It’s hard to believe this is my last month at the helm of NaaiM’s board. looking back, i

would have to say it has been a blast and one of the best things i have done in my career. With that said, i am also thrilled with the continuing leadership as NaaiM moves into its 2014-2015 year. Jason Wilder will be taking over as President, while ted lundgren moves into the vice

President position. they are strong leaders, great people to work with, and will continue to move NaaiM forward.

our emphasis over the last year has really been to formalize the value NaaiM offers its members. big changes have happened on the NaaiM web site as we worked to provide thought provocative, valuable content on investment strategies, markets and even personal insights. NaaiM speaks is one example of that focus.

While still in its infancy, the new NaaiM indicator Wall has something for everyone. this is a new feature of the members’ only section of the website that provides indicators for everyone from the fast money manager to the strategic allocator. You’ll find indicators for leadership, sentiment, valuation, momentum and trends. i would like to extend a big thank you to Ned davis research for allowing us to publish some of their key indicators on the wall. “big Mo tape” is the one indicator i would want to have access to if i were stranded on a desert island. it pretty much guarantees (i assume i’ll be hearing from my compliance dept. on that comment!) to keep you on the right side of the market.

When you visit the indicator Wall, keep in mind that this is just the first go around. We would love to hear from the membership. do we have what you are looking for? What other indicators would you like to see? does the Wall provide a look at indicators you had not considered before?

another exciting innovation of the year is the NaaiM shark tank. the NaaiM shark tank is a new addition to the Uncommon Knowledge conference. if it goes over well, we hope to be able to offer it on a more expanded basis next year. We know NaaiM is filled with intelligent people with creative ideas and strategies. the ability for people looking for help with money management and others looking for distribution to network through NaaiM has always been a big benefit. the shark tank formalizes that process, but also lets a whole bunch of people into some good ideas. i know we had a tough time narrowing it down to just nine presenters. there is lots of room to grow the concept in the future.

Trading STraTegieS

Comments on the Bond Market .............................................................8Study: Active Management Delivers More Dependable Returns ............11The Risk of Not Managing Risk ............................................................13

naaiM newS

Once-a-Year Opportunity is Almost Here ................................................1President’s Letter ...................................................................................1Ned Davis Research’s Neil Leeson Opens the NAAIM Conference

as Keynote Speaker ...........................................................................3Introducing… the Shark Tank Presenters ................................................3Riverfront Cruise Featured on Monday Night at Uncommon Knowledge ...4NAAIM Golfers Can Look Forward to the Club at Emerald Hills ...............42014 Uncommon Knowledge Agenda ...................................................5From All at NAAIM – Thank You, Sponsors ............................................6NAAIM Indicator Wall ...........................................................................6Regional Meetings Update ....................................................................6Wagner Award Past Winners: How the Wagner Award Competition Has

Helped Them to Succeed .................................................................14Please Welcome the Following New Members

at 2014 Uncommon Knowledge ......................................................15Uncommon Knowledge Registration Form ...........................................16

6732 W. Coal Mine ave., #446 littleton, Co 80123 888-261-0787 info@naaim.org www.naaim.org

Bimonthly Journal of the National Association of Active Investment Managers Vol. 11 Issue 2, April 2014

Dave Moenning

President’s Letter

continued on page 10

National Sponsor

The views and opinions of the authors are not necessarily those of NAAIM, its officers or Board of Directors.

continued on page 2

Once-a-Year Opportunity is Almost Here

NaaiM’s UNCoMMoN KNoWledge CoNfereNCe truly is a once-a-year opportunity, and time is run-ning out for you to take full advantage of the event.

the 2014 Uncommon Knowledge will take place May 5-7 at the hyatt regency Pier 66 in fort lauderdale, florida. there’s no other conference that focuses exclusively on the informa-tion needs of the active investment manager – from investment strategies and implementation to marketing, compliance and back office. it’s a conference that pays for itself many times over in new ideas to help your advisory firm be more successful.

among the speakers you will want to get to know are:Timothy P. Connolly, Cfa, Managing Partner, sconset

Capital Management, a long/short equity hedge fund. his specialties include equity valuation, derivatives, convertibles, economics, and quantitative analysis. With more than 20 years of experience in portfolio management and equity analysis, tim has a demonstrated history of selecting profitable investments.

