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   Interview

    Guest Interview:

   Portfolio Strategies

    1724 West Union Avenue STE 200
    Tacoma,WA 98405

    Telephone: 800-959-2001
    Fax: 253-383-1033
    E-mail: linda@portstrat.com

 

    Interview Quarter: 3Q2009

 Sondra Purcell,
Principal (Left)

Dan Yeung,
Investment Strategist (Center)

Teri Weigel,
Principal & Chief

 Compliance Officer (Right)

  Purcell Advisory Services describes itself both as an alternative and active manager. What do you mean by these terms?  
  Many financial professionals divide the investment world into sections which include an alternative investment part, covering a broad range of investing strategies and structures that fall outside the boundaries of traditional asset categories such as equities and fixed income.

Purcellís investment programs are not designed to move in tandem with traditional markets and the active trading component of our strategies provides low correlation with these markets to further reduce risk and preserve assets.

We see active management as a necessary sub-set in the alternative investment arena.
 
  Who started the firm and why did they feel there is a need for your investment services?  
  Although the Purcell firm began in 1998, its genesis really began in 1982 when a stockbroker friend of Sondraís, Carl Kludt, asked her to go into the advisory business with him. She would run the business end and he would run the money. They called the firm Portfolio Timing, Inc. and became registered as an RIA in Washington state. Carlís original idea was to Ďtimeí the markets using no-load mutual funds like Vanguard, Fidelity, Dreyfus and others. The business plan was simple: solicit $2 million dollars, charge 3% management fee and split the $60,000 annual income three ways: $20 thousand for Carl, $20 thousand for Sondra and $20 thousand to run the business. And thatís exactly what happened that first year.

In subsequent years, the assets grew and the partners and their clients were more than pleased to make more than 46% in 1987 by moving to cash on October 6th, before the 19th which was Black Monday, and then getting back into the market again in December to pick up another 4%. Of course, mutual fund companies were not amenable to active trading and Portfolio Timing client accounts were getting kicked out of these funds and being asked not to trade any more. It could be quite chaotic to try to find suitable mutual funds. In 1992, a Rushmore wholesaler came to call and asked about their interest in trading index funds at a company he was planning to start. These mutual funds would be Ďadvisor friendlyí which meant active,every day, trading would be allowed without penalty AND at least one fund would be more than one beta. Just what was needed in the industry, Sondra and Carl thought.

The firm thus became one of the first RIAs in the country to use Rydex Funds, started by former wholesaler Skip Viragh. Purcell Advisory Services takes pride in using Rydex Funds since their inception and a close relationship between the firms continues to this day with Sondra serving on the Rydex/SGI Dynamic RIA Advisory Board. As CEO of Portfolio Timing, later Portfolio Strategies, she steered the firm to a nationwide presence by packaging the money management, and distributing the investment programs through other financial advisors around the country. They gained other shareholders who were also money managers and managed to hold their own during the Ď90s until Carl passed away in 1997.

By this time, Don Purcell, Sondraís husband, had joined the firm to do sales and marketing. When Carl died, they thought this would be a good time to start their own firm which would hire active managers to utilize advisor friendly funds and then expand the advisor base through an extensive marketing campaign. Teri Weigel, CFP, had been instrumental in bringing Carl and Sondra together in 1982 and was still a friend of the firm. Teri began in the financial services industry in the Ď70s and had most recently served as Operations and Financial Principal of a local brokerage firm. She joined Purcell Advisory Services LLC as principal and compliance officer.

So, Sondra Purcell, Don Purcell and Teri Weigel started Purcell Advisory Services in 1998. They brought more than 50 years of financial services experience to the fledgling firm which they formed to take advantage of the void of active management in the financial services industry.

The philosophy of the firm is that average investors need to have the opportunity for positive performance in their portfolios, regardless of market direction. The principals set out to provide both investors and their advisors with investment programs whose managers were not constrained to the long side of investing, but who were tactical, even utilizing inverse mutual funds as necessary.

Currently Purcell has more than 125 advisors using our risk averse, actively managed programs for their clients in 48 states. With more than $200 million now under management, the investment community seems to have responded positively to the risk averse, actively traded models.
 
  What kind of investments do you make and what kind of securities do you use?  
  For securities, Purcell primarily trades leveraged long and inverse Rydex mutual funds in our tactical money management programs. The leverage can range from 1.25% to 2.00% in both equity and non-equity mutual funds, both long and inverse. The majority of the trades are short term.  
  What are the different portfolio strategies you offer?  
  We offer a wide spectrum of strategies ranging from Moderate to Ultra Aggressive. The Olympic Series, our flagship set of investment programs, utilizes a manager-of-manager strategy whose market exposures include both non-equity and equity asset classes. On the relatively moderate part of the spectrum, we offer both Columbus High Yield and Tactical High Yield programs which are tactically managed high yield strategies with a focus on minimizing portfolio drawdowns. On the ultra aggressive part of the scale, we offer Growth Plus, which is a single-manager product. This strategy has historically exhibited large drawdowns, but has shown a higher historical performance. On a risk-adjusted basis, this active large cap program has looked more favorable than long-only buy-and-hold strategies.

