Solution Manual for Financial Accounting, 11th Edition by Robert Libby, Patri...
Destinations white paper_march_2015_final
1. How investor tendencies create the need
for a more disciplined approach
The Brinker Capital multi-asset class
investment philosophy and why it works
How this approach is implemented within the
Destinations program and how it can help
investors stay on track for long-term success
In this piece, we will review:
a long-term
success story
ideas. discipline. outcomes.
Brinker Capital Destinations turns broad
diversification into long-term success.
For financial advisor use in a one-on-one presentation. Brinker Capital, a Registered Investment Advisor.
DEFENSIVECONSERVATIVE
M
ODERATELYCONSERVATIVE
BALAN
CED
INCOME
MODERATE MODERATEL
Y
AGGRESSIVEAGGRESSIVE
AGGRESSIV
E
EQUITY
BRINKER CAPITAL
Destinations
Y E A R S
1995 2015
CELEBRATING
20
COMMITTED TO
INVESTMENT EXCELLENCE
2. 1
A Long-Term Success Story March 2015
“We humans are guided by the immediate and emotional impact of
gains and loss, not the long term prospects of wealth.”
- Daniel Kahneman, Nobel Prize winner, 2002
Investor behavior can
derail the best of intentions
your down payment is protected is important to you. You
are willing to have foregone a missed opportunity for the
knowledge that you minimized your risk and remain in a
position to purchase a new home.
We can see an interesting example of this type of mental
accounting in the chart below. Following the credit crisis of
2008, many investors had a strong emotional reaction to the
marketsandbegantospurnalmostanytypeofequityinvest-
ment in favor of cash and fixed income. While this reaction
may be understandable, it was not necessarily logical,
especially for longer-term investors. Over the next six
years, we experienced one of the strongest bull markets
in history, which the average investor did not partici-
pate in. There was, however, one interesting exception.
From 2009-2013, while the equity markets experienced
net redemptions, there was one type of investment that
saw net flows: 529 savings plans. Many investors under-
stood that most of their 529 money would not be used
for several years, if not decades. They employed mental
accounting and realized that the combination of time, risk
and return opportunity would likely work in their favor.
They came to the rational--not emotional--conclusion
that maintaining and adding to their account could be
beneficial. As a result, from 2008-2012, assets and flows
into 529 plans increased during a period where almost
every other equity-based investment saw a decline.
The last two decades have been a rollercoaster of wild rides
up and down in the financial markets. We have experienced
a technology bubble, a housing bubble, and an energy boom.
Wehaveseenthecollapseofsomeofthemoststoriedfinancial
institutions and the rise of a new digital economy with a social
networking company surpassing the largest U.S. automakers
inmarketcapitalization.Therehavebeentworecord-setting
bull markets, a lost decade, a bear market that rivaled
the declines of 1929 and 1973-1974, the world-changing
event of September 11, 2001 and the global credit crisis.
Through these events, investors have experienced highs and
lows in their portfolios and, as a result, many have prospered
while others lost money and confidence in the markets. As
we consider why some investors do well through various
market cycles and others stumble, one recurring theme is
that many successful investors have been able to incorpo-
rate mental accounting into their decision-making process.
Mental accounting
Mental accounting is the thought process of separating
various buckets of money into categories that meet a
specific need, while assigning a time, risk and return factor
to each one. For example, if you are planning to buy a
home in the next few years and have $50,000 set aside for
the down payment, you may decide to place the money in
a short-term bond fund, with the expectation that you will
experience little risk and potentially generate a modest
return. Even if the equity markets rise, the assurance that
State 529 Plan Assets (billions of dollars, end of period 2002-2012)
Chart source: Investment Company Institute and College Savings Plans Network. Data estimated for a few individual state observations in the early
years in order to construct a continuous time series.
$180
160
140
120
100
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Billionsofdollars
Prepaid Tuition Plans
Savings Plan
3. Objective evaluation and decision with regard to
investment selection
Broader access to investment choices and
options
Portfolios constructed and managed to specific
objectives, helping investors to stay the course
and avoid being derailed by emotion and
behavior-driven decisions
More complete portfolios that can be utilized
as one comprehensive choice for an investor’s
assets
A range of risk tolerances that are easily depicted
and explained
Confidence in knowing that professional manage-
ment is continually monitoring, reviewing and
making educated investment decisions regarding
your portfolio
The Brinker Capital investment philosophy can be defined
as broad diversification across and within six major asset
classes, including traditional and non-traditional, or alter-
native asset classes. Found within the original Yale
endowment model theory, each of these asset classes
plays a role within a client’s portfolio, such as growth,
inflation protection, stability and uncorrelated returns.
