Finally, a Solution to the Income Investing Dilemma

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 8, 2013

IN THIS ISSUE:

1. The Fed Declares War on Retirees

2. Boomers Facing More Headwinds Than Ever

3. The Tactical Solution to Income Investing

4. Introducing Hanlon Investment Management

5. The Managed Income Strategy

The Fed Declares War on Retirees

In our 2012 Client Survey, the quest for income from investments was the number one concern of those who responded. In this week’s E-Letter, I’m going to address the changing trends in retirement income and the difficulties of living on a nest egg without touching principal.

There’s an endangered species in the investment industry today and it goes by the name of “yield.” With continued downward pressure from the Federal Reserve, both short-term and long-term interest rates have been held to artificially low levels. And each new announcement from the Fed seems to extend the outlook for low interest rates farther into the future.

Of course, these low interest rates may be nice if you are refinancing your home or needing to borrow money for your business, but it is wreaking havoc among those at or near retirement. A growing number of investors are seeking a way to earn income on their nest eggs without having to invade the principal.

Many Boomers thought that they could hold on when the assumption was that the Fed’s easing policies would come to an end in 2013. Now, however, the Fed’s easy money policy is open-ended, tied to a significant drop in the unemployment rate. Those at or near retirement now have no idea how long interest rates may stay low. Bernanke says that easing could stop by 2015 but that’s over two years away, and we know that he can change his mind in mid-stream, so that’s no comfort.

It might not be so bad if bonds and CDs were the only income resources affected by the current economic and monetary situation. Unfortunately, other traditional retirement income strategies such as fixed annuities, dividend-paying stocks and even working longer have been threatened by the economy, politics or both.

That being said, pointing out a problem without offering a solution wouldn’t do much good. So as part of the discussion, I’m also going to introduce you to a new Advisor, Hanlon Investment Management, whose income strategy has helped meet the needs of retirees for over a decade.

Boomers Now Facing Additional Headwinds

I have written many times about the plight of Baby Boomers as they begin to retire into what can only be described as an economic malaise. Unfortunately, many Baby Boomers are facing more headwinds than just low yields when seeking retirement income. Consider the following:

Numerous surveys and studies over the years have documented that many Boomers have not saved enough for retirement. However, Boomers are now faced with expenditures such as caring for elderly parents and/or kids that move back home because they can’t find employment. Add to that the number of unemployed Boomers and those whose income is shrinking and you have a retirement crisis in the making;
Healthcare costs are also a factor related to retirement income. A 2012 study by Fidelity Investments^®estimated that a 65-year-old couple retiring in 2012 would need $240,000 to cover medical costs alone throughout retirement. While this figure does assume Medicare coverage, it’s probably a bit low because it leaves out other medical costs such as over-the-counter medicines, most dental services and long-term care expenses, which can be considerable;
Prior to 2008, many seniors planned to supplement low savings with part-time or even full-time employment. Yet with today’s high unemployment rates, dreams of additional earnings from employment may be just wishful thinking;
Many older investors are also wary of the stock market after having the value of their investments decimated by two major bear markets within the span of a decade. While many Boomers need the growth potential that equities provide, they are all too familiar with the downside risk that has become a hard reality during past bear markets;
Changes in tax laws may also affect those seeking income, in that dividends are likely to be taxed at a higher rate than currently in place. Since dividends are already tax inefficient in that they are taxed twice, corporations may find more tax-wise ways to reward shareholders in the future, leaving those seeking dividend income out in the cold. In fact, some companies accelerated the payment of dividends in 2012 in fear of higher tax rates in 2013; and
As noted above, low interest rates on “safe” investments are having a major effect on retirement income. For example, one method of providing income in the past has been through bond “laddering,” where bonds of different maturities are combined in a portfolio. In today’s low-rate environment, bond ladders are not producing the kind of income they used to. Worse than that, if interest rates go higher, liquidating low-rate bonds before maturity to access higher rates could subject retirees to major losses.

Of course, the above list is not exhaustive of the many headwinds that income investors may encounter in this “new normal” environment, but they do illustrate the many concerns facing those who are now seeking to enter the distribution phase of their investment lifecycle.

