The last time that the Dow Jones Industrial Average topped 14,164.5 was October 2007. It did so again in February 2013 then went higher, making headlines in the process. However, what went largely unreported is that on an inflation-adjusted basis the Dow Jones Industrial Average is still 20% below its peak in 2007.

This analysis is not offered in an effort to recommend that stocks be sold or that investment strategies abandoned. The Dow may very well reach 16,000 or it may reach 12,000. While we have no control over the nominal returns of the market, we will actively manage risk in either outcome with vigilance.  In doing so, we can influence the path that returns take. (See graph of Dow Jones Industrial Average.)

Our job as risk managers is not to become complacent and chase returns when the environment is euphoric (as it may be now) or to be shaken and abandon discipline when the environment is fearful.  Rather, our demeanor should be unchanged through these cycles as we focus on variables that are firmly within our control: risk, liquidity, taxes, transparency, and costs.

By design, our investment solutions are broadly diversified with many positions actively hedged at all times. Whether the Dow Jones experiences a substantial correction or a continuation of its rally, we remain positioned to benefit. As always, our goal is to generate consistent, sustainable returns after taxes and after inflation.

Regardless of the price of an investment, we remain active in managing its risk, in an effort to transform it from a liability to an asset. This asset is tangible in the form of income enhancement, asset protection, and return improvement.

Fort Point Capital Partners, LLC provides investment advisory services to sophisticated investors. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

Past performance is not indicative of future results. Investing in securities involves significant risks, including the risk of loss of the entire investment. Certain options strategies used by some of our strategies may include the use of leverage and may create increased risk for loss of principal or limited capital appreciation.  Our portfolio risk management process includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk.  This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate strategies depend upon the client’s specific circumstances and investment objectives.

Model Portfolio Performance. The returns presented for the Model Portfolios referenced in this presentation are model results that are calculated using model data according to an allocation of assets that Fort Point currently recommends as representative of the identified investment approach (e.g. conservative, moderate, or growth) and do not represent actual results from trading or actual allocations of client portfolios.  The returns for many of the underlying assets are also modeled.  Specifically, results for the asymmetric return assets are modeled using the techniques and assumptions described below in the section “Actual Risk Management Strategies – Actual Versus Model Returns.”  Other underlying assets may be modeled if actual results for that underlying asset are not available for a specific time period (see “Other Modeling”).  Performance results for the strategies referred to herein and their respective benchmarks reflect total return figures and include the reinvestment of dividends, interest, and other earnings.  Model and actual results reflect the deduction of subadvisory fees, brokerage or other commissions, and any other expenses that the client would have paid or actually paid, including Fort Point Capital Partners’ advisory fees (calculated at the highest rate charged).  Fort Point does not compare the actual returns of any client portfolio to the returns of any Model Portfolio.  The Model Portfolio returns may not be representative of and may be materially different from the actual returns of Fort Point clients.

Active Risk Management Strategies. The material in this presentation includes back-tested model performance for the active risk management strategies.. The back-tested performance is calculated by using a computer program and daily option price and volatility histories and monthly total return series for various indices.  The model performance is reported net of the subadvisor’s advisory fee, billed monthly, and net of transaction costs.  Actual subadvisory fees are billed quarterly in advance, and may be less depending on the amount of assets under management.  A commission rate of $1 per contract was assumed for the entire period, but actual commissions could be higher or lower.  The commissions reduced the returns by 0.055% per year for the US Large Cap strategy.  Back-tested performance assumes the reinvestment of dividends and capital gains but it reported gross of any potential taxes.  The model assumes securities and options are executed worst-case: purchased at the offer price, and sold at the bid price on the close each day.  No consideration is given for the offer or bid quantities at close.  In practice, clients will often get better execution, buying and selling inside the bid-offer.  Margin expense is calculated at 1.25% above the then current 0-3 Month US Treasury rate, and margin interest is calculated at 0.75% below the 0-3 Month US Treasury rate.  It is assumed the US Large Cap index can be owned with a fund expense of 0.10% per year, the current rate for the SPY exchange traded product, with option overlay beginning 1/1/96, with no overlay assumed prior to this period.  Others assumptions are (Asset Class | Overlay Initiation Date | Expense Factor used to model an ETF prior to overlay): US Small Cap 1/1/96 at 0.20%, International Equity 2/1/08 at 0.34%, Emerging Mkt 4/1/06 at 0.72%, US Real Estate 7/1/06 at 0.25%, Commodities 7/1/07 at 0.75%.  Annualized standard deviation is presented as an approximation by multiplying the monthly standard deviation number by the square root of twelve. The number computed from annual data may differ materially from this estimate.  Returns for periods greater than 12-months are annualized.  The model and methodology were created on October 31, 2008.  The results were updated on June 4, 2009, to incorporate commissions and index ownership fees.  Any changes to the model in the future will be noted here.

