Forecasts & Trends : Money Management

On The Economy And Active Management

Gary D. Halbert — Tue, 21 Oct 2008 22:07:39 GMT

IN THIS ISSUE:

A Look At The Latest Economic Numbers
Economic Forecasts Roundly Downgraded
Fallacies Of A "Buy-And-Hold" Only Approach
The Goal Of Active Management Strategies
The HWM Difference
Is It Time To Try Active Management?
Conclusions -- Don't Miss The Next Bull Market

Introduction

This week, we will take a look at the latest economic numbers which look quite bleak overall. There is little doubt that the US and the rest of the world are headed into a global recession sparked by the international credit crisis. The only question now is: How deep and how long?

Following that discussion, I will review the advantages of including active investment strategies in your portfolio. Long-time readers know that I have been a strong advocate of "active management" strategies, especially those that have the flexibility to move to cash (traditional market timing), "hedge" long positions during market downturns or even go "short" and provide the potential to profit even when the markets decline. Not surprisingly, such active management strategies are back in demand in the wake of the recent stock market collapse.

Now that active management strategies are coming back into vogue, I will tell you why I have always been a fan of money management techniques that seek to avoid big losses, especially of the magnitude that we've all seen over the last 4-5 weeks. I think you'll find that discussion very interesting in light of the recent stock market chaos.

Though I have mentioned the advantages of active management strategies many times in the past, the current market environment has resulted in many more calls to my staff from investors who now seek to include these strategies in their portfolios. Thus, this may turn out to be one of my most popular E-Letters ever, though it's unfortunate that investors have had to endure severe losses in their portfolios to make it so.

A Look At The Latest Economic Numbers

We have long known that consumer spending accounts for apprx. 70% of US Gross Domestic Product, and consumer spending is predicated on consumer confidence. At this point, consumer confidence is in the tank and consumer spending is falling off a cliff.

The mid-October University of Michigan Consumer Sentiment Index plunged to 57.5, down from 70.3 in the last half of September. This is one of the deepest monthly declines in the Sentiment Index since it has been recorded. The latest report noted that there have only been four surveys that posted monthly declines of 10 index points or more. The government's Consumer Confidence Index to be released next Tuesday is expected to show a similar sharp decline.

So a recession is upon us despite the fact that US GDP rose by a healthy 2.8% in the 2Q. We may even find that the economy remained technically in positive territory in the July-September quarter when the government releases its first report on 3Q GDP on October 30. Regardless of what next week's GDP says about the 3Q, there is little doubt that economic growth will fall into negative territory in the current 4Q. And it will likely be down a lot.

Not that much else matters when consumer confidence and spending are in freefall, but here are some of the other recent economic reports.

The Index of Leading Economic Indicators (LEI) actually rose 0.3% in September, reversing the recent downward trend. However, analysts are careful to point out that the rise was primarily due to a large increase in the money supply, essentially masking sharp declines in stock prices and residential building permits and increased layoff activity. The September increase was also offset by a larger downward revision to August's LEI. The leading indicators are almost certain to fall again for October, probably significantly due to the continued washout in the stock markets.

Retail sales fell more than expected in September, down 1.2% following a decline of 0.4% in August. Chain store sales, including Wal-Mart, declined sharply in September and will almost certainly be down even more this month. I don't shop very often, but I was in Macy's over the weekend and it looked like two-thirds of the store was marked down 40-50% or more.

US auto sales plunged 26.6% in September, making it the first month since 1993 when buyers drove less than one million new cars and trucks off the dealerships' lots. Analysts predict that October will be even worse. GMAC announced on October 13 that it will only make car loans to buyers with a credit score of at least 700. This is bad!

On the manufacturing side, the ISM Index fell from 49.9 in August to 43.5 in September. Any reading below 50 in the ISM Index indicates that manufacturing is in a recession. Factory orders fell a whopping 4.0% in August (latest data available). I'm sure it has happened before but I don't remember seeing a 4% drop in one month in the past.

The unemployment rate held steady at 6.1% in September, but this number will definitely go higher for October and the rest of the year as well.

Economic Forecasts Roundly Downgraded

I read and hear a lot of economic forecasts, and every one is being downgraded in light of the events of the last 4-5 weeks. Other than the gloom-and-doom crowd that always predicts a recession or worse, I don't know any outfit that predicted what we have seen in the last month or so. Thus, everyone is having to downgrade their economic forecasts.

The consensus outlook, prior to the last 4-5 weeks, was that the US economic growth would go mildly negative in the 4Q and somewhat more negative in the 1Q and 2Q of next year. Most forecasters felt the US economy would rebound back into positive territory in the second half of next year. But frankly, I don't know anyone that has a clear forecast for what happens next year.

The problem is, no one knows for sure if the massive government bailout is going to work. The Treasury Department is working feverishly to put together the apparatus to begin buying up distressed debts. It's a complicated process that is rife with conflicts of interest. The thinking originally was that the Treasury would be buying assets after the first of the year. Now they are hoping to be in business before the holidays. They need to be.

