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Institutional Approach for Individuals

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As senior financial advisor at Anchor Capital Management Group, Inc., in Irvine, California, Leon James applies the quantitative analysis and strategic asset allocation used with his institutional clients to individuals who are retiring.

Institutional clients typically allocate among money managers to diversify risk and returns. So James thought it was wise to use this strategy for his private clients, and started doing so in April. Anchor Capital developed the allocation among money managers concept for retirees, using four proprietary portfolios for asset allocation. Retirees, or those on their way to retirement, can spread their assets between two or more of these portfolios. Each portfolio is designed to make money in a different environment so having a mix of assets among them will keep retirees’ principal and assets growing and hedged against losses in different market environments, according to James. Anchor has been using this approach with institutions for a couple of years.

“The more aggressive portfolio uses only two of those strategies. When one trading model may not do well in bear markets, another may perform best in bear or sideways markets,” James, 56, says. The allocations are “synergistic.”

The four portfolios include a mean reversion sector rotation, which is a strategy of not holding securities for a long period to exploit high fluctuations in the market. This approach can prove highly profitable, but the risk factor is very high. “Most retirees can’t handle that [market] ride,” James says. The strategy “works best in a bull or a flat market and may have an 18% to 19% drawdown but when you pair strategies together, you can reduce to 3% to 4% drawdown.” Anchor Capital looks for sectors that have fallen off of their mean but have a tendency to revert back. “Once it reverts, we get out,” he says. The second strategy is long-short fixed income, which is used for hedging and works in a subprime market for bonds or a bear or sideways market. The third strategy is long-short equity index trading, which is most effective in strong bull or bear markets; and, finally, statistical arbitrage between securities, which is effective in flat markets or if there is a slight movement in the market. It is based on statistical methods using historical relationships between the securities–not the market’s overall trend, but past performance and how the securities relate to each other, James explains.

A Technique That Pays Off

In the first five months of using this approach for individuals–through the end of August of 2007–the returns posted were just under 18%, compared with an S&P return of just 3.7%, James notes. “Most asset allocation is based on a rising market. We hedge that, protect the downside. We pair these strategies together so they not only grow money so that if the market pulls back or someone fires a rocket in Iraq [the losses are hedged].”

James has been a CFP for more than 20 years but acquired the somewhat controversial CRFA designation or Certified Retirement Financial Advisor designation in 2005. He says he wanted to learn what senior marketing guru Larry Klein, who developed the designation, knew: ways to accomplish retirement planning and clear its roadblocks–such as tax issues–in an orderly manner.

The SEC is scruntinizing professional titles aimed at recruiting seniors to exploit them as they seek to find vehicles to safeguard their savings. The SEC plans to work with Congress’s Committee on Aging and state regulators to perhaps even ban advisors from using misleading designations designed as marketing tools.

Despite the SEC scrutiny on senior specialist designations, James thinks the CRFA has a “very good” curriculum. The financial side of the course concerned avoiding Social Security taxes, how to plan out distributions, and which money to use where. The marketing portion of the course focused on how to communicate with seniors, James says. For example: “You’ve got to be straight up with them [seniors], and not to be afraid to talk about [their] future, be it long-term care insurance or estate planning,” he says. “Most of our clients are people that can manage the money themselves, but realize that it is a job and they are retired. They want to allocate [their retirement savings] rather than hovering over their money, and enjoy their retirement.”

Elizabeth D. Festa is a freelance business writer based in Washington, D.C. She can be reached by e-mail at [email protected].