Active Risk Management Strategies – Actual Versus Model Returns.

The following table compares the actual composite returns experienced by clients with the model performance returns for the time periods specified. The Inception Date is the first day of the first complete month of actual returns in each strategy. The returns presented are annualized rather than cumulative.

Strategy               Inception Date       Current Date      Actual Return     Model Return

US Large Cap         11/1/2008                  12/31/2012           13.37%                      14.79%

US Small Cap          11/1/2008                  12/31/2012          13.66%                      16.86%

International            11/1/2008                   12/31/2012         9.63%                         12.84%

Emerging Markets  11/1/2008                   12/31/2012        18.87%                       21.07%

Commodities            11/1/2008                  12/31/2012         4.48%                        2.80%

US Real Estate         2/1/2009                    12/31/2012         23.87%                      22.90%

Gold                           6/1/2010                     12/31/2012         9.08% 1.36%

Other Modeling. An exchange traded fund (“ETF”), hedge fund, and/or asymmetric return portfolio may not have sufficient data for the time periods for which performance results are presented.  For example, the ETF and/or fund have an inception date that is more recent than the start date of the period for which the performance results were calculated or the back-tested model results for an asymmetric return asset may not extend back to the start date of the period.  In these instances, the returns presented are from indices (or a blend of indices) that Fort Point believes approximate the returns of the asset.  The underlying indices (or proxy securities) are used for the periods where either actual returns or the asymmetric return model returns are not available and where an appropriate index (or proxy security) is available.  Fort Point will provide upon request a list of the assets modeled using this technique, the specific proxy securities used, and the time period covered.

Limitations of Model Performance: The model performance results are for illustrative purposes only and are not necessarily indicative of performance that would have been actually achieved if an investment utilized the strategy during the relevant periods, nor are these simulations necessarily indicative of future performance of the strategy.  Inherent limitations of model performance may include: 1) the model calculations make certain assumptions (e.g. concerning margin and other expenses) and changes in assumptions that were made to calculate the returns may have a material impact on the returns presented; 2) model results are generally prepared with the benefit of hindsight; 3) model results do not represent the impact that material economic and market factors might have on an investment adviser’s decision-making process if the adviser were actually managing client money; 4) there are numerous factors related to the markets in general, many of which cannot be fully accounted for in the preparation of hypothetical performance results and all of which may adversely affect actual investment results.  Hypothetical performance is not indicative of future results.

Suitability. Fort Point Capital Partners does not provide financial planning, tax, or legal advice.  Fort Point Capital Partners investment programs may not be suitable for all investors.  Prospective investors and clients should consult with their own legal, investment, tax, accounting and other advisors to determine the potential benefits, burdens and other consequences of engaging Fort Point Capital Partners.  Potential clients must meet certain suitability qualifications.

Data Sources. We derive our information from a variety of sources we consider reliable, including historical exchange data, published research, technical digests, news media, and from research provided by our principals and employees, which is proprietary, but we do not guarantee that the information is accurate or complete

Focus, as is the case with most things is life, is critical to achieving any measure of success. However, in today’s world of 30 second news cycles and financial media run amok, investors are becoming decidedly distracted.

