Annual Report - manchester capital management, llc

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Manchester Capital Management, LLC
2014 ANNUAL REPORT
Measured Growth
www.mcmllc.com
CARING FOR OUR FAMILIES
FROM FOUR LOCATIONS
1993
2002
MANCHESTER, VERMONT
2012
2010
MONTECITO, CALIFORNIA
LOC AT ION S /OF F ICE S
NEW YORK, NEW YORK
CHARLOTTESVILLE, VIRGINIA
MONTECITO OFFICE
Manchester Capital Management is, and has been since its
inception, a Family Office dedicated to helping families sustain
their wealth, values, and legacy from generation to generation.
NEW YORK OFFICE
CHARLOTTESVILLE OFFICE
> Montecito, California
> 2013
SN A P SHOT
1157 Coast Village Rd, Suite A
Montecito, CA 93108
{Tel} 805.969.5670 • {Fax} 805.969.5680
> 2014
• Complex Households - 37
• Employees - 31
• Employees - 33
• Partners - 11
• Partners - 12
• Managed Assets - $2.5B
> New York, New York
410 Park Ave, Suite 1610 • NY, NY 10022
{Tel} 212.588.1120 • {Fax} 212.588.1124
> Charlottesville, Virginia
123 East Main St, Suite 1A
Charlottesville, VA 22902
{Tel} 434.260.8293 • {Fax} 434.465.6025
> Manchester, Vermont
3657 Main St. • Manchester, VT 05254
{Tel} 802.362.4410 • {Fax} 802.362.1377
MANCHESTER OFFICE
MCM Annual Report > 37
CONTENTS
3
S
TATE OF THE COMPANY
4
L
OOKING BACK AND FORWARD
7
INVESTMENT COMMITTEE CHAIRMANSHIP
8
A
VOIDING THE PITFALLS OF A LEGACY PROPERTY
10 F
AMILY MEETINGS
13 A
LIGNING INVESTMENTS TO FAMILY VALUES
15 R
EAL ESTATE: CREATING VALUE ACROSS MARKET CYCLES
18 THINGS ARE SELDOM WHAT THEY SEEM
22 INVESTING IN THE U.S. ENERGY REVOLUTION
26 FINDING MCM’S INVESTMENT MANAGERS
28 F
AMILY TRUSTEE
31 A
NNUAL OPERATIONS AND ADMINISTRATION UPDATE
32 S
ITUS MATTERS
34 W
ELLNESS IN OUR WORKPLACE FAMILY
TED CRONIN, CEO
2 > MCM Annual Report
TO OUR CL IEN T S A ND F RIEND S OF T HE F IRM
My granddaughter, who is 3 ½ years old, had her first
overnight stay with her grandparents last week. It was
wonderful fun. Through the evening I noticed how many
new words she had in her vocabulary. I realized how fast she
is growing up, and how, perhaps more than anything else,
young children help us realize how much change occurs in the
course of a single year. It reminded me how much Manchester
Capital changed in 2014.
Manchester Capital turned 21 this past year, and we have
grown in a measured way in almost every area. We added
new clients, more assets under management, new employees,
a new member of our Board of Advisors, a new operational
software platform, new organizational processes, new
investment managers on our platform, new initiatives in
impact investing, new programs in our family office services,
and a multitude of smaller, incremental improvements that
feel both comfortable and exhilarating. Other articles in this
Annual Report will detail many of these developments.
We’re still Manchester Capital, with the same values,
culture, and mission focused first and foremost on you,
our clients. We’re just an improved version—a 2.0 MCM
that offers the promise to serve you better with expanded
capabilities and skills. We welcome the growth and deeply
appreciate the favorable referrals from existing clients that
have led to important new clients. We are pleased to see the
increase in assets under management enabled by sound
investment practices. We recognize the importance of
growth in our efforts to create a stable firm where talented,
caring professionals are fairly rewarded for their hard work.
We want a firm that provides a home where professionals
have the ability to grow and advance in their career, taking
on new responsibilities and challenges.
Yet we don’t want to grow so fast it is disruptive. We
consider closing the doors to new business whenever we
feel our capacity to serve additional clients is insufficient.
We have always resisted, for example, the siren song of
accelerated growth through the acquisition of other firms
and their revenues. We have seen the sad outcome of those
firms that pursued growth for growth’s sake. Invariably,
such firms discover that their acquisitions falter when
clients and employees flee a culture of avarice based on
prioritizing profits.
Several notable developments occurred at Manchester
Capital in 2014. First was the addition of two senior
professionals whose arrival materially deepened our
leadership bench. Daniel Goldstein comes to us after serving
a wealthy Italian family for the past 15 years, and Michael
Warszawski joins us after holding several executive positions
with European banks. We have also formed an Executive
Team, comprised of myself and other senior employees, to
discuss strategic matters that face the company.
We have also benefited from the addition of a new board
member, Laurie Thomsen, who brings her significant
venture capital and philanthropic experience to our
board deliberations. The board provides invaluable
independent guidance that challenges and encourages
all us to remain true to our mission of helping families
care for their legacy, their culture, and their wealth
from one generation to the next.
We continue to work towards creating a sustainable
business that is committed to providing high quality,
independent service and advice to our clients in perpetuity.
We recognize that financial profitability is compatible
with offering our employees an empowering working
environment, assisting our client families pass on their
values, and maintaining the integrity of the financial
markets. For example, Greg Dienna actively teaches
ethics to students in the US and in Europe, and Michael
Warszawski plays a leadership role in defining best
practices and educating the investing public with respect
to fiduciary standards. There are many such examples
here at Manchester Capital.
The many changes in 2014 bode well for 2015. We were
very pleased to again be rated as one of the best investment
advisories in the country (number 15 of Barron’s top 100).
While Manchester Capital evolves and grows, we will be
constant in our commitment to you. We deeply appreciate the
opportunity to serve you, and are dedicated to your interests
first and foremost.
Very best,
Ted Cronin, CEO
LOOKING BACK AND FORWARD
Two thousand fourteen was notable for several major
events that will reverberate into 2015 and that could
have impacts on the financial markets and the global
economy. These include:
Cyber-attacks
Last year witnessed prominent cyber-attacks designed
to influence corporate or political behavior rather than
simply designed for financial gain or egotistical mischief.