2 April 2014

Michael A. Gayed, Cfa, chief investment strategist and co-portfolio manager at Pension Partners, llC, an investment advisor that manages a mutual fund and separate accounts according to its ataC (accelerated time and Capital) strate-gies focused on inflation rotation.

Dave Walton is the 2014 winner of the NaaiM Wagner award with his paper on Know Your System! — Turning Data Mining from Bias to Benefit through System Parameter Permutation. dave is a system validation engineer at a large technology company with a passion for system development, validation and automation. he expects to transition to full time quantitative trading over the next several years.

Thomas D. Giachetti, Jd, has been enlightening NaaiM audiences with the realities of compliance complexities for well over a decade. a shareholder and chair of the securi-ties Practice group at stark & stark, tom’s legal practice is devoted to investment-related matters, including the represen-tation of investment advisers throughout the United states.

Neil Leeson, etf strategist, is in charge of etf research and product development for Ned davis research group. he is the editor of etf Corner publications such as the weekly ETF Highlights, and several publications distributed to Ndrg’s third-party relationships.

Julie Littlechild is Ceo and founder of advisor impact, an expert on client engagement among financial advisors and author of the Business Success Kit, a comprehensive guidebook to assist financial advisors in efficient practice management. Julie has worked with and studied top producing financial advisors for 15 years.

David C. Wright, Jd, is a co-founder of sierra investment Management and has served as managing director for over 25 years. together, he and dr. Kenneth l. sleeper have developed

and refined sierra’s integrated, well-proven risk-management strategy to limit the impact of adverse market episodes on managed accounts.

Bob Ruffolo is an inbound marketing professional with over 10 years of experience in online marketing and strategy development. his expertise is online marketing, including: campaign development, web design, search engine optimiza-tion, social media marketing, blogging, marketing analysis, CrM management, closed loop reporting.

Ramon Ray is a small business evangelist with infusion-soft and smallbiztechnology. com. his presentation focuses on the 7-step lifecycle Marketing process which shows small businesses how to get more leads, increase sales, create loyal customers and more.

and don’t overlook the NaaiM members participating in the panel discussions:

The Effects of Rising Interest Rates on High Yield Bonds and Gold — Moderator: brian humphrey, Managing director, sales, Ceros financial services, inc./advisors Preferred, llC; Panelists: ralph doudera, Ceo, spectrum financial services, inc.; Michael Price, President, Price Capital Management, inc.; and Jerry Wagner, President, flexible Plan investments, ltd.

What Type of Manager Are You? Style Boxing Active Management — Moderator: Jason Wilder, CMg Capital Management group inc.; Panelists: Cliff Montgomery, scotia Partners, ltd.; venk reddy, Zeo Capital advisors, llC; brenda Wenning, Wenning investments, llC

Your Conference, Your Agenda: Topics You Want to Talk About Moderator: Jim applegate, financial services advisory, inc.; dave Moenning, heritage Capital Management; Jason Wilder, CMg Capital Management group, inc.

Clockwise from upper left corner - Timothy Connolly, Michael Gayed, David Wright, Julie Littlechild, Thomas Giachetti, Neil Leeson, Ramon Ray, and Bob Ruffolo.

Once-a-Year Opportunity is Almost HerecontInued from pAge 1

www.naaim.org 3

Ned Davis Research’s Neil Leeson Opens the NAAIM Conference as Keynote Speaker

FoUNded iN 1980, Ned davis researCh approaches its 35th anniversary with a remarkable array of market research used by investors worldwide. at

the founding of the company, Ned davis wrote and charted everything manually and his small staff sent a cut-and-pasted version to an outside printer for production. fast forward 35 years. today the breadth, depth, and quality of Ndr’s data and research are unparalleled. investment professionals throughout the world depend on Ned davis research for balanced stra-tegic insights and actionable ideas.

Neil leeson opens the NaaiM conference with invest-ment ideas for every attendee with his focus on Actionable

Investment Ideas for Active Managers. Neil is Ned davis research’s etf strategist and is in charge of etf research and product development for the Ned davis research group etf service and editor of etf Corner publications such as the weekly ETF Highlights, which is designed to enhance Ndrg’s strategists’ thoughts by providing ideas for execution of recom-mendations through etfs.

Neil’s presentation is just the beginning of an information filled three-day conference designed for the active manager. Keep reading to discover more about our speakers and agenda and if you haven’t, register now for the best conference in 2014 for active investment managers.