Investors globally have defined “risk” as being solely some form of exogenous shock or tail-event such as the financial crisis or a fracturing of the European Union. If they perceive that a hot button “event” will be averted, they will pursue “risk-on” strategies regardless of fundamental soundness. If not, the colossal moral hazard of central bank or sovereign intervention will step in to save the day. Alternatively, they look to the recent performance of a market index – say, the S&P 500 – to provide the all clear signal. Both attitudes are misguided at best and total lunacy at worst.

In contradictory fashion, these tail-risk obsessed investors are, in classic fashion, exhibiting the very lemming behavior that creates the very bubbles and crises that they fear. The reckless investor behavior in the credit markets is one of the most visible examples of human cognitive biases creating the very problems that they’re attempting to avoid.

Market drawdowns or extreme losses rarely begin with an event or crisis. They begin with deteriorating fundamentals versus high expectations resulting in observably mispriced assets. The event or crisis may come as a result, but is rarely the cause of initial losses. The most likely cause for losses incurred is the price paid for the asset. Initial losses actually go unnoticed for some time. Of note, the financial sector was down over 50% before the Lehman bankruptcy in 2008. Housing prices had already dropped significantly before any event unfolded. Even truly exogenous events such as the 9/11 tragedy had little to do with disrupting equity markets as the S&P 500 was already down over 30% from its high of the year prior.

Our “always on” risk management philosophy very intentionally protects client portfolios from systemic and exogenous shocks. Importantly, in addition to our broad diversification strategy, the profitability of our hedges creates a cash pool when markets swoon allowing us to pursue our mission of structured contrari­anism and being a liquidity provider to objectively mispriced markets. Being early to de-risk AND early to re-risk is the natural byproduct of our investment program, which is designed to generate a positive compounding experience over time.

PRE-CRISIS LOWS IN VOLATILITY

RISK

Over time the S&P 500’s appreciation is often accompanied by declin­ing volatility. At its troughs volatility is frequently a signal that market participants are herding together. We believe this can be a reliable con­trary market indicator. We are at an unusual point in US central banking history where zero bound interest rate policy and anemic yields across the spectrum of global credit is encouraging rotation into risk assets without respect to valuation or macro risk.

OPPORTUNITY

Contrarian thinking presents obvious opportunities in the face of herd behavior. However, the herding can persist for far longer than most people are willing to stay on the sidelines. As consistent sellers of upside volatility, we are able to participate in the markets’ bullishness and also position to profit from its declines.

INTEREST RATES DON’T EXCLUSIVELY FALL

RISK

Bonds have seen a dramatic and persistent bull market for 30 years. Some commentators speculate that this is coming to an end. While we are not market timers, we do not like to hold assets that have negative expected returns relative to inflation. In the case of cash and treasuries, a current holder is not receiving enough return to offset the erosion of inflation. As seen in the chart above, the emergence from double digit interest rates was preceded by a 400% increase in 10-year rates over the course of the prior 20 year period (1962-1981). In the case of a 10-year bond today, a 2% increase in interest rates would cause a 15%+ price impairment and a 3% increase in interest rates would result in a 25%+ impairment.

OPPORTUNITY

The real opportunity in today’s anemic interest rate environment is decidedly unglamorous. Avoid at all costs the behavior of chasing yield by buying long or maturity bonds, taking credit risk to manufacture additional yield, and adding leverage to manufacture illusory (but high risk) yield. When rates inevitably increase and bond assets begin exhibiting equity-like risk characteristics you should expect Fort Point to be an enthusiastic liquidity provider to global credit markets. This will be similar to our rotation into credit in December 2008 through early 2009.

CASH IS A WASTING ASSET

RISK

Cash or money market strategies have been used by crude practitioners as risk mitigation tools. Owning assets with a negative real, inflation adjusted return is senseless and generally without investment merit. Save for frictional spending needs. Further, from the perspective of the broader economy, the current zero bound rate policy cripples savers and retirees on fixed incomes. This creates dangerous compromises.

