Posts in Traditional Managers
Auction Rate Securities' Market Woes

Auction Rate Securities (ARS) are long-term, variable rate bonds whose yields are tied to short-term interest rates.  While ARS have a long-term nominal maturity, their yields are reset through a modified Dutch auction at predetermined short-term intervals, usually every seven, 28, or 35 days.  With the issues' ties to short-term interest rates, many corporations and high-net-worth individuals were sold these securities as juiced-up municipal money market funds with no risk. 

The lack of liquidity in the credit markets has highlighted that there are indeed risks in these securities.  A recent article by James Churchill, which was featured in Registered Rep, provides good insight into the troubles facing both investors and the brokerage firms that peddled the securities. 

Please click here  for the article. If you have any questions or comments, e-mail me at

PIMCO's Outlook

PIMCO recently held their annual secular forum at which they addressed a number of macro trends that impact their three- to five-year secular outlook for the global fixed income markets.  The discussion also focused on a number of issues that would have an impact on growth and inflation in the U.S., Europe, Asia and the Emerging Markets.  As follows is a summary of four key factors that PIMCO believes will impact the global financial markets over the next several years.

  • Continued global growth that is less driven by the major industrial countries and more a result of emerging market output that is in the middle of a breakout phase. 
  • Upward trend in inflationary pressures reflecting a spillover of global demand into commodities, which in turn will put upward pressure on wages in emerging market economies. 
  • A slowdown in corporate profits in industrial countries relative to both labor and overall production.
  • Institutional re-alignments in the global financial sector. Regulatory changes will be the catalyst in developed industrial economies, while emerging markets will see change from growing economies and the development of sovereign wealth funds.   

Please click here for a more detailed overview of the outlook from Mohamed El-Erian, PIMCO’s Co-CIO and Co-CEO.

Which Bond Investments are on PIMCO's Radar?

In his most recent monthly Investment Outlook, PIMCO's Bill Gross provides a glimpse into the firm's potential purchases for its fixed-income portfolios:

  1. Bonds issued by high-quality financial institutions which may suffer capital impairment during the anticipated recession. 
  2. Lower quality bonds, which may become attractive as corporate defaults rise to peak levels.

The full article is available by clicking here.

PIMCO's Bill Gross Offers his "Populist, Straight-Talking" Views

As chief fixed-income manager at PIMCO, Bill Gross is no wallflower when offering his opinions on the credit markets, the Fed and politics.  In his April "Investment Outlook," Gross describes his views on home price declines, the Bear Stearns crisis, and the importance of character in lending. 

The text of Gross' most recent "Investment Outlook" is available by clicking on this PIMCO link.

Lending Outlook from PIMCO's Bill Gross

With more than $721 billion in fixed-income assets under U.S. management, PIMCO and its lead bond manager Bill Gross command respect among many investors.  In his March Investment Outlook, Gross offers his expectations for U.S. lending: "Tighter lending standards, reduced risk budgets and increased scrutiny all promise to produce a reduction in the growth rate of lending." 

The full article, "No Country for Old Maids," is available by clicking here.

PIMCO 2008 Outlook

Powerhouse bond manager PIMCO recently posted their outlook for 2008.  In a nutshell they intend to take the following positions:

Interest Rates – Expect rates to continue to decline.  They have targeted above-index duration, primarily on the front end of yield curve in both the U.S. and U.K.

Mortgages – Their plan is to overweight this sector as valuations now look attractive after being beaten down in 2007.  Focus is on the high-quality sector, not sub-prime.

Credit – PIMCO's focus is on higher credit quality issues, especially in banking and finance where there appears to be the most value after a very poor 2007.

Currency – Their strategy is to focus on Asian and emerging markets' currencies, as continued weakness in the U.S. Dollar is expected.

Emerging Market Bonds – They plan to focus on higher credit quality EM debt.  Countries of emphasis are Mexico, Russia and Brazil.