Fallacies Of A "Buy-And-Hold" Only Approach

The stock market collapse over the last several weeks has devastated millions of investors' portfolios and shattered retirement plans for untold numbers of Americans. Many investors' portfolios are down 35-40% or more in just the last 5-6 weeks. The market plunge has brought into serious question Wall Street's mantra of "buy-and-hold" for the long-term.

Whether it's called "asset allocation" or "index investing" or any of a number of other names, the basic premise of buy-and-hold investing is to indefinitely hold a group of investments in hopes they will produce gains in an amount to meet investment goals. If you have read me for long, you know that I have never been a big fan of having your entire investment portfolio in a buy-and-hold strategy, especially if there is no "risk management" component involved to deal with periodic bear markets.

Instead, I have recommended "active management" strategies which incorporate risk management techniques. While active management can include programs that stay fully invested and rotate among market sectors, most of those that we recommend have the flexibility to move to the safety of cash (money market) or "hedge" long positions during bear markets. Some can even "short" the market and can profit when the market drops.

At Halbert Wealth Management (HWM), we specialize in finding successful money managers that use active management strategies which seek to minimize the effects of bear markets in stocks and bonds. This is not to say that the strategies we offer cannot lose money in down markets. Any equity investment has the potential to lose money. Instead, the Advisors we recommend in our AdvisorLink® Program use sophisticated investment strategies to limit the downside risk of a bear market or major downward correction -- something you won't find in most buy-and-hold portfolios.

We continually search the universe of professional money managers in an effort to find those Advisors who have delivered solid "risk-adjusted" returns and have managed to avoid the huge losses so common in bear markets and major downward price corrections. As it has turned out over the years, we have found the best risk-adjusted returns among active managers that move out of the market or hedge long positions from time to time to avoid bear markets.

The traditional Wall Street wisdom over the years has been that it is impossible to "time" the market. They argue that if you are out of the market from time to time, you are likely to miss the best days. So you should stay fully invested at all times.

Does that argument sound familiar? I'll bet it does, especially over the last year or so when you may have wanted to sell out, but your broker talked you into holding on. Now, with the stock markets down 35-40% or more (and it may not be over yet), it's probably the worst time to sell out, so you're stuck.

But there were active managers who limited losses in the latest bear market by moving to the safety of cash, hedging their long positions and/or shorting the market. This includes many of the equity money managers I have recommended to you in these pages. Later on, I'll tell you how to find detailed performance statistics on these money managers, but first let's look at the underlying premise of one active management strategy known as "market timing."

The Goals Of Active Management Strategies

Simply put, successful active management/market timing strategies have two basic goals:

1. Participate in stock market gains in the good times; and

2. Limit market losses to half or less of equity losses in the bad times.

These goals are simple in concept, I trust you would agree, but more than a little challenging to deliver. In fact, most active managers we run across don't succeed in meeting these goals over the long haul. Yet there are those that have, if you just know where to find them.

To be honest, many money managers and even individual investors can decide to move to cash in bad times. We are encountering investors who have been on the sidelines for months due to subprime fears. The real challenge is to know when to get back into the market once the market rebounds.

It is also important to note that some active money managers go one step further and seek to make money in down markets by entering into "short" sales of major market indexes using specialized mutual funds. While this is a more aggressive strategy than one that will only go to cash or hedge long positions, it provides investors with the potential to make money even when the markets are going down.

Here is the basic challenge for active managers if they are to beat the buy-and-hold strategy: How do you devise a system that keeps you in the market on most of the good days, but also takes you out (or "short") when bear markets come along? Let me say, this is not easy! And most active managers and market timers are not successful over time.

Those that have been successful over time, generally speaking, have developed sophisticated systems that gauge stock market trends and generate signals for when to enter and exit the market. This is not seat-of-the-pants, emotional trading, though some Advisors do have some measure of discretion built into their systems.

There is much, much more to it than this, of course. It is one thing to be generally correct about the trend -- up or down; it is quite another to know which sectors of the market to invest in. Space doesn't permit me to elaborate on how successful active managers determine which sectors to invest in, when they get their trend signals, but trust that this is another important variable when it comes to selecting a successful active money manager.

The bottom line is, there are active managers and market timers out there that have been successful in delivering their clients good returns over time, but more importantly have avoided the sometimes huge losses that come with buy-and-hold strategies.

The key is, how do you find them? Most investors don't know how to find these successful active managers. Most of these successful managers don't advertise, so they are not household names. The big brokerage firms are not likely to tell you about them, since they don't buy into the Wall Street buy-and-hold mantra.

Truth is, you will probably only find them if you stumble into a boutique investment firm like mine that has the money and the commitment to search high and low for the handful of successful active managers that are out there.

The Halbert Wealth Management Difference

My firm recognizes that we're not the only company that offers active management strategies to our clients. We do, however, believe that we have structured our AdvisorLink® Program in such a way as to offer investors the most flexible way to participate in such programs.

In many cases, actively managed investment programs are "packaged" and sold to investors as a single solution. The selection and retention of each money manager, the types of strategies employed, and the allocation to each participating manager is set by the sponsoring firm. Think of it as being something like a fund of funds. There's nothing wrong with this approach, and we are even considering some of these programs to offer our clients. However, the drawback of such programs is that they limit the investor to pre-selected options.

