The 2006 Wealth Roundtable: Penny For Your Thoughts

by Editorial

The Washington Model: Keeping company in a company town

MATHIAS: My feeling is that Washington is becoming much more of a financial and business center, less dominated by lawyers and the government. How do each of you view the current state of the Washington market?
THORMAHLEN: The market in Washington has shown remarkable growth and sustainability. It’s not just the government that is making the economy grow. It is all of the various industries service this economy – technology providers, homebuilders, etc. – that are fueling this growth.
FISHER: The Washington economy has shown remarkable growth and sustainability. It’s not just the government that is making the economy grow, it is all of the various industries that shoot off from the government – such as contractors- that are causing the growth. In addition, over the past several decades, real estate has become a huge source of wealth within the market.
FOLGER: I grew up here, so I’ve seen a lot of change, but Washington is still is a company town. We have tremendous stability in terms of employment, employment growth and real estate. The area makes for a great platform to build equity over time. I’ve seen a lot of families that have been here many years and are in a solid position to save and invest.
THORMAHLEN: You’re also seeing industries deciding to locate here because of both the intelligence of the population and the high-level of education here. It’s one of the ingredients that we share with Silicon Valley on the West Coast as well as the Research Triangle in North Carolina. The university and education systems are a big draw here.

Investing for long term

MATHIAS: What are the main concerns your clients have in today’s financial environment?
THORMAHLEN: I see more people on the investment side concerned about events that are totally out of their control.
FOLGER: We often deal with the nuts and bolts of money and investing. Clients are looking for solutions to their particular situations. How can I increase my income? How much should I have in stock? How much should I have in bonds? Am I going to have enough money to retire? Am I going to have enough money to send my children to college? These are the sorts of practical questions we work through with our clients.

MATHIAS: If a middle-aged professional came to you with three to five million dollars invested in financial assets, what would be an appropriate diversification given the market conditions today?
THORMAHLEN: For this particular scenario, you’re dealing with someone who probably has a long life expectancy and therefore continuing to grow these assets is going to be important. In addition, they would probably like to pass along some of their assets to future generations. From our vantage point, all things being equal, we would suggest this individual be invested in a growth-oriented portfolio, with an equity mix anywhere from 75 to 85 percent. The balance could be allocated in fixed-income instruments, probably municipal or tax exempt bonds. The real test will be how those equity assets are diversified and managed.
FOLGER: We’d want to have some balance in the portfolio between stocks and bonds with an equity position ranging from 50 to 80 percent, depending on the risk/return parameters. I think the more interesting element is how you would divide up the equity section. Typically, our firm has been a U.S. large cap investor. We are now looking at expanding into some of the other asset categories such as small-cap, mid-cap and developed international and emerging markets. Coming to grips with exactly the right mix of all those asset categories is a challenge that requires considerable input from the client.
FISHER: At the $3 to $5 million-dollar level, you are limited to more traditional asset classes, making it more difficult to properly construct exposure to alternative asset classes.

International Investments

MATHIAS: Internationally you can’t talk to investors without hearing about how China and India are the two dominant economies. How can the average person/small investor participate there?
THORMAHLEN: Twenty years ago the U.S. dominated the world markets. Now the U.S. is at 45 percent and going down because of the growth in China and India and other countries. If you ignore global investing you are ignoring about 60 percent of the available opportunities out there.
FISHER: You can use a manager who is either hedging that position or is taking care of that currency risk within the portfolio and returning U.S. dollars to you.
THORMAHLEN: There has been an explosive growth in funds that are predominantly allocated to the four growing B.R.I.C economies: Brazil, Russia, India and China. It’s really phenomenal. Investing in regions of the world, whether it’s Eastern Europe, Asia, or the Latin American and South American markets is a real possibility. It’s amazing to see the explosion of growth out there.
FOLGER: There have been some innovations so the small investor can invest more easily in different equity asset classes. Our focus has been on exchange traded funds, which generally are index funds based on certain areas of the world, asset classes or sectors of the economy they are traded like stocks over exchanges. ETF’s have given small investors a lot of flexibility in being able to diversify around the world and within the U.S. market.

Real Estate Bubble?

