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Leading-Edge Investment Strategies& Associated Risks
Fiduciary & Investment Risk Management Association21st Annual National Training Conference
April 16, 2007
207.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Today’s Presentation Will Address Trends in Both Market-Linked Products and Traditionally Named Alternative Investments
Source: Tiburon Research & Analysis
Polarization of Investments Process
Polarization
Market-Linked Products
Alternative Investments
Indexed Separate Accounts
Exchange Traded Funds
Index MutualFunds
Hedge Funds
Other Alternative
InvestmentsReal Estate
Venture Capital & Private Equity
307.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
The State of the Investment Advice Market
– The Market Opportunity: Consumer Wealth, Baby Boomers, & the Pending Liquefaction
– The Challenge: The Competitive Playing Field
– Winning Business Strategy: Designing Leading-Edge Investments Offers
The State of the Alternative Investments Markets
– Market Linked Products: Index Funds & Exchange Traded Funds
– Alternative Investments: Hedge Funds, Venture Capital & Private Equity, Real Estate, & Other Alternative Investments
Summary Tiburon Conclusions
Outline
407.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Consumer Households Have Over $17 Trillion of Investable Assets and $46 Trillion of Total Assets
Source: 1/22/04 McKinsey Quarterly; 5/22/02 Wachovia Presentation (Doe) (Spectrem; McKinsey & Company); 5/9/02 Wachovia Presentation (Blythe); 5/9/02 Spectrem Presentation (Doe); 8/14/01 Wall Street Journal; 7/01 Registered Rep (Cerulli); 6/19/00 Investment News; 12/97 Federal Reserve Bank Flow of Funds Accounts & Consumer Finance Survey; Tiburon Research & Analysis
Consumer Households Net Worth($ Trillions)
$46.5
$17.1
$39.7
$6.8
$7.5
$12.4
$9.6
InvestableAssets
RetirementPlan Assets
PersonalAssets
Other IlliquidAssets
TotalHousehold
Assets
TotalHouseholdLiabilities
TotalHouseholdNet Worth
507.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Baby Boomers are the Key Market for the Next Two Decades for Five Reasons, Including their Retirement & Pending Liquefaction
Source: Tiburon Research & Analysis
Reasons Baby Boomers are the Critical Market for Success
Peak Earnings &Savings Years
Wealth Transfer(Receiving)
Retirement & Liquefaction Years
Longer Lives (Retirement Income
Planning)
Social SecurityPrivatization
607.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
The Bad News is… Three-Quarters of Baby Boomers Over the Age of 55 Have Less Than $100,000 in Investable Assets…
Source: 2/3/05 New York Times; Tiburon Research & Analysis
Baby Boomers Over Age 55 by Investable Assets
<$100,00079%
>$100,00021%
707.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
7.0%
8.0% 8.0%
7.0%
8.0% 8.0% 8.0%
5.0%
6.0%
3.3%
2.4% 2.4%2.1%
1.3%
0.2%
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2001 2002 2003 2004
… And the Consumer Household Savings Rate Continues to Hit New All Time Lows
Consumer Household Savings Rate
Source: 1/26/05 New York Times (Federal Reserve); 12/30/04 Wall Street Journal; 11/4/04 US Department of Commerce Web Site; 8/1/01 San Francisco Chronicle; 12/00 SunAmerica Brochure; 10/10/00 San Francisco Chronicle; 7/22/96 Business Week; Tiburon Research & Analysis
807.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
… And the Median Value of a Baby Boomer’s Inheritance is Only $48,000; Very Few Received More Than $100,000
Inheritance >$100,000
2%
Inheritance <$100,000
98%