At HWM, we have "unbundled" the mix of active money managers so that each is available with or without any of our other managers, and in an allocation that can be tailored for each investor. Since most of our clients tend to be do-it-yourself investors, we feel it offers them the following advantages:

Due Diligence -- I have written a number of times about the extensive due diligence each money manager must endure in order to be added to our list of recommended programs. We not only subject the numbers to intense analysis, but also the Advisor's administrative capabilities and business stability.

We also have face-to-face meetings with each Advisor in order to not only get a feel for his or her grasp of the strategy being employed, but also to get a personal feel for the individual with whom our clients' money will be placed. Most of the time, these meetings take place as part of an on-site visit to the Advisor's office by my due diligence staff.

We then summarize the results of our findings in an Advisor Profile document that is made available to each prospective investor. For the investor, this means that the money manager has been subjected to a great deal of scrutiny as to performance, strategy and administrative capabilities. Thus, a lot of the legwork has already been done for our clients.

Another part of due diligence is in regard to ongoing monitoring of an active money manager's performance and operations. We monitor trading and performance on a daily basis, and communicate with money managers immediately if we notice anything out of the ordinary or not within our expectations for the particular program being monitored.
Transparency -- Even before the recent subprime mortgage debacle, "transparency" was a big issue in the managed funds world. Now, it's likely to become the law of the land, even for secretive hedge funds. Fortunately, investors have always enjoyed a high level of transparency in regard to the programs we offer.

As I noted above, some sponsors of actively managed investments will keep the details of who is managing parts of the portfolio a secret. That way, they can make a change in the lineup with a minimum of disruption. However, HWM offers each money manager as a stand-alone unit, providing full visibility of each manager and his or her approach to managing money. This transparency also allows each prospective client to review a detailed summary of the money manager's actual performance since the program's inception.

Beyond the ability to know and evaluate each individual money manager, investors also are able to see exactly how their money is being invested. All of the various money managers we recommend offer our clients the ability to follow the trading of their accounts online.
Flexibility -- Since we do not offer any set portfolios containing a mixture of money managers available in our AdvisorLink® Program, investors have complete flexibility to combine programs in a way they feel is most suitable for their unique situation. We have some clients who invest in only one of the programs we offer, while many others choose to allocate their investments among several programs.

We feel that combining the various AdvisorLink® investments can offer investors additional diversification beyond just having a variety of different asset classes in a buy-and-hold portfolio. This additional diversification comes about in a number of ways, including the following:

● Diversification for different market environments. We all know that a declining market will generally result in losses in a buy-and-hold investment. However, such a market environment could also result in some active management strategies becoming "neutral" by going to cash or hedging long positions. In that event, an extended bear market could result in only money market returns. A combination of investment strategies can provide the potential for making money even in a down market. For example, it may be suitable to have both a "long or cash" strategy and a program that can go both long or short in the market. This would provide a potential for portfolio gains even in a declining market.

● Diversification to reduce correlation. I have discussed correlation of investment programs in past E-Letters, but the basic idea is that two investments are "correlated" if they tend to go up and down at the same times. It is generally best to include some non-correlated investments in a diversified portfolio. I have noted before that most of the investment alternatives in our AdvisorLink® Program have a low correlation to the major market indexes. However, it is also true that many of these programs have little or no correlation to each other

● Diversification among investment strategies. The recent market meltdown has shown that when times get tough, virtually all equity asset classes suffer. Even for investors who choose to maintain an asset allocation or other buy-and-hold investment strategy, adding actively managed programs that go to cash or even "short" the market can result in a higher level of strategic diversification.
Control -- A final advantage of our unbundled approach to active management strategies is that you have complete control over what managers are included in your portfolio. While HWM provides due diligence services and can assist you with making an allocation decision, the final say is up to you. This keeps you in complete control of your investment destiny.

Nowhere is this more important than when it comes time to move from one money manager to another. I often tell prospective clients that few, if any, money managers will ever tell you to fire them. I am personally aware of Advisors with substandard investment programs who keep promising investors that "things will get better" in an effort to retain their business.

At HWM, our due diligence and ongoing monitoring will help to identify Advisors whose programs may no longer be suitable for meeting your needs, and we will offer other alternatives. However, the final decision as to whether to retain a money manager is yours, as it should be. There are also no "lockups," early termination charges or any other impediments to accessing your money should the need arise.

In short, the HWM AdvisorLink®Program offers investors a "cafeteria-type" approach to money management. Do-it-yourself investors can evaluate each money manager on its own merits rather than accepting it as part of a "canned" approach. For investors who are not do-it-yourselfers, the HWM staff can help evaluate the most suitable mix of money management programs based on the investor's assets, risk tolerance and investment goals.

Our experienced staff is also available for ongoing questions about the performance of each of our recommended programs, as well as inquiries about specific issues regarding your account.

As you consider the investments that make up our AdvisorLink®Program, it's also important to remember that none of our Advisors invest in subprime mortgages or anything of the like. The equity managers I recommend invest in well-known, US-based mutual funds that you probably have heard of and can look up in the newspaper or on the Internet daily.

