Download May 2, 2014 Dear Client: Last year was a year of planned, positive

May 2, 2014
Dear Client:
Principals
Mark Orgel
Chairman and Founder
Samir Murty, CFA
Managing Director
Benjamin Kanz, CFA, MBA
Senior Relationship Manager
Craig Falkner, CFA
Senior Portfolio Manager
Teresa Grogan, MBA
Senior Client Service Manager
Mark Boser, AIF, MBA
Senior Retirement Plan Consultant
Orgel Wealth Management
2420 Rivers Edge Drive
Altoona, WI 54720
main 715 835 6525
toll-free 855 674 3596
orgelwealth.com
Last year was a year of planned, positive change for our company as well
as a very satisfying year for global investors. Within the “Organizational
Update” section of this letter, we summarize our continued efforts to
improve your customer experience and our research capabilities. As the
year progresses, we promise to keep you abreast of the many research,
portfolio reporting and customer service enhancements on which we are
working.
In preparation for new strategy updates, we often refer to our prior
letters to review our previous thoughts. In doing so this year, we were
reminded of this paragraph from our early 2012 strategy letter:
“While 2011 will not be one of the market’s most profitable years, it will
certainly be seen as one of its most challenging. Amid extreme
uncertainty, we appreciate your reliance on our expertise to navigate an
environment in which + / - 1% daily market moves have become the
norm…”
Looking back on 2013, market outcomes were strikingly different than
2011. The S&P 500 index experienced annualized volatility that was
barely half that of 2011, and the Index’s largest decline during the year
was only a little over 6%. More importantly, stock market returns were
robust. U.S. equities led the charge, with all segments producing
returns in excess of +30%; certainly not the outcome we would have
predicted based on low reported economic, corporate earnings, and sales
growth.
Fixed income markets remained under pressure for much of the year, as
the prospect of a Federal Reserve “taper” during the middle portion of
the year led to the largest increase in Treasury yields in nearly two
decades. The Barclays Aggregate Bond Index (a measure of U.S.
investment grade Government and Corporate bonds) returned -2.02% for
the year, only the third negative calendar year return since the Index’s
inception in 1976.
Within the following strategy letter, we explore the accretive and dilutive
decisions we made within your portfolio last year, tackle the questions of
forward risk and return amid record stock market levels, outline our
anticipated strategies for 2014, and provide the aforementioned
organizational update.
1 Recap of Strategies Employed During 2013
Absolute portfolio performance was strong last year, paced by unexpectedly large stock market gains.
Relative performance was more mixed, with our equity model underperforming its appropriate benchmark
slightly as a result of our modestly conservative stance; however, our fixed income model outperformed its
benchmark thanks in large part to continuing tactical adjustments made throughout the year. We
summarize the biggest contributors and detractors to relative performance during 2013 below:
Contributors to Relative Performance

Active equity and fixed income manager selection. In spite of significant market strength that
belied weak economic growth, the majority of our U.S. equity managers outperformed their stated
benchmarks. We were especially pleased with fixed income manager performance, as three of the
four outperformed their benchmarks by a very wide margin.

Low Interest Rate Risk. A shorter duration (less interest rate sensitivity) aided fixed income results,
given the sharp rise in interest rates in the middle of the year.

Focus on high yield and investment grade credits. Corporate bonds outperformed Treasuries and
other high quality fixed income investments. Our positions in high yield corporate bonds were
particularly accretive.

Increased exposure to a tactical fixed income manager. JP Morgan Strategic Income
Opportunities, added to portfolios in 2011, was again one of the top-performing fixed income funds in
2013, beating the Barclays Aggregate Bond Index by over five percentage points as a result of timely
tactical adjustments.
Detractors from Relative Performance

Modest underweight in equities entering the year. Given strong equity market gains, even a
modest underweight in equities relative to the benchmark detracted from performance.

Underweight U.S. small capitalization equities. We entered the year underexposed to small
capitalization stocks due to their high valuations relative to other market opportunities. A near +40%
return in 2013 has only exaggerated small capitalization stock valuations.

Rotation toward more defensive equity strategies. The highest risk stocks were the market’s best
performers during 2013, a phenomenon last seen during previous market tops in 2000 and 2007. In
a disciplined effort to harvest strong gains while valuations were nearing extreme levels, we
rebalanced away from some of our best-performing managers to more favorably valued strategies and
sectors. While a rotation toward more defensive strategies has detracted from performance leading up
to previous market peaks, we believe reducing risk is the prudent course to take.

