Monthly Recap – April 2010

Performance Results

Beacon Hill Investment Advisory claims compliance with the Global Investment Performance Standards (GIPS®).
Investment Results shown from 3/31/2009 to 3/31/2010 on an annualized basis.

Investment Results shown from 8/31/2008 to 3/31/2010 on an annualized basis

Beacon Hill Investment Advisory is an independent Registered Investment Advisory. Additional information regarding the firm’s policies and procedures for calculating performance returns is available upon request by calling 614-469-4685. “Moderate Clients” represents our Moderate composite and is for those portfolios with a moderate growth objective, with risk metrics comparable to Benchmark of 2% BarCap U.S. Treasury Bill 6-9 Month index, 40% BarCap U.S. Aggregate Bond index, and 48% Standard & Poor’s 500 index- which had a return of 31.7% for the period. “Moderate Aggressive Clients” represent our Moderate Aggressive composite and is for those portfolios with a moderate aggressive growth objective, with risk metrics comparable to Benchmark of 2% BarCap U.S. T Bill 6-9 Month index, 25% BarCap U.S. Aggregate Bond index, and 73% S&P 500 Index- which had a return of 38.5% for the period. All returns calculated in U.S. Dollar returns and net of all expenses. Beacon Hill’s Moderate portfolios were not charged fees for the period 8/31/2008-12/31/2008. Past performance is no guarantee of future results. Moderate Composite has had a 7.0% since inception in 8/31/08, while the benchmark had performance of 1.5% for the same time period. Moderate Aggressive Composite has had a 27.7% return since inception in 1/1/2009, while the benchmark had performance of 20.6% for the same time period.

Our flexibility benefits our clients
While we add value to our clients beyond the rate of return of their investments we know, by and large, we are judged by our investment performance. Many of those that see our performance that aren’t clients, or clients who have come on board within the past few months, want to know how our clients have achieved positive results in such a volatile market. In essence, our lean structure allows flexibility in ways that benefit our clients. We are not tied to a corporate mantra or models that never adjust.

Firm wide Research
Our firm wide research process sets up our long term, strategic portfolios. It is also likely the most boring aspect of our analysis, so for a detailed explanation on our firm wide research process, click here. In a nutshell, however, we analyze the most efficient way to bring different asset classes (stocks, bonds, real estate, etc.) together in a portfolio to achieve the highest amount of expected return with the lowest amount of risk. We then analyze the most efficient investing method for each asset class. On an ongoing basis, however, we do not simply maintain static asset allocations. We adjust. This step in the process provides the most impact to our portfolios, as the vast majority of portfolios that we have analyzed are inefficient in asset allocation and expenses.

Customized for Each Client
For each individual client, we then gauge risk tolerance to determine the type of portfolio they should have. This is very common in our industry. Once we determine the type of portfolio they should have, we tailor it based on their individual needs- this is less common in our industry (analysis doesn’t take place at the level of the client-facing broker). Customization will take into account, amongst other things, other assets (i.e. if the investor owns rental property, we will not include a real estate allocation).

Gauging our Performance
We then include that investor’s performance with the “composite” of other clients that share the general type of portfolio. We then calculate on a quarterly basis the performance of each of our composites. This performance is calculated after all investing costs, including our fees. While it is very common to measure actual composite performance in institutional money management (management for large pools of capital), it is much less common in management of individual’s portfolios. It is very common for salespeople to talk about the performance of a specific product, but you won’t get data on the performance of the overall portfolios they have constructed.

We then compare our performance to standard benchmarks that will match the risk level of the various composites. This provides a feedback loop where we then determine if we should continue investing the way we have been, or whether change is warranted.

How have we done?
Since inception, our portfolios have done quite well. Click here for our two largest composites’ returns.

Our largest composite by number of accounts is our Moderate Composite, which has outperformed its benchmark by 6.5% per year since we began managing money, before the huge market selloff in September of 2008. It has had a return of 7% per year; in comparison the S&P has lost 7% per year since that time. You may be asking, “But they were managing less money during the recession, so they simply lost less money and more assets came on board when the market went up, right?” While it’s true we were managing significantly less money at the end of 2008 than now, and you should be skeptical of performance claims, this is where following the Global Investment Performance Standards (GIPS®) comes into play. The GIPS® standards are created to allow investors to have confidence that performance metrics aren’t gamed. We won’t bore you with the details of the calculation methodology prescribed, but it essentially shows management skill through time negating the effects of any asset flows.

Our other portfolios have done quite well and complete performance information is available by request. Our composites are Moderately Aggressive, Moderate, Conservative, Principal Protection, and our recently added Cash Management.

A few specific ways we have added and detracted value
While we are constantly researching the markets and increasing the efficiency of our portfolios, we rarely make major shifts in portfolios. We have made three major shifts in our portfolios since inception.

Ways we have added value
1.) We kept a low risk profile during 2008.
2.) We were performing a profitable arbitrage for a period of time during the market downturn.
3.) We increased the risk profile in the spring of 2009.
4.) We had a heavy allocation to foreign markets last year, which outperformed the U.S. stock market.
5.) We had a reasonable allocation to smaller company stocks, which outperformed larger company stocks.
6.) Our heavier allocation of value stocks rather than growth stocks.
7.) Our heavier allocation to real estate.
8.) We again increased our risk profile in the summer of 2009.

Ways we have detracted value
1.) We became more conservative in the fall of 2009.
2.) We overweighed higher credit quality bonds, which underperformed lower credit quality bonds.
3.) Our allocation to foreign markets underperformed the U.S. stock market in the first quarter of 2010.