Our Olympic Blend programs place in the middle of the risk spectrum, using a combination of five manager models trading either long or inverse in such asset classes as large cap, small cap, international, hard assets (precious metals or REIT) and long Treasury bond.
 
  Which do you favor as investment vehicles: Rydex or ETFís?  
  Purcell Ďs research has shown that Rydex leveraged mutual funds are efficient vehicles to trade. We are able to trade these funds at NAVís and so avoid the trading commissions that are associated with ETFís. In addition, we can trade Rydex leveraged index equity funds twice a day, once in the morning and another in the afternoon, which may help a manager capture some movement in the market. Our experience is that many active managers have found the 2 beta Rydex fundsí twice a day liquidity to be sufficient for their risk averse models and there is limited tracking error with the underlying indices.  
  Am I correct in describing you as a ďmanager of managersĒ?  
  Yes. That is exactly what we are and what we do. We research, vet, stringently monitor, and occasionally replace our managers. Currently we use, or actively track, a total of 20 managers. A difference between Purcell and other managers of managers is the strategies or models we look for and employ are oriented to mainly technical analysis. In other words, our managers do not often use macro overlays or fundamental analysis. They rely on such indicators or techniques as moving averages, oversold/overbought indicators, Elliott wave counts, investor sentiment, Fibonacci retracements and advance/decline lines, etc. Because we are able to trade both leveraged long and leveraged inverse mutual funds, our programs can take advantage of a range of exposures in a diversified set of index portfolios.  
  How do you go about choosing the managers with whom you work?  
  Our manager selection and due diligence process is rigorous. We use both quantitative analysis and qualitative assessment in evaluating and selecting managers. We start out with a universe of manager candidates in a particular strategy or asset class and then narrow the universe using a number of quantitative screens and metrics including maximum drawdown, trailing and calendar-year returns, Sortino Ratio and our own proprietary statistical measures. In terms of qualitative analysis, we interview managers about their firms, strategies, processes and models during initial calls or meetings. In most cases, no manager is approved to be placed on our farm team or for implementation until we have an in-person meeting at either the managerís location or our office in Tacoma, WA.  
  How often do you replace the managers in your universe?  
  We are rather proactive in both manager selection and replacement. We replace managers as needed, using the metrics and criteria described previously. It is understandable that managers can go through cycles experiencing substantial underperformance at times. During difficult times, we seek to find out whether a particular strategy or model may not work in a certain market trend or if any enhancements may have been made to the model to make it more adaptive. We ask for honest and sensible rationale from our managers and for us, itís important that our managers are able to articulate where the issue or shortfall is.  
  What determines whether a manager gets replaced?  
  Purcellís investment committee, chaired by investment strategist, Dan Yeung, MBA, CFA, follows a number of metrics and criterion determining any manager replacement. Some of the metrics used were mentioned earlier. Itís also important for Purcell to determine the correlation amongst managers to evaluate whether certain strategies may work best in combination with other strategies or are better executed individually in a particular market trend.  
  How do you allocate portfolio funds within your manager universe?  
  The portfolio allocation among managers depends on many factors, including the investment parameters of individual programs and the core competencies of individual managers . In most cases, managers are responsible for certain assigned percentages of assets within a given program. The investment committee sets these parameters.  
  In a recent investment report to your clients you stated that you do not know the marketís future direction but as far as your strategy was concerned it did not matter. Please explain.  
  Not being able to see the marketís future is not specific to Purcell Advisory Services, we just want our investment programs to be structured more like absolute return strategies so that whichever way the market goes, the opportunity for gain is there, over time. It is important to note that a long only portfolio will not win the day. For the last 10 years, the S&P 500 has returned -0.15% when annualized. Some investors have not improved their financial position for 10 years! We call that not just buy and hold, but buy and hope! Our active strategies do not try to find out which asset classes may make money, but which managers can position themselves to take advantage of the situation, regardless of market direction.  
  How can you make money in both markets - trending or choppy? Wonít the effects of the two styles negate each otherís returns?  
  Pairing managers with low correlation to each other can add value in either trending or mean-reverting markets, whether with high or low volatility. Certain types of managers, however, tend to perform better in certain markets. For example, this year, trend-following managers (assuming the managers caught the trend) have done quite well , while mean-reverting managers have not done as well as they did when the market volatility was higher, as in 2008.