The Tactical Solution to Income Investing

The bottom line for many Boomers at or near retirement is that they may have to seek out higher-risk investments in order to attain the income they need. However, buying and holding higher-risk investments could subject retirees to the kinds of losses incurred in the two bear markets we’ve endured since the year 2000. How can you balance the need for higher potential returns while also keeping risk manageable?

Fortunately, there is a way and it’s through “tactical” investing. Unlike buy-and-hold, tactical asset management involves moving assets from one asset class to another, or to cash, when conditions become unfavorable for the higher-risk investments. Of course, having the goal of moving to lower-risk investments during volatile markets and having an actual track record of doing so are two different things.

With the increased attention on income investments today, there is no shortage of new mutual funds and other investments featuring tactical strategies intended to produce income and to manage risks. However, many of these strategies have little or no actual track record proving the manager’s ability to actually deliver on the promise of both meaningful income and managed risk.

As I have mentioned many times, the AdvisorLink® Program offered by my company actively seeks out third-party money managers who not only have a goal of managing risk, but actual track records to go with it. After reviewing many different money managers promising managed-risk income strategies, we recently found one with more than a decade of actual track record to add to our list of recommended money managers. In the remainder of today’s E-Letter, I’ll tell you more about this manager and the income opportunity it provides.

Introducing Hanlon Investment Management, Inc.

Hanlon Investment Management, Inc. (Hanlon) is an SEC Registered Investment Advisor located in New Jersey. Hanlon was founded in 1999 by Sean Hanlon, CFP^®, who serves as its Chairman, CEO and Chief Investment Officer. He also developed the proprietary tactical and strategic portfolio management techniques employed by the firm. Sean is a member of the Forbes Investment Team, periodically publishing articles on www.Forbes.com, and is also a member of the Pershing Advisor Solutions Advisory Board.

As long ago as 1982, Sean came to see the need for professional money management to serve retail investors. He saw that traditional buy-and-hold investment strategies had some good qualities but exposed investors to far too much risk, especially during volatile market environments. Using a combination of his investing experience and his Mechanical Engineering degree, Sean developed proprietary bond and equity strategies designed to provide reasonable returns with limited risk as measured by drawdowns.

Hanlon's "Managed Income Strategy"

Hanlon’s Managed Income investment strategy can best be described as a combination of modern portfolio theory (MPT) and intermediate-term trend following. This may sound odd considering that MPT is usually associated with buy-and-hold asset allocation strategies, but Hanlon's Managed Income Strategy is anything but buy-and-hold.

Recognizing the weakness of MPT during volatile markets, Sean coupled the non-correlation aspect of MPT with two active management strategies. The first is tactical analysis, which is a quantitative approach to determining the overall direction of the market. In essence, it asks “Should I be in or out of the market?”

Once the decision to be in the market is made, the second overlay is strategic asset allocation. This analysis seeks to determine which asset classes have the greatest potential for gain in the current market environment. Hanlon selects the investment opportunities with the best risk-adjusted return potential within each asset class.

In the Managed Income Strategy, Hanlon selects a bond allocation that can be any combination of high-yield and/or high-quality bond investments, domestic and international. While high-yield bonds are generally considered to be an aggressive asset class, Hanlon’s tactical and strategic overlays seek to balance out this risk without sacrificing too much of the upside. The goal is to produce a meaningful income stream with minimal losing periods (drawdowns).

Want to know more about Hanlon’s strategy?
Click Here to Register for our January 15, 2013
webinar featuring the Managed Income Strategy

Performance Evaluation

These days, it’s not often that you find an active money manager with a track record spanning over 10 years. It's even less common to find one that has produced enviable gains while preserving capital during two major bear markets and government intervention in the markets.

Hanlon is a rare exception to that rule. The performance information provided below tells the tale of how well Hanlon's Managed Income Strategy has historically lived up to its goal of providing superior risk-adjusted returns.

It’s just common sense that an investment designed to provide periodic income must keep drawdowns to a minimum. Otherwise, you risk invading principal and possibly running out of money in later years. Hanlon's worst drawdown of just -5% (measured as of month-end) is impressive, but even more so considering the variety of market environments we have experienced since the program's inception in 2001.

Yet, principal protection is only half of the income equation. Unless there is the potential for meaningful returns, the level of income provided by an investment may not be sufficient. This, again, could result in invading principal in order to provide adequate income.

