Q: Tom, I first knew of you about fifteen years ago when you were with another firm. When and why did you start Mench Financial?
A: I formed Mench Financial, Inc. in late 1994 to manage assets for individual and institutional clients. With over 27 years experience in the investment industry, I created a firm to implement the strategy I developed back in 1977.
Q: You use investment trusts and securities designed to track specific market indexes. How do these investment instruments fit into an overall investment strategy?
A: Exchange Traded Funds (ETF's) work like stocks. ETF's trade on the American Stock Exchange, the Chicago Board Options Exchange, and the New York Stock Exchange the same way as shares of a publicly held company. It's easy to buy and sell ETF's through any brokerage account. They can be traded anytime during normal trading hours, using all the portfolio management approaches associated with stocks (market orders, limit orders, stop orders, short sales, and margin buying). But ETF's aren't shares of a company; ETF's are shares of a portfolio designed to closely track the performance of any one of an array of market indexes.
ETF's track like index funds. Each ETF fund closely tracks a specific market index, offering new ways to get cost-effective exposure to the markets and sectors you need - or want. Like traditional index fund owners, ETF investors own a pool of securities. Index investing, of course, is a time-tested, analytical approach to getting broad market exposure and a high degree of diversification at a very low cost.
ETF's offer the potential benefits of stocks and index funds. Index investing through ETF's can be a vital element of an active investment strategy. When you invest in ETF's, you're investing in a precisely calculated portfolio that gives you clearly defined market exposure. And ETF's provide an easy-to-use, flexible tool for changing your portfolio's strategic direction on your terms.
ETF's are more transparent than traditional mutual funds, and provide greater control for the investor. Typically you only know what a mutual fund's holdings are when the portfolio manager reveals them - which may happen just twice a year. And when you decide to buy or sell shares, you must do so without knowing in advance what the net asset value that day will be. ETF's allow you to buy or sell a known portfolio of stocks, any time the markets are open, with a single trade.
Q: Please give us an overview of the eight portfolios you offer investors.
A: At Mench Financial, Inc., we offer a combination of individual security management and the use of Exchange Traded Funds to create what we call Sector Enhanced Portfolios. I'll deal with the individual security portfolios first. We have two hybrid portfolios that we manage for clients. The first is a long-term style with Mench Financial, Inc. of managing mid-cap, small-cap securities with growth at the right price style called Aggressive Equity. We have, in the last five years, begun to integrate many of the mid-cap and small-cap exchange traded funds into this portfolio to create a hybrid of individual securities, and exchange traded funds. This style has 25 positions, no position is more that 4% and only 40% of the portfolio can be in exchange traded funds at any particular point in time.
The second hybrid portfolio is a Growth Equity portfolio which is targeted to use the S&P 500 as a primary data base to pick individual securities. In this portfolio we also hybrid in a combination of the exchange traded funds to raise the diversity and allow for allocation to areas that we believe are attractive as a basket during market cycles.
Both of these portfolios have been widely accepted by individual investors and sub-advisory groups.
In the last five years, Mench Financial, Inc. has become nationally and internationally recognized as a leader in creating individual portfolios using only exchange traded funds. We have created six styles that are readily available to our clients; five of those through sub-advisors and one directly at Mench Financial, Inc. The six styles are Capital Preservation, Balanced, Core, Global, International Sector Enhanced and a portfolio we call Hedge. Each of these portfolios uses a combination of 16 through 30 exchanged traded funds to determine an asset allocation of either six or ten individual names. This grouping of six different styles of portfolios is designed to allow an investor a location on the efficient frontier that best suits their return and tolerance expectations.
Q: How have you arrived at these particular portfolio groups?
A: We have taken our best effort through my background as a strategist in the institutional market to combine the exchange traded funds in a combination that will allow us to duplicate the major points on the efficient frontier for investors. It is my belief, as is indicated by most others, that 90% of the assets invested in the institutional and individual investor market are primarily allocated into a five by three matrix. The primary five categories are large-cap, mid-cap, small-cap, international and real estate. And underneath the majority of those you have to make the decision whether you want to be growth, core or value. So, by having five across the top & three down the side, you have a five by three matrix. By combining components of each of those categories, we can create multiple styles for our clients and actually create new styles if an individual investor wants a particular benchmark to be exceeded.
As an example, our Capital Preservation style uses the large-cap value core position, the S&P 500 Barra Value, but then concentrates on all of the value components in large-cap, mid-cap, small-cap, international and real estate.
The Core style is S&P 500, both large-cap growth, large-cap value, large-cap core, and the nine sector select SPDR's to create diversity by industry.