Source: 2/04 Journal of Financial Planning; 8/12/01 US Bancorp Piper Jaffray Web Site (Gallup); 12/00 SunAmerica Brochure; 7/96 Commonwealth Club Newsletter; 2/19/96 US News & World Report; Tiburon Research & Analysis
Baby Boomers by Size of Inheritance
907.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
The Good News… Boomers’ Pending Retirement Will Drive More Assets Into the Investable Assets Market
Source: 1/22/04 McKinsey Quarterly; 5/22/02 Wachovia Presentation (Spectrem; McKinsey & Co.); 5/9/02 Wachovia Bank Wealth Management Presentation (Blythe); 5/9/02 Spectrem Presentation; 8/14/01 Wall Street Journal; 7/01 Registered Rep (Cerulli); 6/19/00 Investment News; 12/97 Federal Reserve Bank Flow of Funds Accounts and Consumer Finance Survey; 12/97 First Manhattan Consulting Group; Tiburon Research & Analysis
Consumer Households Net Worth($ Trillions)
$46.5
$17.1
$7.5
$12.4
$9.6
InvestableAssets
RetirementPlan Assets
PersonalAssets
Other IlliquidAssets
TotalHousehold
Assets
1007.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Beyond the Liquefaction, Another Opportunity is Presented by the Risk of Living Too Long
Source: 11/03 Institutional Investor; 3/11/03 First Quadrant Presentation (Arnott); Tiburon Research & Analysis
Individual Life Expectancy by Birth Year
6369 70 72 74 75 77 78 79 80
1940 1950 1960 1970 1980 1990 2000 2010 2020 2030
1107.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Even More Critical is the Fact that More than Half of 65 Year Olds Will Reach Age 85 and Over One-Third Will Reach 90
Source: 12/11/06 Investment News; 8/12/01 US Bancorp Piper Jaffray Web Site; 8/12/01 Allstate Brochure; 12/00 SunAmerica Brochure; 7/22/96 Business Week; Tiburon Research & Analysis
100+6%
90-9418%
85-8920%
95-9911%
65-8445%
65 Year Old Person Life Expectancy
1207.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
100% 97%91%
76%
50%
22%
70 75 80 85 90 95
And Amongst 65 Year Old Couples; there is a 50% Chance that One (or Both) Will Live Another Twenty-Five Years
Share of American Couples at Age 65 Where One Spouse Will Reach Certain Age
Source: 2/07 American Funds Brochure; Tiburon Research & Analysis
1307.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
The State of the Investment Advice Market
– The Market Opportunity: Consumer Wealth, Baby Boomers, & the Pending Liquefaction
– The Challenge: The Competitive Playing Field
– Winning Business Strategy: Designing Leading-Edge Investments Offers
The State of the Alternative Investments Markets
– Market Linked Products: Index Funds & Exchange Traded Funds
– Alternative Investments: Hedge Funds, Venture Capital & Private Equity, Real Estate, & Other Alternative Investments
Summary Tiburon Conclusions
Outline
1407.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
All Types of Competitors are Increasingly Chasing the Emerging Affluent and the Wealth Management Business
Source: 5/22/02 Wachovia Presentation (Doe); Tiburon Research & Analysis
Competitive Playing Field
Insurance Agents, CPAs & Lawyers
• Entering the business• Relying on fee-account
programs at the high-end
Emerging Affluent & Wealth Management
Business
Full-Service Brokers• Segmenting offers• Moving to fee-based
accounts
Boutique & Upscale Firms
• Moving down market• Testing new models
Retail Banks• Up-selling banking
customers• Rebuilding trust
departments
Discount Brokers & Online Financial Services
• Adding help & advice• Moving up market
Independent Advisors• Expanding investment
offers• Extending services to
wealth management
1507.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Retail Banks $5.4 Trillion
32%
Independent Advisors $2.1
Trillion12%
Discount Brokers $1.4
Trillion8%
Insurance Companies $0.3 Trillion