Everyone is familiar with the stealing of credit card data
from Target stores and the hackers’ invasion of JP Morgan’s
client data for the purpose of personal profit. But the
events surrounding the attacks by North Korean hackers
unhappy with a movie based on a comedic assassination
of their leader, Kim Jong-un, represent a new frontier of
cyber-attacks for political purpose.
Certainly government hackers from every country
have tried to pry secrets out of other governments and
corporations to spy on activities and steal business secrets.
Government-sponsored hackers working to impact political
opinion is different. Will 2015 see Shiite hackers attack
General Electric to influence its sale of jet engines to Sunni
governments? Will environmental organizations attempt to
disrupt Chilean coal mining companies selling their coal
to China? The vulnerability of Internet firewalls is being
exposed and is prompting those with a particular agenda to
pursue use of the Internet. Hackers have learned to bypass
firewalls by attacking employees’ personal mail that opens a
hole into the data core. Undoubtedly, 2015 will witness more
activity than ever.
Oil prices
We are still searching for a swami or fortune-teller
who correctly predicted the dramatic fall in the price
of oil last quarter. This once again affirms the limits of
financial professionals’ predictive ability—the people who
are supposed to know it all. Lower oil prices will have an
impact on the rate of inflation (decrease) and likely global
growth (increase). It will dramatically change the political
and economic balance of power, favoring the consumers of
fossil fuels and hurting the producers of fossil fuels.
Oil prices are falling due mostly to a surplus of supply
from shale and anticipated global demand that hasn’t
materialized. China, which had been a major energy
consumer, has a slowing economy with decreasing
demand. Some countries might be driven to the brink of
disaster, such as Venezuela, which has used the addition of
oil revenues to feed a bloated bureaucracy. Other countries,
such as Russia, will likely face a recession and potential
political upheaval.
Some companies, such as smaller shale and tar sand
producers and a multitude of infrastructure companies,
are at the edge of profitability. If leveraged, they could
close operations or be forced to sell assets. Expect 2015
to witness an increase of mergers and acquisitions as
the strong companies gobble up the weaker players. We
should also see a bottoming of energy prices as selling and
liquidations moderate, and the market finds a new balance
between global demand and global supply.
Ruble collapse
The Russian invasion of Crimea and Ukraine has
prompted devastating sanctions on banking and trading
relationships with the West. Along with a decline in oil
revenues, Russia is facing a full-blown economic crisis that
could result in defaults and even a loss of its investmentgrade credit rating. Real income is certain to decline by as
much as 5%, and a serious recession seems unavoidable.
Some are predicting a decline of as much as 5% in GDP. The
impact on the ruble has been shocking, with a loss of almost
50% of its value in 2014. Imagine the pension assets of the
elderly now facing a very bleak future.
While Russian citizens have already suffered, 2015 will
see the spread of its currency problems to its neighbors and
beyond. This will resemble 1998, when Russia defaulted and
AMY MACLEOD, WEALTH MANAGER, AND TED CRONIN, CEO, MEETING WITH A CLIENT
Asia suffered. Russia’s neighbors have significant trade
with Russia, and the weakness of the ruble undermines
the efforts to create a Eurasian Economic Union. Belarus
has initiated a 50% tax on its citizens trying to buy foreign
currency. The political calculus created by the ruble’s
problems spreads as far as Cuba, which has been a beneficiary
of significant Russian support. Cuba has begun to turn its
focus toward the West in accepting the overtures of the U.S.
to host an embassy. A milder Russian foreign policy might
take the pressure off the threats to the Ukraine, Moldova,
Georgia, and other neighbors in 2015.
Financial Markets
U.S. corporate earnings have continued to prompt record
highs in the stock market but have created new problems
for the Federal Reserve, which announced a decision to
be patient in raising interest rates. The excessively low
rates have soothed the fears of investors since the Great
Recession, but they could be artificially supporting
U.S. stock prices. A fully functioning U.S. economy with
moderate inflation is accustomed to rates of around 3.75%.
In the past, the Fed would raise rates by ¼% following a
typical recovery from recessions. The Fed predicts (hopes?)
that we’ll see GDP growth of 2.8%, but that is unlikely if
inflation continues to be so weak.
Expect 2015 to be another year of little inflation, low
commodity prices, and moderate global growth. The
relatively strong U.S. GDP growth has resulted in a strong
dollar as foreign investors chase U.S. assets, including
everything from penthouse apartments in New York to
Treasury bills and U.S. stocks. News out of Europe continues
to be negative, with even the once-invincible Germany
showing signs of possible recession after championing a
policy of fiscal tightening rather than monetary stimulus.
The European Union continues to struggle with how
it might pursue quantitative easing as it watches the
growing threat of deflation and the plague of excess
sovereign debt. There will eventually be a rebound
in European economic growth, but the early promise
of 2014 proved ephemeral and a return to substantial
growth is unlikely in 2015. Even the stimulus of low oil
prices is unlikely to be enough to propel growth back to
normalized rates. Expect the U.S. to continue to be the
global leader in 2015.
“Boing!” by Susan Read Cronin
Republican landslide
The political climate in America shifted dramatically
in 2014 as the Republicans increased their majority in the
House, won a majority in the Senate, and expanded the
number of Republican governors. President Obama and the
Democrats suffered a perfect storm as everything seemed to
be going wrong just as the election neared. Scandals in the
IRS, Treasury department, and Veterans Administration,
combined with the evolution of ISIS, discord over the
Affordable Care Act, and financial decay among the middle
class, made for a difficult second-term election season for
the Democrats.
Two thousand fifteen greets a new Congress and the
potential, if not the promise, that both parties can work
together in ways not possible to date. The hope of more
functional governance lies in each party restraining its
more extreme wings with their deep-seated convictions.
The parties need to agree to disagree where their
philosophies clash, and agree to agree on matters small
and large that benefit the country. Two thousand fifteen
should see progress on addressing several major issues,
including immigration, the terrorist war in Syria and
Iraq, and the upheaval in Russia.
INVESTMENT COMMITTEE
CHAIRMANSHIP
MORGAN ROBERTS, WEALTH MANAGER AND CHAIRMAN OF THE INVESTMENT COMMITTEE
Manchester Capital’s investment process is not the
product of a single guru dictating what to buy or sell
and when. Rather, our process takes advantage of the
collective intelligence of the 10 members of the Investment
Committee, which includes all of our wealth managers
and managing directors and our director of research.