Introducing… the Shark Tank Presenters

A NeW PrograM is debUtiNg at the Close of the 2014 conference – the NaaiM shark tank. the “tank” is an opportunity for NaaiM members with

strategies they would like to offer through other advisers to pitch their investment approaches and answer challenges from the “sharks.” it will be held Wednesday afternoon from 1:30 to 5 p.m.

the nine presenting members include:• Ken graves, Capital research advisors, llC• deWayne hall, good life asset strategies, llC• len fox, scarecrow trading• bryan sullivan, vellum financial• larry McMillan, McMillan analysis

• John McClure, Profitscore Capital Management, inc.• alan battles, brighton Wealth Management inc.• Paul Cunningham, signal research group• steve Pursky, Windsor securities

all registered attendees at the NaaiM conference are welcome to attend the presentations Wednesday afternoon. there will be limited audience participation, so you may have the opportunity to ask your questions of the presenters.

the shark tank promises to provide exceptional insight into the strategies of other active managers and new ideas for everyone. this is one conference where you don’t want to leave early.

4 April 2014

SUNshiNe, rolliNg greeNs aNd little White balls are oN the ageNda for sunday, May 4 at the NaaiM conference in fort lauderdale. the 2014 NaaiM golf Classic will take place at the Club at emerald hills, with a shotgun start at 12:30pm.

transportation will be provided from and to the hyatt regency Pier 66, as well as wrap-up awards banquet.

the Club at emerald hills is recognized by Golf Digest as one of its

“best Places to Play.” opened in 1969, the club is centrally located between fort lauderdale and Miami in the city of hollywood, florida. it has served as host site for the Pga tour doral and honda open Qualifiers, as well as numerous Pga tournaments, so players are guaranteed a great experience along with an exceptional opportunity to get to know other NaaiM members and sponsor representatives on a personal basis.registration is limited, however, so send in your conference registration before the four-somes are all filled.

Riverfront Cruise Featured on Monday Night at Uncommon Knowledge

MoNdaY Night, atteNdees at UNCoMMoN Knowledge 2014 will have an opportunity to cruise the calm waters of fort lauderdale’s magnificent

inland waterways on the luxury yacht anticipation iv. this special off-site event includes cocktails, appetizers and dinner along with a spectacular view of florida’s gold Coast. special

thanks to NaaiM National sponsor guggenheim for making this adventure possible.

on tuesday, after the agenda comes to a close for the day, enjoy cocktails and appetizers in the sponsor room courtesy of NaaiM’s Platinum sponsors - sierra Mutual fund and advi-sors Preferred/Ceros.

NAAIM Golfers Can Look Forward to the Club at Emerald Hills

www.naaim.org 5

NAAIM UNCOMMON KNOWLEDGE 2014 CONFERENCE AGENDA

May 5 – 7

2014 National Sponsor - Guggenheim

SUNDAY, MAY 4 11:00 AM NAAIM Golf Classic – The Club At Emerald Hills (12:30 PM Start) 4:00 – 6:30 PM Solo Advisors Meeting – Hyatt Regency Pier 66 7:30 NAAIM Welcome Reception – Hyatt Regency Pier 66

MONDAY, MAY 5 7:00 – 9:00 AM NAAIM Board Meeting - All Members Invited to Attend 8:30 – 9:15 New Member Registration and Welcome Orientation 8:30 Registration/Sponsor Hall Opens - Continental Breakfast 9:45 Welcome - NAAIM President, Dave Moenning, Heritage Capital Management 10:00 Keynote Speaker -- Actionable Investment Ideas for the Active Manager– Neil Leeson, Ned Davis Research 11:00 Long Term Trading Strategies – Tim Connolly, Sconset Capital Management 12:00 PM Lunch and Sponsor Introductions 1:30 Inbound Marketing – Bob Ruffalo, IMPACT Branding 2:30 – 3:15 Sponsor Breakouts – Session #1 – concurrent breakout sessions hosted by Sponsor firms 2:30 – 3:30 Refreshment Break 3:30 – 4:30 The Effects of Rising Interest Rates on High Yield Bonds and Gold – Moderator: Brian Humphrey, Managing Director, Sales,

Ceros Financial Services, Inc./Advisors Preferred, LLC; Panelists: Ralph Doudera, CEO, Spectrum Financial Services, Inc.; Michael Price, President, Price Capital Management, Inc.; and Jerry Wagner, President, Flexible Plan Investments, Ltd.