Overweight in emerging markets. Emerging markets were hurt by the discussion and ultimate
decision by the Federal Reserve to “taper” its Quantitative Easing program. As detailed in our
September 2013 strategy letter, we believe that historical undervaluation relative to U.S. equities
makes emerging markets equities an attractive investment over the next three-to-five years.

Initiation of defensive PIMCO All Asset All Authority position. Added in March, PIMCO All Asset
All Authority struggled through the end of the year (though year-to-date results are encouraging).
Such underperformance was not entirely unexpected, given the defensive, benchmark-agnostic
approach employed by the Fund’s manager, Rob Arnott. The Fund’s best work, at least from a
relative performance perspective, is usually done during flat (like 2014 thus far) or falling markets.
2 Of Indexing, Active Management and Market Tops
NEPC, a well-respected institutional investment consultant with over $400 billion in assets under
advisement, produced a recent study on the topic of the benefits of active versus passive investing (a full copy
of the study is available upon request). Rather than prescribing a dogmatic adherence to either active or
passive management, NEPC concluded that the active vs. passive decision should be considered within the
framework of two primary factors: 1) individual asset classes (e.g. U.S. Large Cap, Foreign, Core Fixed
Income) and 2) the market environment. The most obvious asset classes for indexing include those that are
efficient, well researched, highly liquid, and can be accessed through inexpensive index vehicles. The best
example would be the use of an S&P 500 Index Fund to represent the U.S. Large Cap equity market segment.
Further, according to the NEPC study and our continued research on the topic, the most opportune time to
invest passively is during a period in which markets tend to move upwards in lockstep fashion. Periods of
significant market strength are difficult for active managers to navigate typically, given that equity
fundamentals often take a back seat to momentum and speculation and that actively-managed strategies
typically have some portion of their portfolios in cash (whereas index funds do not). This was certainly the
case in 2013, as all segments of the U.S. equity market eclipsed +30% gains. Conversely, NEPC also
concluded that active management tends to fare better in flat or declining markets, given that indexed
strategies tend to be more concentrated by sector and security, do not have the ability to take defensive
measures (such as raising cash holdings), and cannot reallocate away from stronger performing companies
and sectors into weaker performers as markets begin to peak.
The table below provides annual rankings of the primary U.S. large capitalization (S&P 500), mid
capitalization (Russell Mid Cap) and small capitalization (Russell 2000) benchmarks within their
corresponding Morningstar fund universes. A ranking of less than 50 (green) indicates that the index
outperformed the majority of actively-managed strategies, while a ranking of more than 50 (red) indicates that
most actively-managed strategies outperformed the respective index:
Morningstar Category Percentile Rank
Index
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
S&P 500
68
62
55
43
46
60
33
52
39
55
31
18
36
41
Russell Mid Cap
71
74
65
38
30
21
34
43
70
25
27
22
42
45
Russell 2000
82
72
69
25
52
68
23
59
44
62
37
63
32
36
Source: Morningstar
45
40
35
30
25
20
15
10
5
Source: Robert Shiller, Yale University
2012
2014
2004
2006
2008
2010
1996
1998
2000
2002
1990
1992
1994
1982
1984
1986
1988
1974
1976
1978
1980
0
3 Shiller P/E Ratio
50
1970
1972
The data provided above confirms NEPC’s finding
that passive index strategies (e.g. S&P 500 Index
Fund) have performed below median (50th
percentile) during periods of market duress (e.g.
2000-2002, 2007-2009) while performing
particularly well during the past four years.
Indeed, as the bull market that emerged from the
ashes of the Financial Crisis celebrated its fifth
birthday on March 9th, most active managers have
lagged their respective benchmarks. Following
periods of such strength, many investors are lured
by the siren song of indexed strategies, typically at
the end of a bull market and immediately
preceding the very period in which the active
management strategies that they are trading out
of come into favor.
In response to the current bull market’s
length and elevated valuations, we have
continued to employ active managers while
incorporating two strategies into the large cap
allocation that have demonstrated strong
downside protection characteristics during
the past market declines: the Cullen High
Dividend Value Fund (CHDVX) and the
Jensen Quality Growth Fund (JENIX).
S&P 500 Subsequent 5 Year Excess Returns After a 2 Year Run
(Since 1980)
10%
Subsequent Annualized
5 Year Excess Return
While macroeconomic conditions do not
indicate a contracting economy and technical
market analysis implies the potential for
further gains, we have some cause for concern.
Not only has the S&P 500 Index steadily risen
for more than 30 months without a 10%
correction, but the current bull market is the
third longest in U.S. stock market history.
While both facts in isolation suggest a sober
reassessment of risk and reward, a number of