While past returns cannot guarantee future results, the following actual performance statistics (net of fees) show how Hanlon’s Managed Income Strategy has both produced reasonable income and protected principal during multiple market cycles:

Hanlon Managed Income Composite

Composite Chart

Performance Bar Chart

Past performance is not indicative of future results. Please see complete GIPS Disclosure at the end of this E-Letter.

The S&P 500 Index is unmanaged, investors cannot directly invest into the S&P 500. The S&P 500 is comprised of 500 widely held securities considered to be representative of the stock market in general. Investors should understand that the performance data presented comparing the four managed composites to the S&P 500 varies greatly and that depending upon the holdings within each composite, the volatility of the composites may be higher or lower than that of the S&P 500.

Note that Hanlon’s performance is compliant with the Global Investment Performance Standards, or GIPS. In a nutshell, GIPS consists of ethical standards for performance presentations that ensure fair representation and full disclosure to potential investors. There is no law or regulation that requires an Advisor to be GIPS compliant, but doing so can give you confidence that Hanlon strives to meet the highest standards of performance reporting.

Suitability

Hanlon's Managed Income Strategy was developed for investors who are interested in preserving capital while realizing a better return than those offered by many fixed income investments. Any drawdowns are expected to be minimal and temporary, though there are no guarantees as to future performance.

The Managed Income Strategy may be suitable if you currently need income from your investments. However, it may also be an attractive investment even if you are years away from retirement but want the potential for reasonable returns with limited downside risk.

Hanlon can manage accounts for individuals, trusts, corporations, IRAs, retirement plans and most other entities. The Managed Income Strategy is offered through Charles Schwab and Co. where Hanlon has access to hundreds of mutual funds and ETFs. Each investor opens a brokerage account at Schwab and grants Hanlon the authority to make investment decisions for the account. Hanlon’s minimum account size is $75,000.

Conclusions

After two major equity bear markets in less than a decade, many income investors are wary of stocks since they don’t have the luxury of time to regain lost ground. Hanlon’s Managed Income Strategy has distinguished itself by performing well even during two bear markets, as well as during the uncertainty of the subprime meltdown and subsequent government intervention in the markets.

While the potential for the bond bubble bursting has been the object of much speculation recently, Hanlon’s Managed Income is not a passive buy-and-hold strategy where you have to worry about whether or not there’s a bond bubble. Instead, Hanlon’s tactical approach is designed to move out of the market should signs of potential downward volatility become apparent.

One of the most impressive things about Hanlon is the strong team orientation and dedication to customer service. The firm has a well-organized vision and is prepared to grow larger without compromising their standards. If you are seeking a conservative growth investment option or an income solution, the Managed Income Strategy may be just what the doctor ordered.

To learn more about Hanlon, I encourage you to watch our short video featuring the Managed Income Strategy. You may also want to sit in on a live webinar with Hanlon on Tuesday, January 15, 2013. Just click on the webinar link to register for this event.

But Hanlon Investment Management can’t put your money to work if you don’t invest. So don’t procrastinate – contact us today in any of the following ways to get more information about the Hanlon Managed Income Strategy:

Call one of our Investment Consultants at 1-800-348-3601;
Send an e-mail to info@halbertwealth.com;
Complete our Managed Income Online Request Form; or
Check out our website at www.HalbertWealth.com.

Hoping this New Year is happy and prosperous,

Gary D. Halbert

IMPORTANT DISCLOSURES:

ADDITIONAL IMPORTANT INFORMATION: Halbert Wealth Management, Inc. (HWM) and Hanlon Investment Management, Inc. (Hanlon) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from the Advisors in exchange for introducing client accounts to the Advisors. For more information on HWM or Hanlon, please consult their respective Form ADV Part 2, available at no charge upon request. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

In addition, you should be aware that (i) the Managed Income Strategy is speculative and involves risk; (ii) the Managed Income Strategy’s performance may be volatile; (iii) an investor could lose his or her principal in the program; (iv) Hanlon will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Managed Income Strategy’s fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses. Be sure to read all disclosures for the performance numbers before making a decision to invest. Past results are not necessarily indicative of future results.