Have you ever thought about how you would be treated by your asset manager if your net worth were over $100,000,000? How you'd get a money manager that would continuously rethink your asset allocation, incessantly assess the various dimensions of risk of your portfolio, and would be available to talk to you any time you wanted? At Vega we pride ourselves for doing exactly that for even our smallest investor. Vega Capital Group provides smaller investors with the level of service previously available only to ultra-high net worth individuals.

The ABCs of investing

A good investor should follow a simple process that can be described as A, B and C:

1. Assess your goals
2. Build a portfolio of securities that achieves your goals with minimal risks
3. Continuously monitor your portfolio

Investing is a process rather than an event. Your investment goals, market conditions, risk profiles of securities change all the time; the best investor is one who continuously rethinks his or her ABCs and makes appropriate adjustments. Unfortunately, such an investor would have to be a genius combining in himself an economist (to paint an economic landscape - as the market is nothing but a reflection of an economy), a market strategist (continuously assessing the thousands of dimensions of risk that are present in the market), and a mathematician (calculating the optimal mixture of securities that achieve investment goals and minimize risks). Of course, just as with any area of human expertise, you may try to find a team of professionals who would do this for you. But what do you get for your money?

With this question in mind, let's look at what, we believe, is seriously wrong with the way a typical smaller (between $1 and $25 million net worth) investor is treated.

What is wrong with the way industry treats a smaller investor?

The first problem comes when you think of investment professional compensation. Indeed, for a typical smaller investor with, say, $500,000 net worth, and assuming typical compensation of the money manager of, say, 1.5% of the assets under management, the compensation comes out to be $7,500 per year. A typical money manager makes approximately $200 per hour, thus, he may spend approximately 37 hours with you. Now, don't forget, since you need three different people (economist, market strategist and mathematician) for quality money management, you get approximately 12 hours of their time—and this assuming that your money management firm does not make any profit! The investor does not get much for the entire year worth of money management.

Naturally, any "financial advisor" (often just a fancy term for a retail broker) in a larger investment bank will gladly take your money and assure you that you will receive a lot of personal attention for a "deceptively" smaller fee. Not to mention the broker institution's inherent conflicts of interest (the bank wants to sell you certain products that may not necessarily be suited for you), let us examine what kind of service you really get and what kind of results should you expect.

First of all, many (if not a majority) of the financial advisors are not properly trained to assess your goals. Indeed, to be properly trained to assess investment goals of high net worth client one must possess knowledge of such disciplines as statistics, macro- and micro- economics, demographics, taxation and applicable laws. There are many educational programs (and corresponding designations) that typically lead to accumulation of such knowledge, such as Master of Business Administration with emphasis in Finance (MBA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Does your advisor have any of these designations? If you find one who does, you are lucky as they represent less than 5% of retail brokers and financial advisors. Even then, it is a valid question to as what is a highly trained professional doing in a retail brokerage environment? There are notable exceptions, of course, but why take chances?

Now, then, assume that your advisor is qualified and is such a good friend of yours that he is willing to work for just minimal legal wage (otherwise he would not have enough time for proper periodic analysis). He spends enough time with you that he indeed understands your investment goals, and how they may change in the future (in order to do that he really must learn as much as possible about your career and family plans, your lifestyle and hobbies, your plans for vacations and retirement, etc.). He finally creates a great investment plan and chooses appropriate mixture of securities. Because he spends so much time analyzing your goals, he does not really have time to build and monitor your portfolios. Thus, he outsources at least some of these tasks to outside money managers (note additional fees here!)—either in the form of mutual funds or in the forms of separately managed accounts. Here comes another set of problems.

Indeed, when you outsource investment decisions you loose at least some control over your investments. This can lead to significant unforeseeable risks that you as an investor cannot afford to take. Here is an example. Suppose for simplicity that your financial advisor concludes that you need to have $3 million in investment grade corporate bonds, $1 million in large cap value stocks and $1 million in mid cap growth stocks. He decides to build the fixed income portfolio himself, outsources mid cap growth stocks portion of your portfolio to New York Trend Fund (mutual fund), and large cap value to Jones Delaware Venture (managed account). He has carefully chosen these managers because their styles seem to be complementary and not bear similar risks. He then proceeds to build the fixed income portfolio. It so happened that a large portion of the fixed income portfolio is built using currently attractive reverse floating notes from a major investment bank (AA or higher rating). The interest on these notes reversely depends on the underlying interest rates, say, LIBOR—if LIBOR stays at current level the notes pay very attractive dividends, but the dividends can go all the way down to 0% if the LIBOR rises above certain levels. At the same time the managers at Jones Delaware Venture decide that high dividend paying stocks currently offer very good value and shift their investment strategy towards utility stocks. Furthermore, the managers at New York Trend funds find several excellent growth opportunities in the area of biotechnology. You learn about these developments from the quarterly newsletters from each of these companies. You are excited about each of these investment opportunities, as the newsletters clearly show you how appropriate are these changes in investment strategies to their style.

