The CLS Risk Continuum

The risk associated with various asset classes changes over time. That’s why CLS’ risk budgeting and the integrated risk continuum is a critical element in creating and maintaining client portfolios. Key elements of Risk Budgeting:

Not all bonds are conservative
Not all stocks are aggressive
Some bonds are more risky than some stocks
Some stocks are more conservative than some bonds
The overall risk of a portfolio is more important than the Stock to Bond ratio

The risk of various asset classes changes. The risk in your account should not.

January, 2002

The relative risk associated with each asset class on the CLS Risk Continuum charts is the risk of the asset class after adjustment for CLS proprietary risk indicators relative to the five-year volatility of the S&P 500. The pie chart represents the Asset Classes that a CLS 80/20 portfolio were invested in on January 1 of the specified year.

January, 2003

Notice that from January of 2002 to January of 2003, the risk associated with the S&P 500 index (Purple box on the continuum) declined. The CLS Allocation (by asset class) did not change much from the previous year.

January, 2004

From January of 2003 to January of 2004, the risk of Aggressive International (Yellow Box) increased significantly, as did the opportunity for positive returns. CLS Portfolio Managers moved 11.9% of the allocation into Aggressive International. As the risk of Aggressive International increased in 2003, in order to keep the risk of the entire portfolio constant, 5.1% of the portfolio was traded into short term bonds/cash and 7.2% into high yield Bonds. CLS was able to take advantage of the opportunities Aggressive International presented without increasing the risk in the client’s account.

January, 2005

From 2004 to 2005, overall market risk increased. To keep the risk of the CLS portfolio constant, our Portfolio Managers increased the Short Term Bond/ Cash holding from 5.1% to 11.7%. Aggressive International continued to be favorable and accounted for 12.8% of the allocation, a 0.9% increase from 2004.

January, 2006

By January, 2006 Aggressive International had again increased in risk, exceeding the risk traditionally associated with Small Cap equities. CLS Portfolio Managers moved another 5.2% to Aggressive International increasing the holding to 18% of the allocation. The increased risk of the portfolio necessitated increasing Short Term Bonds/Cash from 11.7% to 21.1% of the Allocation. These trades were funded by reducing Large Value by 9.6%, Large Growth by 3% and international by 2.2%.

The difference in returns is impressive over the time period we’ve discussed. A $100,000 account invested in a CLS 80/20 portfolio on Jan 1, 2002 would return $34,425.38 by Dec 31, 2005 whiled keeping the risk level in the account constant. The benchmark return was $17,958.89.

In review, CLS Risk Budgeting allows our Portfolio Managers the flexibility to move to attractive asset classes in an effort to out-perform the market while keeping the risk in the allocation constant.

Risk Changes. The risk in client accounts should not.


