Item 6 - Portfolio Manager Selection and Evaluation

  • Description of how our firm selects and reviews portfolio managers, our basis for recommending or selecting portfolio managers for particular clients, and our criteria for replacing or recommending the replacement of portfolio managers for the program and for particular clients.

    Our firm does not utilize outside portfolio managers. All accounts are managed by our in-house professionals.
  • Disclosure of whether our firm or any related persons act as a portfolio manager for a wrap fee program described in the wrap fee program brochure. We must explain the conflicts of interest that we face because of this arrangement and describe how we address these conflicts of interest.

    Our firm and its related persons act as portfolio manager(s) for this wrap fee program. This may create a conflict of interest in that other investment advisory firms may charge the same or lower fees than our firm for similar services.
  • If our firm, or any of our supervised persons covered under or investment adviser registration, act as a portfolio manager for a wrap fee program described in the wrap fee program brochure, we must respond to Items 4.B, 4.C, 4.D (Advisory Business), 6 (Performance-Based Fees and Side- By-Side Management), 8.A (Methods of Analysis, Investment Strategies and Risk of Loss) and 17 (Voting Client Securities) of Part 2A of Form ADV (Firm Brochure).

    Our firm and supervised persons act as portfolio manager(s) for this wrap fee program

1.  Advisory Business

See Item 4 of this Wrap Fee Program Brochure for information about our wrap fee advisory programs. We offer individualized investment advice to clients utilizing the following services offered by our firm’s TAF® Wrap Fee Program. We usually do not allow clients to impose restrictions on investing in certain securities or types of securities due to the level of difficulty this would entail in managing their account. In the rare instance that we would allow restrictions, it would be limited to the TAF® Wrap Fee Program.

Our wrap fee and non-wrap fee accounts are managed on an individualized basis according to the client’s investment objectives, financial goals, risk tolerance, and the program’s discipline. We do not manage wrap fee accounts in a different fashion than non-wrap fee accounts.

2.  Performance-based fees and side-by-side management.

Our firm may charge qualified clients1(“qualified investors”) “performance fees” – that is, either fees based on a share of capital gains or capital appreciation of the managed client’s assets. We charge performance based fees for the following program:

1We are currently permitted to charge performance based fees only to clients with at least $1,000,000 under management with our firm or a net worth of at least $1.5 million. It is expected that the SEC will revisit this standard in the near future and tie the definition of a qualified client to inflation. It is unclear at this time whether the SEC will grandfather or exempt existing qualified clients being charged performance based fees from a greater financial threshold for meeting the qualified client standard should the definition change.

Alternative Investments where appropriate for qualified investors, include primarily a select few strategies: a long/short Technology hedge fund, a private equity Fund of Funds and a private equity Real Estate portfolio. Our firm endorses, for qualified investors, non-traditional investment strategies that have the potential to generate absolute returns independent of the market’s strength or weakness.

Alternative Investments have historically provided efficient portfolio diversification because they have low correlation to traditional asset classes.  We seek to identify these superior strategies and managers that can increase the Alpha and reduce the Beta of our Global Asset Allocation portfolios. In other words, in most cases than not a disciplined process of evaluating, selecting and monitoring non-traditional managers can increase a portfolio’s overall returns while decreasing its overall volatility risks.

Our firm seeks to identify these superior strategies and managers that can complement our investment philosophy that relies primarily on identifying global Economic Sectors, Sub-Industries, and Specific Equities that sell at deep discounts to their respective and historical intrinsic values, and that are poised for a “Super Cycle” long-term growth.

The due diligence process of choosing a few select alternative strategies and managers out of a universe of more than 10,000 funds and over $1.4 trillion in cumulative assets under management begins with the Investment Strategy sought and the organizational structure and registrations, a select few Alternative Investment Managers have to adhere to.