TIPS – With lower yields and higher inflation, real returns are expected to be low.  TIPS do not offer much value.

Municipals – Yields are at historically high levels versus comparable Treasuries.  An overweight is expected.

To see PIMCO's full outlook, please click on this PIMCO Link.

Bill Gross Forecasts 3% Fed Funds by Midyear

In his January 2008 "Investment Outlook," PIMCO's Bill Gross forecasts a 3.00% Fed Funds rate by midyear, a significant drop from the current level of 4.25%.  He believes that recent drops in short-term interest rates will be inadequate to offset tighter lending conditions. As financial derivatives continue to implode, he expects lower interest rates and increasing federal deficits. Click here for the full report. 

For calendar year 2007, Gross' PIMCO Total Return Bond Fund outperformed 99% of other mutual funds in the intermediate-term bond fund category, according to Morningstar.  The full-year 9.1% total return of the fund's retirement shares outperformed the Lehman Aggregate Bond Total Return Index by an amazing 2.1%.  The fund continues to measure up to investors' high expectations. 

PIMCO's Bill Gross Expects Numerous Fed Cuts

As managing director of bond powerhouse PIMCO, Bill Gross pens a monthly outlook on the fixed-income world and the economy.  His December 2007 "Investment Outlook" anticipates a "tumultuous 2008" marked by significantly lower Fed Funds rates and sounder banking and financial management.  Gross opines that "The Fed needs to bring Fed Funds levels down steadily and significantly more in order to counteract the contraction of the shadow banking system ... in an increasingly risky financial environment."  Click here for the full text of Gross' December "Investment Outlook."

Bill Gross Expects More Rate Cuts to Offset Credit Woes

In his November "Investment Outlook," PIMCO's Bill Gross forecasts a 3.50% Fed Funds rate (from the curent rate of 4.50%) to stabilize a noticeable slowdown in credit growth.  He believes that a slower economy combined with bankers' reluctance to lend will increase the need for government assistance in the form of lower interest rates.  Click here for the full report. 

Through October 31, 2007, Gross' PIMCO Total Return Bond Fund has outperformed 98% of other mutual funds in the intermediate-term bond fund category, according to Morningstar.  The fund continues to measure up to investors' high expectations.

Pimco's Gross Expects the Fed to Fixate on Housing for Years

Bill Gross, chief investment officer at Pimco, expects the downward path of home prices to dominate Fed policy over "the next several years."  While Gross expects the Fed to lower short rates from 4.75% to 3.75% over the next six to twelve months,  he believes that the Fed may be reluctant to do so because of fears of a run on the U.S. dollar or because of "false hopes of a housing bottom."  In his October 2007 "Investment Outlook," Gross opines that the powerful nonbanking private system of derivatives and credit structures can have a much more powerful effect on credit liquidity than the deposit-and-lending banking system.  Click here for Gross' October outlook.

Gross oversees $692 billion in investments at Pimco, including the $104 billion Pimco Total Return Fund.  For the year-to-date and the 10 year annualized periods through September 30, 2007, the returns of the Total Return Fund's institutional shares are in the top 2% of similar funds as tracked by Morningstar.


CPPC Annual Meeting

The 16th annual Colorado Public Plan Coalition (CPPC website) conference was held in Winter Park last week.  More than 100 participants gathered for this educational conference dedicated entirely to the challenges and opportunities facing Colorado public sector retirement and health plans.  Guest speakers included Mike Coffman, Colorado Secretary of State, Cary Kennedy, Colorado State Treasurer, and John Fielder, Colorado’s most published landscape photographer and author.  Innovest presented three topics; presentations are available upon request, please click below. 