When looking over 5 to 10 years of markets, there might be choppy, trending, overbought, oversold, drifting, soaring or plummeting and all could be experienced. Purcell wants to have the managers on the team to take advantage of these markets. We will not always beat the market, but we will not be content to just play the long side.
 
  Do you use only outside managers or do you manage some of the money yourself?  
  We use outside managers exclusively and do not manage any individual signals ourselves. We are totally focused on our current mangers. Of course, we also do spend time vetting prospective managers, so there is plenty to keep Dan and his investment committee busy.

When we spoke about the start of Purcell, we mentioned that it had been the past experience of the principals, that when a principal of an investment firm was also one of the managers but did not have good performance, they either did not take themselves out of the game or other principals did not replace them. Not positive for the firm nor for investors. So, not having a principal manage money is a deliberate, conservative company policy. Our time can best be spent as the manager of managers.
 
  Are there any times when you put your clients money in cash?  
  We often place assets in market-neutral positions or a money market fund, depending on the manager signals. Purcell sees money markets or cash positions as a viable, separate asset class and they can help protect the downside in a portfolio. No market exposure at all can be quite positive on some days, as you know.

Further, our managers are not as constrained in our program portfolios as most mutual fund managers are who must keep cash to a minimum in order to be fully invested under the mandate of the mutual fund prospectus. Our managers can only make the team if they are risk averse, with low downside volatility and this means they are often in the money market or in market neutral positions. Remember, most mutual fund managers can only manage on the long side, not the inverse side. They only can make a decision about what to buy (long), so if new money should happen into their fund, they MUST find a long buy to get the money working. Our managers are not constrained in this way.
 
  If I am with a very aggressive manager, in your past experience what is the greatest quarterly drawdown I might expect?  
  The greatest quarterly drawdown has been in the 19% range for our aggressive programs. On the other side of the coin, our aggressive programs have also had 19% up quarters. This is why we recommend giving all Purcell programs a 3 to 5 year investment period before judging performance. It is also why we recommend not putting all your investment eggs in one aggressive basket. Purcell offers a range of programs, each, however, active and risk averse, so an advisor can efficiently use several Purcell programs to craft a diversified total portfolio for a client while keeping downside protection in the forefront of the planning. For instance, our high yield programs are remarkably consistent over time, and have put together a stellar year in 2009, capping more than 30% through 9/30. We remind potential investors that the past performance is no guarantee of future returns or that those returns would be profitable. Our focus is on finding managers who can manage risk.  
  If the market is random, as many respectable members of the investment establishment maintain, how can an actively traded portfolio possibly work?  
  Conversely, we might ask, if the market is random, why risk capital and invest at all? Can an investor believe the market is random AND always going up?

Purcell does not believe that the markets are efficient and indeed after horrendous market performance in 2008, more and more professionals in the investment community are starting to question a buy-and-hold strategy. The prominent Modern Portfolio Theory was first proffered in 1955 by Harry Markowitz and is now 55 years old. Its tenants were, briefly, that investor behavior is rational, historical distributions are normal and market upside and downside are equally weighted. Still viable? We donít think so. Today, we often hear the phrase Buy and Hold is Dead or there is a New Normal in the markets. At Purcell, our work centers on the concept called Post Modern Portfolio Theory (PMPT). With PMPT, semi-standard deviation has a heavier weight than standard deviation, we understand that investor behavior is NOT rational and there are dragons lurking in the fat tails of distributions. We base many of our metrics on these ideas.
 
  What are the characteristics you look for in a successful active manager?  
  We typically look for managers who have a proven track record, an experienced team and unique, time-tested processes and strategies. A track record using Rydex mutual funds is very helpful in judging all aspects of performance.  
  Do you do overall market investment research or is all your research geared towards evaluating managers?  
  The vast majority of our research is focused on evaluating both current and prospective managers and we do not research individual securities. Our investment team, however, does research the macro trends and run market/sector analysis and occasionally apply appropriate, proprietary overlays to manager signals. We spend a majority of our research time on building proprietary measures in evaluating managers and exploring more efficient or value-added ways of monitoring our manager performance. We also participate in trade conferences (e.g. National Association of Active Investment Managers) in meeting and sourcing prospective managers.  
  How long has Purcell been actively managing money?  
  Purcell was formed specifically to be a manager of active managers, so we are coming up on our 12th anniversary, soon. The senior members of our investment committee have combined industry experience exceeding 100 years, now, so we are a well seasoned firm. We doubt there is another firm in our space of the industry with more specific experience in active investment management.  
  What are the advantages and disadvantages of your investment methodology compared to a buy-and-hold strategy?  
  We think the advantages of an active strategy should be apparent by now, thanks to your comprehensive interview, Peter, and we appreciate you asking us to participate. MMR is very well respected in the industry and we comment on your research often.