The International is all of the international exchange traded funds that can be put together as a group with ten securities being targeted for primary use.
Q: As an investor, how would I use your various strategies to achieve my investment goals?
A: I mentioned that we do have multiple styles, but let's concentrate on the style that we have worked with the longest, which is our Global Sector Enhanced. In 1993, when exchange traded funds were started, they were started with the S&P 500 as the primary vehicle, which is widely known today and accepted as the Spyder, symbol "SPY". Subsequently, the mid-cap index became available and then, at that time, the MSCI EAFE index was broken into 17 countries, which were originally called the "WEBS". We started with this particular style using both the large-cap and mid-cap exchange traded funds and five of the major international securities and created a global portfolio. As the exchange traded funds continued to expand in 1998 and 1999, we added related securities to create our current Global Sector Enhanced style which has thirty potential securities available for allocation purposes. We concentrate on ten of those securities, buying 9.6% position and allowing for a 4% cash position. We review the valuation of each of those 30 securities on a monthly basis, ranking them one to thirty. We want to concentrate on the top ten securities. We have a buffer zone to allow for the noise of month-to-month valuations. We restrict ourselves to changing only one security a month if there is a required change, thereby targeting primary asset allocation over the long-term period of time. The benchmark for this particular portfolio is the MSCI World Index due to the fact that it can be invested up to 50% in international securities.
Q: Where does your asset allocation model come from?
A: The key to our success is an econometric investment process that reacts to, and participates in, market trends. A composite of indicators triggers portfolio purchases and sales in a highly disciplined manner. We believe 75% of our ability to outperform the market comes from this process of asset allocation.
Q: Can you explain how your asset allocation works?
A: During weekly Investment Policy Committee meetings, current portfolio market, sector and industry allocations are determined. These allocations allow us to decrease the volatility in a portfolio by pinpointing the markets, or sectors of a market, which we believe, have the greatest potential of outperforming the general market. In turn, assets are moved away from sectors which have a high probability of under-performing. Once we have identified those industries, which are poised to do well in the coming economic environment, we use absolute and relative fundamental and sector analysis, combined with broad diversification, to shift the risk/reward ratio in our client's favor.
Q: How do you decide the proportional amounts you allocate among sectors?
A: We have made the decision that by targeting a core position that is the benchmark that we are competing with, we are instantly exposed 9.6% to all of those securities in that particular core style. We then want to over weigh or under weigh relative to size of security and style of security to be able to either reduce the correlation to the market or increase the correlation to the market depending on the market environment. We feel that allocating 9.6% across multiple securities allows us to achieve our targeted commitment to the client of having the fewest number of securities with the maximum allocation. As an example, in our Global Portfolio we may be exposed to over 2,000 securities in the underlying indices making up the 10 securities that we have purchased.
Q: How long have you been applying your models and can you give us some examples of when these models did particularly well.
A: These models have been in development since the late 1970's and were particularly enhanced during the 80's when I was the Director of Portfolio Management for a major institution. In the early 90's, they were applied using our primary strategy, but using individual security portfolios as I developed separate mutual funds for a mutual fund company where I was Chief Investment Officer. The real step forward in allowing me, as a strategist, to use our asset allocation techniques came with the development of the exchange traded funds. In 1992, I became aware that there was an effort to develop new type of security that would trade as stocks but have an underlying index behind them. I thought this was a major step forward in our ability to make a clear strategic investment decision for our client and apply it with the greatest speed and accuracy. These particular models are designed on our management philosophy of trying to capture 90% to 120% of the upside potential of the market but distinctly also through asset allocation changes, try to reduce the downside volatility to only 65% to 80% of the downside of the market. During the majority of the early 90's our distinct participation in the market was to target that 90% to 120% due to the positive nature of the market. In late 1999 and early 2000 our modeling worked revealed a distinct overvaluation in large-cap growth and technology and on a monthly basis we started to re-allocate away from large-cap, away from growth and away from technology into either mid-cap, small-cap, or value and into value related industries, such as utilities and REIT's. During the last two years, a period of time that has been very difficult for a majority of investors, we have found that our work has allowed us to reduce the downside volatility for our clients.
Q: Do your strategies allow investors to be either aggressive or conservative with their money?
A: We have multiple strategies across the efficient frontier, which allows clients to go through a life-cycle stage or a category stage for specific monies. Longer term money like IRA's or deferred compensation plans can be invested on a more aggressive basis like in our Core or Global styles, whereas retirement money and short-term needs money can be invested in our Capital Preservation style. The majority of times we are picked by an investor for a singular style, then that style can be re-allocated if, for some reasons circumstances or life-style changes do occur.