Together, committee members contribute ideas, debate
issues, examine opportunities, and determine the best
way to negotiate the changing financial and economic
conditions. Ted Cronin has led these weekly meetings in
the past, serving as a chairman to referee the discussions
and ensure that everyone’s voice is heard and respected.
Given the demands on his time, Ted felt it was wise for him
to pass the responsibility on to another tenured member of
the committee, and the committee recently voted to appoint
Morgan Roberts to fulfill the role. Morgan has been with
the firm for over 17 years and has been a member of the
Investment Committee since 1999. Morgan is particularly
well suited for such a responsibility as he was instrumental
in helping create the original committee constitution and
bylaws. He helps draft the weekly agenda whereby every
quarter the committee addresses its major responsibilities,
from reviewing manager performance to analyzing each
client’s portfolio returns relative to benchmarks, and
holding free-ranging discussions of investment issues.
He also sits on all three subcommittees: the Tactical
Allocation Subcommittee, the ESG & Impact Investment
Subcommittee, and the 401(k) Oversight Subcommittee.
Most importantly, Morgan is one of Manchester’s wisest
and most experienced investors, with a discipline born from
years of managing client portfolios through bull and bear
markets and negotiating both the bubbles of optimism and
the angst of negativity. He has regularly filled in for Ted in
the past, and he has demonstrated the necessary skill of
managing the meeting while allowing an open debate that
draws on the best thinking of the entire group. Ted Cronin
will still be attending and contributing to all Investment
Committee meetings, and he looks forward to supporting
Morgan in guiding the committee’s discussions and debates
so the group can continue to best care for clients’ assets.
AVOIDING THE PITFALLS
OF A LEGACY PROPERT Y
One of the trickier areas to navigate, when working with
wealthy families, is the topic of legacy properties. Parents
frequently want to pass the cherished summer home,
lakeside cottage, ski chalet, or beachfront retreat to their
children and grandchildren. And why not? The property
teems with fond memories of love, laughter, children,
family, and years of good times. But passing on a legacy
property is not a simple task, and occasionally, what
began with good intentions ends in strife that can rend
siblings apart.
In passing on a legacy property, there are questions to be
considered and pitfalls to be avoided in order to have the
best chance for success, defined as gifting a property for
the use and enjoyment of future generations. The parents
typically wish that the property will come to mean as much
to their heirs as it did to them. To examine the issues,
let’s create a hypothetical family . . . say the Penobscotts,
whose summer home on Long Island has been the family
gathering point every Fourth of July for as long as the three
children—Lilly, Mitt, and Wesley—can remember. The
parents, Grace and Winston, have finally come around to
doing their estate plan and would like to leave the summer
home to their beloved children.
Before addressing many of the critical issues, the
Penobscotts are advised to create some physical memento
of the property’s history—how they came to own it, what
they have done to it over the years, and what it has meant
to them. Whether they include photographs, or simply
write it down in letter form, that history and the values it
embodies should be as much a part of what is passed on as
the property itself. We recommend recording the memento
in digital form so that each and every heir can receive a
copy, or storing it online where all the heirs can access it
and it can be added to annually.
Turning to the more formal issues, the first question
posed to the Penobscotts by their estate attorney is do the
children want the house? While on first blush the answer
would seem to be an obvious yes—the beautiful location,
the wonderful memories, the sense of history—life has
caused the children to scatter. Lilly lives in California,
and though in love with Pepperdine and the West Coast,
still comes to Long Island every summer. Mitt has been
bitten by the travel bug, and is working his way around
Australia. Wesley recently completed medical school, has
started a family of his own, and rarely seems to have time
for anything. In a moment of honesty, Grace and Winston
admit they aren’t sure the children, aside from Lilly, will
be interested in coming back to Long Island every summer.
Will the home be a gift, or a burden? the estate attorney
asks. Annual maintenance and upkeep, plus property
taxes, may be too much for recent college graduates, or
young families, to bear, particularly for a place they only
occasionally, or rarely, visit anymore. It may be that Grace
and Winston hand their children a cherished property
only to have it sold immediately and the spoils divided.
Instead of a treasured legacy property, the children may
see a tax and maintenance liability they can turn into a
one-time pile of cash. And although Grace and Winston
believe they will leave each of their children sufficient
inheritance to support the property, there is no guarantee
that even one, let alone all three, will want to use inherited
funds to keep up the legacy home. Imagine, suggests the
attorney, that Lilly visits frequently, or even moves in.
Does Mitt, living in India, want to keep paying to support
his sister in a home he no longer visits? Does Wesley, who
wants to send his children to private school?
The attorney advises that if the couple wants the
property to be a gift, they should consider creating an
endowment sufficient to cover the annual expenses of the
property. In this way no one is burdened and the home
stays available for all to use. This plan requires additional
assets, but can alleviate any financial drag on the heirs.
The next challenge, says the attorney, is do you want
ownership to be monetizable? Suppose Wesley wants to
open a private medical practice and needs capital. He
wants to sell his third of the Long Island home, but Lilly
and Mitt can’t afford to buy him out. Moreover, neither one
wants to. Thanks to the endowment, the house doesn’t cost
them anything and they enjoy using it. Can Wesley force
a sale, or does the decision to sell have to be unanimous?
Frequently, even with wealthy families, as children pursue
their own interests, they end up in different financial
circumstances, and just as frequently at least one will want
to cash out ownership of an asset like a family property.
Divided interests and an unwillingness to work together
can strain even close relationships.
MCM recently assisted with a property where ownership
was, for all practical purposes, not monetizable. If heirs
didn’t want to use it, they didn’t have to, but their ownership
interest could not be sold, only forfeited or passed to
successive generations. This eliminated the possibility of
tension between family members who wanted to cash out
and those who didn’t.
Finally, the attorney advises Grace and Winston,
consider a sunset provision, whether at the end of your
children’s generation, or your grandchildren’s. Consider
terminating the gift. Allow your heirs the first right to
purchase the property individually or collectively, and
if individual heirs want to cash out, allow them to do so
at a discount. In this way, their choice becomes: receive
some money and give up the home, or continue to use the
property with no real monetary benefit. Providing some
funds, but not a full, equal share of the value, allows those
who choose to retain the property the bulk of the assets to
continue supporting it.