Plus, no one on my staff is paid a commission, so there is never any pressure to invest or incentive to sell you something that may be unsuitable for your needs. On that, you have my promise. Likewise, we have an ironclad "privacy policy" and your private financial information is never, ever shared with anyone else, other than as may be required by law.

Is It Time To Consider Active Management?

As I noted above, many of my readers have recently contacted us for information on the money managers I recommend in light of the market's recent meltdown. They have seen their buy-and-hold portfolios devastated by losses of 35-40% or more. Retirement prospects have been shattered for millions of investors. People across the US are now looking for risk-averse ways to invest their money that can deliver market returns with less downside risk.

Earlier, I said that I'd provide a way for you to see how our various programs have fared so far this year. If you are ready to explore the world of actively managed investments, I recommend that you visit our AdvisorLink® performance summary web page at the following address:

http://www.halbertwealth.com/advisorlink/programs.php

While you will no-doubt notice that some of the programs we offer had year-to-date losses as of the end of September, you will also note that these are far less than those suffered by the major market indexes. Our goal is to offer programs that limit losses to half or less than those of the market, which means that when the markets turn up again, there's less ground to make up.

One noticeable exception to this goal is the Niemann Dynamic Program, which has a year-to-date loss close to that of the overall market. The reason that losses have not been limited is that this particular program is a high-octane long-only program that is always fully invested. Niemann does not have the option to go to cash or hedge any of Dynamic's positions, so it suffers in down markets. However, I also urge you to look at the long-term performance of this program as compared to the S&P 500 Index. Of course, past performance is not necessarily indicative of future results.

Conclusions -- Don't Miss The Next Bull Market

The stock markets have imploded in the last 4-5 weeks on a scale that virtually no one anticipated. Buy-and-hold strategies are down nearly 35-40% or more in less than five weeks. Americans' retirement plans are now turned upside down.

I certainly don't have all the answers. But I do have some suggestions for avoiding the huge losses that have occurred in just the last few weeks.

I have argued these points about minimizing losses for over five years in these E-Letters. I have argued my thoughts about active management strategies that seek to minimize losses in market downturns.

Maybe now is the time to do something about it.

I don't know when the stock markets will bottom. Much depends on how quickly the credit markets free up. Whenever the market bottoms, I fully expect we will see a powerful bull market emerge. When that happens, you want a professional manager that will get you back in the market for the next run.

A very successful money manager once told me the following: Investors think they pay us our management fees to get them out of the market during the down periods. But what they really pay us for is to get them back in when the market heads higher again.

This is so true, I believe. Millions of investors have bailed out of the market in the last few weeks. Sadly, most will not know when to go back in. The only way to recover the massive losses that have been experienced over the last couple of months is to participate in the recovery.

The professional Advisors I recommend have histories of catching major trends in the market -- both up and down. And you don't want to miss the next bull market. Maybe it's time to get the professionals I recommend on your team.

If you are ready to join the ranks of investors who are putting active management strategies to work for them to reduce the risks of being in the market, I urge you to contact us about the various opportunities available in our AdvisorLink® Program. Feel free to call one of our Investment Consultants at (800) 348-3601, or send us an e-mail at info@halbertwealth.com. You can also request additional information about our risk-managed investments by completing one of our online request forms.

Wishing you profits,

Gary D. Halbert

SPECIAL ARTICLES:

How to Read the Constitution (By Justice Clarence Thomas -- A Must-Read!)
http://online.wsj.com/article/SB122445985683948619.html

Get Ready for the New New Deal
http://online.wsj.com/article/SB122455099434052597.html

The Coming Pink Slip Epidemic
http://www.businessweek.com/bwdaily/dnflash/content/oct2008/db20081020_022663.htm?chan=top+news_top+news+index+-+temp_top+story

Who's Making Money In This Crazy Stock Market?

Gary D. Halbert — Tue, 10 Jun 2008 18:42:52 GMT

IN THIS ISSUE:

Recent Market Volatility Difficult To Navigate
Scotia Partners, Ltd. – Our Latest Find
A Leveraged Long & Short Equity Strategy, With A Twist
Impressive Results In Recent Volatile Market Environment
Hedge Fund-Like Strategy For Only $25,000

Introduction

Over the last year or so, we have experienced an increase in market volatility that has proven to be difficult for many investors and investments to weather. A Wall Street Journal article from earlier this year documented how from 2004 through 2006, the Dow Jones Industrial Average had only one day with a gain or loss of over 2%. In 2007, amid concerns over the subprime mortgage bust, the bursting of the housing bubble and the credit crisis, this number rose to 14!

In fact, last Thursday and Friday were good examples of this volatility. After an impressive gain of 1.9% in Thursday’s trading, the S&P 500 Index reversed course and lost over 3% percent the very next day. However, as the WSJ article noted, this level of volatility is nothing new. And in fact, the current market volatility is relatively tame compared to the bear market of 2000 – 2002.