long-term equity valuation measures (such as
the Shiller P/E ratio) are at levels associated
with low forward return expectations.
Additionally, the periods immediately following
a two-year market gain of 50%+ (like we
experienced in 2012-2013) are typically poor.
Further, margin balances (borrowing against
an investment portfolio) have reached an alltime high. More serious market corrections
are typically associated with a peak in margin
balances followed by a reversal in trend. 8%
6%
4%
2%
0%
-2%
LT Avg.
<0
0-10%
10-20% 20-30% 30-40% 40-50%
<50%
2-Year Excess Return
Source: Haver Analytics.
Corporate Profit Margins
14%
13%
12%
11%
10%
9%
8%
7%
6%
Mar-74 Mar-78 Mar-82 Mar-86 Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10 Mar-14
Source: Morningstar.
Cullen was added during the third quarter of 2011. Since the date of its addition through 3/31/2014, the
Fund has underperformed its benchmark (the Russell 1000 Value Index) by roughly 7.6% annualized. While
underperformance in a market environment where the benchmark is up 55.7% over the previous two years
isn’t surprising, the magnitude of underperformance is disappointing. Still, as the chart below shows, during
periods of market stress like 2007-2008 and 2011, the Fund can make up this shortfall quickly.
Annual Performance
Fund/Index
2006
2007
2008
2009
2010
2011
Cullen High Dividend Value I
22.17%
5.82%
-29.20%
12.69%
10.89%
11.12%
9.67%
23.66%
Russell 1000 Value Index
22.25%
-0.17%
-36.85%
19.69%
15.51%
0.39%
17.51%
32.53%
+/- Benchmark
-0.07%
5.99%
7.64%
-7.00%
-4.62%
10.73%
-7.84%
-8.87%
Source: Morningstar
4 2012
2013
Jensen was added during the third quarter of 2012 and has performed better than expected given the market
environment during that time, trailing the benchmark by just 0.1% annualized through 3/31/2014. Similar
to Cullen, the Fund experienced its best relative performance during 2008:
Annual Performance
Fund/Index
Jensen Quality Growth I
2006
2007
2008
2009
2010
2011
2012
2013
14.26%
7.53%
-28.77%
29.28%
12.12%
-0.70%
13.90%
32.63%
Russell 1000 Growth Index
9.07%
11.81%
-38.44%
37.21%
16.71%
2.64%
15.26%
33.48%
+/- Benchmark
5.19%
-4.28%
9.67%
-7.93%
-4.59%
-3.34%
-1.36%
-0.85%
Source: Morningstar
We are happy to report that, in spite of strong market index returns of late, most of our equity managers
remain ahead of their respective benchmarks on both risk-adjusted and absolute bases over periods longer
than five years, thanks in large part to superior performance during the down markets of the past decade.
Further, though the S&P 500 Index returned more than 30% during 2013, our combination of four domestic
equity managers was still able to outperform by over two percentage points. Both points speak to the
importance of losing less in down markets (it is easier to climb out of a shallow hole) and remaining tactical,
as opposed to buying and holding managers, throughout full market cycle.
We have not employed a passive investment strategy within the current market cycle; however, that is likely
to change following the next bear market (decline of more than 20%). Should we experience a significant
decline, we will reevaluate the defensive allocations and look to reallocate the proceeds to inexpensive Beta
(market risk) through the use of select, low fee, passive investment vehicles that complement our longer-term
active managers.
Changes to the Portfolio Since the Beginning of 2014
Trade #1: The Introduction of Emerging Markets Debt
5 2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
In late January, we introduced the
Transamerica Emerging Markets Debt Fund
Rolling 12 Month Returns: U.S. High Yield - EMD
40%
to our discretionary fixed income model.
The Fund is managed by Logan Circle
30%
Partners, a Boston-based firm that was
U.S. High Yield Outperforms
20%
founded in 2007. Though the firm is only
seven years old, the portfolio management
10%
team has been together for well over a
0%
decade. The team takes an opportunistic,
-10%
benchmark-agnostic approach to investing
within the emerging markets debt space.
-20%
They maintain a relatively small number of
-30%
Emerging Market Debt Outperforms
holdings, most of which comprise core longterm positions that are then supplemented
-40%
with shorter-term opportunities. Much of
the underperformance in emerging markets
last year can be traced to currency weakness. Source: Morningstar. Red dashed lines represent +/- 1 standard deviation
In the case of the Transamerica fund, the
from the mean (dashed black line).
managers currently maintain relatively low
(<20%) non-dollar exposure, which mitigates the impact of further emerging markets currency depreciation.
Our portfolios have never included explicit exposure to emerging debt until this year; though, such holdings
have been smaller components of several funds (e.g. JP Morgan, PIMCO) within the portfolios. Much like
emerging markets equities, emerging markets debt struggled mightily in 2013, underperforming broader bond
benchmarks by several percentage points. In particular, underperformance relative to U.S. high yield debt
was unusually high. This observation, along with attractive yield characteristics, prompted our attention to
the space. Our timing appears good so far, with the position up over five percentage points since the time of
purchase.
Euro Area PMI
65
Trade #2: Increase European Equity
Exposure
60
55
50
45
40