As for the disadvantages, an investor should know that our programs are not tax efficient, as the gains are all short term, obviously. For some investors who have loss carry forwards from 2008, this may not be an issue. In addition, paying taxes on gain is not all bad, is it? On the other hand, there are several investor friendly annuities which can be utilized in a portfolio to defer taxes to good effect. Most of our risk averse programs can operate in a low cost annuity setting.

Our active investment programs are especially suitable for financial advisors who believe a defensive strategy is a necessity for their clients and that their clients deserve both downside protection and upside opportunity. Purcell now has selling agreements with 55 broker/dealers across the country, so we welcome advisorsí calls to see how we can help them get started with Purcell programs for their clients.
 
  If I wanted to get some more information about Purcellís investment services including how to open an account, where would I go?  
  A good place to start would be to leave your name on our website www.purcelladvisory.com and request more information or just call us at 800-730-6867. Felicia Lewis or John Lepito in our sales and marketing department would be more than happy to help you get started. Our staff of 15 is quite advisor and client centered, so opening an account is very easy. We look forward to speaking with some of your many readers, Peter.

Team Bios

Sondra Purcell

Sondra founded Purcell Advisory Services, LLC with her husband Don, now retired, and Teri Weigel in 1998. She is the Managing Member of the firm, acting in a CEO capacity and currently serves on the Rydex/SGI Dynamic RIA Advisory Board. Prior to founding Purcell, she was co-founder and CEO of Portfolio Strategies, Inc. and was with the firm for 16 years. Sondra was an early supporter of Rydex Funds and the National Association of Active Investment Managers. (NAAIM).

Sondra attended Northern Illinois University and Lake Forest College before beginning her teaching career in Illinois. She and her family lived in Europe for 11 years where she was involved in both publishing and teaching. They relocated to the NW in 1980 are pleased to have their 3 children, spouses and 6 grandchildren living nearby. Sondra has served on the board of directors of the Tacoma Chamber of Commerce, The Tacoma YWCA, as president, The Greater Tacoma Community Foundation and the Washington Trust for Historic Preservation, serving as Treasurer.

Teri Weigel, CFPģ

Teri is the supervising member and chief compliance officer of Purcell Advisory Services. LLC. She began her career in 1971 and held many positions within the investment industry including that of corporate secretary and operational and financial principal for a regional broker dealer. When the BD firm closed, Teri moved to Merrill Lynch where she worked as a financial consultant until she helped found Purcell Advisory Services in 1998.

Teri is a lifelong resident of Tacoma and attended Western Washington University. She is active in community organizations including committees of the Pacific Peaks Girl Scout Council and as a board member and president of Child and Parent Resources, a non-profit agency committed to helping families.

Dan Yeung, MBA,CFA

Dan joined Purcell Advisory Services as an Investment Strategist in June 2009, in charge of overseeing and monitoring current signal providers/managers, researching prospective managers and creating strategic products or partnerships that are beneficial to both existing and prospective clients and advisors. Dan has 13 years of investment experience ranging from extensive manager due diligence, analyzing and trading mutual funds, portfolio construction and asset allocation to quantitative analytics and measurement.

Prior to joining Purcell, Dan was the head of manager research at a multi-family office servicing ultra-high-net-worth families. Prior to that, Dan was a Senior Investment Officer with a Seattle-based mutual-fund company overseeing assets in excess of $3.5 billion and a total of 16 mutual-fund strategies. Before moving to Seattle, Dan spent 10 years with Morningstar in Chicago working as an institutional consultant for Fortune-100 plan-sponsor clients, major insurance companies, large broker dealers and endowments and foundations.

Dan has been a CFA Charterholder since 2000 and is currently a candidate for the Chartered Alternative Investment Analyst designation. Dan received his MBA with concentrations in Analytic Finance and Accounting from the University of Chicago Booth School of Business and a BA (with Honors) in Economics from the University of Michigan at Ann Arbor. In his spare time, Dan enjoys travel, jazz and basketball.

Sue Summers

Sue recently joined Purcell in the role of Chief Operating Officer. She has more than 20 years of operations and management experience in financial services including working for a retail brokerage firm, a mutual fund company and a registered investment advisor.

A Pacific Northwest native, Sue graduated from the University of Washington with a BA in Political Science and Economics. In her free time she enjoys birding, gardening and volunteering and currently serves on several non-profit boards.
 
 
 
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