What are we looking at now?
Major themes and tactics we continue to research

Increasing interest rate environment in the long term, coupled with a steep yield curve. Decrease interest rate sensitivity in the fixed income area (adds some credit risk, stay out of long term bonds, explore international fixed income)

In the longer term, the problems that fueled the last recession haven’t been fixed (Banks that are “too big to fail” are still too big, Low interest rates fueling asset bubbles) Analyzing buying insurance for “unexpectedly” large market drops

Persistent government debt and deficit increases with commensurate tax increases Staying away from government bonds. Analyzing tax efficiencies of portfolios.

April . . . At A Glance (2010)

Investing themes stayed constant throughout April; the “easy money” policy of the Fed is still buoying all markets, improved corporate earnings continue being announced, as well as problems throughout the Euro-zone. Disturbingly, the last three weeks of the month were essentially sideways, while volatility picked up across most markets due to Euro-zone troubles and concerns that the Goldman Sachs debacle may lead to increased regulatory costs for banks and brokerage firms.

1st quarter 2010 GDP figures were released, which measures everything we produce as a nation. We had a 3.2% annual growth rate for the quarter, less than the previous quarter’s annual gain of 5.6% and less than the consensus. This number was disappointing, as it will take a higher rate of growth to decrease our persistently high unemployment. It takes about 3% GDP growth to keep the unemployment rate constant to offset population growth. As a comparison, after our last serious recession in the early 80’s GDP grew over 7% annualized for five straight quarters.

The silver lining in the GDP figure is that it appears we are opening our wallets a bit more, as consumer spending increased at a 3.6% rate. This is double the previous quarter’s rate. This is important, as there were major concerns that the previous quarter’s growth was due to companies restocking their shelves and that no one would purchase the inventory. In essence, it shows that the recovery is becoming more broad based.

Smaller companies again outperformed larger companies, while International stocks were punished by Euro-zone worries and a strengthening dollar.

The fixed income markets had a good month. The bond market saw in the GDP figures that unemployment would not increase soon, and, if people don’t have jobs companies don’t have much pressure to increase wages. Lack of wage increases signals continued easing of inflation worries, which provided a tailwind for bonds. Lower credit quality bonds in particular outperformed as can be seen by the below graph.

Due to decreased concerns over inflation, interest rates dropped across the longer term maturities.

HEALTHCARE: Are You Paying The Bill?

There has been much discussion in the past year about healthcare and the role of government. Now that legislation passed, what does this mean to you from a cost standpoint? While an entire paper could be written on the complexities of the Bill, here is an overview for investors.

Who is paying for these increased services?
Well, like every new service, it has to be paid for and this one is no different. A portion of the funding will come from an extra tax on investment income to the tune of 3.8%. This tax will begin in 2013 and is often characterized as a Medicare contribution but is actually a surtax on the investment income you realize.

Who does this affect?
The surtax is not necessarily targeted at high net worth investors. The catalyst for the surtax lies in whether you’re in a high income tax bracket. Specifically, if you have a modified adjusted gross income (MAGI) over $200,000 or over $250,000 for married couples filing jointly you’ll be affected. In 2013, when the highest tax bracket is 39.6%, those individuals will actually pay 43.4% (39.6+3.8) on investment income. Investment income includes taxable interest, passive activity income, rents, and royalties. It does not include retirement account distributions.

Is there a way to avoid this tax?
As you may know, tax evasion is illegal but tax avoidance is a form of strategic planning to reduce the taxes you owe today. Since avoidance strategies are permitted, let’s look at some options for this surtax.

1.) Keep income below ‘trigger point”
2.) Decrease investment income if above ‘trigger point”

The name of the game is to decrease investment income in 2013 and beyond. First, you may consider converting your IRA to a Roth IRA sooner rather than later. Other than the obvious provision this year that allows you to convert regardless of your income, it my behoove you to realize the income by converting to a Roth today versus later. If you were to wait until 2013 to convert, the additional income may trigger the surtax and you could potentially pay 43.4% taxes on your investment income.

Another advantage of converting to a Roth is that you won’t be required to take RMD’s (required minimum distributions) at age 70 ½ as you would with a traditional IRA. This could potentially allow you to avoid the surtax wherein a RMD could throw you over the thresholds discussed earlier and ultimately subject you to the added tax.

Finally, we analyze for our clients whether techniques such as Asset Location and Security Selection will have a positive effect on avoiding the surtax. A simple example of security selection would be the choice between a corporate bond and a municipal bond. The municipal bond will throw off tax free income from the federal perspective which could ultimately save you from exceeding the thresholds we’ve discussed. While their before-tax returns are slightly lower than corporate bonds, an after-tax analysis might yield favorable results for municipal bonds.

Click here to contact us to see if we can be of assistance in more complicated strategies for your strategic tax avoidance planning.

B.O.S.S. SCHEDULE™
(Business Owner Strategy Sessions)

Business Sale Review: May 20, 2010
Join Scott Chapman and Andy Hays, Partners and Co-founders of Copper Run Capital to learn how to:

• Find buyers for your company while maximizing value
• Structure a deal

Monthly workshops are held at the Beacon Hill Office for our clients and friends whom are business owners. Typically, sessions begin at noon with lunch provided and not to exceed an hour. To RSVP, please call Mark at 614-469-4685 or Click Here.

DID YOU KNOW?

The RAND Institute for Civil Justice in 2008 found that 63% of investors believe registered representatives (“Financial Advisors”) are required to act in the best interests of their client (they aren’t).. [TD Ameritrade White Paper].

Our mission is to manage our clients’ financial matters in a manner that allows them to focus on their families, their businesses, and their lives.

Clint Edgington, CFA Partner Beacon Hill Investment Adivsory	Mark Fissel, RFC Partner Beacon Hill Investment Adivsory