4:30 – 5:30 Style Box / Member Panel – Moderator: Jason Wilder, CMG Capital Management Group Inc.; Panelists: Cliff Montgomery, Scotia Partners, Ltd.; Venk Reddy, Zeo Capital Advisors, LLC; Brenda Wenning, Wenning Investments, LLC

6:30 Monday Evening Event – Dinner Riverfront Yacht Cruise on Anticipation IV

TUESDAY, MAY 6 7:30 AM Continental Breakfast in the Sponsor Hall 8:30 This is Not Yet a “New Normal” Environment – What are the Implications for Investing? -- David Wright, Sierra Investment

Management 9:30 Client Engagement and Practice Management – Julie Littlechild, Advisor Impact 10:30 – 11:15 Sponsor Breakouts – Session #2 – concurrent breakout sessions hosted by Sponsor firms 10:30 – 11:30 Refreshment Break 11:30 Succeeding in the Face of “Felt and Feared/Giuliani Style” Regulation Exams - Thomas Giachetti, Stark & Stark Attorneys

at Law 12:30 PM Lunch & 25th Anniversary Celebration 1:45 Keynote: Equity Perspectives - Farhan Sharaff, Assistant Chief Investment Officer, Equities, Guggenheim 2:45 – 3:30 Sponsor Breakouts – Session #3 – concurrent breakout sessions hosted by Sponsor firms 2:45 – 3:45 Refreshment Break 3:45 Asset Allocation Utilizing Intermarket Analysis - Michael Gayed, Pension Partners 4:45 NAAIM Annual Membership Meeting – 25th Anniversary Celebration, Committee Reports, Financial Report, Annual Elections

and more to be presented during the meeting. 5:15—6:30 Cocktail Party in Sponsor Hall

WEDNESDAY, MAY 7 7:30 AM Continental Breakfast in the Sponsor Hall 8:30 Wagner Award – First Prize Winner Dave Walton - Know Your System! — Turning Data Mining from Bias to Benefit

through System Parameter Permutation. 9:30 Date Your Leads, Marry Your Customers with Lifecycle Marketing – Ramon Ray, Small Business Evangelist, Infusionsoft

and Smallbiztechnology.com 10:30 Refreshment Break 11:00 Your Conference, Your Agenda / Member Panel – Moderator - Jim Applegate; Financial Services Advisory, Inc.; Dave

Moenning, Heritage Capital Management; Jason Wilder, CMG Capital Management Group 12:00 PM Closing Lunch 1:30 NAAIM Shark Tank 2:50 Refreshment Break 3:10 NAAIM Shark Tank Part II 4:30 Adjourn

6 April 2014

From All at NAAIM – Thank You, Sponsors!

The sUPPort of the NaaiM sPoNsors MaKes our conferences possible. take some time to visit with the firms at the NaaiM conference and let them know

that their participation matters. and, when you have the need for products and services they can provide, we urge that you call them first.

Regional Meetings Update

NaaiM reCeNtlY held a ChaPter MeetiNg iN the Northern California/san francisco bay area. the event was well-attended with members and prospec-

tive members coming from all around the area. the event was held at the olympic Club (a well-known private institu-tion with a wonderful athletic history.) and was sponsored by NaaiM member Zeo Capital. thanks to venk reddy and Kara Paik with Zeo for helping to organize and host the event!

the toledo/Perrysburg Chapter will host its next meeting on May 20, 2014 starting at 10:00 am. Meetings are held every two months at the toledo Public library. for more informa-tion, call Jim fydroski at (248) 358-6970.

if you would like to help host a meeting in your area, please contact susan baber, NaaiM Marketing director at susan.baber@naaim.org

NAAIM Indicator Wall

ReCeNtlY, NaaiM aNNoUNCed a NeW MeMber benefit, the NaaiM indicator Wall. it is up and running on the website – you can find a quick link

under Member benefits or use this link to visit the page: http://www.naaim.org/join-naaim/membership-benefits/naaim-indicator-wall/

save as a favorite and you’re ready to go! the indicator Wall is updated every Monday.

since this is a member-only benefit, it is password-protected. to get the password, members can login to the NaaiM Community. there they will find the password in the all MeMber discussion group.

or just email NaaiM at info@naaim.org or susan.baber@naaim.org.

the NaaiM indicator Wall consists of various indicators compiled in one place, courtesy of NaaiM President dave Moenning. Moenning will monitor and post the indicators on a weekly basis.

the indicator Wall will include readings and explana-tions of indicators and/or models in the areas of price/trend, momentum, key price levels, overbought/sold readings, senti-ment, monetary, economic, inflation, and market cycles.

firms that supply their indicators would receive attribu-tion and links to their website.

for more information or for details on how to get your indicator included on the NaaiM indicator Wall, please contact dave Moenning at dave@heritagecapitalmanagement.com.

