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   Interview

    Guest Interview:

   Weatherly Asset Management L.P.

    832 Camino Del Mar, Suite 4
    Del Mar,CA 92014

    Telephone: 858-259-4507
    Fax: 858-259-0782
    E-mail: carolyn@weatherlyassetmgt.com

 

    Interview Quarter: 4Q2011

 Carolyn P. Taylor

 President

  Carolyn, could you please tell us something about your background and what inspired you to found Weatherly Asset Management?  
  I was born and raised in Santa Cruz California surrounded by a family that was dynamic and supportive of all activities and dreams. I attended Stanford University where I received a B.S. Industrial Engineering and B.A. International Relations, and studied abroad in Spain. I began my financial career right out of college as an Investment Banker for Dean Witter Reynolds in New York, primarily reinvesting bond funds until they were needed for public projects, which gave me depth of understanding of the fixed income market. I moved back to the west coast to work for Payden & Rygel in Los Angeles, but returned to New York a few years later working as a portfolio manager for Neuberger & Berman. I received firsthand experience in most areas of the financial markets early on in my career and met a number of individuals who became mentors and influenced my decision making abilities.

I managed over $1 billion in assets at Neuberger & Berman and noticed that clients paid particular attention to after tax returns. I believed this wasn’t a challenge of narrow scope but actually a niche that could be expanded. These ideas coincided with a personal desire to achieve a balance between working and living. As a result of these goals, in June 1994 I relinquished my day-to-day responsibilities at Neuberger & Berman to devote my full attention as President and Chief Investment Officer at Weatherly Asset Management, which began managing client funds in December 1994 as an SEC registered investment advisor, offering services to high-net-worth clientele. The firm has grown to over $300 million in assets and a team of eight professionals, the Weatherly Crew.
 
  What were the most valuable lessons you learned managing money for large institutions?  
  In my experience working with large institutional clients, I found that the individual decision makers responsible for the pension’s or foundation’s portfolio needed the primary focus to be returns on investments and outperforming benchmarks. Often because some of the decision makers had a short tenure, new individuals became involved in the investment decisions, and priorities and goals shifted. When the decision maker’s intent changed, the long-term objective of the fund often became interrupted. I realized the importance of adhering to the underlying objectives of the portfolio while individuals’ roles within the institution changed and wished to make their imprint. Often as an advisor, one has to be creative in dealing with new clients or decision makers and offer a reminder of which products and services will best help achieve their overall plan. Providing sufficient materials and background information often help reinforce the validity of the specific recommendation.  
  Do you have a general investment philosophy that guides your overall decision making?  
  Weatherly’s overall investment philosophy incorporates the continual evolution of the world around us, integrating changes in society and the environment, shifts in demographics, and advancements in technology. These factors, among others, are critical to investing in the right sectors to capture expansion in the global economy. With the explosion of technology allowing the exchange of information to occur at more rapid speeds, we continue to adapt and filter massive amounts of information influencing our investment decisions on a daily basis.  
  How do you go about deciding how to allocate client assets between investment classes?  
  Asset allocation is determined on an individual account basis and guided by a written investment policy statement. A number of factors are considered when deciding what is appropriate for a specific portfolio including; age, liquidity needs, time horizon of investments, tax bracket, risk tolerance, required return, and unique circumstances. Although these client details are most important when determining the appropriateness of overall asset allocation, the current investment environment, short and long term economic outlook, and availability of high-quality investment products are also taken into consideration. All client details are weighed before adapting and implementing an investment policy. This is a dynamic process that is continually fine-tuned and adjusted according to client needs, investment opportunities, and the changing global economic environment.  
  What factors are considered in managing investment risk?  
  The principal factors Weatherly considers while managing investment risk on the client level include individual asset allocation, risk adversity, required income stream, and the ability to tolerate volatility. When choosing securities, we consider the impact of inflation and volatility, alongside credit quality and duration of fixed income securities. Our primary goal is to minimize risk while maximizing return as appropriate for each client portfolio. We are constantly monitoring asset classes and specific positions within those groups as the economic environment changes to determine how risk has evolved and the expected impact on portfolios. We weigh the affect on our original goals and risk versus return before implementing any changes to a portfolio.  
  What investment products do you offer clients and what percentage of assets are divided between them?  
  Weatherly does not offer products; instead we tailor each portfolio to the client’s needs. Our clients rely upon the holistic approach we utilize when providing advice. Dependent on the needs of the client, these products range from low-beta dividend paying stocks married with interest-oriented fixed-income in conservative portfolios to more sophisticated portfolio strategies containing alternative investments, real estate, and covered calls paired with a blanket of structured notes that are linked to a variety of indices, for example: commodity linked. In general we invest in individual stocks and bonds both foreign and domestic, no-load mutual funds, ETF’s, structured products, and alternative assets as appropriate for each individual client.  
  What investment process is used to determine your equity selections?  
  Equity selection is based on an investment process which begins with short and long term economic views as well as overall global and domestic trends. With this platform, further analysis is performed from both a top down macroeconomic view and a bottom up company specific analysis. Industries identified as attractive are examined for high quality investment options that fulfill individual portfolio and asset allocation needs. Individual companies are then evaluated based on past performance, risk, return potential, and fundamental valuations to determine if the position meets the goals and expectations of our strategy. We consider a variety of investment vehicles to achieve the desired equity exposure including individual stocks, exchange traded funds, no-load mutual funds, and alternative securities. We weigh the cost of fees upon after tax benefits of each type of investment vehicle.  
  Comprehensive Wealth Management Services  
   