35
2014
2013
2012
2011
2010
2009
2008
2007
30
2006
With economic activity (as represented by
the Euro Area Purchasing Managers Index)
and investment markets stabilizing, we
increased our exposure to European
equities in late March by adding to our
holdings in the Oppenheimer International
Growth Fund. The addition brought our
portfolios in alignment with their long-term
target allocation of 20% to developed
foreign equities and continued the trend of
additions to the space that began early last
year.
Source: Haver Analytics. A reading above 50 generally indicates an
expansionary economic environment while a reading below 50 generally
indicates a contractionary economic environment.
For the past five years, we have been underweight developed Europe, which has proven generally to be
accretive to performance:
Calendar Period
Index
2009
2010
2011
2012
Cumulative
2013
YTD 2014
1/2009-3/2014
S&P 500 Index
26.46%
15.06%
2.11%
16.00%
32.39%
1.81%
132.32%
MSCI EAFE Index
31.78%
7.75%
-12.14%
17.32%
22.78%
0.66%
80.88%
U.S. +/- International
-5.32%
7.31%
14.25%
-1.32%
9.61%
1.15%
51.44%
Source: Morningstar. Data as of 3/31/2014.
As discussed earlier, the rapid ascent of the S&P 500 Index and lackluster performance from foreign equities
has left European equities, in particular, at very attractive relative valuation levels. With investor and
consumer confidence improving along with its broad economy, Europe seems poised to outperform over the
next three-to-five years. The Oppenheimer Fund currently holds more than 80% of its assets in Europe.
Trade #3: Reduce U.S. Equity Exposure
In recent weeks, we used the continuing market rally to reduce U.S. equity exposure. As a result of
continued market strength, most of our client portfolios had drifted into a modestly overweight equity
position, which we corrected through a series of trades designed to take some profits in anticipation of
increased U.S. equity market volatility through the summer. Although we are not anticipating a major
6 market correction at this time, the last 30 years have taught us to steadily reduce exposure to the asset
classes with which investors have fallen in love. Currently, the love affair is with the U.S. stock market.
Forward Strategies
We plan to employ the following strategies during the remainder of the year:
1. Increase defensive positioning into market strength. While there are no clear signs of a bear
market emergence, stretched valuations and rising expectations suggest that caution is prudent. As
the market continues to press forward, we will look for additional opportunities to curb downside risk,
whether through rotating from more aggressive managers to more conservative managers, extending
our underweight in U.S. small capitalization stocks, or reducing overall portfolio equity exposure.
Selling into strength requires discipline but is rewarded typically in the end.
2. Continue to add to Developed foreign equities and maintain exposure in Emerging foreign
equities. European equities laggardly performance continued through much of 2013, prompting us to
begin adding exposure while still remaining underweight relative to the long-term target. As with
emerging equities, valuations remain compelling, and while roadblocks to prosperity in Europe
remain, we believe the largest part of the debt crisis that roiled markets in 2010 and 2011 is behind
us. With the most recent addition, we have returned to a neutral position relative to the long-term
target allocation but may continue to add exposure if economic momentum continues to build.
3. Maintain or Increase Exposure to Flexible Mandate Funds. Both the JP Morgan Strategic Income
Opportunities (added August, 2011) and PIMCO All Asset All Authority (added March, 2013) Funds
employ strategies that afford them greater tactical flexibility (e.g. the ability to take long and short
positions). We believe that greater management flexibility, particularly with regard to defensive
positioning, will be critical to protecting and cementing recent stock and bond market gains during
periods of increased volatility. PIMCO, in particular, has performed better year-to-date than it did in
2013, suggesting that market dynamics are beginning to stabilize following extreme movements last
year.
4. Maintain below-market duration while waiting for further yield increases. Our willingness to
sacrifice short-term yield in favor of principal protection from rising interest rates added significant
value in 2013. With early signs of inflationary pressures forming and the Federal Reserve steadily
reducing its Quantitative Easing (QE) program, we believe yield risk continues to be to the upside.
Should yields continue to rise, we may trim exposure to the traditionally short-duration JP Morgan
Strategic Income Opportunities Fund and begin extending duration slightly.
5. Continue use of opportunistic bond exposures. Both Global and Emerging Markets debt have been
accretive to fixed income performance year-to-date. Coupled with continued overweight in corporate
debt, our fixed income portfolio’s yield advantage over its benchmark remains significant in spite of a
shorter-than-benchmark duration.
Organizational Update
With our departure from RBC now five months behind, we have taken the time to assess our progress. We
summarize some of the benefits that have already accrued to clients as a result of the transition and items