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* Blended benchmark is a 50%/50% split between S&P 500 Index and JPMorgan Developed High Yield Index. S&P 500 Index is an unman-aged index of common stock performance. JPMorgan Developed High Yield Index is an unmanaged index of high-yield fixed-income securities issued in developed countries. Indexes are unmanaged and used as a broad measure of market performance. It is not possible to invest directly in an index. Past performance is not indicative of future results. Investing involves risk, including loss of principal.

Consider these risks before investing: Investments in small and/or midsize companies increase the risk of greater price fluctuations. Lower-rated bonds may offer higher yields in return for more risk. Growth stocks may be more susceptible to earnings disappointments, and value stocks may fail to rebound. Bond investments are subject to interest-rate risk (the risk of bond prices falling if interest rates rise) and credit risk (the risk of an issuer defaulting on interest or principal payments). Interest-rate risk is greater for longer-term bonds, and credit risk is greater for below-investment-grade bonds. Unlike bonds, funds that invest in bonds have fees and expenses. Our focus on leveraged companies and the fund’s “non-diversified” status can increase the fund’s vulnerability to these factors. Our use of short selling may increase these risks. Mortgage-backed securities are subject to prepayment risk and the risk that they may increase in value less when interest rates decline and decline in value more when interest rates rise. Stock and bond prices may fall or fail to rise over time for several reasons, including general financial market conditions and factors related to a specific issuer or industry. You can lose money by investing in the fund.

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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or a loss when you sell your shares. Performance of class A shares before sales charge assumes reinvestment of distributions and does not account for taxes. After sales charge returns reflect a maximum 5.75% load. To obtain the most recent month-end performance, visit putnam.com.

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8 April 2014

Comments on the Bond MarketsdAVId W. WrIght

The Yield oN the teN-Year U.s. treasUrY Note is the fulcrum for yields on all other debt instru-ments in the world of similar maturities – as well as

a key factor in the valuation of other investments including stocks and real estate.

in normal circumstances, corporate bonds and muni bonds, for example, trade at yields that reflect a premium over treasuries of similar duration, in order to compensate for the perceived risk of default. however, since the global banking crisis that began in the fall of 2008, the federal reserve has been massively intervening in the treasury market, making it complicated for investors to decide what yields (and thus valu-ations) to place on other instruments.

in retrospect, the rise in the ten-year yield from the 4% range in late 2002 through early 2004 to the highs of over 5% in the summers of 2006 and 2007 (see chart below) may have been due to the gradual concern of the markets about a global bubble in housing speculation – spain and ireland, for example, had even larger housing bubbles than the U.s.

once the bubble broke, followed by the banking crisis, the fed began massive purchases of treasuries, initially in order to rescue the major U.s. banks, and subsequently to help the economy. in Qe3, for example, starting in late 2012 the fed began to purchase $85 billion per month of treasury debt and mortgage-backed instruments.

these massive programs – over $1 trillion in 2013 alone, much more than the 2013 federal deficit! – were designed to drive down the yields on ten-year treasuries and nearby maturities, as well as rates in the U.s. mortgage market – and until the spring of 2013 they succeeded in depressing those yields, as shown in the second chart.

Latest three years

the ten-year treasury Note yield hit a remarkable low of 1.43% in the summer of 2012. and from late 2011 until the spring of 2013, mortgage rates were similarly pushed to attrac-tively low levels, so the housing market revived, people who were underwater on their equity recovered (and could sell their homes and move to areas with stronger labor markets) – and in some parts of the country home prices indeed surged to new (re-bubble?) highs.

the federal deficit began to decline substantially during 2013, and the fed decided to “taper” its purchases, to $75 billion this past January, and to $65 billion starting in february. even the early fed comments about the possibility of tapering, in May 2013, caused yields to rise significantly – from a low of 1.66% on the ten-year t Note to a bit over 3%. (see the second chart.) somewhat surprisingly, the fed has not reacted to the rise, even though one dramatic result was a sharp and sustained decline in mortgage applications, housing permits and construction.