Such recurring market uncertainty is one reason that I decided over 10 years ago to seek out professional money managers who have established successful historical track records using active management strategies. In volatile markets, investors are often hit with conflicting messages from the gloom-and-doom crowd who says “the end is near,” and the buy-and-hold crowd who counsels “this, too, shall pass.” I continue to believe that active management strategies can offer investors an effective option for dealing with virtually any kind of market environment.

That’s why I am especially pleased this week to be able to introduce you to an Advisor who has not only posted an enviable track record over the past 3½ years, but has also shown the ability to not only survive the market’s recent volatility, but to thrive in it. The Advisor is Cliff Montgomery, CFA, founder of Scotia Partners, LTD. and its Growth S&P Plus Strategy has now been added to our list of recommended actively managed investments.

While past performance cannot predict future results, Scotia’s 12-month gain of over 90%, and year-to-date gain of 32.56% is a testament to a trading strategy that has been able to tame the market’s recent volatility. These are real numbers for real accounts and are net of all fees and expenses. Scotia’s trading model is different than any I have ever analyzed, and I’ve seen a lot of trading systems in my 30+ year career.

As we review Scotia’s Partners’ strategy and performance this week, you will see numbers that will likely look better than those of any other investment alternative you may have seen. Keep in mind that Scotia’s money management system is an aggressive program which uses leverage with both long and short positions. It is therefore not suitable for all investors. Past performance is not necessarily indicative of future returns.

Volatility And Your Investments

It is now quite clear that the stock markets have moved to a higher level of volatility since the beginning of the subprime crisis last year and the subsequent bursting of the housing bubble. And, it remains to be seen how long this period will last. Unfortunately, few sources of financial and investment information take the time and effort to discuss just what volatility is, and why it can be bad, or good, for your portfolio.

“Volatility” means the measure of the uncertainty of the returns on any particular investment, or even in regard to the market as a whole. This uncertainty about the direction and magnitude of market returns moves higher and lower over time. In periods of low volatility, the markets may move up or down in a seemingly orderly fashion, without many unexpected events. But in periods of high volatility, as we have seen over the last 12-18 months, the markets can experience very large moves in one direction one day, and reverse course the next.

While there are a variety of ways to calculate, evaluate and try to predict volatility, it still comes down to trying to “know the unknowable.” Even so, the financial services industry has come up with ways to measure market volatility, with the best-known of these indicators being the Chicago Board Options Exchange (CBOE) Volatility Index, or “VIX” for short. This index seeks to measure the expectations of near-term volatility based on the prices of S&P 500 index options. The thought is that, since options represent an expectation of future price movements, then measuring the magnitude of such expectations can shed light on possible future volatility.

The following chart shows the movement in the VIX since 1990:

As you can see in the above chart, volatility is a regular, recurring feature in the stock markets. More importantly, we see that periods of high volatility can last for several years, as was the case from 1998 to 2003. While we do not know how high volatility may get in the near future, or how long it may persist, a growing number of analysts I respect believe this period could last for several more years.

One interesting thing about the market’s most recent bout of volatility is that it has proven to be very difficult to trade, even for some seasoned active managers that fared well during the 2000–2002 bear market’s even higher level of volatility. Space does not permit me to go into some of the various theories for why the markets have been so difficult to navigate over the last couple of years. Suffice it to say that many previously very successful money managers are scratching their heads as to why their systems have not worked over the last 12-24 months.

As a result, my staff and I have combed through the various money management databases, looking for active money managers who have shown the ability to invest successfully in this very tricky market environment. Specifically, we looked for managers that have shown the ability to manage money in both high and low volatility markets. As you will read below, Scotia Partners is one of the few success stories, and that is putting it mildly!

Scotia Partners, Ltd.

Scotia Partners, Ltd. was founded in 2006 by Clifford J. Montgomery, CFA. Cliff graduated from Messiah College in Grantham, PA with dual degrees in Environmental Science and Accounting but has spent most of his working career in the financial services industry.

Early in his career, Cliff worked as a mutual fund trader for a medium-sized SEC Registered Investment Advisor. After that, he became a research analyst at Theta Investment Research, LLC, a firm that his father, Paul, had established. At Theta, Cliff had the opportunity to witness how different market environments affected the performance of different types of money management strategies. He also began to notice how some active money managers were “whipsawed” by market action, especially during periods of high volatility.

Cliff reasoned that there should be some way to build a trading model that would issue trading signals only on days when there was the greatest probability of success and stay in the safety of a money market account the rest of the time. Ideally, such a system would trade both long and short, and use leverage to enhance returns.

With that in mind, Cliff began researching how markets and trading systems worked with the goal of producing his own active management strategy. In 2003, Cliff finalized his basic trading model and began trading it in real time with real money. He soon found that during periods of low volatility, his program did well. More importantly, in high volatility markets, his model actually did even better. I can tell you, this is very rare. As always, past performance does not guarantee future results.

Over time, Cliff continued to enhance his trading model and in 2004, began actively trading his Growth S&P Plus Strategy. In 2006, Cliff established Scotia Partners, Ltd., as a Registered Investment Advisor with the State of Pennsylvania so that he could offer his programs to investors. Cliff chose the name “Scotia” because it reflects his Scottish heritage. Cliff notes that his family motto, “Garde Bien,” which means “Watch Well,” serves as a reminder of the approach Scotia takes to managing client money.