OPPORTUNITY

Fort Point has been built on a foundation of “total portfolio thinking”. This means ignoring the prevailing approaches of market timing, chasing “hot” or highly appreciated asset classes, and some of the aforementioned approaches to manufacturing yield on the prior slide. The goal is to achieve extensive diversification across many return sources influenced by different economic and market factors where all decisions are recognized as inter-related and made in the context of composite outcomes.

WORDS OF WISDOM

“If the herd is doing the wrong thing, and if you’re capable of seeing that and doing the opposite, it’s still highly unlikely that the wisdom of what you do will become apparent immediately. Usually the crowd’s irrational euphoria will continue to take prices higher – possibly a long while – or its excessive negativism will continue to take prices lower. The contrarian will appear wrong, and the fact that his error comes in acting differently from most people will make him look like nothing but an oddball loser.”

- Howard Marks

When a financial advisor presents an investment strategy or financial plan, it is not obvious if it has safety measures in place to protect us in the event of an accident. Many advisors offer a map to get from point A to point B with the persuasions of high returns, past performance, and slick marketing materials. Few advisors offer a plan on how to deal with bumpy roads and detours. Instead the investor is told “be patient,” “we’re still on course,” and “you’re a long-term investor”; but by then the destination has become less important than the near-term uncertainty.

Unfortunately, investors accept less safety and clarity from their investments for a variety of reasons, but the primary one is the misinterpretation of “risk.” On the road, traffic delays and accidents are daily and cause visceral experiences, but market gyrations don’t register on the same instinctual scale. Naturally, the discussion of risk management is challenging for both investors and advisors. Technical and academic terms are generally used that are not the least bit intuitive.

Put simply, investment risk is defined as the chance your money won’t be there when you need or want it. The clearest observable measurement of investment risk is volatility. It is ever present and can have a potentially profound impact on both your returns and, consequently, your decisions.
The higher the volatility, the more it impedes positive returns, and the greater effect it can have on remaining invested when it matters most.

An intuitive way to think about volatility is to imagine a highway with two lanes, each with a speed limit of 70mph. Let’s assume that the fast lane has a 50% volatility (going as fast as 105mph and as slow as 35mph) and the slow lane has a 10% volatility (as fast as 77mph and as slow as 63mph). The fast lane’s average will only be 57.5mph versus the slow lane’s 69.5mph. Why? Because the further you fall behind the longer it takes to catch back up to the average speed.

Like stop-and-go traffic on the freeway, volatility will often trick investors into picking the “faster lane.” In both traffic and investing, lane changing is a loser’s game.

Traditionally, in the investment management world, “winning” is defined as beat¬ing or outperforming an index. The problem is that after fees and taxes, 80%-90% of all active managers fail to beat their benchmark. Investors who chase “hot” performing managers are more likely to suffer above average losses. As seen in the table below, the bigger the loss, the bigger the gain required to get back to even.
The winning strategy is not about trying to beat something, but rather, to preserve capital when markets become challenging.

As illustrated in the graph below, if you bought a share of Apple’s stock 10 years ago and held on to it you would be sitting on a 4800% gain. But, what if when Apple’s stock went up you participated in 80% of the positive returns and when it went down you only participated in 50% of negative returns? You never “outper¬formed” or “beat” Apple when it was making money but instead preserved capital when it was losing money. In this example, instead of a 4800% gain you would have a 7200% gain.
Limiting losses is more important than beating bull markets. This goal cannot be consistently achieved through market timing, security selection or diversification. Nor can it be achieved by holding concentrated positions in cash and bonds.

We believe actively managing risk is the key ingredient for real investment success. Predicting when markets will go up and when they will go down is impossible. This is why we hedge our investments with a conservative option strategy that targets 80% – 90% of the positive returns and only 50% – 60% of the negative.

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This Blog post is a general communication of Fort Point Capital Partners and is not a recommendation, offer or solicitation to buy or sell any security or service. The information contained in this post has been prepared without reference to any particular individual’s investment requirements or financial situation. Certain transactions give rise to substantial risk and are not suitable for all investors.