2%
Mutual Fund Companies $1.7 Trillion
10%
Wirehouse, Regional, & Boutique
Brokers $6.2 Trillion
36%
Consumer Households Investable Assets by Market
Full-Service Brokers and Banks Have Historically Dominated Control of Consumer Investable Assets
Source: 3/02 Open Finance (Tower Group); 8/13/01 On Wall Street Web Site; 7/13/01 Cerulli Presentation (SIA); 11/6/00 Investment News (Cerulli Associates); 12/97 Securities Industry Yearbook; 12/97 S&P’s Securities Dealers of North America; 7/22/97 American Banker; 6/97 Financial Planning; 6/97 Dow Jones Investment Advisor; 5/12/97 Pensions & Investments; 4/12/97 American Banker; Tiburon Research & Analysis
1607.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
But Independent Advisors Collectively Continue to Outgrow the Competition…
Annual Client Assets Growth Rate by Market(1995 - 2006)
Source: 7/19/04 Federal Reserve Bulletin; 12/97 Securities Industry Yearbook; 7/22/97 American Banker; 5/12/97 Pensions & Investments; 3/97 Federal Reserve Bulletin; 12/96 ACLI Life Insurance Factbook; 11/95 Best’s Review; Tiburon Research & Analysis
16%
13%
11%
7%
3%2%
IndependentAdvisors
Discount Brokers Full-ServiceBrokers
Mutual FundCompanies
Banks InsuranceCompanies
1707.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
The State of the Investment Advice Market
– The Market Opportunity: Consumer Wealth, Baby Boomers, & the Pending Liquefaction
– The Challenge: The Competitive Playing Field
– Winning Business Strategy: Designing Leading-Edge Investments Offers
The State of the Alternative Investments Markets
– Market Linked Products: Index Funds & Exchange Traded Funds
– Alternative Investments: Hedge Funds, Venture Capital & Private Equity, Real Estate, & Other Alternative Investments
Summary Tiburon Conclusions
Outline
1807.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Individual Securities Account for the Largest Share of the Investable Assets of High Net Worth Households
Source: 2/04 Worth (Spectrem Group); Tiburon Research & Analysis
Investable Asset Distribution Amongst High Net Worth Investors
Individual Securities
30%
Separately Managed Accounts
26%
Alternative Investments
9%
Other17%
Deposits & Cash9%
IRAs9%
1907.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
And at Banks, there are Now Nearly Four Million Personal Trusts, More Than Twice the Number That Existed in 1997
Source: 7/6/98 San Francisco Examiner; Tiburon Research & Analysis
Personal Trusts(Millions)
1.71.9 2.0
2.9 3.0
3.4
3.8
1997 1998 1999 2000 2001 2002 2003
2007.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Irrevocable Trust Assets Growth(Including and Excluding Market Appreciation)
Source: 5/01 Banking Strategies (VIP Forum); 3/26/01 Investment News; 1/99 Corporate Executive Board (Federal Financial Institutions Examination Council; VIP Forum); Tiburon Research & Analysis
But When Taking Market Appreciation Out, Irrevocable Trust Assets Have Been Declining at a Rate of 5.2%
8.7%
-5.2%
Growth WithMarket
Appreciation
Growth WithoutMarket
Appreciation
2107.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Banks40%
Brokerage Firms12%
Law Firms9%
Insurance Companies
8%
Independent Financial Advisors
7%
Independent Trust Companies
4%
Other Providers20%
Personal Trust Services Providersby Type
Source: 3/27/03 American Banker (Diversified Services Group); Tiburon Research & Analysis
And While Banks Still Control the Largest Share of the Personal Trust Business, Competition is Multiplying
2207.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Outside of the Trust World, Mutual Funds Have Grown to be an $11 Trillion Market….