Ever seeking to increase his investment analysis skills, Cliff received the prestigious Chartered Financial Analyst (CFA) designation in 2005. With so many professional designations available in the financial services business, investors sometimes can’t tell which are meaningful and which are not. I can attest that the CFA certification is one of the most challenging financial professional designations in the investment industry, and is a distinction shared with many successful mutual fund managers and noted market analysts.

The Scotia “Growth S&P Plus” Strategy

Investors familiar with alternative investment strategies, such as hedge funds, often seek out programs that can go both long and short in the market. In such programs, the potential for profit exists no matter what the market’s direction. Some also seek out leveraged programs that offer greater potential gains (or losses) per dollar invested, especially in volatile markets. Unfortunately, many such programs are available only to wealthy investors, but the Scotia Growth S&P Plus Strategy offers both long/short trading and 2X leverage without the barriers to entry found in many hedge funds.

The Growth S&P Plus investment strategy is a combination of Cliff’s basic trading model plus a proprietary overbought/oversold indicator that overlays the basic model. The objective of the strategy is to provide positive returns regardless of market conditions, with significantly reduced risk due to limited market exposure. Of course, there are no guarantees that Scotia can continue to achieve this objective.

Using technical analysis, the basic model begins the process by seeking to determine a long-term market trend (6-12 months) for the S&P 500, which then sets the overall direction for any trades. If the long-term trend is determined to be bullish, only long S&P positions will be taken. If the overall trend is gauged as bearish, the basic model will only take short S&P positions.

Once the long-term trend is identified, the intermediate trend is then determined by plugging S&P 500 Index prices into several different technical indicators over different time intervals within a 2-4 week time period. If the intermediate trend is in agreement with the long-term trend, the basic model is eligible for positioning on either the long or short side of the S&P. If the intermediate trend is not in agreement with the long-term trend, then the model will remain in the safety of a money market account.

With both long-term and intermediate trends identified, the basic model then looks for short-term movements against the trend, to potentially take advantage of the probabilities in favor of “reversion to the mean.” In other words, Cliff’s model views a contra-trend market movement as an opportunity, since future market action should move back in line with the overall trend. Thus, Cliff describes his model as being trend-following in the long term, but contrarian in the short term.

But there is yet one more wrinkle to Scotia’s Growth S&P Plus program. Cliff has also developed a proprietary overbought/oversold indicator that overlays the basic model. This added signal seeks to identify long or short trades that have a high probability of success, without regard to the direction of the long-term trend indicator. Accordingly, this overlay generally results in more trades per year than would be possible under the basic model.

The Growth S&P Plus Strategy is exceptional in that it has historically been in the safety of a money market account over half of the time and trades only on days when Cliff’s proprietary strategy indicates chances are optimal for a gain. Again, this is one of the most interesting trading strategies I have ever seen, and it has certainly done extremely well in a market environment reeling in the wake of the subprime/housing meltdown. Remember, however, that past performance does not guarantee future favorable results.

Cliff’s methodology is 100% mechanical with no discretionary input, and no provision for Cliff to override any trading signal. In addition, the Growth S&P Plus Strategy does not make graduated or partial investments. Instead, the model will be 100% long in the Rydex S&P 500 2X Strategy Fund, 100% short in the Rydex Inverse S&P 500 2X Strategy Fund or 100% neutral (money market), depending upon the signal. These Rydex S&P 500 Index funds seek to provide investment returns equal to 200% of the daily performance of the underlying S&P 500 Index, with the S&P 500 2X Strategy providing a leveraged long exposure and the Inverse S&P 500 2X Strategy providing a leveraged short exposure.

Historically, the strategy has averaged approximately 65 round-trip trades per year, and has been in the safety of a money market fund approximately 65% of the time. Scotia does not employ any formal stop-loss techniques to limit risk other than the relatively short duration of trades. If a trade makes money, the model automatically retreats to cash. If a trade loses on its first day, the model may stay long or short, but if even one indicator disagrees with the others, the model exits the market and goes to cash.

Performance Evaluation

To say that Scotia’s track record is one that attracts a lot of attention would be an under- statement. As of May 30, the Growth S&P Plus Strategy had a 12-month gain of over 90% and a year-to-date increase of 32.56%. While past performance doesn’t guarantee future results, these numbers are hard to ignore. However, we feel that the real story is how Scotia’s trading model has been able to be effective in the volatile markets of 2007–2008, when many other previously successful trading systems failed miserably.

You will note that the Scotia growth chart below shows a more modestly sloping growth line from its inception to apprx. June of 2007, at which time the growth line took a much steeper upward angle. When comparing this chart to the VIX chart above, we see that the higher level of growth coincided with an increase in the market’s volatility, brought on by the subprime fiasco and subsequent bursting of the housing bubble.

As a result, we essentially split Scotia’s track record into two parts and scrutinized each using our various investment analysis software. As noted above, Scotia’s performance during the market volatility that began around June of 2007 has been spectacular. As I noted in the Introduction, Cliff’s cautious approach to money management not only survived, it thrived.