The Investment Strategies include the followings: Convertible Bond Arbitrage, Distressed Securities, Emerging Markets, Event Driven, Fixed Income Arbitrage, General Hedged Equity, International Long/Short, Macro Price Movement, Merger Arbitrage, Multi Arbitrage, Opportunistic, Sector Investing, Short Selling, and Fund of Funds.

The due diligence process of the Organizational Structure and Registrations of the Alternative Investment Managers include, but is not limited to the followings: 1) Finding out the tenure and experience of the investment management team, 2) Researching organizational ownership, Board of Directors, general and limited partners, 3) Understanding the investment process and its implementation, 4) Looking for Independent, disinterested Board of Directors, 5) Seeking preferred and independent bank to custody the assets, 6) Insisting on a reputable third party accounting firms to value the funds’ assets, 7) Checking for an independent third party administrator, 8) Reviewing the capital structure, liquidity and financial strength of the preferred Prime Broker the Alternative Investment firm is associated with for executing its trades, 9) Insuring the highest level of “transparency” by reviewing and checking issuance of timely semi-annual, and annual reports to investors that fully disclose financial information and manager allocation, and 10) Requiring that prime Alternative Investment Managers are registered with the SEC under the Investment Company Act of 1940 (The “1940 Act”).

The due diligence process for identifying a few, uniquely positioned Alternative Investment Advisors also attempts to evaluate risk/reward parameters as measured by their quantitative and/or Mathematical Calculations of Risk. The followings are some of the criteria studied when quantitative risk parameters are evaluated: Beta, Alpha, Standard Deviation, Sharpe Ratio, and R-Squared. In addition, the followings are some of the risk parameters researched when qualitative data is included: long and short-term performance results, Market Risk, Economic Sector Risk, Industry Risk, Significant Sector and Position Concentration Risk, Liquidity Risk, and Management Fee Risk.

At the end of the process, periodic ongoing reviews are scheduled with all clients. This process includes the followings: 1) Review of the entire portfolio as well as its underlying Economic Sectors, Sub-Industries and their respective Individual Equities benchmarked each quarter against their respective Equity and World Indexes, 2) Recalibrate each client’s asset allocation models as his or her life circumstances change, and 3) Present consolidated reporting that incorporates the portfolios of the Alternative Investment Managers with the entire holdings of the clients’ other investments disciplines

The pricing schedule for the Alternative Investments Program will be based on our ability to negotiate a favorable institutional rate for all of the cumulative assets of the firm’s qualified clients expressing a desire to participate in the program. Our goal is to negotiate a fee structure, on minimum investments of $100,000 per client that will adhere to the following criteria: 1) annual fees not to exceed 2% of net assets, 2) incentive fees not to exceed 20% of net profit, and 3) a one-time placement fees not to exceed 3% of net assets.

When charging performance fees to some of our clients’ accounts, we face a conflict because we can potentially receive greater fees from client accounts having a performance-based compensation structure than from those accounts we only charge a fee unrelated to performance (e.g., an asset-based fee).  As a result, we may have an incentive to either direct the best investment ideas to, or to either allocate or sequence trades in favor of the account that pays a performance fee.

We have taken several important steps to ensure that our performance based accounts are not favored over our client’s non-performance fee based accounts.  These steps include:

  • A periodic comparison of our performance based and non-performance accounts. Our comparison will entail a review of our ten most profitable and ten least profitable (including unrealized gain or loss) investment decisions based on total return of positions opened and closed for each investment strategy or mandate offered to clients. We keep track of securities ticker symbol, purchase date, sale date, percentage of gain and/or loss, and dollar amount of the gain and/or loss. In the event that we find performance based accounts are being unduly (i.e., consistently) favored over non-performance based accounts, we would take action to address the situation. This could include allowing non-performance based accounts to trade before performance based accounts to the extent practicable, or if the problem persists, not allowing new performance based accounts, waiving our performance based fees or cancelling our performance based fee arrangements altogether and in some cases, termination of firm personnel.
  • The use of block trades and allocations made based on client’s risk tolerance, investment objectives and restrictions. A periodic review of the block trade allocations to detect whether profitable trades are being disproportionately allocated to performance based accounts, while unprofitable trades are being disproportionately allocated to pure-fee based accounts with no performance fee. If our firm detects a problem in the allocation of block trades, our remedies are the same as those outlined above.