Source: 9/25/05 ICI Web Site; 12/31/04 Investment Company Institute Fact Book; 3/05 ICI Web Site; 5/02 Merrill Lynch Presentation (Doe); 9/01 Financial Advisor; 7/01 Registered Rep; 5/1/01 EA Invest Presentation (Doe); 7/16/99 USA Today; Tiburon Research & Analysis
$1.1$1.6
$2.2
$3.5
$5.5
$7.0 $7.0$6.4
$7.4
$8.1$8.5
$10.4$10.8
1990 1992 1994 1996 1998 2000 2001 2002 2003 2004 2005 2006 2007
Mutual Fund Assets($ Trillions)
2307.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
… And Become the Dominant Investment Product…
Source: 3/05 ICI Web Site; 7/19/04 Barron’s; 4/04 Research (MMI); 12/15/03 Investment News (Cerulli); 7/03 Ticker; 5/27/02 Merrill Lynch Presentation (Cerulli) (Doe); 10/01 Investment Consulting News; 7/13/01 Cerulli Presentation (Strategic Insight) (Cerulli); 7/11/01 RunMoney Conversation (Jorgensen); 7/2/01 RunMoney Quarterly Report; 7/01 Financial Advisor; 6/25/01 Investment News; 4/01 AIM Brochure (Cerulli); Tiburon Research & Analysis
Leading Investment ProductsAssets Under Management
($ Billions)
$503 $720
$1,800 $1,800
$10,800
ExchangeTraded Funds
SeparatelyManagedAccounts
Annuities Hedge Funds Mutual Funds
2407.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Beyond Mutual Funds & Individual Securities, there are Three Key Product Trends, Including Open Architecture, the Polarization, and Wealth Management Services & Family Office Services
Source: 11/8/02 EnvestnetPMC Conversation (Yanari); Tiburon Research & Analysis
Financial Advice Key Product Trends
Mutual Funds&
Individual Securities
Polarized Trends to Indexing & Alternatives
Open Architecture
Wealth Management
& Family Office Services
2507.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Banks Continue to Slowly Reposition their Investments Units as Asset Gatherers and Wealth Managers
Source: 1/04 Worth; 5/30/02 Wachovia Meeting (Kelly); Tiburon Research & Analysis
Asset Managers(Manufacturers)
Alternative Value Propositions
Asset Gatherers Wealth Managers
Medium/Low
Financial planning, asset allocation, solid performance, and wealth management services
Medium
Asset allocation and good performance
High
Top performance
Importance of Investment
Performance
Value Proposition
Alternative Value Propositions for Private Banking Units
2607.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Other Investment Products
96%
Separately Managed Accounts
4%
Source: 12/31/05 Money Management Institute Report (Dover Financial Research); Tiburon Research & Analysis
Bank Trust Departments Assets By Product
But the Banks are New to Open Architecture…
2707.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
And Open Architecture Brings Issues… Issue #1: Asset Class Breakdown Shows the Dominance of Large Cap Equity in Separately Managed Accounts
Source: 11/03 On Wall Street (Cerulli); 9/22/03 Money Management Executive; 10/16/01 CDC Email (Jarrett); Tiburon Research & Analysis
Separately Managed Account Program AssetsBy Asset Class
Large Cap Equity60%
Balanced Portfolios24%
Specialty Groups 9%
Mid-Cap Portfolios 4%
Small-Cap Portfolios 3%
2807.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Issue #2: Three-Quarters of Full-Service Brokers Use One-to-Three Separate Account Managers Per Client, Hence Clients Get Limited Diversification
1 Manager40%
2-3 Managers35%
4-5 Managers15%
6 or More Managers
10%
Separately Managed AccountsBy Number of Managers Used
Source: 11/7/03 Legg Mason Advisor Conversation (Rosenfield); 11/7/03 Legg Mason Advisor Conversation (Castle); 11/7/03 Legg Mason Advisor Conversation (Graham); 11/6/03 Legg Mason Advisor Conversation (Barnhill); 11/6/03 Legg Mason Advisor Conversation (Davidov); 11/6/03 Legg Mason Advisor Conversation (Lopez); 11/5/03 Legg Mason Advisor Conversation (Rafalko); Tiburon Research & Analysis
2907.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Issue #3: Many Sponsors Send a Disproportionate Share of their Assets to their Own In-House Offerings
Source: 3/19/03 Wealth Management Letter (Cerulli); 7/01 Inside Institutions Newsletter; Tiburon Research & Analysis
Share of Separately Managed Account Assets Held with In-House Managers
49%
29%
Smith Barney Merrill Lynch