Since we know that the market goes through cycles of high and low volatility, we also analyzed Scotia’s performance prior to June of 2007 to see how Growth S&P Plus might perform in more “normal” market conditions. We were pleased to find that, between its inception in August of 2004 and May of 2007, the Growth S&P Plus Strategy produced an annualized gain of 12.84% with a maximum month-end drawdown of only -7.36%.

Since any long-term investment horizon is likely to include periods of both high and low volatility, Scotia's strategy would appear to give investors the potential to do well in either type of market environment. However, if you believe as I do that the stock market will continue to be volatile over the next few months or even longer, the Growth S&P Plus Strategy may be exactly what your portfolio needs now.

Though the worst month-end drawdown is a relatively tame -7.36%, Cliff says that potential drawdowns in the Growth S&P Plus program can be -20% or more based on his analysis and testing. This, again, confirms that this program should only be considered by investors with an aggressive risk tolerance.

Since its inception in August of 2004, the Scotia Growth S&P Plus Strategy has proven its ability to navigate past periods of both high and low market volatility by posting an annualized return of 29.35% through May 30, 2008, net of all fees and expenses, with a worst-ever month-end losing period (or “drawdown”) of –7.36%. See the actual performance history in the tables below for more comparisons and detailed monthly returns. Also note that there are no guarantees of favorable future performance.

In short, dear readers, I have not seen a real performance record like this in a long time!

Performance Statistics
(Net of all fees and expenses)

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Please see Important Notes at the end of this E-Letter.

While Scotia’s performance is very impressive by itself, it’s even more so when compared to the S&P 500 Index’s annualized return of 8.43% and the Nasdaq 100 Index’s annualized return of 7.86% over the same period of time. While past performance is not necessarily indicative of future results, it’s clear that Cliff’s high-probability approach to money management has been effective in the past, especially when faced with highly volatile market conditions.

Since Scotia’s Growth S&P Plus Strategy has numbers that are sure to attract attention, it is important to note that this investment may be most suitable for aggressive investors who are comfortable with using leverage and a long/short exposure to the S&P 500 Index. You should only consider this program if you have a three-to-five-year investment horizon and are comfortable possibly spending a large amount of time in a money market account, awaiting the next high-probability trading opportunity.

Even though Scotia’s Growth S&P Plus Strategy has been in the market less that half the time and has delivered outstanding results with limited losing periods, this is an aggressive investment and should only be considered by investors who are comfortable with taking on significant investment risk. Cliff counsels his direct clients to invest no more than 20% of their portfolios into this program, as he feels the recent big run-up in performance may not be sustainable.

The Trading Platform

Cliff has outsourced administrative tasks to Purcell Advisory Services, a Registered Investment Advisor in Tacoma, Washington that we also work with. Purcell provides back-office support for his trading activities, allowing him to concentrate on market analysis and the generation of a trading signal. Cliff communicates his trading signals daily to Purcell, and they execute the trades and maintain client accounts. Purcell is highly experienced when it comes to providing back-office operations for professional money managers, and currently does so for a number of Investment Advisors nationwide.

Because of this outsourcing, the Halbert Wealth Management due diligence team has also subjected Purcell Advisory Services to a full review of their administrative capabilities and internal controls, including an on-site visit to their offices in Tacoma, Washington. We are happy to report that they passed our due diligence review with flying colors.

Cliff shares offices with his father, Paul, and Theta Investment Research. As a result, Paul is very familiar with the trading strategy, and provides an ample level of backup should Cliff be unable to trade for any reason. Purcell also serves as an extra measure of backup so that trades could be unwound if both Cliff and Paul were to become incapacitated, or in the case of a regional disaster, power outage or Internet disruption.

All accounts are held in individual accounts at Rydex Funds, and clients have online access to their accounts via the Rydex website. Both Rydex and Purcell issue quarterly statements, and Rydex provides year-end tax reporting for those investing through non-retirement accounts.

Since this program has the potential to trade frequently, investors in taxable accounts may have to deal with “wash sales” and short-term gains. Given the actual performance numbers of late, it may be well worth any tax disadvantages. Even so, it may be most suitable for IRAs and other tax-qualified retirement accounts. The Growth S&P Plus program may also be managed within no-load, low-cost variable annuity products available through Purcell that can help to address the negative tax consequences of frequent short-term trading in a non-retirement account.

Scotia’s minimum account size is $25,000. Management fees are billed quarterly in advance, based on the following schedule:

First $100,000	2.50%
$100,001 to $1 million	2.25% (entire account)
Over $1 million	2.00% (entire account)

Conclusions

The Scotia Growth S&P Plus Strategy can be a very attractive option for investors who understand the risks and want to diversify their portfolios by adding an investment that has both leverage and a long and short exposure in the market. As noted above, the program has an annualized return of 29.35%, net of all fees and expenses, with a worst-ever month-end drawdown of only –7.36%.