At Brinker Capital, this multi-asset class philosophy is
implemented through the essential principles of diversi-
fication, innovation and active management.
Consistent with this six asset class methodology, broad
diversification considers market exposures beyond the
typical domestic equity, international, and fixed income
classes, but also includes real assets, absolute return and
private equity. Portfolio managers consider diversification
across the various sub-classes and strategies, resulting in
added value over time.
In order to achieve competitive and consistent returns,
a portfolio manager must embrace investment theory
and be skilled in its application and implementation,
creative in uncovering enhancements and committed
to making continual improvements to its implementa-
tion. Our multi-asset class investment philosophy has
proven successful in meeting investor objectives through
independent market data and the historical track records
of many Brinker Capital strategies.
2
The Brinker Capital multi-asset
class investment approach
Why this approach works
Outsourcing portfolio construction enables
advisors and investors to harness this
expertise and realize several advantages
over self-constructed portfolios, including:
Goals-based wealth management is a multi-step, top-down decision
that begins with an asset class allocation discussion.
Private Equity
Absolute Return
Real Assets
Traditional
Asset Classes
Non-Traditional
Asset Classes
Domestic Equity
International Equity
Fixed Income
Source: Brinker Capital
Brinker Capital’s Six Asset Class Methodology
A Long-Term Success Story March 2015
4. The advantages of outsourcing
Several independent studies have shown that investors
with outsourced professional portfolio management
often have better results than those who do not. As
shown in the chart below, when comparing individually
selected portfolios against outsourced portfolios, gross
returns may not vary significantly but investor risk can.
Knowing how and when to buy and sell individual invest-
ments can make an impactful difference in the overall
success of a portfolio. The historical tendency to “buy
high and sell low” is the greatest single detractor for
investors not meeting their financial goals. When
investment decisions are turned over to a manager of
A Long-Term Success Story March 2015
Destinations is a 20-year success built on diversification.
Putting theory into practice
For two decades, the Destinations mutual fund advisory
program has helped advisors meet the needs and expec-
tations of their clients while navigating the diverse events
that occur on an almost daily basis. Brinker Capital’s
commitment to innovation, diversification across six asset
classes and a disciplined approach have enabled inves-
tors to have greater confidence in the financial markets,
creating an opportunity to grow and sustain their wealth.
While it may be easy to view a line chart illustrating
positive investment performance over a long period of
time, most investors are too short-term focused and
never realize or enjoy the gains that are available to
them. We have seen this documented for more than
two decades in the annual Dalbar Survey of Investor
Results. It is also widely demonstrated that the emotional
impact of a loss is roughly twice the gratification of a gain.
Taking a closer look at the most popular Destinations
strategy, the Moderate portfolio, we focus our atten-
tion on the time periods that were likely to generate the
strongest emotional reaction and potentially cause an
investor to make decisions based on short-term events,
not long-term goals.
Median returns of investors using guidance from a financial advisor (“help”)
vs. the returns of those not using a financial advisor (“non-help”)
a model portfolio, investors tend to react less emotion-
ally and maintain a more patient approach that, over
time, may help keep them invested through all kinds of
markets. It is widely accepted that in order to achieve
long-term investing success, the qualities of discipline,
skill and patience are essential.
Additionally, a study by AON Hewitt titled “Help in Defined
Contribution Plans,” which covered the period from
2006-2012, found that employees who used help in the
form of managed accounts, target-date funds or advice
experienced median annual returns 3.32% higher (net
of fees) than participants managing their own portfolios.
