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Portfolio climate control

by Aug 14, 2014Advisor perspectives

Portfolio climate control

by Aug 14, 2014Advisor perspectives

Gary Ziegler • Madison, WI
Transamerica Financial Advisors

A Wisconsin native, Gary Ziegler has weathered scorching summers and frigid winters. Like the thermostats he relies on for climate control, active management is at work around the clock—adjusting his clients’ portfolios in all market conditions.
Proactive Advisor Magazine: Gary, when were you first introduced to active investment management?
It was in the 2006-2007 time frame, well after the dot-com crash. Our firm began introducing the availability of active strategies from several third-party managers.

It was a relatively long process for me to fully embrace active or tactical investment management. I had been brought up in the business on the theories of traditional style-box portfolio allocations. Though it was difficult to watch my clients’ portfolios go through volatility at times, that all came with that style of asset management. Portfolios did historically rebound over time, generally speaking, and that was pretty consistent with the principles of buy-and-hold investing.

The financial crisis of 2007-2009 totally changed my thinking. I really saw no reason to ever have clients fully exposed to that type of risk and drawdowns—and the uncertainty about how long it would take to recover.

How did your clients react as you introduced more tactical strategies to them?
Most were very excited about it. They agreed that “buy-and-hope” was becoming a less viable way to go about planning for their future security.

Some were hesitant, as the concept of active management was very new to them. It flew in the face of things they had read from the business media and some famous investors who are always giving interviews. They were pretty sold on the idea that you cannot time the markets and that low-cost index funds were the way to go, despite how painful 2008 was.

How did you go about convincing those who were unsure?
First of all, I think there is a role for many types of strategies and vehicles in a portfolio. It is not necessarily all or nothing. I have many clients for whom a blend of active and more passive strategies is appropriate. We also use many other vehicles aside from equities and bonds, most frequently variable annuities and variable life insurance.

On the tactical side, TFA has developed some excellent client materials and presentations that help explain active management. So have many of our third-party managers.

I will thoroughly go through these materials with clients, explaining about market cycles, risk and return, the math of drawdowns, and the need to play both offense and defense with your portfolios. We look together at some numbers showing how portfolios protected against downside risk, and minimizing those drawdowns, can perform over time versus just sticking with the performance of a market index.

I also use some simple analogies. My favorite involves a thermostat. I will ask my client what their ideal temperature is in their house all year-round. Let’s say they answer 70 degrees. In Wisconsin, weather can go above 90 degrees in the summer and below zero in the winter. However, if you have a thermostat, a furnace and an air conditioner, you can keep your home at a comfortable temperature all of the time. That is the goal of tactical money management—to make your investing experience less volatile. Sometimes you need to run the furnace and other times you need the air conditioner. It is nice to have a thermostat to help keep things comfortable and under control. I try to relate this back to the markets and the fact that you cannot do the same thing in all market conditions—it just does not make practical sense.


How do you counter some of those client beliefs on market timing and low-cost index funds?
Tactical strategies, to my mind, are not exclusively about market timing. Far from it. It is a disciplined, quantitative approach that is followed week after week, not some dramatic one-time call on the markets. Active management can include a wide variety of different philosophies, strategies, hedges, and diversified asset classes. It is not just a market-timing approach.

On the low-cost index funds, there is certainly a place for them, but not an exclusive place. Strictly investing in that fashion is the essence of buy and hold. Even though markets are healthy right now, investors that invested passively from 2000 to 2013 experienced two downturns of over 40% that dramatically impacted their portfolio returns.

How do you set expectations with clients about active strategies?
It entirely depends on their risk profile and the overall objectives we are trying to reach with each client or couple. But to generalize about tactical management, I will tell clients that some of the strategies might underperform a bit in a strong bull market, but should outperform by a wide margin in a down market.

That relates back to the math piece and how hard it is to recover in your portfolio from steep losses. We want the power of compounding—the Rule of 72, if you will­—to work on portfolios that have more consistent, less volatile performance, not wild swings. That makes sense to most clients.

For clients with more appetite for risk, we do have available some leveraged strategies that have done quite well in both bull and bear markets, but they carry with them more volatility and the potential for larger drawdowns. That all has to be carefully explained in detail and understood by the client.

We have a very wide range of tactical managers and strategies available to us, and different ways to structure portfolios. It is my job to put together the most appropriate combination of strategies for clients. It is the job of our third-party managers to maintain their disciplined approaches and execute well against their specific strategies.

With both of those elements working well together, I explain to clients that we can better manage market cycles and help them in meeting their long-term investment and planning objectives.

What types of clients do you tend to work with?
I have in the neighborhood of 800 clients, coming in all sizes and shapes and with all sorts of life circumstances. That is what makes the job interesting and enjoyable, as I love helping people with their unique challenges.

Our organization is totally vested in helping all families with their financial needs, so my clients range from the very affluent to those just starting out—with perhaps relatively little to invest right now. It is gratifying to be able to bring the most sophisticated investment strategies to a wide universe of clients.

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Disclosure: Gary Ziegler is a registered representative and an investment advisor representative with Transamerica Financial Advisors, Inc. Securities and investment advisory services offered through Transamerica Financial Advisors, Inc. (TFA), Transamerica Financial Group Division—member FINRA, SIPC, and registered investment advisor. Non-securities products and services are not offered through TFA.

Photography by Nick Berard

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