Investment Management Philosophy
Investment ManagementPhilosophyExecutive OverviewThe investment marketplace has grown increasingly complex andunpredictable for individual investors. This reality may make it difficult formany people to effectively manage their own investments to accomplishtheir objectives. The task becomes especially challenging as the size ofthe portfolio increases and investment time frames lengthen. As a result,many investors turn to professional investment managers for assistance increating and managing portfolios that may be better positioned to performin a variety of market environments.It is our belief that investment performance can be attributed, in large part,to such things as:Our experiencedteam of investmentprofessionalsblend both the“science” and“art” of portfoliomanagement toimplement portfoliostrategies. Well designed, appropriately diversified, and strategic portfolioconstruction. Carefully selected investments, managers and funds. Tactical strategies, which attempt to add value in the short termthrough constrained portfolio adjustments.Our approach to investment management is customized and dynamic.We believe that the investment management experience is successful if itincludes the following attributes: Creation of a customized investment plan which outlines investmentgoals within the risk limits that are acceptable to the client. Implementation of a portfolio construction process that is customizedto reflect the agreed upon investment plan. Active investment management with respect to portfolio holdings,managers, funds, and use of tactical allocation strategies. Active communication designed to meet client preferences. Detailed performance measurement and ongoing evaluation. Appropriate adjustments incorporated as client circumstances change.This steadfast approach exemplifies the long-term commitment of ourexperienced professionals in helping clients meet their investment objectives.Important disclosures provided on page 7.
Page 2Investment Management PhilosophyThe Importance ofProfessional ManagementIt can sometimes be difficult for individuals tomanage their own assets and achieve the desiredresults. It is often more demanding as the size of theportfolio grows larger. Today’s increasingly complexand volatile markets add to the challenge. For thisreason, investors with significant wealth are likely toturn to professionals who can provide managementexpertise and insight. But how can investorsdetermine whether the approach employed by theirinvestment managers is the most effective methodand management style for them? What is the keyto effective investing in a market that continues toevolve and offers literally thousands of options tochoose from?One critical step is to identify trusted, competentprofessionals who understand how best to capitalizeon the full range of opportunities available intoday’s ever-changing investment landscape. Justas important is selecting professionals whounderstand how to align an investor’s objectivesand financial philosophy with potential currentand long-term opportunities.Disciplined ProcessAt the foundation of our investment philosophyis a belief that all portfolio managers should beguided by consistent and disciplined investmentmethods. For this reason, the creation of our multifaceted investment philosophy is the responsibilityof our chief investment officer and team of seniorportfolio strategists. Leveraging a dynamicapproach that includes deep intellectual insights andexpansive industry experience, this leadership teamcollaborates to develop, drive and oversee the coreprinciples and key tenents which guide our portfoliomanagers. Portfolio managers draw on the breadthand depth of this collective knowledge and direction,along with their own expertise, to implementcustomized portfolio construction decisions for eachindividual client. We believe the use of a structured,disciplined investment process helps improve localdecision making, enables active risk management,and helps ensure potentially successful outcomesare consistent and repeatable.A Team of ProfessionalsOur team includes more than 75 portfoliomanagers located throughout the country who helpguide individuals and organizations through theinvestment process. These professionals are wellversed in designing and implementing portfoliosaround the complex needs of individuals withsignificant assets. Many are certified as CharteredFinancial Analysts (CFA) or Certified FinancialPlanners (CFP). Clients benefit not just from theexperience of the individual Portfolio Managerworking with them, but also the collectiveknowledge and insights of our entire team, one thatworks closely together to stay abreast of markettrends and portfolio strategies.Discovering the UniqueNeeds of Every ClientAt the core of our philosophy is a fundamentalbelief that every client deserves a customizedportfolio created and maintained to his or her ownspecifications. Our investment management styleis underscored by a belief that taking the time tofully comprehend a client’s individual situationmakes it possible to tailor solutions that may helpdramatically improve the chances of meeting theunique investment objectives of each client.An important component of our process isthe insight gathered about each client’s uniquesituation and objectives. We emphasize a trulypersonalized approach from the very beginning ofthe relationship.Part of the process is quantitative and involvesgathering information about a client’s financialdata. We begin by taking a comprehensive personalfinancial inventory of all financial holdings. Thisincludes discussions about: Assets in retirement plans Taxable and tax-exempt investment accounts Savings accounts and certificates of deposit Real estate holdings Life insurance contracts Private investments and partnerships Current employment and business exposureImportant disclosures provided on page 7.