With legacy properties, there are no simple solutions,
but many of the pitfalls are readily identifiable, and
structures intended to avoid them can be created. In all
cases, we advise clients to preserve the history, the legacy,
and the values in some form to let future generations
know the true measure of the gift they are receiving. As
our fictional family the Penobscotts know, the wealth
is in the intangibles—the memories, the values, and the
possibilities—not the money.
JACQUELINE RODRIGUEZ, GREG DIENNA, AND MARI NUNEZ IN OUR NYC OFFICE
FAMILY MEETINGS
One of Manchester Capital’s advisors tells us that at
roughly 6:15 pm each day a family meeting takes place
in his home. There is no agenda, no moderator, and none
of the formalities that come with a traditional meeting.
The only rule is that the entire family sits together for
about 30 minutes and talks about their day over dinner.
All other rules of the family meeting have to be quite
flexible, as 30 minutes is forever to a 3-year-old, not to
mention the disruptions that come from the occasional
broccoli projectile lobbed from the 1-year-old’s highchair.
The conversation is often taken off track by the 5-year-old
telling a joke without a punchline, which somehow makes
the joke even funnier, and the family rarely covers more
than 20 minutes of what actually happened during the
day. In the end, though, they all step away from the table
knowing a little bit more about each other, which perhaps
makes this a rough model for an effective larger, more
formal, family meeting.
As a steward of family wealth, Manchester Capital is
frequently asked to get the ball rolling for family meetings—
tasked to help with structure, agenda, and implementation.
We know firsthand that establishing and carrying out a
family meeting can be a daunting task. Many decisions
must be made—where to hold the meeting, when to hold it,
who to invite, what to discuss, and most importantly, why
to hold one in the first place. Unwillingness, or inability,
to face these decisions frequently leads to avoiding them,
and a family meeting never happens.
Since every family meeting, like every family, has
its own character, we cannot claim to have developed a
magic formula for a successful family meeting. However,
over the years we have experienced what has worked
and what hasn’t. Successful family meetings tend to
share certain characteristics—flexibility, education and
entertainment, openness, and above all, a focus on family.
Make It Happen: Who, When, and Where
The decision to get together with family members and
talk is not an easy one, and it is only made more difficult
by the frequently sensitive nature of the important
topics—retirement, wealth, death, and legacy. Once the
decision has been made to have a meeting, we find it
best to communicate to the invited family members the
time, the place, and most of all, the importance of their
presence. This task can be relatively easy for parents and
their children, but much more challenging when trying
to wrangle multiple generations and larger numbers of
attendees. Once the decision is made regarding the who,
when, and where, it is time to think about what should
be accomplished.
Focus On Why You Are There
There can be many reasons for a family meeting.
Frequently the most important reason of all is simply
to get distant and disparate family members together.
The creation and presentation of a family tree can be an
excellent start. A tree visually establishes connections
among all attendees and allows younger generations to
see their roots. At a recent family gathering we organized,
the event began with several family members treating
everyone to a family history complete with photographs,
stories, quotes, a timeline of significant events, and a
family tree. The slides brought everyone together, more
stories were told, and what began as a presentation turned
into a conversation of shared history.
Tell Stories
(and do not be afraid to poke sacred cows)
The progression from a family tree to stories about the
exploits of ancestors can help set the stage and tone for the
meeting. It is easy to tell the success story of generations
past that helped to create the family legacy you share today.
What can be overlooked, but is often equally important, is
sharing the stories of how the wealth creators may have
led early ventures that never materialized before one
took hold and became wildly successful. Frequently the
BRIAN VOGEL, WEALTH MANAGER, WITH OTHER VERMONT OFFICE EMPLOYEES
first-generation wealth creators are seen as infallible
because of their tremendous success; by discussing their
misadventures, families can increase awareness that they
were, or are, human. Talking about what went wrong along
with what went right can help a family realize that taking
risks, and even failing, is perfectly acceptable, and even
encouraged. The important part is what is learned and
how individuals move forward.
Try Something Different
Communicating family values is a critical element of
most family meetings. The method to achieve this varies
widely. Some families prefer to write open letters to the
generations that follow that lay out what is important
to them and what they hope to pass on—not just dollars,
but values. Other families can openly discuss values
in an informal conversation. We have found that often
something unexpected can start this conversation in
ways that get family members to open up about both their
individual and family values. One family meeting involved
a breakout session with life legacy cards that prompted
family members to share the values and experiences that
were important to them with family members they weren’t
necessarily close to. This particular family broke up into
small groups of six to seven people of mixed branches and
generations. Each individual selected a life legacy card and
responded to its question out loud to the table. Imagine
sitting along with your sister, father, college-age nephew,
two cousins, and aunt as they take turns sharing a memory
about a person who had an impact on them, talking about
an experience they hope everyone gets to have, or speaking
about how they want to be remembered. The stories were
emotionally moving, allowed people to share things about
themselves, and let them see each other with new insight.
The session could have lasted for hours. It was the most
well-received segment of a daylong gathering, and, as with
our colleague’s nightly dinners, everyone walked away
knowing a little bit more about their family members.
A discussion about family wealth is frequently an
important “why” of a family meeting and is an area
we are often brought in to lead. Sometimes the topic is
educational, sometimes process-oriented (how does the
estate plan function?). The question we ask ourselves
is, how do we engage and inform all family members?
We strive for methods to start a conversation and then
figure out how to get everyone involved. In one meeting
we discussed trusts—from their historical origination
to the various types of trusts used today. We then had
family members role-play using the positions of trustees
and beneficiaries. We included several lightly scripted
scenarios, which the family members used as launching
pads. The improvisational skill of the family members was
brilliant and the comic relief very welcome.
Take Lots of Breaks and
Let the Meeting Flow
As is the case with most meetings, a family meeting will
morph throughout a day as it becomes apparent what works
and what doesn’t. Frequent breaks throughout the meeting
AMY MACLEOD, WEALTH MANAGER
give everyone a chance to think about the discussions and
how they relate to each individual. With larger groups,
breaks allow individual members the opportunity to ask
specific questions of presenters one-on-one.
It All Starts with the First Meeting
Family meetings are great venues for sharing stories
(preserving family history), learning more about family
values, discussing intergenerational wealth and wealth
transfer, and laying the foundation for the family’s future.
The first meeting is often the most difficult and initially
awkward; however, it can be the most beneficial. We
encourage families to make meetings part of their family
culture and are happy to help begin the process.