  What advantages are there in concentrating your portfolio in mostly mid-cap stocks and how many stocks are generally held in a typical portfolio?  
  A typical Weatherly equity portfolio holds between 25 and 30 positions, with each position representing approximately 3% exposure to individual companies at time of purchase. Incorporated into the equity exposure are exchange traded funds, no-load mutual funds, alternatives, and covered call options. A balanced portfolio would also include individual bonds (taxable, tax-advantage, and tax-exempt) and preferred stock with maximum 5% positions at time of purchase. Over long periods of time, portfolios with exposure to mid-cap stocks have outperformed large- and small- cap equities with less volatility. Although returns vary with changes in the investment environment, a mid-cap tilt in a portfolio usually increases overall return while lowering risk. The graph below shows a small, mid, and large cap index over a fifteen year period:

S&P 400 Mid-Cap Index vs. S&P 600 Small-Cap Index and S&P 500 Index, 1995-2010

Annualized Return 1995-2011: S&P 600 Small-Cap Index: 10.76%
                                                   S&P 400 Mid-Cap Index: 12.52%
                                                   S&P 500 Large-Cap Index: 8.46%

Contrary to historical trends, during 2011 we saw mid-cap and small company stocks decline dramatically while international large-cap, dividend-paying stocks outperformed. This dramatic shift was predominately due to the changing global investment landscape surrounding the Euro Zone debt crisis, declining consumer sentiment, and increased volatility. This “risk off” approach has briefly been reversed during the first month of 2012. The graph below compares small- and mid-cap stock indices to the Dow Jones U.S. Select Dividend Index for 2011:


S&P 600 Small-Cap and S&P 400 Mid-Cap vs. Dow Jones U.S. Select Dividend Index, 2011
Annualized Return 2011: S&P 600 Small-Cap Index: 1.02%
                                           S&P 400 Mid-Cap Index: -1.74%
                                           Dow Jones U.S. Select Dividend Index: 12.42%
 
  Do you only invest in domestic companies or do you have some international exposure?  
  We firmly believe that as the world and globalization continue to evolve, international investments should be an integral part of portfolios. Weatherly incorporates international equities and non-dollar bonds into client portfolios; however, the degree to which this is done is determined on an individual portfolio and client basis. As companies compete for business around the globe, the mix and diversification provided by international and non-dollar investments present opportunities for portfolios with decreased volatility. The graph below illustrates the return of the MSCI Emerging Market Index versus the S&P 500 Index from 2000 to 2011:


MSCI Emerging Market Index vs. S&P 500 Index 2000-2011
Annualized Return 2000-2011: MSCI Emerging Market Index: 5.36%
                                                    S&P 500 Index: 0.55%
 
  What market conditions would indicate that it is time to sell a stock position?  
  Weatherly considers a number of factors when making the decision to close a stock position. These factors include:
a. Price targets have been reached or surpassed.
b. Event risk involving a particular company or sector, for example, the gulf oil spill.
c. Individual client tax circumstances dictating the realization of gains or losses.
d. Positions have become a dominant percentage of portfolios with undue risk.
e. Weatherly’s or client’s desire to minimize overall equity exposure in a portfolio.
In certain situations, Weatherly incorporates a sell discipline in a unique fashion often by selling a portion or “shaving” a position, both to capture upside opportunities and minimize downside risk.
 