Target Date Retirement Funds: Not Created Equal presented by Rich Todd

Tools for Participants wanting a DB Option from their DC Plan presented by Rick Rodgers

Capacity Issues for Investment Managers presented by Scott Middleton

Growth vs Value

In a recent Pensions & Investments article, "Line blurs further between growth and value strategies," several investment advisers noted that the differentiation between growth and value stocks has decreased significantly in recent years.  Because of a smaller dispersion in stocks' relative valuations and forward growth potential, a larger number of stocks have become attractive to both sets of managers.  As a result, money manager due diligence needs to focus all the more on managers' investment process and philosophy.  (Click here for the article.)  In addition, there has been a widening gap in year-to-date performance for the Morningstar categories for Large Cap Growth (+6.53%), Mid Cap Growth (+9.86%) and Small Cap Growth (+5.95%), over their Value counterparts (+2.90%, +4.20%, and +0.21%, respectively).  These performance disparities could further widen with ongoing increases in market volatility.


To keep our clients more informed about the investment products we cover and to provide greater insight about the way we evaluate products, Innovest is proud to introduce our new monthly publication named INFoRM.

INFoRM the acronym for the INnovest Fund Report Monthly will provide an in-depth assessment of various investment products.  The six main criteria we evaluate -- Organization, People, Philosophy/Process, Performance, Asset Base, and Expenses -- will be expounded upon to give our clients clear insight into their investment products.  In addition, at the end of each review there will be an evaluation written by our analysts about each product, as well as a fact sheet.  Published monthly, INFoRM will cover three products that are the most utilized by our clients.

We hope you enjoy this first edition of INFoRM, as well as all future publications.  All comments are welcome.

Please click here to download the file.

July Meetings

Listed below are the investment firms that Innovest met with during the month of July, either in our office or onsite. If you have questions regarding our thoughts on any of these firms, please feel free to contact us.

  • Benchmark Plus
  • Boston Company
  • Cadogan Management LLC
  • Centennial Partners
  • Eaton Vance
  • Fuller & Thaler
  • FutureSelect
  • Genesee Investments
  • Ironwood Capital Management
  • Legg Mason
  • Navallier & Associates, Inc.
  • Parametric Portfolio Associates
  • Portfolio Advisors
  • Quellos
  • Rainier Funds
  • Red Rocks Capital Partners
  • Royce & Associates LLC
  • Santa Barbara Asset Mgmt.
  • Wakefield Asset Management
  • Western Asset Management
Private Equity Investment Isn’t Just for the Wealthy Investor Anymore

It used to be that Private Equity investment was for the wealthy.  Not anymore. Red Rocks Capital in Golden, Colorado has created an index named the Listed Private Equity Index (LPE), consisting of public companies that invest in private equity deals. From this index a new ETF (available through PowerShares - Ticker: PSP) was created, allowing any investor to gain access to the asset class. Although investment in the ETF is not exactly a direct investment in the actual private equity deals, it is an investment in the companies that invest in private equity. In other words, the revenues of these public companies in the ETF are derived from the private equity deals in which they participate.
The ETF consists of at least 30 publicly traded companies that do business in the private equity arena. Together, these companies have investments in more than 1,000 private business deals diversified across all market caps, styles and various stages of business development.

The ETF is unlike a direct investment in a private equity fund, or fund of funds, which have:

1) Large minimum capital investment, usually $500,000 or more

2) Substantial lock-up periods where the investor may not be able to withdrawal their capital without a severe penalty

3) Relatively high fees that consists of a management fee (usually 1% or more) AND an incentive fee or share of profits generated (usually 5% or more) and

4) Lack of transparency.

The ETF on the other hand has no minimum investment, no lock-up, a 75 basis point expense ratio, and complete transparency of the companies it is invested in (but does not include the underlying private deals).

Although the terms are very favorable for the ETF, the investor needs to understand that they would not have an actual stake in any of the private deals, rather only an investment in the public companies that derive their revenue from those deals. Back-tested performance of the Listed Private Equity Index has proven to be not only appealing, but also has demonstrated a relatively low 0.72 correlation to the S&P 500 over the past 10 years. Additionally, even though there is no lock up period, investors allocating to the asset class should plan for a long time-horizon as most private equity deals take several years to work themselves out and revenues may not be booked until certain hurdles are achieved.