3007.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Issue #4: The Hype of Customization May Not be Fulfilled in Real Client Accounts; Less Than One-Fifth of Full-Service Broker Clients Customize Their Separately Managed Accounts
Separately Managed Account ClientsBy Propensity to Customize Accounts
Customize18%
Don't Customize
82%
Source: 11/7/03 Legg Mason Advisor Conversation (Rosenfield); 11/7/03 Legg Mason Advisor Conversation (Castle); 11/7/03 Legg Mason Advisor Conversation (Graham); 11/6/03 Legg Mason Advisor Conversation (Barnhill); 11/6/03 Legg Mason Advisor Conversation (Davidov); 11/6/03 Legg Mason Advisor
Conversation (Lopez); 11/5/03 Legg Mason Advisor Conversation (Rafalko); Tiburon Research & Analysis
3107.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Issue #5: The Tax Benefits of Separately Managed Accounts May Also be Overstated
Source: 5/03 Financial Planning; 1/23/03 Wealth Management Letter; 11/2/02 SunTrust Presentation (O’Reilly); Tiburon Research & Analysis
Special Year-End Tax
Treatment30%
No Special Year-End
Tax Treatment
70%
Full-Service Broker Clients Who Seek Customized Year-End Tax Treatment
3207.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
The State of the Investment Advice Market
– The Market Opportunity: Consumer Wealth, Baby Boomers, & the Pending Liquefaction
– The Challenge: The Competitive Playing Field
– Winning Business Strategy: Designing Leading-Edge Investments Offers
The State of the Alternative Investments Markets
– Market Linked Products: Index Funds & Exchange Traded Funds
– Alternative Investments: Hedge Funds, Venture Capital & Private Equity, Real Estate, & Other Alternative Investments
Summary Tiburon Conclusions
Outline
3307.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
As Noted Earlier… The Investments Process is Being Polarized with Twin Growth Patterns in Both Market-Linked Products and Alternative Investments
Source: Tiburon Research & Analysis
Polarization of Investments Process
Polarization
Market-Linked Products
Alternative Investments
Indexed Separate Accounts
Exchange Traded Funds
Index MutualFunds
Hedge Funds
Other Alternative
InvestmentsReal Estate
Venture Capital & Private Equity
3407.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Source: 9/04 Journal of Indexes (Bogle); 12/23/02 Forbes; 4/25/01 Smith Barney Presentation (Moszkowski) (Strategic Insight); 11/19/01 Investment News; Tiburon Research & Analysis
Created in 1973, Index Funds Continue to Grow as a Share of All Dollars Invested in Mutual Funds
Index Mutual Fund Assets as a Shareof All Equity Mutual Fund Assets
1%
5%
9%
11% 11%
17%
1991 1996 2001 2002 2003 2004
3507.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Index Mutual Fund Wins
70%
Active Investment
Strategy Wins30%
Over the Long Haul, Index Mutual Funds’ Combination of Low Fees and Low Turnover Has Beaten Active Management Strategies Almost Three-Quarters of the Time
Winning Investment Strategyby Type of Management
Source: 11/23/03 Hudson City Star-Ledger; 6/03 Journal of Indexes; 3/03 Kiplinger’s; 2/3/03 Forbes; 4/24/02 Wall Street Journal; 11/19/01 Investment News; 11/26/01 Wall Street Journal; 8/26/01 San Francisco Chronicle; Tiburon Research & Analysis
3607.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
And Now… Exchange Traded Funds are a Fundamentally Important Product Innovation…
Source: 1/8/07 Investment News (SSGA); 1/23/06 Ignites Email (ICI); 1/18/06 Dow Jones Email (Ryan); 12/19/05 Rydex Investments Brochure (ICI); 11/30/05 ICI Web Site;11/9/05 Morgan Stanley Analyst Report; 10/24/05 Investment News; 10/05 Research; 9/12/05 New Millennium Advisors Presentation (Carty) (ICI); 8/29/05 Investment News (ICI); 8/05 Morgan Stanley Analyst Report (Bloomberg); 7/12/05 IIR Conference Brochure; Tiburon Research & Analysis
Exchange Traded Fund Assets($ Billions)
$1 $7 $20 $36$70 $83
$102
$151
$226
$290
$407
$503
1993 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
3707.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Traditional Index Funds69%
Exchange Traded Index Funds
31%
Index Fund Assets by Product Type
Exchanged Traded Funds Have Made Ground on Index Funds in the Market-Linked Products Market, Already Accounting for One-Third of Its Assets
Source: 6/6/05 Business Week (Financial Research Corporation); Tiburon Research & Analysis
3807.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