Q: Do you ever raise significant amounts of cash? When raising cash what leading indicators do you use?
A: We do have, in our allocation of the thirty securities that we may be using in a particular sector enhanced style, cash as one of those thirty components. Since we are doing a 12 to 18 month appraisal of the valuation of securities, if during certain market environments, a combination of the fundamental and correlation work indicates that cash is a better valuation than the next best alternative security, we will hold one position in cash equivalents. A combination of the 4% cash as a standard position that we have for operating purposes is then combined with the 9.6% to 10% cash that would be in an alternative security creating a 13% to 14% cash position. That cash position is then reviewed like any other security on a monthly basis and can be re-allocated to the market when we feel we have an industry sector or major sector that is a better alternative to cash at some point in the future.
Q: You offer "wrap" programs through a number of brokerage firms. Please explain how wrap programs work and why investors might benefit from them?
A: Our investment management style has caught the interest of a tangible number of regional and national broker-dealer firms that do offer us as a sub-advisor through their wrap programs. The use of exchange traded funds is a unique style we are one of, if not the only manager, that has a long-term track record of using only exchange traded funds. Secondarily, this particular style does create efficiency both for the client and the firm due to the fact that we are using only ten securities to asset allocate the portfolio. By using only ten securities we reduce a substantial amount of problems that occur both for the client and the firm in doing sub-advisor assets. As an example, instead of buying 30, 50 or 80 different securities to create an appropriate style for the client, we can pick ten securities, thereby reducing both the transaction costs and the reporting that is related to a tangible number of securities. It also creates substantially fewer numbers of taxable events for reporting in terms of dividends and also the amount of paperwork that is related to the wrap fee program. Lastly, the wrap programs have found that the primary objective for both themselves and their client is to have a targeted benchmark portfolio that produces an optimal return. I want to emphasis the fact that we are now back to talking about optimal returns. Optimal return is exceeding the targeted benchmark after fees and transaction costs with less volatility. By combining the combination of fewer securities, less operating noise for client and optimal return, we have found that the wrap fee programs have been readily acceptable to our particular styles and are both cost efficient and productive for the client long-term.
Q: Has the Internet changed the way you invest in any way?
A: The internet has been a distinct advantage for the efficiencies of our operation in two ways. First, we have a very active web page that can be targeted at www.menchfin.com. On this web page we have developed a good description and understanding of Mench Financial, Inc. and our primary participants, but more importantly, we have the capability of keeping our clients aware of our activities by doing a monthly update of the market using exchange traded funds as the basis for that component and also our primary asset allocation of major styles under "MFI Update". Under the client forms category we do have PDF files on all our primary styles with fully disclosed performance and any related material that may be needed to establish an account or do a review of our activities from third parties. With the Internet we also communicate by using emails to our clients and our primary wrap fee program participants on any major events that may be occurring in our asset allocation or the operation of our organization.
Q: What are your plans for the future? Where do you want to take Mench Financial from here?
A: Mench Financial, Inc. will continue to target institutions, foundations, retirement plans and high net worth individuals. We are comfortable with our current average client relationship of approximately $600,000 and will continue to target those types of relationships. Our goal is to grow assets at the rate of approximately $4 million per month while continuing to offer the type of service, communication and results that our current clients have become accustomed. Based on the current complexion of accounts we will add personnel, whether clerical or professional, with each new one hundred accounts signed.
Q: What is the biggest difference between you and other managers?
A: The primary difference at Mench Financial, Inc. is threefold. 1) We have designed a multiple category of investment portfolios for our clients, thereby showing our strength as a strategist rather than a single size or sector manager. 2) We have developed a leading ability to use the exchange traded funds as a major asset allocation tool to develop efficient portfolios for our clients. 3) We have proven to our investors and the investment community that our primary objective of 90% to 120% of the upside, but just as importantly, conserving assets during a volatile and negative market is our primary objective of as a manager. During 1999, 2000, 2001 and now into 2002 we have been able to demonstrate to both our clients and the investment community that through primary asset allocation changes, at distinct periods of time, we can substantially enhance the return of their portfolios.
Q: In closing, what final words would you like to leave to investors interested in your services?
A: At Mench Financial, Inc. our mission is to actively manage investment strategies to protect the assets of our clients and enhance those assets through capital appreciation and /or income generation. Our objective is to maximize portfolio value by generating high total returns in rising price markets and to preserve capital when stock and bond prices fall. Our goal is to provide more consistent performance over a market cycle.