All in all, this new ETF is a great way for the “average investor” to gain access to an asset class that used
to be out of reach. For more information on Red Rocks Capital and to learn about the Listed Private Equity Index, go to, and to learn more about the ETF derived from the Listed Private Equity Index, go to

Pundit Corner: Bill Gross of PIMCO

When the manager of more than $668 billion in fixed-income securities opines about interest rates and the bond market, numerous investors take notice. The person they pay heed to is Bill Gross, the Managing Director of PIMCO, a subsidiary of Germany-based financial giant Allianz SE. 

While Gross and PIMCO have an excellent track record in bond fund management, Innovest Portfolio Solutions considers past performance as only one of the indispensable factors in its due diligence scrutiny. An investment firm’s organization, people, process, philosophy and expenses are some of the essential qualitative criteria in our ongoing analysis and recommendations for our clients. 

In addition to frequent interviews in the financial media, Gross’ outlook for inflation and interest rates is made known through his periodic circular “Investment Outlook.” Often sprinkled with his personal stories and political views, Gross' most recent perspectives are available by clicking here.

Marsico Capital Management Announces Purchase of Firm from Bank of America

Tom Marsico, founder and Chief Executive Officer of Marsico Capital Management, has announced that he will be buying back his company from Bank of America. After founding the firm in 1997 Tom Marsico agreed to sell the firm to Bank of America in 2000 for a total of $1.1 billion. "We felt we needed a larger financial institution to help us grow in new areas and to diversify our business further," Marsico said in his recent announcement. "Now, we're a much larger group, and we have the ability to spread equity throughout the company." Although the specific terms of the deal have not been released Marsico expects the deal to be finalized during the fourth quarter of this year.

Marsico Capital Management currently manages approximately $94 billion in assets across several growth equity strategies. They have also hinted at plans to roll out two new products, the Marsico Global Fund and the Marsico Flexible Capital Fund in an effort to better capitalize on the opportunities in the expanding global market. Overall we view the decision of Tom Marsico to buy back his company from Bank of America as a positive. It will seemingly provide Marsico Capital Management the ability to spread out equity ownership across company. Providing equity to key employees should serve as a nice incentive to current employees and further provide Marsico Capital Management the ability to attract and retain talented investment professionals. Senior

See the press release below for further details:

Beware of Point in Time Analysis

I recently review the performance of a fund after its five year cumulative return ending March 31, 2007 fell below the five year return of its appointed index. The fund returned 13.3% over a five year period, just slightly underperforming the 13.5% return of the index. However, in looking at the fund’s performance more closely it is interesting to note that the fund outperformed its index by 350 bps over the past four years and 130 bps over the past six years ending in March 31, 2007. I also reviewed the fund’s risk adjusted statistics over the same time periods and they too reflect a similar pattern. Over a five year period the fund’s alpha is negative, -1.56%, but over a four and six year period the fund’s alpha is positive. Further analysis revealed that the fund’s underperformance over a five year period was the result of just two slightly underperforming years where the fund had significant exposure to the underperforming financial sector. However, this analysis also clearly illustrates how point in time analysis is often very misleading and doesn’t always accurately reflect a fund’s true performance. For example, this same fund has outperformed the index in 8 out of the last 10 annual periods and 8 out of the last 9 rolling three year periods. This consistency over a long period of time and during numerous market environments more accurately reflects the Fund’s true performance. However, most investors who read various financial periodicals will be hard pressed to find these types of consistency measures. Instead time and time again you will see periodicals highlighting mutual funds with the best 1, 3, or 5 year cumulative return. Though these measures do have some value, they certainly don’t tell the whole story. Did the fund with the best 5 year return have two spectacular years followed by three poor performing years? It is difficult to know looking only at cumulative point in time returns. Therefore, if investors are seeking consistent long term performance they need to beware of the flaws of cumulative point in time analysis and rather seek performance measures that more accurately reflect a fund true performance over various market cycles.