Destinations white paper_march_2015_final

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.

DEFENSIVE CONSERVATIVE M

ODERA

TELY

CO

NSE

RVAT

IVE

B

ALANCED IN

COME MODERATE MODERATELY AGGRESSIVE AGG

RESSIVE AGGRESSIVE EQUITY

BRINKER CAPITAL

Destinations

Y E A R S

1995 2015

CELEBRATING

20COMMITTED TO

INVESTMENT EXCELLENCE

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 markets and began to spurn almost any type of equity invest-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. We have seen the collapse of some of the most storied financial institutions and the rise of a new digital economy with a social networking company surpassing the largest U.S. automakers in market capitalization. There have been two record-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 accountingMental 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

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Billi

ons

of d

olla

rs

Prepaid Tuition Plans

Savings Plan

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 ReturnReal Assets

Traditional

Asset ClassesNon-Traditional

Asset Classes

Domestic Equity

International EquityFixed Income

Source: Brinker Capital

Brinker Capital’s Six Asset Class Methodology


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


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

Billi

ons

of d

olla

rs

35-40 40-45 45-50 50-55 >6055-60Age

Help Non-Help

Source: AON Hewitt

4


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&P

500

Pric

e In

dex

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

615.93

757.02

970.43

1229.23

1469.251517.68

1366.01

1147.39 1111.921211.92

2200

2000

1800

1600

1400

1200

1000

800

600

S&P

500

Pric

e In

dex

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

1249.48

1418.30

1549.38

1115.10

1400.381363.61

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

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


$900,000

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

20132014

$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)

SummaryInvestor behaviors and emotion-driven decisions are signif-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 [email protected] 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 [email protected]. 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


Year 1 2 3 4 5 6 7 8 9 1010% 1.10 1.21 1.33 1.46 1.61 1.77 1.95 2.14 2.36 2.599% 1.09 1.19 1.30 1.41 1.54 1.68 1.83 1.99 2.17 2.375% 1.05 1.10 1.16 1.22 1.28 1.34 1.41 1.48 1.55 1.634% 1.04 1.08 1.12 1.17 1.22 1.27 1.32 1.37 1.42 1.483% 1.03 1.06 1.09 1.13 1.16 1.19 1.23 1.27 1.30 1.342% 1.02 1.04 1.06 1.08 1.10 1.13 1.15 1.17 1.20 1.22

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.com1055 Westlakes Drive, Suite 250

Berwyn, PA 19312 800.333.4573

Connect With Us

great ideas + strong discipline = better outcomes

ideas. discipline. outcomes.DEFENSIVE CONSERVATIVE

MODE

RATE

LY C

ON

SERV

ATIV

E

BAL

ANCED INCOME MODERATE MODERATELY AGGRESSIVE AG

GRESSIVE AGGRESSIVE EQUITY

BRINKER CAPITAL

Destinations

Y E A R S

1995 2015

CELEBRATING

20COMMITTED TO

INVESTMENT EXCELLENCE

DEST_WP

Destinations white paper_march_2015_final

Economy & Finance

Transcript of Destinations white paper_march_2015_final