The State of the Investment Advice Market
– The Market Opportunity: Consumer Wealth, Baby Boomers, & the Pending Liquefaction
– The Challenge: The Competitive Playing Field
– Winning Business Strategy: Designing Leading-Edge Investments Offers
The State of the Alternative Investments Markets
– Market Linked Products: Index Funds & Exchange Traded Funds
– Alternative Investments: Hedge Funds, Venture Capital & Private Equity, Real Estate, & Other Alternative Investments
Summary Tiburon Conclusions
Outline
3907.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
More Traditional Alternative Investments Vary on Their Risk & Reward Parameters; They Need to be Considered Individually
Source: 3/20/00 John Hancock Brochure;7/23/99 Hedge Fund Research Meeting (Burney); 7/12/99 Investment News; 6/30/99 Hedge Fund Research Presentation (Burney); 6/30/99 John Hancock Meeting (Aborn); Tiburon Research & Analysis
Alternative Investments MarketsRisk & Return Curve
Return
Risk
• Traditional Real Estate
• Agricultural Land (Farmland)
• Timberland
• Leveraged Buyout Funds
• Mezzanine Finance
• Venture Capital
• Collateralized Loan Obligations
• Convertible Bond Arbitrage
• Statistical Arbitrage Hedge Funds
• S&P 500
• Macro/Opportunistic Hedge Funds
• Energy Properties• Collateralized Bond Obligations
• Multi-Strategy Hedge Fund-of-Funds
• Event Drive Hedge Funds• Fixed Income Arbitrage
• Hedged Equities Hedge Funds
• Non-Hedged Equities Hedge Funds
• Collateralized Mortgage Obligations
• Distressed Securities
• Short-Selling Hedge Funds
4007.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Source: 3/20/00 John Hancock Brochure; 9/15/99 Windermere Investment Associates Brochure; 7/23/99 CMS Meeting (Landman); 7/12/99 Investment News; 7/99 Investing in Hedge Funds; 6/30/99 Hedge Fund Research Presentation (Burney); 6/28/99 Business Week; 5/99 Institutional Investor; 5/99 Dynamic Offerings Web Site; 1/13/99 Ivy Funds Letter; 12/14/98 Business Week; 11/2/98 Barron’s; Tiburon Research & Analysis
Each of the Four Types of Alternative Investments Also Has a Different Positioning
Uncorrelated Investments
Incremental Asset Classes
Incremental Asset Classes
Unique Securities
Client Need
AlternativeInvestments
Hedge FundsVenture Capital
&Private Equity
Real EstateOther
AlternativeInvestments
Alternative Investments Types
4107.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Source: 12/99 Dow Jones Investment Advisor; 7/23/99 CMS Meeting (Landman); 7/22/99 Greenrock Research Meeting (Malone); Tiburon Research & Analysis
And The Four Main Types of Alternative Investments May Need to be Seen Differently in Asset Allocation
Representative Asset Allocation
Private Equity & Venture Capital
Real Estate
Hedge Funds
Structured Debt
Cash Fixed Income
EquitiesOther
Hedge Funds
Other Alternative Investments
4207.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Hedge Funds, Relatively Stagnant for Fifty Years, Have Gained Huge Assets Since the Mid-1990s
Hedge Fund Assets($ Billions)
Source: 3/6/06 Business Week (Hedge Fund Research); 12/5/05 Money Management Executive (Hedge Fund Research); 10/15/05 Financial Times; 6/8/05 Wall Street Journal; 1/5/05 Wall Street Journal (Hennessee); 9/2/04 Financial Times; 5/24/04 Forbes (Hedge Fund Research); 4/29/04 Financial Times (Alternative Fund Services Review); 3/29/04 Barron’s (Tass); 3/04 Tremont Presentation (Schulman); Tiburon Research & Analysis
$55
$435$500
$600$750
$980 $1,000
$1,400
$1,800
$200
1990 1995 2000 2001 2002 2003 2004 2005 2006 2007
4307.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
79%
66%61% 63% 61%
21%
34%39% 37% 39%
2001 2002 2003 2004 2005
Hedge Funds-of-Funds
Hedge Funds
Source: 12/14/05 Financial Times (Hedge Fund Research); 12/5/05 Money Management Executive (Hedge Fund Research); 10/15/05 Financial Times; 6/8/05 Wall Street Journal; 1/5/05 Wall Street Journal (Hennessee); 9/2/04 Financial Times; 5/24/04 Forbes (Hedge Fund Research); 4/29/04 Financial Times (Alternative Fund Services Review); 3/29/04 Barron’s (Tass); Tiburon Research & Analysis
Hedge Fund Assets by Fund Type
Hedge Funds-of-Funds Now Account for Nearly 40% of Hedge Fund Assets
4407.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Most Hedge Funds are Relatively Small; 65% of Hedge Funds Have Less Than $50 Million Assets Under Management