ALIGNING INVESTMENTS
TO FAMILY VALUES
We have seen increasing interest from families who
would like to align their investment strategies with
their family values to be more coherent in their use and
deployment of financial wealth. There are many names
and acronyms that are used to label some of these
perspectives and methodologies. Socially responsible
investing (SRI), environmental, social, and governance
(ESG) metrics, and impact investing are just some of the
many terms used. What is the meaning behind these
terms and how can it be applied?
Take a simple example of a family that directs its
charitable giving toward research to eradicate cancer,
yet holds stock in tobacco companies. There is clearly
a misalignment between the investment strategy and
the values of the family. Earliest SRI technique involved
applying a negative screen to filter out securities that
would cause such a misalignment. The screening is
subjective and depends on the beliefs of every family, or
individual. What one family or individual believes should
be ethically screened out of a portfolio may differ greatly
from the beliefs of the next.
ESG metrics expanded the investment process to
incorporate more sophisticated variables into the
individual security evaluation process. Company
governance and hiring protocols, carbon footprint and
particulate release, supply chain controls for child labor,
and many other factors are looked at to come up with a
company scorecard that is used in deciding whether or
not to invest in the equity or debt issued by that company.
In the case of our example, a metric might be analyzed to
evaluate the waste product stream of companies to be sure
that carcinogens are not being released.
Another tactical approach to aligning investments
to family values is called shareholder engagement. An
investment might be purposely made in a company that
is known to not have alignment with the family’s values
so that the management of the company is then engaged
at the shareholder level to effect change from within.
An example might be to invest in an industrial company
that is not utilizing the latest technology to eliminate
particulate emissions. The management would then be
brought under pressure from shareholder engagement to
invest in the technology needed to improve emissions.
Impact investing is a term that is so widely used that
it can apply to many types of investing along a spectrum
of above-market returns to philanthropic infrastructure
building. Rather than relying on labels, it is more
meaningful to understand the substance of the underlying
objectives, investments, and outcomes. Manchester
Capital has been actively involved in impact investing
activities across the spectrum for many years.
At this point, Manchester Capital has evaluated well over
a 100 investment opportunities and invested in nearly 50
ESG/SRI/impact investments that are currently carried on
our platform. These include investments in: U.S. large-,
mid-, and small-cap equities; fixed income; mutual funds
and ETFs; LPs; community banks; and a wide variety of
investments in renewable energies, supporting economic
enterprise in indigenous communities, organic agriculture,
and much more. Manchester Capital’s commitment goes
beyond financial investments to include sustainable
investment strategies through real estate innovation. Two
properties managed by Manchester Capital have achieved
Leadership in Energy and Environmental Design (LEED)
certification. We have also worked with clients to attain
sustainable timber harvests, conservation easements,
and other sustainable land management programs. To
support our continued commitment to these investments,
a subcommittee of the Investment Committee was
convened calling together a number of wealth advisors
and investment associates to research, evaluate, and
recommend sustainable and impact investments.
Not all of Manchester Capital’s activity is directed just to
market rate and above sustainable financial investments
and real estate. Manchester Capital supports several family
foundations in looking at sustainable social business
plans that might return only the capital invested and in
making connections for more efficiently structuring their
grant making. Further updates will be given in upcoming
newsletters and on the Manchester Capital website, or
please contact us to learn more.
JEFF HALL, SENIOR MANAGING DIRECTOR
REAL ESTATE: CREATING VALUE
ACROSS MARKET CYCLES
Manchester Capital’s real estate clients benefited
from continued strength in the commercial real estate
markets during 2014. As an indicator, U.S. REIT
sector performance was up 32.0% in 2014, leading all
sectors, as reported by Morningstar Direct, including
more than doubling the result of the runner-up.
The office sector was particularly strong in our directly
managed client real estate portfolios, as occupancy rates
soared above 90%. Property valuations, like the REIT
market, increased as well. In San Francisco, valuations
breached pre-recession levels owing to growth in
technology investment, suburban flight to urban centers,
and continued downward pressure on capitalization
rates. Clients also benefited from similar trends in other
markets such as Seattle, Denver, and Portland.
In our view, this is clearly a “seller’s market” as exuberance
abounds, fueled by low interest rates, positive capital flows,
and positive employment growth. In 2014, institutional
buyers presented our clients with a number of unsolicited
offers to acquire their properties at substantial gains. But for
our clients, the answer to these sell proposals was an emphatic
“no” as their properties in many cases have transformed from
mere investments into family legacy assets.
investment strategy, and how is it relevant in various
stages of the real estate investment cycle? In early 2009,
Manchester acquired the Spalding Building in Portland,
Oregon, on behalf of a client. The building was physically
tired and suffered from below-market occupancy and lease
rates, compounded by recessionary economic conditions.
When it opened in 1911, the building enjoyed iconic
status as it was designed by Cass Gilbert, who went on to
design the Woolworth Building in New York and the U.S.
Supreme Court Building. This architectural gem and
onetime market leader entered the third millennium as a
price-cutting follower. This was a property sorely in need
of a “value add” strategy.
Our team quickly recognized the building’s strong
design roots and the absence in the market of a highquality historic office building that would appeal to a
broad range of office tenants. The strategy was to make
economically sensible investments in the building and
What is a legacy asset and how is it created? We believe
that a strategy of investing in the most vibrant submarkets
in this country’s international gateway cities, and our
clients’ patience and willingness to invest in “value add”
investment strategies, is a formula for creating long-term
legacy assets. Properties that make the transformation
into legacy assets are often earmarked to be handed
down to the next generation. This transformation is one
of the most rewarding aspects of being a member of the
Manchester Capital real estate team, and we are grateful
for the opportunity our clients grant us to accumulate real
estate portfolios on their behalf.
What do we mean when we speak of a “value add”
REAL ESTATE TEAM: JEREMY HEIDRICK, CORBIN RICH,
BART KRAFT, AND JEFF HALL
achieve higher occupancy and market-leading lease rates.
We focused the effort on the high-traffic public areas of the
building, such as the exterior entry, the lobby, and tenant
floor hallways. Today, the Spalding Building is considered
a leader in the historic downtown Portland office market,
achieving some of the highest lease rates and occupancy
within its submarket, and it has attained legacy status with
our client.