What lies ahead? this is a key question, in our opinion, not only for the bond markets but for the general economy, and the stock market.

the consensus is that rates will soon begin a sustained rise, given the $16 trillion federal debt and the end of fed largesse. our view, however, is that rates will decline for most of the next twelve months – as the result of a slowdown in the economy, a spread of deflationary tendencies and/or a major stock market decline – which always drives global money treasuries regardless of yield. stay tuned!

David W. Wright is Principal and Co-Portfolio Manager, Sierra Mutual Fund. This article was originally released March 18, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

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President’s LettercontInued from pAge 1

We also changed up the conference schedule year with the fall outlook conference. over the past five years or so, NaaiM has offered a fall/early winter event focused on trading techniques and/or etfs, followed by a february event focused on marketing. recognizing that most members have a hard time attending both events plus the Uncommon Knowledge conference, we trimmed the schedule down to two major events, Uncommon Knowledge and outlook, and then put more emphasis on developing regional chapter meetings. the result was more opportunities than ever for members to meet and exchange ideas.

Which brings up a key point i can’t make enough. the best way to get the full benefit of being part of the NaaiM community is to get to know people and get involved. the upcoming Uncommon Knowledge conference is one place to start. We have a great line up of speakers, but the real value of the conference goes beyond just the presentations. Come to the conference and meet people. get to know our sponsors.

they have a wealth of knowledge to offer. ask questions of the other attendees; look for ways you can be more active within NaaiM from committees to presentations, participating on the board and more. this is very much an association for members by members and the more you participate, the more you benefit.

let me close by thanking the NaaiM board and all of our volunteers and staff for a great year. i look forward to seeing you all at the conference in fort lauderdale and at all the NaaiM events for many years to come. this is a great association and 25 years is just a start. let’s make the next 25 just as valuable.

sincerely,

dave Moenning

www.naaim.org 11

Study: Active Management Delivers More Dependable ReturnsWIll hepburn

SUMMarY: the risK of selliNg aNd MoviNg out of the stock market often focuses on missing good days and hurting overall returns. however, investors

have an equal chance of missing a bad day and increasing returns. since the best days often follow the worst days, back to back, it is statistically more likely that if an investor missed one he will miss the other. this expanded study looks at the outcome of missing both the best and worst days.

Moving into 2014, the stock market is basking in the afterglow of two years without a significant correction. it is difficult for investors to know what to do, including those who actively trade their holdings.

investors looking for a better way will see articles and commentary telling them to stay fully invested and not to try to “time” the market. after all, runs the most common theme… “What if you miss some of those very good days because you are out of the market?”

the 2013 update to an ongoing study by hepburn Capital Management, llC confirms that missing the best days of the market really doesn’t matter if investors also miss the worst days.

the s&P 500 stock index averaged 7.63% annual return (dividends reinvested) for the period January, 3 1950 through december 31, 2013, the hCM study shows.

if you happen to be the unluckiest investor on earth, and you missed just the 10 strongest days over that period, your return would have dropped to 6.39%. Move out of the market and miss the 20 best days and you end up with only 5.58% gains, and miss the 40 best days and your average gain drops to 4.18% per year. “Clearly it doesn’t pay to be unlucky.”

the luckiest person around might miss the 10 worst days in the market instead and boost their average returns to 9.23%. if you are on a roll and miss only the 20 worst days,

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12 April 2014

your returns jump to 10.3%, and if you are lottery-winning kind of lucky and your streak has you out of the market for the 40 worst days, your returns will soar to 11.96% annually, hepburn explained.

but how likely is either of these scenarios? Not very. statistically, missing only the best or worst days of the market is virtually impossible. history shows that the best days tend to closely follow the worst days. sometimes they occur back to back. so if an investor misses one, chances are he will miss the other, as well.

What happens to an investor’s returns if one were to sit out for both the worst days and the best days? remarkably, average annual returns become more consistent and may actually increase at the same time. our study shows that if one were to miss both the 10 worst and 10 best days, the resulting average returns are 7.99%. Miss both the 20 worst and best, and annual returns become 8.22%, and dodging the 40 worst and best days creates returns of 8.38%.”