  Tell us about your fixed-income portfolios, what kinds do you use, and how you allocate between them.  
  Weatherly utilizes a multitude of fixed income investments in each portfolio dependent upon the client’s liquidity needs, income needs, and individual tax situation. Fixed-income investments include both US and non-dollar bonds, fixed- and floating-rate notes, corporate bonds, preferred stock, and government-backed mortgage obligations. We allocate between sectors dependent upon credit quality and inflation, and monitor interest rate risk with an eye on portfolio duration, making adjustments according to market outlook. We also utilize the tax advantage of tax-exempt and taxable (Build America Bonds) municipal bonds for client portfolios based on their tax status.  
  How do you measure "value" when comparing specific fixed-income securities?  
  In selecting individual fixed-income securities, we compare each investment to the no-risk, no-return alternatives (US Treasury benchmark), and consider credit quality, duration, and liquidity. When deciphering value in a particular fixed-income investment, we utilize an undervalued approach similar to the analysis of an equity security. Is risk versus price demonstrated in the potential return outcome? Are these securities out of line with similar securities? Relative and absolute returns are also analyzed in great detail utilizing changes in the shape of the yield curve, inflation, and risk assets.

We ask ourselves: is risk versus price demonstrated in the potential return outcome? Are these securities out of line with similar securities? Relative and absolute returns are also analyzed in great detail utilizing changes in the shape of the yield curve, inflation, and risk assets.
 
  How do you adjust your investments to maximize your after tax returns?  
  Before selecting investments for an individual portfolio, we measure after-tax, after-fee performance potential based on the individual client and prevailing tax law. For example, high quality bank perpetual preferred stocks with high coupons were selected for total return in client accounts where income was necessary and no severe tax ramifications were present. Although we focus on the most tax advantageous portfolio for clients, we also balance this goal with positive returns and wealth preservation. It is not unusual for us to utilize fully taxable securities in a portfolio of a high tax bracket client. For example, during market volatility in 2011 we employed covered calls in taxable portfolios to generate incremental income as clients endured sharp swings in the market. Lastly, unforeseen changes can dramatically alter individual client’s tax circumstance come year end. We work extensively with clients in the fourth quarter to ensure the most efficient treatment of investment accounts and the overall tax impact.  
  How much of your investment research is done in-house versus using independent sources?  
  We utilize a variety of independent research both internally and externally to influence our investment decisions. These include paid-for research capabilities such as Bloomberg to research specific companies and industries, in addition to online tools, webinars, conference calls, and seminars. We incorporate and execute the investments based on our investment committee decisions and individual portfolio guidelines. We use a team approach when making final investment decisions per each individual client portfolio.  
  What investment instruments do you use to trade commodities and how do you decide which ones to use and in which proportions?  
  We have utilized a number of different vehicles to provide exposure to commodities for portfolios. These include structured notes linked to a basket of commodities, exchange traded funds, no-load mutual funds, and individual stocks and bonds. In specific instances, we have also held the physical asset at the client’s request (most recently, gold). Depending on the environment and client risk preferences, commodity-based securities are allocated as appropriate. As with any investment, our goal is to provide diversification appropriate for a client with an eye towards weighing risk and return.  
  Tell us about your Trust services.  
  In 2001, Weatherly along with 100 plus investment advisors founded National Advisors Trust. National Advisors Trust is a federally chartered trust company, however, it does not accept deposits, make loans, or market its services directly to the public. National Advisors Trust understands and respects the relationship the advisor has with the client and is committed to delivering excellent trust administration services. National Advisors Trust currently administers approximately $7 billion in assets and has the expertise to assist you with a variety of trust situations. The relationship with National Advisors Trust allows us to offer trust services to clients as appropriate as successor co-trustee or trustee of their assets. This innovative trust company has provided Weatherly a highly effective way to work with an independent trustee with cutting edge technology and low cost solutions. You can visit their website at www.nationaladvisorstrust.com.  
  Who are the other principles in your firm and what are their backgrounds?  
  Weatherly has 3 partners- Carolyn P. Taylor, founding and principal partner, Candise Holmlund, and Hazel Easton. Candise Holmlund, CFA, CFP®, brings over 30 years of experience in the financial markets to Weatherly and is responsible for management of client relationships, specializing in financial and estate planning issues along with various analytical functions, including overseeing the firm’s covered call strategy, providing client stock option analysis, retirement planning, performance attribution, asset allocation, and general investment analysis. Prior to joining Weatherly, Candise was Vice President, Manager of Trading and Investments at First Interstate Investment Services in Los Angeles, California where she managed a portfolio of $5 billion in Domestic and Foreign Investments for large public pension funds including Cal PERS, Oregon PERS, and Nevada PERS. Candise served as a senior member of the investment committee and provided credit, market, and economic analysis. Before joining First Interstate, Candise traded fixed income securities for Merrill Lynch in their Institutional Sales and Trading Division. Candise was responsible for global money market securities, government securities, futures, and derivative products coverage to large money managers on the West Coast. In a previous role at Merrill Lynch, Candise specialized in restricted stock sales and option execution for key officers of Silicon Valley Companies.