Source: 12/02 Putnam Lovell/New River Research Report; 12/11/01 Goldman Sachs Presentation; 12/11/01 AXA Rosenberg Presentation (Martin)(Van Hedge); 6/28/99 Business Week; 5/99 Institutional Investor; 10/1/98 New York Times (Cerulli Associates); Tiburon Research & Analysis
Hedge Funds by Assets Under Management
$50 Million or Less
65%
$50-$500 Million
30%
$500 Million or More
5%
4507.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Hedge Funds Have at Least Three Data Integrity Issues, Including Cherry Picking and Survivor Bias
Source: 3/11/03 Deutsche Bank Presentation (Lamm); 11/8/02 EnvestnetPMC Conversation (Yanari); Tiburon Research & Analysis
Hedge Fund Data Integrity Issues
Cherry Picking
• Self reporting creates high returns bias, as poor performing funds do not report
Survivor Bias
• May need to lower average returns 3-4%
Multiple Data Sources
• Databases all have different data
4607.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
10.7%
6.4%
Returns as Reported by TASSResearch
TASS Returns Adjusted forCherry Picking
One Study Suggests Cherry Picking by Hedge Funds Distorts the Reported Performance Results
Hedge Fund Annual ReturnsAs Reported & Adjusted for Cherry Picking
Source: 9/27/04 North Bay Business Journal (Free Business Journal of Amsterdam); Tiburon Research & Analysis
4707.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Source: 3/3/07 Wall Street Journal (Thomson Financial); 12/2/99 CMS Companies Presentation (Harvard Study); Tiburon Research & Analysis
The Future of the Private Equity Market is Less Clear… Returns Vary Widely…
Investment Performance DifferenceBetween Top & Bottom Quartile Managers
15%-30%
3%-5%
0%-1%
Fixed Income Public Equities Private Equity
4807.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
All that Said, Investments May Matter Less than Wealth Management Services…
Source: 5/5/04 NFP Presentation (Montgomery); 2/10/04 SEI Email (Smith); 1/7/04 SEI Conversation (Smith); 9/23/03 SEI Presentation (Smith); Tiburon Research & Analysis
Baby Boomer Financial Phases of Life
Accumulation (Peak Earnings & Savings Years)
Liquefaction (Retirement & Distribution Planning)
Estate Planning
• 30s-50s
• Marriage• Children• Early earnings years• Business ventures• Wealth accumulation• Early divorces• Peak earnings• Peak savings• Vacation homes• Late divorces• Children's college• Children’s marriage• Aging parents• Grand children
• 60s-70s
• Retirement• Liquefaction• Rollovers• Stock options• Sales of homes• Wealth transfer (received)
• 80s-90s
• Long-term care• Disability• Death of spouse• Wealth transfer (sent)• Charitable giving
Approximate Ages
Key Life Events
4907.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Nearly Half of Consumers Fear that They Will Outlive Their Savings, Creating a Large Potential for Retirement Income Products
Fear They Will Outlive Their
Savings48%
Feel Their Savings Will Be
Sufficient52%
Consumers by Propensity to be Concerned About Retirement Savings
Source: 2/9/04 American Banker (American Bankers Insurance Association); Tiburon Research & Analysis
5007.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Retirement Distribution Portfolios Will Call for Avoiding Volatility Through Annutization and Low Volatility Investment Strategies
Source: 2/07 American Funds Brochure; 6/2/03 National Underwriter; 5/19/03 Investment News; 1/2/03 Ernst & Young Report; Tiburon Research & Analysis
Low Volatility Investment Strategy
• Average investment returns become less meaningful and the timing of returns grows in importance in the distribution phase
• Declines that are compounded by a dwindling capital base can lead to irreconcilable losses
• Must insulate from downside risks
Retirement Distribution Portfolio Strategies
Annutization
• Income annuities or annutization to generate monthly income flow to add to clients’ social security and traditional pension payments
• Interest from CDs or other accounts, sales of assets, and part-time jobs
• Monthly payments from reverse mortgages
• Systematic cashing-out of T-bills, other bonds, and CDs
• Systematic withdrawals from mutual funds and annuities
• Withdrawals from cash value life policies
• Good focus for later!