Page 3Investment Management PhilosophyPerhaps more significant than our financial datagathering process is getting to know what’spersonally important to the client. This qualitativeassessment is very subjective and helps usunderstand more deeply each client’s personalbeliefs, goals, fears, unique circumstances, incomeneeds, tax situation, and time horizon.The outcome of these quantitative and qualitativereviews is the development of a personalized planthat guides decisions on how best to construct aninvestment portfolio that is consistent with theclient’s unique situation.Taking inventoryAt the outset of each new client relationship, wecarefully analyze the specific needs of the client.Seven key areas of discussion help determinehow best to structure a personalized portfoliosolution. They are: I ncome expectations — the targetedlevel of income the portfolio should seek togenerate in order to meet client expectationsand needs. R isk tolerance — how the ups-and-downsof the market affect the client’s outlooktoward the way assets are invested.Combining “Science” and “Art”to Construct PortfoliosOur investment professionals combine both the“science” and “art” of investing, selecting amongmultiple asset allocation styles in an effort to limitthe affect of volatility that can occur in individualinvestments or markets, while striving to achieveclient goals. We believe this approach is an effectivemethod of potentially managing risk exposurefor clients.We feel opportunities exist in a variety of assetclasses through different market environments.Our asset allocation approach seeks to capitalizeon those opportunities by focusing on quantitativeanalysis of historic asset class attributes (expectedreturn characteristics) and long-term capital marketestimates. This is an objective form of marketanalysis – the “science” of investing – that createsrecommended optimal portfolio mixes based onhistoric returns and risk levels for various assetswithin each class. Historical return characteristicsof different asset classes enables us to potentiallydetermine what mix of assets may generate thebest after-tax return for an acceptable level of risk(market volatility).Example of How Asset Allocation StrategiesRank on a Risk/Return Scale T ime horizon — key milestones on theclient’s investment horizon that could affecthow assets are positioned. C onstraints — an opportunity to spell outspecific restrictions desired in a portfolio,such as industries, social issues or countriesthat should not be included. O ngoing communication — the type andtiming of personal contact the client desiresfrom The Private Client Reserve as theinvestment process continues. L iquidity — any specific financial needsthat may require significant withdrawalsfrom the portfolio.Scale of Potential Return T ax considerations — the role of taxplanning in determining the ultimate asset servativeBalancedScale of Potential RiskWhen designing our range of portfolio strategies,we take advantage of a wide spectrum of investmentoptions, centering on four broad capital marketasset classes: Equities – including large-, mid- and small-cap;domestic, developed and emerging internationalmarkets. Also, when appropriate, alternativeImportant disclosures provided on page 7.
Page 4Investment Management Philosophyinvestment styles such as hedged equity funds,structured equity notes, exchange funds, andprivate equity. Active and passive managementoptions are also available. Fixed income – bonds, bills and notes withvarious maturities and tax status, from a broadrange of domestic and foreign issuers. Also, whenappropriate, alternative investment styles such asstructured notes and hedged fixed income funds.Active and passive management options. Real estate – including outright ownershipof properties, Real Estate Investment Trusts(REITs), direct real estate funds, and asappropriate, structured real estate notes. Bothactive and passive management options can beutilized. Commodities – including outright ownershipof mining, oil and natural gas properties, fundswhich invest in commodity exposures, andas appropriate, alternative investment styles,including structured products and privatecommodities. Active and passive managementoptions can be utilized.We attempt to accomplish risk management withinportfolio strategies by effectively utilizing correlationsbetween different asset classes (and specific investmentsthat represent those classes) and matching them to theinvestment objectives and risk profile of the client. Webelieve thoughtful portfolio construction may helpbalance the return with the risk.Tactical decisions to each portfolio strategy areapplied to adjust for changing market and economicconditions and to take advantage of potentialmarket movements with the goal of reducing riskand possibly enhancing returns. This represents the“art” of investing, incorporating the judgment ofour chief investment officer and senior portfoliostrategists. They use their experience and expertiseto make adjustments to our quantitative strategies,assessing how current market conditions couldimpact overall portfolio performance. This is acritical “value-added” factor designed to potentiallylimit the prospective risk inside an individualportfolio while attempting to capitalize on themarket’s full return potential.Our approach to asset allocation also includes aunique emphasis on differentiating strategies basedon clients who may be more tax sensitive versusthose who are not subject to taxation. This allows usto construct portfolios incorporating expected aftertax return and volatility assumptions to assure thattax concerns are addressed in the final asset mix.Broad Capabilities Targetedto Specific NeedsFor many clients with significant wealth, preservationof capital is often a top priority. This may be one ofthe most important measurements of a professionalasset management organization. Individuals andorganizations that place importance on tryingto protect what’s already in place will look formanagers with the expertise to understand marketcycles, how to read economic trends and the impactthey may have on a portfolio.We offer broad-based capabilities and in-depthproficiency not just with securities (stocks and bonds)but with a wide variety of asset types, including: Managed asset class solution – mutual funds,separately managed accounts (SMAs), exchangetraded funds (ETFs) Alternative investment styles – hedge andexchange funds, private equity and venturecapital opportunities Risk management approaches – includinghedging strategies and structured notes Concentrated management strategies – use ofcollars and covered calls Stock options – defining appropriate exercisestrategies and timing Specialty assets – including farm, ranch andtimber land, income-producing real estate, oil,gas or mineral rights, loan assets, and closelyheld companies.A key element of our approach is the belief thata client’s investment universe should not be limitedto “in-house” capabilities. We provide access toa broad array of third-party investment managers.One way we try to maximize the potential forreturns is to capitalize on well-researched,Important disclosures provided on page 7.