Candise is a Certified Financial Planner (CFP)® and is a Chartered Financial Analyst (CFA) charter holder, a member of the CFA Institute, the Chartered Financial Analysts Society of San Diego, the Estate Planning Council of San Diego, North County Estate Planning Council, and the Financial Planning Association (FPA). Candise has been a panelist on Wealth Planning Forums and also serves as a Subject Matter Expert (SME) for the Certified Financial Planner Board of Standards (CFP Board).

Hazel Easton has worked at Weatherly since the inception of the Firm in 1994. In 2010 Hazel was made an Income Partner of Weatherly and as Controller of the Firm, her main duties are Finance, Compliance, Client Services, Computer Administration and Operations. She also shares responsibility for the monitoring and reporting on our client’s portfolios. In addition to her 17 years with WAM, Hazel has over 40 years of prior experience in complimentary professions such as teaching, real estate and accounting. Born and educated in England, Hazel began her career after receiving a Diploma of Education from London University, teaching both in England and the West Indies. After settling in California, Hazel passed the California Real Estate Board exams and, for many years, enjoyed being a Licensed Real Estate Agent and Property Manager with a Century 21 Realtor in Del Mar. This experience, along with further college studies naturally propelled Hazel to occupations in the accounting and financial world. Hazel Easton worked with a Certified Public Accounting Firm and a Commercial Real Estate Firm prior to joining the Weatherly Asset Management Team.

Hazel Easton is a Registered Investment Adviser Representative (RIA) and an Accredited Investment Fiduciary (AIF). She is also a Certified Trust Representative of National Advisors Trust and a member of the La Jolla Trust and Probate Section. She has qualified for the “Find a 529 Pro” Directory, a listing of professional consultants with knowledge on 529 College Planning and Qualified State Tuition Programs, and is a member of the AIPB. In order to offer clients of Weatherly additional services, she is a Notary Public, bonded in the State of California.
 
  You have won numerous awards for yourselves and your firm. What factors most differentiate you from other money managers?  
  Since inception, the Firm’s goal has been to provide the highest level of comprehensive financial advice modeled specifically for each individual client’s situation. This type of widespread service covers a large range of subjects and their entire financial picture. We are able to offer these types of service by creating an environment that is client focused and dynamic. We employ top tier professionals with high levels of experience and expertise, as well as encourage continual education to improve themselves and the firm. The culture is one of hard work and dedication, combining a team centered approach with cutting edge technology to achieve efficient operations and streamline the delivery of investment services.

My goal is to make clients comfortable and engaged in the process in addition to ensuring clarity. We implement complex strategies but try to educate clients about why we believe the strategy is correct, as well as provide resources and supporting research to further their knowledge. This may simply be an introduction to a type of security but it makes a difference to clients during the investing process. In addition, our team centered approach allows clients a number of resources for their specific needs, whether that is discussing the reasoning behind a recent purchase or complex estate planning issues and financial planning scenarios.

As we continue to grow and evolve, investing in professionals, technology, education, and training are many of the key factors that allow us to continue to deliver premier financial services. We strive to consistently improve in all areas of our business.
 
  How do I get on your mailing list for quarterly market reports and where can I learn more about Weatherly Asset Management?  
  There are several ways to learn more about Weatherly Asset Management. You can visit our company website at www.weatherlyassetmgt.com, our LinkedIn page at www.linkedin.com/company/weatherly-asset-management, our Facebook page at www.facebook.com/weatherlyassetmgt, and our Brightscope page at www.brightscope.com. To join our mailing list for our quarterly letter, the Weather(ly) Report, you can call our office at (800) 967-9354 or email us at carolyn@weatherlyassetmgt.com.

As demographics, longevity, and globalization change, how do you think investors and advisors will shift or realign their thinking to compensate these changes?

The world is evolving as never before. The US, Japan and Germany represent half of the world’s output, yet they face aging populations and declining labor forces. Our lives have become increasingly globalized and the world more interconnected. The events playing out in the Eurozone demonstrate how capital flows, business profits, financial institutions and world central banks each play a role in managing risks. Emerging economies, China and Brazil’s influence in particular, are woven into this intricate balance. Technology and the immediate flow of information, news and revolutions have only just begun with Twitter, LinkedIn, Facebook, and blogs disseminating headlines, facts, and opinions at lightning speed. Investors and advisors will be required to incorporate more information and a multitude of variables in each and every decision going forward in 2012 and beyond.
 
 
 
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