5107.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Annuity Sales by Funding Method
But Over Three-Quarters of Annuity Sales Represent Transfers From Existing Policies
Source: 12/18/06 Investment news (NAVIA);12/00 Bloomberg Wealth Manager; 5/25/99 San Francisco Gate Web Site; Tiburon Research & Analysis
15%21%
85%79%
2005 2006
Actual New Sales
Existing Policy Transfers (1035
Exchanges)
5207.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
And Finally… Life Insurance May Play an Increasingly Important Role; About Half of Consumer Households Say that They Need More Life Insurance
Consumer Households By Perceived Need for Life Insurance Coverage
Source: 8/15/05 Investment News (Hayden Financial); Tiburon Research & Analysis
5307.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
The State of the Investment Advice Market
– The Market Opportunity: Consumer Wealth, Baby Boomers, & the Pending Liquefaction
– The Challenge: The Competitive Playing Field
– Winning Business Strategy: Designing Leading-Edge Investments Offers
The State of the Alternative Investments Markets
– Market Linked Products: Index Funds & Exchange Traded Funds
– Alternative Investments: Hedge Funds, Venture Capital & Private Equity, Real Estate, & Other Alternative Investments
Summary Tiburon Conclusions
Outline
5407.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
The Opportunity for Financial Institutions to Win is Now!
Source: Tiburon Research & Analysis
Comments
• Boomers will start to liquefy wealth, creating many new (and larger) investors
• But at the same time, boomer investment needs will shift
- Investment strategies may shift more defensive- Retirement income will become a challenge for many- Subsequently, investment management focus will
give way to a broader wealth management focus
• High net worth and moderate net worth households are the sweet spot for most types of advisors…
• Financial institutions will seek to distinguish themselves through superior investments offerings…
5507.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Product & Service Offerings Will Broaden, Creating Numerous New Risk Issues…
Source: Tiburon Research & Analysis
Comments
• Separately managed accounts are growing nicely but use is still concentrated and many are incorrectly managed…
• Index funds & ETFs have emerged as cost competitive alternatives
• Hedge Funds… that’s 1% and 20%… got to get deeper than that and understand the risks – not funds-of-unknown-funds… and valuing securities… and…
• Lots of other alternatives to be packaged soon (e.g., venture capital, private equity, real estate)… return spreads are wide…
5607.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Tapping Into Tiburon Research; Three Free Follow-Ups…
Source: Tiburon Research & Analysis
Free Tiburon Research
• Obtain Copy of Today’s Slides- Business Card with Email Address (preferred) or
send me an email – [email protected]
• Encourage Your Financial Advisors to Benchmark their Businesses & Receive Free Comprehensive Report
- www.BrokerBestPractices.Com- www.IndependentRepBestPractices.Com- www.BankBrokerBestPractices.Com- Thirteen total tools…
• Receive Free Weekly Research Releases- Business Card with Email Address or Sign Up
Online at www.TiburonAdvisors.Com
5707.04.16 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™
Source: Tiburon Research & Analysis
Tiburon Strategic Advisors
• Focus on corporate-level strategy- Serve senior executives only at financial
services companies- Key services: market seminars, market
research, & strategy consulting - Served almost 300 corporate clients and
completed almost 1,000 projects since 1998- Host semi-annual CEO Summits, offer free
weekly research releases, and offer free business benchmarking tools for all types of advisors
• Chip Roame background- McKinsey & Company- Charles Schwab & Company- Tiburon since 1998
Comments