Page 5Investment Management Philosophybest-in-class separate account managers, publicmutual funds and private alternative investmentfunds. An emphasis is placed on selecting managerswho can not just articulate an investment process,but have historically shown their ability tosuccessfully apply it consistently over time.Keeping Portfolios on TrackEach client’s portfolio requires appropriate rebalancing,tactical decision making, and ongoing assessment.This is carried out in three different ways:Along with developments in the markets and theeconomy that can affect portfolio success, anotherelement in our process is to incorporate changes inthe client’s own circumstances. We conduct regularreviews to assure that the stated investment strategyremains in line with any developments that couldaffect the client’s investment goals and risk profile.A typical portfolio review meeting includes: A review of actions committed to during thelast meeting.1. Through rebalancing of asset classes withinthe portfolio. The need to rebalance occursfrom time-to-time as certain assets performbeyond expectations, while other holdingslag or underperform expectations. To assurethat portfolios continue to be positionedin accordance with the client’s investmentobjectives, risk profile and tax sensitivity,assets are bought and sold to adjust the mixback to an allocation that better reflectscurrent tactical recommendations. A discussion of rebalancing measures,investment and/or manager changes, and tacticalstrategies implemented in recent months.2. Through market-driven adjustments made on atactical level. Our investment team continuouslyassesses current economic conditions, asset classvaluations, market sentiment and momentumfactors. This information supports the judgmentof the portfolio manager, who recommendsappropriate changes in an attempt to captureshort-term opportunities with the goal ofmanaging risk and potentially improving theoverall performance of each portfolio. Thisform of constant monitoring of economic andmarket trends as well as the performance ofspecific holdings is especially important in anenvironment where markets don’t stand still andunderlying investment objectives can change. Economic and market outlook, along withreview of current tactical asset allocation advice. A review of economic and market conditionssince last meeting. A review and analysis of investmentperformance compared to expectations. An assessment of any changes in the client’scircumstances that could affect portfolio strategyand a reconfirmation of the long-term strategy. Agreement on anticipated tactical andrebalancing measures that may be implementedin the coming months.3. Through ongoing assessment and supervisionof investment decisions based on the portfoliomanager’s active supervision of funds andmanagers utilized in the portfolio.Important disclosures provided on page 7.
Page 6Investment Management PhilosophyConclusionWe offer customizedportfolio solutionsand access to awide range ofinvestment options.Different asset managers have different investment philosophies. Determining ifone is more likely to succeed over another can be difficult for investors who areassessing their options. But one crucial element, regardless of the attributes of themanager, includes having a customized investment policy statement and stayingdisciplined about adhering to the investment strategy that is implemented.Choosing an investment manager who can narrow down an investor’s ultimatefinancial objectives and recommend an appropriate portfolio solution may helpimprove the chances of success in today’s market, which offers both tremendousopportunity and increasing complexity.Within The Private Client Reserve, our disciplined process ensures that each clientsolution is aligned with our overall philosophy. Portfolio managers leverage abroad-based investment platform when constructing customized portfolios andprovide ongoing assessment and active supervision. It is our belief that we serveour clients’ interests best by providing personalized attention to make a significantdifference in achieving investment objectives.Important disclosures provided on page 7.
Investment Management PhilosophyIMPORTANT DISCLOSURESThis information was prepared in June, 2010 and represents the opinion of U.S. Bank. It does not constitute investment advice and is issuedwithout regard to specific investment objectives or the financial situation of any particular individual. The information presented is for discussionpurposes only and is not intended to serve as a recommendation or solicitation for the purchase or sale of any type of security. The factualinformation provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank isnot responsible for and does not guarantee the products, services or performance of third party providers. U.S. Bank and its representatives do notprovide tax or legal advice. Individuals should consult their tax and/or legal advisor for advice concerning their particular situation.Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning how investments should be allocated tospecific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes may be suitable for everyportfolio. Hedged equity and hedged fixed income investment strategies are typically available via hedge funds which may not be appropriate for allclients due to the speculative nature and high degree of risk involved in these investments.Mutual fund investing involves risk; principal loss is possible. Investments in certain funds involves special risks, such as those related toinvestments in small- and mid-capitalization stocks, foreign, debt, and high-yield securities, and funds that focus their investments in a particularindustry. Investors should refer to the fund prospectus for additional details pertaining to these risks. U.S. Bank may enter into agreements withnon-proprietary mutual funds or their service providers whereby U.S. Bank provides shareholder services and/or sub-transfer agency, custodial andother administrative support services and receives compensation for these services. Compensation received by U.S. Bank directly or indirectly frommutual funds does not increase fund fees and expenses beyond what is disclosed in the fund prospectus. For more information, investors shouldreview the fund prospectus.Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. Stocks of smalland mid-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more establishedcompanies. International in
“science” and “art” of investing, selecting among multiple asset allocation styles in an effort to limit the affect of volatility that can occur in individual investments or markets, while striving to achieve client goals. We believe this approach is an effective method of potentially managing risk exposure for clients.
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