Yet the most impressive thing about this program is that it has shown outstanding results during the last 12 months, gaining over 90% during a time when other money managers found it difficult to stay above water. Keep in mind that past results are not necessarily indicative of future performance, and you should not expect the same return over the next 12 months.

And you can access Scotia’s Growth S&P Plus Strategy for a minimum investment of only $25,000, which is important for investors with smaller portfolios who want access to an investment option that uses both leverage and a long/short trading strategies.

Our analysis has also shown that Scotia’s historical returns show little or no correlation to the major stock market indexes, or to other Advisors I have written about in this E-Letter. Thus, the Growth S&P Plus Strategy may be an ideal complement to the other actively managed investments offered under the Halbert Wealth Management AdvisorLink® Program. For more information on the Growth S&P Plus Strategy, visit our website at www.halbertwealth.com.

If you believe, as I do, that market volatility could continue to be high, or go even higher, and that the equity markets will face some tough times in the next several years, then I suggest that you take a serious look at Scotia’s very successful program. Having the potential to make money in a very volatile market may prove extremely important over the next few years.

If you have any questions or would like to talk to one of our experienced Investment Consultants about whether this program may be suitable for a portion of your portfolio, please give us a call at 1-800-348-3601, or e-mail us at info@halbertwealth.com. You can also request additional information, including paperwork to establish an account, by going to our online request form. Also be sure to read the Important Notes about this investment program following my signature below.

Very best regards,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL), and Purcell Advisory Services, LLC (PAS) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from PAS in exchange for introducing client accounts. For more information on HWM or PAS, please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends), and the NASDAQ Composite Index represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of these benchmarks may differ materially (more or less) from that of the Advisor. The performance of the S & P 500 Stock Index and the NASDAQ Composite Index is not meant to imply that investors should consider an investment in the Scotia Partners Growth S & P Plus trading program as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the stocks that comprise the NASDAQ Composite Index. Historical performance data represents an actual account in a program named Scotia Partners Growth S&P Plus, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Scotia Partners Growth S&P Plus. The signals are generated by the use of a proprietary model developed by Scotia Partners. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mutual funds carry their own expenses which are outlined in the fund’s prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Scotia Partners Growth S&P Plus trading program.

In addition, you should be aware that (i) the Scotia Partners Growth S&P Plus program is speculative and involves a high degree of risk; (ii) the Scotia Partners trading program’s performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Purcell Advisory Services will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Purcell Advisory Services trading program’s fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

Answering Your Retirement Planning Questions

Gary D. Halbert — Tue, 18 Mar 2008 18:08:00 GMT

Mike Posey's ongoing series about planning and investing for income after retirement has generated quite a few questions and comments from readers. This week, Mike will address some of these comments and questions he has received from our readers. I think that featuring reader feedback will add value to these periodic Retirement Focus issues, since many of you may have the same questions or comments....(read more)

The Science Behind Buying High & Selling Low

Gary D. Halbert — Tue, 25 Sep 2007 09:18:00 GMT

The Science Behind Buying High & Selling Low IN THIS ISSUE: 1. The Mutual Fund Merry Go-Round 2. The Dalbar Studies 3. Some Interesting Statistics On Emotions 4. "Neuroeconomics" To The Rescue? 5. Is Your Risk Tolerance What You Think It...(read more)

Retirement Focus - Post-Retirement Income Planning, Part 2

Gary D. Halbert — Tue, 21 Aug 2007 09:22:00 GMT

Retirement Focus - Post-Retirement Income Planning, Part 2 By Mike Posey IN THIS ISSUE: 1. Taking Your Lump-Sum Distribution 2. Why Are Seniors Often Targeted? 3. Investment Scams Aimed At The Elderly 4. Other Scams Targeting Seniors 5. Fighting Back...(read more)

How To Make A Small Fortune In Commodities

Gary D. Halbert — Tue, 07 Aug 2007 09:28:00 GMT

How To Make A Small Fortune In Commodities IN THIS ISSUE: 1. My History With The Commodity Futures Markets 2. How To Make A Small Fortune? Start With A Large One 3. Why The Commodity Futures Markets Are So Risky 4. Why Almost All Individual Investors...(read more)

Goodbye To Alternative Investments For Many?

Gary D. Halbert — Tue, 26 Jun 2007 09:42:00 GMT

Goodbye To Alternative Investments For Many? Introduction Most of you reading this are at least somewhat familiar with the term " accredited investor ." In 1982, the Securities & Exchange Commission established that individuals with a net...(read more)

Investors Flunk The Test, Revisited

Gary D. Halbert — Tue, 15 Feb 2005 06:51:00 GMT

Introduction The US stock markets have been on a roller-coaster so far this year. Right out of the box, the Dow Jones fell from 10,800 to below 10,400 in the first three weeks of the new year. Then just as abruptly, the Dow ran right back up to the 10...(read more)

A Money Manager For Virtually Any Kind Of Market

Gary D. Halbert — Tue, 18 Jan 2005 06:54:00 GMT

Introduction As I discussed last week, “hedge funds” have been the rage in investment circles for the last several years. However, most of these funds require minimum investments of $1 million or more, if you can get in at all. This week I am delighted...(read more)