Spalding Lobby, Building at Time of Acquisition
As we entered 2014, we viewed the coming year with some
trepidation as low interest rates continued to push real
estate values higher, much different conditions than those
faced when the Spalding Building was acquired in 2009.
However, during the year we acquired five buildings in
three different markets with total purchase prices of $43.4
million. Again, we were able to successfully formulate “value
add” strategies to potentially enhance value beyond current
market pricing for those assets. Briefly, the strategies
employed are as follows:
1. 80,000-Square-Foot Office Building in Central
Virginia—Physically distressed Class A office
building acquired in submarket with only 1%
vacancy. Convinced current tenant occupying 59%
of building to cover majority of upgrades to office space
while still paying market rents.
Spalding Building, New Lobby
ON SITE: CORBIN RICH AND JEREMY HEIDRICK
2. Three-Building Portfolio in Portland, Oregon—
Acquired Class B historic office buildings in central
business district from bank that owned it through
foreclosure. Enabled our client, who owns the Spalding
Building, to control substantial portion of Class B
historic buildings, a total of 207,500 square feet,
in the sub-market. Since acquisition, have increased
occupancy from 72% to over 90%.
3. 88,000-Square-Foot Office/Restaurant Building in
Seattle, Washington—Building directly competed with
client-owned building located next door and by offering
lower lease rates than client’s building. By acquiring
this asset, we estimate that we have been able to
raise lease rates by an average of 15% between the two
buildings. The building is located in a sub-market
of downtown Seattle showing promising change and
optimism.
We look forward to continuing our value-enhancing
strategies on behalf of our clients in 2015.
THE SPALDING BUILDING, DOWNTOWN PORTLAND, OREGON
THINGS ARE SELDOM
WHAT THEY SEEM, SKIM MILK
MASQUERADES AS CREAM
REGUL ATOR Y CH A NGE S G O V ERNING T HE DEL I V ER Y OF IN V E S T MEN T
A D V ICE W IL L M A K E I T H A RDER TO K NO W W HO IS ON YOUR SIDE .
Congress has done it again! The 848-page-long “Wall
Street Reform and Consumer Protection Act” of 2010
charges the SEC with making matters that should be
simple ever more complex; as a consequence of this
legislation, it will soon be more difficult for the public to
distinguish investment advisors who are trying to sell
them something from those who place their interests first.
On the surface, the Washington word-splitters aspire
JAMES BISHOP, BART KRAFT, AND ROBYN HARRINGTON
to the honorable intention of applying a stringent
“Uniform Fiduciary Standard” to all delivery of financial
advice, currently bifurcated between a strong “Fiduciary
Standard” that applies to Registered Investment Advisers
(RIAs), such as Manchester Capital Management, and
a substantially weaker “Suitability Standard” that
applies to brokers and dealers. Registered Investment
Advisers are required by the SEC to be fiduciaries, which
means they must always do that which is in the very
INVE STMENT ADVISOR:
BROKER/DEALER:
An investment advisor is a fiduciary
Broker/dealers that do business
whose duty is to serve the best
with the public are generally not
interests of its clients, including an
subject to a fiduciary duty under the
obligation not to subordinate clients’
federal securities laws, [although]
interests to its own. Included in the
courts have found broker/dealers to
fiduciary standard are the duties of
have a fiduciary duty under certain
loyalty and care. An advisor that has
circumstances. The federal securities
a material conflict of interest must
laws and rules and SRO rules address
either eliminate that conflict or fully
broker/dealer conflicts in one of three
disclose to its clients all material
ways: express prohibition; mitigation;
facts relating to the conflict.
or disclosure.
best interest of the client, even if it is not as lucrative as
other recommendations. Broker/dealers may offer clients
investments that are merely suitable, and they can choose
those that might pay them extra fees or commissions.
Although broker/dealers cannot recommend risky penny
stocks to elderly couples living off their retirement money,
they are at liberty to offer a similar mutual fund over
another, selecting the one that has higher expenses and
pays them a distribution fee.
As the SEC’s rule-making progresses, the likely outcome
from Washington is that the fiduciary standard will
remain in full force for RIAs, will be partially extended
to include brokers/dealers, but will cover only a subset
of broker/dealer activities. This is perhaps the “worst of
both worlds” for investors, as it will provide broker/dealers
with the appearance of observing a fiduciary standard
that, in fact, will not be applicable at all times in their
client interactions.
Two fundamentally different business models exist in
the financial services industry. The “sell side” consists of
broker/dealers who are “product specialists,” engaged in
creating, packaging, and distributing financial products
on behalf of issuers. The “buy side,” for the purpose of
this article, consists of Registered Independent Advisers,
like Manchester, that have expertise in client service,
financial markets, and products, but receive no sales and
distribution incentives from the “sell side” or from their
product issuers. Both the “sell side” and the “buy side” have
vital roles to play in ensuring that, on the one hand, firms
and institutions wishing to raise capital are successful
and that, on the other hand, investors wishing to build
appropriate investment portfolios are well advised. The
MARI NUNEZ, INVESTMENT ASSOCIATE
confusion arises from the fact that, under current and
prospective regulation, both sides are allowed to present
themselves to the public as “advisors.”
An analogy from the food industry helps to illustrate
the roles, dynamics, and potential conflicts at work.
Suppose that you set out on a mission to create an optimal
meal plan for your family. Two distinct approaches are
possible. You might speak directly with a “sell side” food
provider such as a butcher, baker, or supermarket. Or you
might speak with a “buy side” personal health specialist
such as a registered dietitian. The food providers, after
hearing your objectives, offer tasty menus and almost
instant execution based on products available in their
inventory. The registered dietitian takes a little longer
and probes further, addressing not only your family’s
objectives and tastes, but also your health requirements.
The RD then recommends an equally tasty, but more
diversified and balanced, menu based on a broad range
of products available in the market. He or she may also
assist you in purchasing high-quality, low-cost versions of
these products from a variety of sources. The difference
in approach stems not only from their background and
expertise, but also from their financial incentives. Profits
earned by food specialists are not clear to consumers and
may lead them to stock or to highlight products that are
expensive or unhealthy. In contrast, registered dietitians
are paid a transparent fee for assisting your family in
planning and purchasing a balanced menu of high-quality
foods at the best possible prices.