3
14%
12%
10%
8%
6%
4%
2%
0%
25-30 30-35
Billionsofdollars
35-40 40-45 45-50 50-55 >6055-60
Age
Help Non-Help
Source: AON Hewitt
5. 4
A Long-Term Success Story March 2015
S&P 500 Market Highs as of Month End (1/1/1995 - 12/31/2004)
S&P 500 Market Highs as of Month End (1/1/2005 - 12/31/2014)
2000
1800
1600
1400
1200
1000
800
600
400
S&P500PriceIndex
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
615.93
757.02
970.43
1229.23
1469.25
1517.68
1366.01
1147.39
1111.92
1211.92
2200
2000
1800
1600
1400
1200
1000
800
600
S&P500PriceIndex
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
1249.48
1418.30
1549.38
1115.10
1400.38
1363.61
1257.64
1440.67
1848.36
2067.56
Chart Source: Brinker Capital and FactSet
For each year from 1995-2014, we’ve identified the month-
end peak of the market, represented by the Standard &
Poor’s 500 Index (S&P 500). For example, in May 2008,
the S&P 500 ended the month at a peak of 1400.38 and
dropped down to 896.24 by the end of November of the
same year. Certainly for any investor who had invested
near the peak of the market or during this difficult time,
there was tremendous risk of making decisions more
based on emotion instead of rational thought.
The chart below shows year by year the results for the S&P
500 Index and reflects the month-end high for each year.
S&P 500
Market peaks each year
represented by the S&P 500
S&P 500
Market peaks each year
represented by the S&P 500
Market high
for the year
Better time
to invest
6. As you can see from the chart, in a perfect world we would
have rather invested during the periods when the market
was at its low point for the year. Instead we selected
the high point and we did so for 20 consecutive years.
Let’s compare the Destinations Moderate strategy
to an investment that enjoyed one of the better bull
markets in bond market history; the Barclays US
Aggregate Index.
In the example below, $100,000 was invested on
January 1, 1995 into the Destinations Moderate portfolio
and the Barclays US Aggregate, with an additional $10,000
invested each year for the next 20 years. This annual
investment of $10,000 is made during the month when
the market reached its peak for the year. In this example,
the Destinations Moderate portfolio would have produced
returns to generate an ending value of $808,963 and the
Barclays Aggregate would have yielded an end result of
$678,310, a difference of $130,653.
While an equity portfolio would be expected to outper-
form a fixed income portfolio over the long term, it
is widely recognized that the last twenty years have
been a favorable period for bond investors and a more
challenging time for equity investors. The Destinations
Moderate portfolio is a diverse combination of stocks,
bonds and alternative assets and usually maintains a
roughly 60-40% mix between growth and stability assets.
Smart and successful investing is not always easy and
emotions and volatility can lead to poor decisions and
impede success. As this example demonstrates,
important elements of successful investing include
broad diversification, professional management and
a time horizon to match an investor’s personal goals.
For 20 years, Destinations has helped investors achieve
their goals by adhering to these principles, even when,
as this example shows, the investments are made during
challenging times in the market.
20 Years of Investing Near the Peak vs. Investing in a 20 Year Bull Market
(Growth of $100,000 with additional annual investment)
5
A Long-Term Success Story March 2015
$900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
$808,963
$678,310
Chart Source: Brinker Capital and FactSet
Perspective: 20 Years of Speed Bumps vs. Tailwinds
Destinations Moderate Qualified
Barclays Aggregate
$100,000 initial investment on 1/1/95. An
additional $10,000 investment was made
each year in the month of the market peak
(identified by S&P 500 on previous page)
7. Summary
Investorbehaviorsandemotion-drivendecisionsaresignif-
icant detractors of financial success. Utilizing the expertise
and discipline of professional money managers can help
investors avoid the pitfalls of irrational investing. Brinker
Capital’s proven multi-asset class investment philosophy
and Destinations’ time-tested track record of consistent,
risk-adjusted returns may help investors achieve better
outcomes and stay on track for long-term success.
Visit www.BrinkerCapital.com
Call 800-333-4573 and ask to speak with an
Investment Consultant
Connect with us at blog.brinkercapital.com
Learn more about how Destinations and Brinker
Capital’s multi-asset class philosophy helps
investors achieve better outcomes.