Missing the 40 best and worst days produces an increase in return over buy and hold of .75%. that may not sound like much, but that is a 9.84% earnings increase, and when compounded for long-term investors that makes a huge differ-ence in the end results.

this increased earnings compounded over the life of the study results in a hypothetical $1,000 investment growing to $172,633 for the actively managed portfolio versus $110,655 for buy and hold.

as Novel laureate Paul samuelson said, “the longer one invests, the greater the chances of encountering a major market upheaval. risk does not go down with time, it goes up!” the risk reduction potential of active management as modeled in this study is what accounts for the significant out-performance of actively managed portfolios.

S&P 500 – Jan. 3, 1950 - Dec. 31, 2012–

Average Annual Return 7.63%Miss the Best Miss the Worst Miss Both Best and Worst

10 days 6.39% 9.23% 7.99%20 days 5.58% 10.30% 8.22%40 days 4.18% 11.96% 8.38%

Source: Hepburn Capital Management 2014 Study. Dividends reinvested.

the reason that missing both the best and worst days increases one’s returns and dramatically reduces volatility is that the worst days in the stock market tend to be much worse than the good days are good. throw in the math of gains and losses and the case for risk management becomes clear.

if you lose 10% you must have an 11% gain to break even. a 50% loss requires a 100% gain to return to breakeven making it much more important to avoid a large loss than make a gain of the same amount.

although past performance does not assure future results, the hepburn Capital study illustrates the point that invest-ments actively managed for risk reduction may provide added potential benefits compared to a passive buy-and-hold approach, including more consistent returns and lower prin-cipal fluctuations.

it’s also much easier to deliberately miss the worst days of the market, because they rarely occur in isolation, but rather follow steadily deteriorating market values.

before you make up your mind whether or not it makes sense to actively manage your assets, you have to look at both sides of the argument. and you have to realize that no trading system is going to be perfect. but the good news is you don’t have to be. simply reduce losses and you don’t need eye-popping gains to exceed a buy-and-hold position. that’s what the buy-and-hold argument conveniently overlooks.

Will Hepburn is a private investment manager who specializes in active investment strategies. He is President of Hepburn Capital Management, LLC, a Registered Investment Advisor, and a Past President of NAAIM, the National Association of Active Investment Managers.

Study: Active Management Delivers More Dependable ReturnscontInued from pAge 11

www.naaim.org 13

RIAs- looking for a sub-advisor or hedge fund?

Looking for advanced quantitative adaptive portfolio management? Our original strategies are developed by a Ph.D. over many years. Rocket Science Helps! Past performance does not insure future performance. Call 440-871-7278 and ask how we can help your business.

The Risk of Not Managing RiskmIchAel A. gAyed, cfA

“Risk comes from not knowing what you’re doing.” – Warren Buffett

This bUsiNess isN’t easY. WheN MaNagiNg wealth and client portfolios, there is a constant tempta-tion to magnify returns by chasing those areas of the

investable landscape that are going “up and to the right.” this desire to follow the crowd and jump in on momentum names is driven first by the psychological need to be a part of the herd, and second by investor pressure. those advisors who are aiming to grow their business are under the impression that with just a little bit of extra performance, not only will that pressure for higher returns ease, but assets under manage-ment will grow. after all, the stronger your performance, the more likely you are to get referrals and make more revenue as a result.

this isn’t the right way to look at things. strategically, it’s actually minimizing volatility and loss relative to potential gain which is most important. everyone remembers 2013, but i’d venture to say in five years clients will still be haunted by the memories of 2000 to 2002 and 2008. behavioral studies have proven that the pain of losing one dollar is more than twice as felt in terms of emotional response as the joy of gaining one dollar. loss aversion results in asymmetric responses between making and losing money, which means that if you really want to win at the game of building a world class investment advisory firm, you need to manage risk exceedingly well. More clients are lost through the mismanagement of risk than through the focus on returns.

easier said than done right? i disagree. volatility is actu-ally considerably more predictable than stock market direction and movement (though at times the two go hand in hand). that’s what my director of research Charlie bilello and i set out to prove earlier this year. We have been honored by the Market technicians association with the 2014 Charles h. dow award for our white paper titled “an intermarket approach to beta rotation” which touches on how Utilities leadership going back to 1926 tends to be predictive of corrections and volatility to come. that paper is available on the social science research Network (ssrN.com) and can be a significant help in terms of positioning for those periods most likely to experi-ence price gyrations.

tracking the relative behavior of the Utilities sector is not the only way of managing volatility for your clients, however. separate from the dow award, Charlie bilello and i also won 3rd place in the NaaiM Wagner award competition for a second white paper titled “an intermarket approach to

tactical risk rotation.” in that work, we show that when long duration treasuries outperform intermediate duration trea-suries on a month over month basis, volatility in stocks tends to rise and bond momentum continues. We suggest practical ways of rebalancing a stock/bond mix based on that and show that risk-adjusted returns can increase meaningfully.