However, two weeks after you receive the newsletters, the Bureau of Economic Research issues a memorandum that clearly shows that inflation in the United States is grossly underestimated and is in fact bound to increase significantly during the next few years. In response to rising inflation concerns, FOMC raises target overnight Fed funds rate by 2%. The reaction of the market to these developments is rather mute, except for the utility stocks (as their dividend payout is now less than projected inflation) and companies that have their cash flows far in the future (now discounted at much higher rates), such as young biotechnology startups. The next time you receive your account statements, you are totally devastated to learn that 1) your fixed income portfolio now pays half the dividends you expected, and 2) both your large cap value account and your mid cap growth mutual fund have lost over 10% of their value, while the broad market at the same time grew at a reasonable 10% annualized rate!

How could this have happened? The answer is that your financial advisor could not have foreseen the alignment of circumstances that significantly increased your exposure to a single risk factor, in this case, higher interest rates. Oh, well, you say, it is too obvious. True for interest rate risk, but do you know how many independent risk factors influence various parts of your portfolios? Does anybody monitor your total exposure to these risks?

Investing with Vega: The Art and Science of Astute Investing

We at Vega Capital Group pride ourselves on working even with our smallest client as if he or she was our only client. No, we cannot possibly devote 100% of our chief strategist's time to you—otherwise we would go bankrupt in no time; what we do, however, is split our investing process into two components which we call the Art and the Science of astute investing: the Art—where we get to know you, learn about your plans, and in the process understand what your investment goals are, and the Science—where we apply the most progressive portfolio management science and technology to create and implement the investment strategy that addresses these goals.

By clearly understanding the parts of the investment process where human involvement is crucial we are able to allocate our best people for the job of formulating your investment goals. All of our representatives have advanced degrees or designations such as MBA or CFA, and are properly trained to help you reach the soundest financial decisions. Their ultimate goal is to make sure that Vega Capital Group as a whole is completely aware of these decisions and any changes in your situation that may influence your investment objectives. Once we understand what the objectives are, there is no place left for the art in our process.

Indeed, the science of portfolio management has come a long way in the past years. Just decades ago the best money managers were Wall Street veterans who learned to pick stocks based on the soft information they continuously received (such as rumors, the mood on the trading floor, the weekend chats with their high-profile friends on a golf course). Not anymore. The rules of fair disclosure and continuous scrutiny of the SEC has made sure that such money managers have lost their competitive advantage. Instead, major brokerage houses have invested in sophisticated number-crunching operations and have hired brainy Ph.Ds and MBAs from top universities to design algorithms and strategies that are based on available hard information. We know, we were those Ph.Ds and MBAs…

However, as the cost of supercomputers fell through the floor, and the portfolio management science became common knowledge, the big institutions lost their advantage. Finally, the words such as "customization" are being heard on Wall Street—indeed, as everybody knows the science now, the best money managers should be those that can apply it to your needs! But the major brokerages are not easily changed. They need time to dissolve century old tradition of making a sale rather than understanding investor's goals. They need to create new pathways for information propagation between customer service and portfolio management. And, most importantly, they need to finally understand that their best people should not be the marketers able to sell, but rather the first-line financial advisors that are able to understand what is it that the client really need…

Vega Capital Group is a money manager that is built from the ground up on these premises. We spend our best human capital on those critical tasks that are often neglected by other money managers: talking to you and formulating your investment goals. We then apply our advanced portfolio management infrastructure (yes, we do have supercomputers!) to custom-craft investment strategy that meets your specific objectives. We then keep monitoring your goals and portfolios and make adjustments as needed. In other words, we do the ABCs of investing for you with only your goals in mind—without a baggage of obsolete traditions or conflicts of interest inherent to big investment houses.

The result may be invisible to you—and this would be our biggest achievement. Indeed, just as the result of the well performed surgery is a healthy person that may not even remember the old disease, the result of a well thought out and implemented investment strategy is an investor that does not have to worry about such things as whether he will have enough money to send kids to school, buy a house, save for retirement or go on a long-ago planned sabbatical…