Past performance is not indicative of future results. Investing in securities involves significant risks, including the risk of loss of the entire investment. Returns presented are provided by LOGe Solutions, LLC (“LOGe”); are for the LOGe U.S. Small Cap strategy; reflect actual composite returns on LOGe client accounts ; and are presented net of expenses and LOGe’s investment advisory fees. LOGe is an SEC registered investment adviser. Registration of an investment adviser does not imply any certain level of skill or training.

This Blog post is a general communication of Fort Point Capital Partners and is not a recommendation, offer or solicitation to buy or sell any security or service. The information contained in this post has been prepared without reference to any particular individual’s investment requirements or financial situation. Certain transactions give rise to substantial risk and are not suitable for all investors.

Links to third party web sites are provided only as a convenience, and do not imply an affiliation, endorsement, approval, verification or monitoring by Fort Point Capital Partners of any information contained in any third party website. In no event shall Fort Point Capital Partners be responsible for the information contained on that site or your use of or inability to use such site. The terms, conditions and privacy policy of such third party site may differ from this website.

Gold faces the same issue, but for different reasons. Unlike interest-baring securities, companies that grow earnings, or land that can be improved; a bar of gold does not multiply itself. An ounce of gold today will still be an ounce of gold one hundred years from now. As a result, gold’s value is derived almost exclusively from investors who view it as a safe haven from currency debasement and believe that other investors will bid up the price as market conditions deteriorate. If market conditions improve or inflation increases, the real value of gold declines and its volatility increases. Perhaps the real value of gold is in its volatility?

This Blog post is a general communication of Fort Point Capital Partners and is not a recommendation, offer or solicitation to buy or sell any security or service. The information contained in this post has been prepared without reference to any particular individual’s investment requirements or financial situation. Certain transactions give rise to substantial risk and are not suitable for all investors.

Links to third party web sites are provided only as a convenience, and do not imply an affiliation, endorsement, approval, verification or monitoring by Fort Point Capital Partners of any information contained in any third party website. In no event shall Fort Point Capital Partners be responsible for the information contained on that site or your use of or inability to use such site. The terms, conditions and privacy policy of such third party site may differ from this website.

This Blog post is a general communication of Fort Point Capital Partners and is not a recommendation, offer or solicitation to buy or sell any security or service. The information contained in this post has been prepared without reference to any particular individual’s investment requirements or financial situation. Certain transactions give rise to substantial risk and are not suitable for all investors.
Links to third party web sites are provided only as a convenience, and do not imply an affiliation, endorsement, approval, verification or monitoring by Fort Point Capital Partners of any information contained in any third party website. In no event shall Fort Point Capital Partners be responsible for the information contained on that site or your use of or inability to use such site. The terms, conditions and privacy policy of such third party site may differ from this website.

Disclosure. This Blog post is a general communication of Fort Point Capital Partners and is not a recommendation, offer or solicitation to buy or sell any security or service. The information contained in this post has been prepared without reference to any particular individual’s investment requirements or financial situation. Certain transactions give rise to substantial risk and are not suitable for all investors.
Links to third party web sites are provided only as a convenience, and do not imply an affiliation, endorsement, approval, verification or monitoring by Fort Point Capital Partners of any information contained in any third party website. In no event shall Fort Point Capital Partners be responsible for the information contained on that site or your use of or inability to use such site. The terms, conditions and privacy policy of such third party site may differ from this website.

Disclosure. This Blog post is a general communication of Fort Point Capital Partners and is not a recommendation, offer or solicitation to buy or sell any security or service. The information contained in this post has been prepared without reference to any particular individual’s investment requirements or financial situation. Certain transactions give rise to substantial risk and are not suitable for all investors.
Links to third party web sites are provided only as a convenience, and do not imply an affiliation, endorsement, approval, verification or monitoring by Fort Point Capital Partners of any information contained in any third party website. In no event shall Fort Point Capital Partners be responsible for the information contained on that site or your use of or inability to use such site. The terms, conditions and privacy policy of such third party site may differ from this website.