both this and the dow award paper will be discussed at the Uncommon Knowledge conference where we will be making a presentation which we hope will provide active managers a new way of looking at markets. suffice it to say that while focusing exclusively on return might get you new clients in years like 2013, managing risk will help you keep clients and steadily grow over much longer and more normal cycles. We all, to some extent, intuitively know that markets are not efficient, and that as active managers we can manage client wealth better than Mr. Market. the best way to do that is by knowing when Mr. Market is about to go through mood swings before they happen.

Michael A. Gayed, CFA, is chief investment strategist and co-portfolio manager at Pension Partners, LLC, an investment advisor that manages a mutual fund and separate accounts.

14 April 2014

Wagner Award Past Winners: How the Wagner Award Competition Has Helped Them to SucceedSuSAn bAber

NaaiM iNtervieWed several of the Past Wagner award winners and participants to see how entering the Wagner award competition has helped

them succeed.

2011 First Place Winner, Thomas Krawinkelthomas Krawinkel is a private trader based in germany.

at the time of the Wagner award competition, he had only recently started trading full-time, after a life as a successful financial controller and director of a small business.

When he started as a full-time trader, he had been working at it part-time for some years. he started off using methods learned in van tharp’s trading courses before delving into the research presented in his paper. it was through a trader’s chat room that Krawinkel learned of the Wagner award competition and decided to submit his research on buying power and how it affects simulated and real-life trading results.

When he was notified that he had won the first place prize in the 2011 Wagner award competition, Krawinkel was astonished, considering at the time that he had little trading experience. When asked what impact the Wagner award had on his career, he answered “it made me sit down and think about the topic and how to present it clearly and concisely.” he goes on to say “Writing this paper helped me organize my own thinking in a way that would not have happened if i had not submitted it. as a result of the research and writing the paper, i have changed my approach to trading.”

in fact, Krawinkel said that after winning the award and preparing for the presentation at the NaaiM Uncommon Knowledge conference, he discovered some new aspects to the topic of his paper and was able to present the new ideas at the conference. he also found most helpful the apprecia-tion of his ideas by a knowledgeable audience, as NaaiM conference attendees are well versed in active investment management techniques.

Krawinkel is a private trader and as such, does not manage money for other people. When asked how the Wagner award affected his career, Krawinkel joked “My supervisory board – my wife – was very pleased!”

thomas Krawinkel is interested in talking with other traders about the pros and cons of buying signals or systems from third parties. if you are interested in discussing this topic with him, you can contact him via email at tKrawinkel@gmx.de. to read more about his experience as a NaaiM Wagner award winner, you can also read this article on van tharp’s website http://www.iitm.com/Weekly_update/Weekly_534_July_13_2011.htm#article

2012 First Place Winner and 2011 Second Place Winner, Gary Antonacci

gary antonacci is familiar with the benefits of NaaiM’s Wagner award, having been a winner in two consecutive years of the competition.

gary is a consultant with Portfolio Management Consul-tants of vancouver, bC, a firm that he started in 1990 to trans-late academic ideas into real-world applications.

after winning first place in the competition in 2012, antonacci added several new consulting clients and also licensed his methodology to others.

antonacci has made several appearances both in Canada and the Us to discuss his methodologies. Winning the Wagner award has helped raise his profile in the industry.

antonacci also said that the Wagner award competition helped attract some publishers. in fact, he currently has three well-known publishers bidding with one another for the right to publish his book on dual momentum, which should be out later this year.

gary antonacci is grateful to NaaiM for this opportunity and for the chance to meet so many NaaiM members at the national conference and says “Winning the Wagner award was a wonderful experience and one i will always remember.”

www.naaim.org 15

Regular / Emerging / Special MembersHelen C. BerenyiAlphavest210 Corning St., Suite CCharleston, SC 29403(843) 573-7277cokie@redtriangle.us

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Associate MembersJoe BarratoArrow Funds2943 Olney Sandy Spring Rd., Ste. AOlney, MD 20832(877) 277-6933

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Welcome Back!Howard P. SmithChanging Parameters, LLC250 Oak Grove Ave., Suite AMenlo Park, CA 94025(650) 327-7705

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