that require additional attention and client feedback below.
7 Our primary goals through the transition were to 1) create long-term organizational stability through
expanded ownership, 2) improve the customer experience, and 3) gain autonomy over staffing decisions and
technology implementation. While much work remains, we have made progress toward all three goals:
1. We have implemented a formal ownership structure that provides for long-term continuity in the
management of the organization as well as a foundation upon which to build and maintain
independence long into the future.
2. Several of the more notable improvements in client outcomes that resulted from working with
Pershing are 1) a reduction in the margin loan rate to 1.25%, one of the lowest margin rates in the
industry, 2) the conversion of three mutual funds (AllianzNFJ, Oppenheimer, PIMCO) to an even lower
cost structure, and 3) an increase in the number of Municipal bond trading desks to which we have
access. All three of these changes have already been accretive to client performance.
3. Most importantly, in order to enhance our current depth and breadth of services, we have made six
new hires during the past six months, including a new Director of Operations, two relationship
management professionals, another dedicated research analyst, a client service professional and an
internal CPA/controller. We remain committed to hiring skilled, caring investment and service
professionals.
The aforementioned progress is but a small part of the changes that we believe will improve your experience.
Still, we recognize that there are several areas that require additional attention. Orgel Wealth Management
will soon launch a new version of its website (www.orgelwealth.com) within the next few weeks. In addition to
reviewing information about the firm, you will be able to access your account information and read current
and past strategy letters and client communication material via our website. Based on feedback and
concerns received from our clients, we have also been working diligently with Pershing to improve their
website, bill payment, and statement experiences. In collaboration and consultation with our group,
Pershing launched a major revision to its website recently, and our early review of the changes suggests that
our clients’ thoughts and guidance influenced the revision heavily. Further Pershing website enhancements including full detail on daily, monthly, and annual changes in portfolio value - are planned throughout the
year. We welcome additional thoughts, suggestions or concerns related to the website, bill payment system,
statements or anything else that you believe we could improve to serve you better.
While our organization has experienced meaningful change over the past six months, we believe that the
enduring legacy of hard work, client service, and superior financial outcomes remains. With three decades of
practice knowledge and experience to guide us, we look forward to serving you and your family for many
years to come.
Sincerely,
Mark Orgel
Chairman and Founder
Principal
Samir Murty, CFA
Managing Director
Principal
Benjamin Kanz, CFA
Senior Relationship Manager
Principal
Craig Falkner, CFA
Senior Portfolio Manager
Principal
8 Disclosures:
Orgel Wealth Management LLC (“OWM”) is an SEC registered investment adviser. For additional information about
OWM, including fees and services, our disclosure brochure, as set forth on Form ADV Part 2A, is available for
review upon request. OWM may only transact business in those states in which it is notice filed or qualifies for a
corresponding exemption from such requirements. OWM and its representatives are in compliance with the notice
filing and registration requirements imposed upon registered investment advisers by those states in which OWM
maintains clients.
The material in this letter is prepared for informational and educational purposes only. This letter has been
prepared for general circulation to clients and prospective clients and has been prepared without regard to the
individual financial circumstances and objectives of persons who receive it. The investments or services discussed
in this letter may not be suitable for you and it is recommended that you consult with OWM if you are in doubt
about the suitability of such investments or services. Nothing in this report constitutes legal, accounting or tax
advice or individually tailored investment advice. This letter is not intended as a recommendation to purchase a
specific security. The information provided has been derived from sources believed to be reliable, but is not
guaranteed as to accuracy and does not purport to be a complete analysis of the material discussed.
Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original
capital may occur. Any reference to an index is included for comparative purposes only, as an index is not a
security in which an investment can be made. A list of all recommendations made by OWM within the immediately preceding one year of the date of this letter is
available upon request at no charge.
To the fullest extent permitted by law neither OWM nor any of its affiliates, nor any other person, accepts any
liability whatsoever for any direct or consequential loss arising from any use of this letter or the information
contained herein.
9