In the financial services industry, roles and conflicts are
less clear than in the food industry. While pure advisers,
such as Manchester Capital, are rare, pure product
providers are even rarer as most broker/dealers have
embraced “hybrid models” by adding advisory activities
and ostensibly “managing” the conflicts implicit in
earning revenues from both product distribution and
client advisory businesses. As a result, most professionals
on the “sell side” have co-opted names and titles from the
“buy side.” “Brokers” call themselves “financial advisors,”
“wealth managers,” and, more recently, “family offices”!
This is the equivalent of a baker or butcher calling herself
a registered dietitian. The investors can easily be misled
about who is on their side, helping them to find the best
investments at the best price, versus who is trying to sell
them something that has hidden fees, commissions, or
lackluster performance.
Irrespective of proposed regulatory changes, Manchester
Capital always has been and always will be a fiduciary
on behalf of our clients, placing their interests first at all
times. We ensure this approach in perpetuity by hiring
staff who are not only competent but also caring; we
accept no income from product providers or any source
other than completely transparent client advisory fees;
our balanced approach to setting goals and remuneration
encourages teamwork in the service of our clients; and
each tactical or strategic decision we make as a firm
is judged based on its potential to add value to our
client families.
As a, possibly unintended, consequence of the “Consumer
Protection Act,” investors must heighten their vigilance.
Until today, firms such as Manchester Capital that observe
full-time fiduciary standards were the primary refuge of
investors seeking unbiased professional guidance. Going
forward, the “Uniform Fiduciary Standard” is likely to
create the appearance of fiduciary practices in firms that
are not committed to placing their client’s best interests
first at all times. Gilbert and Sullivan were prescient when
they wrote in HMS Pinafore in 1878, “Things are seldom
what they seem, skim milk masquerades as cream!”
INVESTING IN THE
U.S. ENERGY REVOLUTION
The U.S. is undergoing a dramatic change in every
area of its energy production that promises to create a
less expensive, cleaner future for all of us. The National
Renewable Energy Laboratory recently concluded that
renewable energy technologies in that are currently
available today combination with a more flexible electric
grid could supply 80% of the U.S. electricity demand by the
year 2050.
Firms such as Sempra Energy are leading the future of
sustainable energy sources, which wait for improvements
in battery storage and two-way power grids to provide a
greater share of our energy needs. While our government,
our utilities, and the investing public are rethinking
how to support the growth of clean energy, there are new
technologies that promise improvements in the traditional
carbon energy sources.
Indeed, there are significant developments toward
cleaner forms of carbon-sourced energy. The International
Energy Agency recently noted that the U.S. is now the
largest producer of oil and gas in the world, surpassing
Russia and Saudi Arabia (Bloomberg, July 4, 2014).
We believe that the energy revolution will fundamentally
change our economy for the better and will create benefits
and opportunities that we aren’t yet aware of. Investors
face the question of how to best take advantage of the
increase in domestic energy supply.
There are several distinct sectors within the carbon
energy industry, each of which benefits in some way from
increased U.S. production: large integrated companies;
companies that specialize in niche equipment or services
for the industry; companies that own oil and gas reserves;
refiners that process crude oil into fuels and other
products; and “mid-stream” companies that gather,
process, store, and transport oil and natural gas.
After careful consideration, the Investment Committee
believes the midstream companies offer the best
opportunities at this time. The midstream business
model is to be the “toll-taker” for oil and gas that flows
through their pipelines. In many cases, the drillers lock
in long-term contracts that include a price adjustment
for inflation over time, so the midstream companies
effectively lock in highly visible revenue and have limited
exposure to volatile commodity prices.
Most midstream companies are organized as master
limited partnerships (MLPs), which have some unique
characteristics.
•T
hey are publicly traded limited partnerships that are
exempt from corporate-level taxes.
•T
hey are obligated by the terms of their partnership
agreement to distribute most of their available cash,
typically 80% or more (MLPData.com/mlpbasics).
DANIEL GOLDSTEIN, SENIOR MANAGING DIRECTOR
• I n many cases, a significant portion of the distribution
is treated as a return of capital, meaning that you don’t
pay tax on that portion of the distribution until the sale
of the asset.
“WE BELIEVE THAT THE
ENERGY REVOLUTION
WILL FUNDAMENTALLY
CHANGE OUR ECONOMY
FOR THE BETTER AND WILL
CREATE BENEFITS AND
OPPORTUNITIES THAT WE
AREN’T YET AWARE OF. ”
GREG DIENNA, WEALTH MANAGER
Another important consideration is that tax filings are
more complex since you receive a Schedule K-1 each year
for each MLP that you own.
There are some reasons for caution as well—first, even
with the recent drop in the price of oil, the index of
midstream MLP companies has outperformed most other
asset classes over the last one, three, and five years. We
believe, however, that the amount of infrastructure needed
to keep up with increased production provides room for
continued growth in the sector. Second is the risk that the
MLP’s tax-friendly status could change. To our knowledge,
there is no pending legislation that would impact their
tax status. And third, as is the case with any security
with a high income stream, an increase in interest rates
could negatively impact the price of the MLPs as investors
gravitate to more traditional sources of income.
KAREN DREIBLATT AND GRIFFIN SIVRET
While we wait for alternative clean energy to become
a larger share, as it is only a few percentage points of
demand, there is an important transition occurring
toward cleaner-burning gas over coal. The next few decades
will see an enormous change in how we meet our needs to
light our homes, drive our cars, and power our industries.
Few would have predicted the recent developments and
there are surely many surprises yet to come.
There are benefits and drawbacks to each sector of
the energy revolution—your wealth manager will review
which is most appropriate for your particular situation.
The U.S. energy revolution is a game-changer in many
ways—investing in midstream MLPs provides one way
access to that opportunity.
TED CRONIN, AMY MACLEOD, BRIAN SMITH, DANIEL GOLDSTEIN, AND LAUREN VANVEELEN
READ CRONIN, MANAGING DIRECTOR
FINDING MCM’S
INVESTMENT MANAGERS
As director of the Manchester Capital research team,
Bart Earley leads a two-fronted effort: monitoring the
firm’s platform of existing approved managers and
identifying new managers according to the priorities of
the Investment Committee.
strategies including mid-cap value, Nordic-region activists,
long/short hedge funds, mission-related investment
managers, venture capital, and direct lending (to name a
few). These 52 meetings led to additional due diligence on a
select few, and the addition of two to our approved list.