MATHIAS: You cannot live in Washington and ignore real estate. There’s a lot of talk on how the bubble, in recent weeks the market has performed extraordinarily well. Do you have thoughts on the real estate market and what people should do with their homes?
THORMAHLEN: I have trouble when I see the reports in the national publications about the real estate market, the real estate bubble. There is no denying the real estate market in this area is going through some tough times, but I am one who is convinced that real estate is, more than anything else, a localized market. I think that while the real estate market isn’t the healthiest it’s been, I would bet the Washington region is about as healthy as a market for real estate is going to get in this country.
FISHER: It is very much a localized phenomenon and I think we’ve seen this real appreciation throughout many parts of the country especially coastal properties. But where I grew up in Detroit, they are saying, “What real estate bubble?”
FOLGER: On a practical basis, our clients live here locally and have experienced in their own homes and other real estate. So while we do offer real estate investment vehicles, we have not been focused on adding significant real estate to their investment portfolios because our clients often have substantial holdings in this area.

Opportunity and risk

MATHIAS: If you look at the market today, where do you see opportunities? And where do you see areas that you’d want to avoid?
THORMAHLEN: People are living longer, healthier, more vibrant and active lives. There are companies and industries that are making their products and services to cater to those types of individuals. Look at companies that produce hip joints and knee replacements. Companies in the medical technology fields or in the leisure fields are tremendously successful. Another theme we talked about earlier was global growth. The world is getting smaller, and there are now international companies that are servicing U.S. based companies. They are servicing the world’s demands for cellular communications, food, shipping, and all these companies are tremendous opportunities out there for investors.
FISHER: If you look at [different] sectors within the equity market over the past five years, small cap value has had an incredible run. If you look at the evaluation relative to where there is opportunity now, large cap growth appears to be the next opportunity.
FOLGER: We search for companies with a consistent growth rate in their earnings overtime. These companies typically have a certain competitive advantage and can be found in any industry. We try to stay away from companies that have lost their edge, even though their stock prices may have dropped. For example, the U.S. auto sector is going through real difficulties right now. It may be an appropriate investment for a value manager, but not for a growth manager such as ourselves. The airline sector is another area that has been fraught operational problems and is probably not appropriate for our clients.

MATHIAS: If each of you could select one industry as having favorable prospects for the next three to five years, what would it be?
THORMAHLEN: I would probably put a portion of my investments into the information/technology field. Qualcomm is a growth play on China and Asia. They will introduce a new screen for cell phones that does not fade in direct sunlight and their CDMA technology is considered state of the art. Medical technology is another field of great innovation. Bio-tech companies like Amgen and Genentech are making huge strides bringing new therapies to market. Technology, whether its information, clinical or industrial, is very attractive to us.
FISHER:  There are also some great investments to be made in the healthcare, finance, and technology markets, but allocation is the key to meeting expectations.
FOLGER:  Financial services is another attractive area. The U.S. is becoming more and more of a service economy, and financial services are playing a large and innovative role. It’s interesting to note the market capitalization of the financial services sector is now the largest of all the major industry sectors in the S&P 500.

MATHIAS: What type of return do you think the broad based market will provide on an annual basis as we look forward to 2011? And then let me throw in a kicker: who do you think will be elected president in 2008?
THORMAHLEN: Looking towards 2011, I think that we all would anticipate this market will trade at the mean. Typically we see equity investments that are going to return eight to ten percent, and hopefully you’re in the right categories for growth and value that will garner this kind of return. On your other question, I believe four of the last five presidents had been governors previously. If that’s the case and the trend holds true, I think that a local individual, Mark Warner, would look interesting in the White House.
FOLGER: It’s very hard to provide any kind of credible five year forecast. I will say, however, that this year looks pretty good. We had fairly poor growth in the fourth quarter, but it looks like we’re going to have a much strong first quarter. Economists are looking at overall growth this year in the 3 to 4 percent range. Another positive is that we’re looking at an end to the increase in interest rates by the Federal Reserve and, as interests rates start to level out or perhaps even start to go down, rates will provide less competition for stocks. Over the next five years, given we don’t know what’s going to happen, I think the prudent thing to do for investors is to assume a relatively conservative equity return in the high single digits. On the presidential election, I’ll go with Mark Warner too.
FISHER:Mark Warner and Geroge Allen look strong for local reasons, but I like John McCain.

MATHIAS: Last question, how much do each of you charge in asset management fees?
THORMAHLEN: Our fee schedule is based on the assets under management. We charge 1.0% on the first $5million, .75% on the next $5 million and .50% on the balance. We never charge on a percentage of sales.
FISHER: We charge one percent or approximately a hundred basis points annuallly. It can be a little bit higher or a little bit lower, out from there depending on the client.
FOLGER: Our fee schedule is one percent on the first two million of assets under management, three quarters of a percent on the next three million, and half a percent on the balance.

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