented weights US equities dramatically out of proportion to their underlying’s share of global GDP or growth, and does so with funds charging as much as 1.22%.  (The Asia Pacific funds it does include has a rate of 1.61% and a 5.5% front end load!)  A truly global equity allocation can be created with more broad diversification for much less.  Our equity holds are about 36% in the US, 33% in other developed markets, and 22% in emerging markets (spanning large to small market caps, with the remaining 9% in overlapping classes), all for a weighted 0.48%.  That difference in expenses alone could account for a significant change in account value over a mid- to long-term investing horizon.

Every advisor takes a different approach to managing assets.  However, some advisors employ a methodology that doesn’t seem very analytically rigorous, is applied in an expensive way, and doesn’t yield impressive returns.  We think we have an alternative and I look forward to possibly discussing our approach with you.

Best regards,
Adam Orlov

Ms. Anand,

I am writing in reaction to your article in Friday’s Wall Street Journal (“ETFs? Not Right Now.”).  I found several of Donna Levy’s perspectives to be curious and, in line with your objective to “Feature model portfolios from prominent financial advisers who invest in mutual funds and ETFs”, I’m writing to see if you have an interest in perhaps covering another point of view on this subject.

My firm, Holos, is a five-year-old advisory shop that represents some of the new sophistication that is helping this business to evolve.  We have an efficient business model and use cost effective investment products to attempt to optimize risk-adjusted returns for today’s knowledgeable clients.  We are a research and valuation driven shop that uses models based on a fundamental look at global macroeconomic information.  Those models drive dynamic asset allocations decisions that over- and under-weight an array of classes, based on mispricings in the market.

We have also learned many of the lessons that some older advisors haven’t; e.g., not trying to time the markets, realizing the folly of picking active managers, etc.  We take a fundamental approach to global debt and equity asset allocations, we do so in a cost effective way, and we allow mispricings time to adjust while avoiding the temptation for over-trading.

I would enjoy discussing with you the new approach that we implement, but here are also a few of my thoughts about Ms. Levy’s approach:

1.       She favors active managers over ETFs for their flexibility. However, haven’t we seen sufficient research yet to tell us that the majority of active managers will underperform their benchmarks and that you can’t know ex ante who the minority of winners will be?

2.       She’s cited as saying that the “typical ETF loses value when markets fall”. Isn’t that tautological?  If we’re talking about being long an ETF which is itself long securities and those securities decrease in price, then yes, the ETF’s price will fall.

3.       She goes on to say that it is “more egregious to lose money than to underperform a benchmark”. That seems hard to argue with…and hard to defend.  On the one hand, I suspect many investors would rather underperform a theoretical number than lose actual money, but those are two separate issues.  How one performs relative to a benchmark is a measure of an investment strategy’s results against similarly allocated assets.  Whether or not an account loses money is an absolute measure of its performance.  All investors want to make money, but what benchmark they use depends on their total investment profile, their risk appetite, time horizon, etc.

4.       She further states that “We don’t think over time investors have been rewarded for taking equity risk”.  Then why does she have as much as 65% of assets (currently 48% in the portfolio she mentions) in equities and not all in fixed income?

5.       One of the holdings she discusses is Fairholme Fund, which she likes (in part) because they held lots of cash. Is she paying them their expense ratio to be a bank and handle her asset allocation decisions?  She says the fund has “lots of red flags” and has underperformed the US market by 15% recently, so now is the time to start winding down the position?! This is a perfect example of the problem with picking managers and trying to time the market.

6.       She only allocates 10% of the portfolio to foreign stocks. However, international markets represent more than 50% of global equity market caps.

7.       Ms. Levy said that one of her modest risk appetite clients would have seen 6.4% annualized for three years ended March 31, 2011 before fees, which would make the true number closer to 5.4%, I guess. We produced 9.8% in our 65% equity/35% debt baseline strategy for the same period after fees.

8.       The weighted portfolio cost of the products Ms. Levy listed is 2.06%, which goes on top of the 1% annual management fee she referenced for smaller accounts. The cost of our portfolio is 0.40% and our maximum fee is 0.75% of assets.  (Holos is strictly an investment advisory firm that doesn’t provide full financial planning.)  Even if we assume that we only did as well as Ms. Levy and not outperform her (as recent history and an understanding of our strategy might suggest), the impact of those differences in fees is substantial: If the securities in Ms. Levy’s portfolio and in our portfolio each made 10% per year for the next 10 years, we outperform by more than a cumulative 20% just based on our cost structure!

I hope that you think our starkly different point-of-view (new vs. old, cost-efficient vs. expensive, passive vs. active, global vs. parochial), our underlying strategy, and our performance to date would be interesting for your readers.  I appreciate your time and please let me know if you would like any further information or would like to set-up a time to talk.

Best regards,
Adam Orlov

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