The views and opinions expressed are those of Brinker Capital.Brinker
Capital, a Registered Investment Advisor. The returns are composed of
accounts that were open for the full month and are invested according to
the allocation policy. Detailed information on composite returns is available
upon request. Returns are based on actual market values and are weighted
accordingly. Returns are calculated gross (before the deduction) of advisory
fees payable to Brinker Capital and any other expenses for services not
covered by the advisory fee including administrative costs, which would
reduce your return. Certain funds included in the performance information
may no longer be available for purchase and may not be included in the
recommended Investment Strategy. Brinker Capital may also determine
to replace a fund due to a change in management or based upon Brinker
Capital’s evaluation of the fund’s performance. Since Brinker Capital retains
full discretion to add or replace mutual funds in which the account is invested
and to change the allocation among such funds, the historical performance
of the recommended Investment Strategy may reflect the performance of
mutual funds which are no longer included in the recommended Investment
Strategy. Brinker Capital charges one comprehensive fee for investment
management services, which includes manager and fund due diligence, asset
allocation, manager fees, custody fees and trading expenses and solicitor
fees. Solicitor fees are determined by the solicitor and may vary. For returns
net of advisory fees, see the Brinker Capital Net Composite. Advisory fees
are described in Brinker Capital’s Form ADV, part 2A. Returns for periods
exceeding one year are annualized. 0% of the portfolios comprising the
returns are non-fee paying. All return calculations are in U.S. Dollars. Past
performance is no guarantee of future results. An index is unmanaged and
does not reflect the deduction of any fees or expenses, which could reduce
returns. Investors cannot invest directly in an index.
Investing in any investment product carries risk, including the possible loss
of principal, and there can be no assurance that any investment strategy will
provide positive performance over a period of time. The asset classes and/
or investment strategies described in this publication may not be suitable for
all investors. Alternative strategies may involve risks not associated with tradi-
tional investment approaches. As with any actively managed investment, the
manager’s investment style may become out of favor and/or the manager’s
selection process may prove incorrect; which may have a negative impact on
the portfolio’s performance. Investment decisions should be made based on
the investor’s specific financial needs and objectives, goals, time horizon, tax
liability, and risk tolerance. When investing in managed accounts and wrap
accounts, there may be additional fees and expenses added onto the fees
of the underlying investment products. Brinker Capital, Inc. is an investment
management firm, registered with the Securities and Exchange Commission
under the Investment Advisors Act of 1940, and provides customized invest-
ment products and services for financial advisors and their clients. Brinker
Capital, Inc. is wholly owned by Brinker Capital Holdings, Inc. Contact Brinker
Capital’s Client Service team at 800-333-4573 or clientservice@brinkercapital.
com for more information on our investment philosophy or to receive a copy
of our Form ADV Part 2A, composites or a GIPS standards presentation.
The chart below depicts the effect of a 1% management fee on the growth
of one dollar over a ten year period at 10% (9% after fees), 5% (4% after fees)
and 3% (2% after fees) assumed rates of return. For more information about
Brinker Capital and our investment philosophy, including information on fees,
you may request a copy of our Form ADV Part 2A from a Brinker Capital Client
Services representative at 800.333.4573 or at clientservice@brinkercapital.
com. Opinions and research referring to future actions or events, such as
the future financial performance of certain asset classes, indexes or market
segments, are based on the current expectations and projections about
future events provided by various sources, including Brinker Capital’s Invest-
ment Management Group. Information contained within may be subject to
change. Brinker Capital does not render tax, accounting, or legal advice.
6
A Long-Term Success Story March 2015
Year 1 2 3 4 5 6 7 8 9 10
10% 1.10 1.21 1.33 1.46 1.61 1.77 1.95 2.14 2.36 2.59
9% 1.09 1.19 1.30 1.41 1.54 1.68 1.83 1.99 2.17 2.37
5% 1.05 1.10 1.16 1.22 1.28 1.34 1.41 1.48 1.55 1.63
4% 1.04 1.08 1.12 1.17 1.22 1.27 1.32 1.37 1.42 1.48
3% 1.03 1.06 1.09 1.13 1.16 1.19 1.23 1.27 1.30 1.34
2% 1.02 1.04 1.06 1.08 1.10 1.13 1.15 1.17 1.20 1.22
8. At Brinker Capital we implement great ideas with
a disciplined investment approach to consistently
offer financial advisors forward-thinking solutions
intended to achieve better outcomes based on
their clients’ personal goals.
Who we are
BrinkerCapital.com
1055 Westlakes Drive, Suite 250
Berwyn, PA 19312
800.333.4573
Connect With Us
great ideas + strong discipline = better outcomes
ideas. discipline. outcomes.
DEFENSIVECONSERVATIVE
M
ODERATELYCONSERVATIVE
BALAN
CED
INCOME
MODERATE MODERATEL
Y
AGGRESSIVEAGGRESSIVE
AGGRESSIV
E
EQUITY
BRINKER CAPITAL
Destinations
Y E A R S
1995 2015
CELEBRATING
20
COMMITTED TO
INVESTMENT EXCELLENCE
DEST_WP