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Printable Version The CLS Risk Continuum The risk associated with various asset classes changes over time. That’s why CLS’ risk budgeting and the integrated risk continuum is a critical element in creating and maintaining client portfolios. Key elements of Risk Budgeting: Not all bonds are conservative Not all stocks are aggressive Some bonds are more risky than some stocks Some stocks are more conservative than some bonds The overall risk of a portfolio is more important than the Stock to Bond ratio The risk of various asset classes changes. The risk in your account should not. January, 2002 The relative risk associated with each asset class on the CLS Risk Continuum charts is the risk of the asset class after adjustment for CLS proprietary risk indicators relative to the five-year volatility of the S&P 500. The pie chart represents the Asset Classes that a CLS 80/20 portfolio were invested in on January 1 of the specified year. January, 2003 Notice that from January of 2002 to January of 2003, the risk associated with the S&P 500 index (Purple box on the continuum) declined. The CLS Allocation (by asset class) did not change much from the previous year. January, 2004 From January of 2003 to January of 2004, the risk of Aggressive International (Yellow Box) increased significantly, as did the opportunity for positive returns. CLS Portfolio Managers moved 11.9% of the allocation into Aggressive International. As the risk of Aggressive International increased in 2003, in order to keep the risk of the entire portfolio constant, 5.1% of the portfolio was traded into short term bonds/cash and 7.2% into high yield Bonds. CLS was able to take advantage of the opportunities Aggressive International presented without increasing the risk in the client’s account. January, 2005 From 2004 to 2005, overall market risk increased. To keep the risk of the CLS portfolio constant, our Portfolio Managers increased the Short Term Bond/ Cash holding from 5.1% to 11.7%. Aggressive International continued to be favorable and accounted for 12.8% of the allocation, a 0.9% increase from 2004. January, 2006 By January, 2006 Aggressive International had again increased in risk, exceeding the risk traditionally associated with Small Cap equities. CLS Portfolio Managers moved another 5.2% to Aggressive International increasing the holding to 18% of the allocation. The increased risk of the portfolio necessitated increasing Short Term Bonds/Cash from 11.7% to 21.1% of the Allocation. These trades were funded by reducing Large Value by 9.6%, Large Growth by 3% and international by 2.2%. The difference in returns is impressive over the time period we’ve discussed. A $100,000 account invested in a CLS 80/20 portfolio on Jan 1, 2002 would return $34,425.38 by Dec 31, 2005 whiled keeping the risk level in the account constant. The benchmark return was $17,958.89. In review, CLS Risk Budgeting allows our Portfolio Managers the flexibility to move to attractive asset classes in an effort to out-perform the market while keeping the risk in the allocation constant. Risk Changes. The risk in client accounts should not.
The risk associated with each asset class on the “Asset Class Risk” charts is the risk of the asset class after adjustment for CLS proprietary risk indicators relative to the five-year volatility of the S&P 500. The indices on the chart are as follows: Large Cap Growth: Barra Large-Cap Growth –an index that measures the performance of the growth styles investing in large-cap US stocks. The index is constructed by dividing the stocks in the S&P 500 Index according to price-to-book ratios. The Growth Index contains stocks with higher price-to-book ratios. The indices are market-capitalization-weighted, and their constituents are mutually exclusive. High Yield: CSFB High Yield -designed to mirror the investable universe of the US-denominated high-yield debt market. Int/Long Term Bond: Lehman Brothers Aggregate Bond -a broad representation of the investment-grade fixed-income market in the US including government and corporate debt securities, mortgage-and asset-backed securities, and international US dollar-denominated bonds. Agr Int’l: MSCI EAFE –free-float-adjusted market-capitalization index that is designed to measure developed market equity performance, excluding the US and Canada. Standard and Poor’s 500 -The S&P 500 Index is an unmanaged composite of 500 large-capitalization companies. Real Estate: Wilshire Real Estate: REIT –designed to provide measures of real estate securities that serve as proxies for direct real estate investing. Small/Mid Value: Russell Midcap®Value Index -measures the performance of Russell Mid cap companies with lower price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value index. Russell 2000®Value Index -measures the performance of the 2,000 smallest companies in the Russell 3000 Index with lower price-to-book ratios and lower forecasted growth values. Benchmark Return Composition: 80% S&P 500 Index / 20% Lehman 1-5 Year Government Credit Index. The Standard & Poor’s 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. The returns presented for the S&P 500 Index are total returns, including the reinvestment of dividends each month. The Lehman 1-5 Year Government Credit Index represents a combination of the Government and Corporate Bond indices for bonds with maturities between one and five years. The returns for the index are total returns, which include reinvestment of dividends. The volatility of the indices may be materially different from the individual performance attained by a specific investor. In addition, portfolio holdings may differ significantly from the securities that comprise the indices. The indices have not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather are disclosed to allow for comparison of the investor’s performance to that of certain well-known and widely recognized indices. You cannot invest directly in an index. The 80/20 Portfolio performance results shown represent the performance of model portfolios managed identically to the actual profiles of clients in the managed accounts participants’ program. The results assume reinvestment of interest, dividend and capital gains distributions. The returns are calculated gross of performance fees and then modified to reflect the maximum quarterly fee a client would pay (0.375%). Actual account holdings and performance for individual clients may vary. Past performance is not indicative of future results. Investment in securities are not guaranteed and will fluctuate, so that when redeemed, may be worth more or less than their original cost. In February 2003, CLS’ proprietary funds became available in the Nationwide Resource program. On April 10, 2003, Clarke Lanzen Skalla Investment Firm, Inc. changed its form of organization from a corporation to a limited liability company. It is now known as CLS Investment Firm, LLC. CLS Investment Firm, LLC relies on the performance data of its predecessor. There is no guarantee that any CLS program or account will be profitable or prevent loss. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. The CLS 80/20 Portfolio shown may not be suitable for all investors. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategies and should understand that statements regarding future prospects may not be realized. Portfolio Inception Date –12/31/01
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