3.  Methods of analysis, investment strategies and risk of loss.

Methods of Analysis:

  • Global Macro;
  • Analysis of Sectors and Industries;
  • Top Down Value Analysis;
  • Underlying Fundamentals;
  • Cyclical;
  • Technical.

Investment Strategies we use:

  • Long term purchases (securities held at least a year);
  • Short term purchases (securities sold within a year);
  • Trading (securities sold within 30 days);
  • Short sales;
  • Margin transactions;
  • Option; including, covered call writings, uncovered calls and puts purchases and/or spreading strategies.

Risk of Loss:

Investing in securities involves risk of loss that clients should be prepared to bear. While the stock and bond markets may increase in value and consequently your account(s) could follow suite, it is also possible that the stock and bond markets may decrease in value, and consequently your account(s) could suffer a loss. It is important that you understand the risks associated with investing in the stock and bond markets, your investment portfolios are appropriately diversified, and that you ask any questions you may deem necessary for managing your investment portfolio(s).

Alternative Investments:
For clients who own alternative investments, the absence of a public market, lack of liquidity and an expected long term investment time horizon may include the following risks that you should consider:

  • You may experience the risk that your investment or assets within your investment may not be able to be liquidated quickly, thus, extending the period of time by which you may receive the proceeds from your investment. Liquidity risk can also result in unfavorable pricing when exiting (i.e. not being able to quickly get out of an investment before the price drops significantly) a particular investment and therefore, can have a negative impact on investment returns.
  • No guarantee that investors will receive a distribution. Distributions may be derived from the proceeds of the offering, from borrowings, or from the sale of assets, and we have no limits on the amounts we may pay from such other sources. Payments of distributions from sources other than cash flow from operations may decrease or diminish an investor’s interest;
  • Economic factors affecting the real estate markets generally, including changes in the economy, tenant turnover, interest rates, availability of mortgage funds, operating expenses, cost of insurance and tenants’ ability to continue to pay rent;
  • No connection between the share price of the REIT and the net asset value of the REIT until such time as the assets are valued.

4.  Voting client securities.

  • If we have, or will accept, proxy authority to vote client securities, we must briefly describe our voting policies and procedures, including those adopted pursuant to SEC Rule 206(4)-6.

    SEC Rule 206(4)-6 requires investment advisers who have voting authority with respect to securities held in their clients’ accounts to monitor corporate actions and vote proxies in their clients’ interests. We are required by the SEC to adopt written policies and procedures, make those policies and procedures available to clients, and retain certain records with respect to proxy votes cast.

    Our firm votes client proxies for all of the participants in our Wrap Account Management services. It should be noted that our firm does not vote proxies for clients of Alternative Investments and Independent Money Managers’ Programs as this is the separate responsibility of these parties. We understand our duty to vote client proxies and to do so in the best interest of our clients. Our firm further understands that any material conflicts between our interests and those of our clients with regard to proxy voting must be resolved before proxies are voted. We subscribe to a proxy monitor and voting agent service, which includes access to proxy analysis with research and vote recommendations. Our firm will generally vote in accordance with the recommendations of the proxy voting firm we subscribe to, but may vote in a different fashion on particular votes if we determine that such actions are in the best interest of our clients. Where applicable, we will consider any specific voting guidelines designated in writing by a client. Clients may request a copy of our firm’s written policies and procedures regarding proxy voting and/or information on how particular proxies were voted.
  • Whether we pay for proxy voting services with soft dollars or pass the cost on to our clients through a supplement to our advisory fee.

    We do not pay for proxy voting services with soft dollars. Also, we do not charge an additional fee to vote proxies.