Although the bulk of the research team’s time is spent
working with existing managers—discussing their specific
strategies, their view of market conditions, their tactical
adjustments, and changes at their respective firms, the
team also dedicates a portion of time to identifying new
investment managers.
While rejecting a vast preponderance of managers that
solicit us might seem unduly harsh, 95% of the managers
in our industry do not meet our due diligence standards
and are not worthy of managing our clients’ assets. We set a
high bar because we are stewards of wealth with a fiduciary
duty to care for client assets as if they were our own. That
means recommending only managers that we would entrust
to manage our own assets (and we do). We can understand
why investment banks and large trust companies, which
cater to a much broader spectrum of clients, therefore find
it necessary to offer access to 300, 400, sometimes even
500 managers.
At Manchester Capital, our client base of wealthy families
and individuals allows us the luxury of focusing our
efforts on the narrow set of managers we believe will help
our clients meet their financial objectives. We can be
selective—and we are. Of the approximately 23,000 mutual
fund and 8,000 hedge fund managers in the U.S., our
approved platform includes just 49 firms managing 78
distinct products. We typically add two to four managers a
year and fire one or two.
By those numbers, we don’t mean to suggest that we
have reviewed all 31,000 managers, but we have been
exposed to quite a few. In 2014 alone, Manchester Capital
received meeting requests from more than 600 prospective
investment managers. A handful of those we actively sought
out, but the vast majority came in the form of unsolicited
requests via email, telephone, and snail mail. Of that 600,
we chose to meet with just 52—representing a diverse mix of
Why do we believe only 5% of managers are worth investing
with? The primary reason is quality. We choose to invest
only with high-quality firms led by experienced portfolio
managers with demonstrated track records and a repeatable
process. Their interests, like ours, need to be focused on
creating value and taking care of their clients. Surprisingly,
a large portion of the investment manager universe consists
of products that do not meet these simple, but critical,
criteria. Another reason: performance. Most managers
straight-up fail to beat their index. When you factor in risk,
fees, and taxes, the list of potentially acceptable managers
narrows quickly to a very select group.
BART EARLEY, DIRECTOR OF RESEARCH
This past year offers a prime example of this phenomenon.
In 2014, nearly 85% of active U.S.-focused mutual fund
managers failed to beat their benchmark, according to Lipper.
In other words, only 15% of managers outperformed in 2014,
the lowest rate in more than a decade. While our managers
were not immune to this trend, 43% of the managers on our
platform outperformed their respective benchmarks this
year—nearly three times the rate of the overall market. In
2013, less than 30% of all active managers outperformed
their specific benchmarks, and we were pleased that nearly
60% of MCM managers beat their index.
Some of the prospective manager priorities for 2015
are deepening our stable of emerging markets managers,
strengthening our bench in the mid-cap space, and adding
to our group of outstanding hedge fund managers. Finding
the great manager needles in the 31,000-straw haystack is
by no means easy, but the challenge, and the reward for our
clients, makes the process extremely worthwhile.
FAMILY TRUSTEE
Once you have decided to create a trust, you are
immediately confronted with the very important decision
of naming a successor trustee. While it might be a natural
reaction to think that your child would be the best person
to serve as successor trustee, time has shown that the
people who are closest to us may not be the best qualified
or equipped to fulfill this difficult role. In fact, naming a
child as successor trustee often creates a time bomb that
is destined to explode and could destroy once close-knit
family relationships.
Parents name a child as trustee for a variety of reasons,
including their belief that a child will most likely adhere
to his or her parents’ intentions, their belief that the
child has a thorough understanding of and insight into
the family throughout the trust period, and avoidance
of the cost of a corporate trustee and all the frustrating
bureaucracy that goes along with a corporate trustee bank.
But those family members not designated as trustee
often feel resentful that they weren’t chosen. Beneficiaries
often disagree on how the trustee is managing the trust
assets and for whom. Beneficiaries may have personal or
business goals that need funding, only to find that the
trustee disagrees. Conversely, beneficiaries may remain
quiet if the trustee is mismanaging the assets out of
reluctance to argue with their “kin” and create discord.
Further, often the family trustee will feel the pressure to
be amenable to the beneficiaries’ demands even if he or she
knows it’s not honoring the parents’ wishes. At the same
time, the trustee could resent suffering the burden of
responsibility for the money but not the right and freedom
to enjoy it. The successor trustee is unlikely to have the
legal skills, and more importantly the time and interest,
to act as a true fiduciary in understanding the goals of the
trust and its legal constraints.
In our own experience, the best-laid plans of one of our
clients in naming a family member as successor trustee
resulted in five lawyers arguing in front of a judge over
the fate of the trust assets. Our client had designated his
nephew as trustee because the nephew had no beneficial
interest in the assets, and our client believed he would act
independently. The client’s choice was also made in part to
avoid showing favoritism among his three children. Not
surprisingly, the client’s first-born son felt humiliated not
to be trusted as trustee and was determined to go to any
lengths to secure control. Claims of asset mismanagement,
trustee abuse of process, and denial of rights required a
court’s attention, a tremendous amount of money was spent
in court and attorneys’ fees, and familial relationships
were irreparably broken—the very outcome our client had
tried to avoid.
Not all family member trusteeships end in disaster.
Asking a family member to serve as successor trustee
might work if all beneficiaries are knowledgeable about
financial matters, are allowed full access to the activities
of the trustee and asset management, have the legal
expertise to understand the fiduciary responsibility of
trust structures, are respectful of the trustee’s role and
responsibilities, and are comfortable with the limits of
their role as beneficiaries.
While there are exceptions, such conditions are highly
unlikely for most families. With so much at stake, research
your trustee candidates and make sure the trustee has the
time, ability, and commitment necessary to carry out your
intentions. Taking time to consider all of the dynamics in
advance of naming your trustee will help you make a wise
choice and preserve the value of the legacy you want to
leave your beneficiaries.
GREG DIENNA, WEALTH MANAGER, AND MICHAEL WARSZAWSKI, SENIOR MANAGING DIRECTOR
MARI NUNEZ, MICHAEL WARSZAWSKI, GREG DIENNA, AND JACQUELINE RODRIGUEZ
ANNUAL OPERATIONS AND
ADMINISTRATION UPDATE
The Operations and Administration team saw
much change in 2014, all geared toward improving
your experience as a client with Manchester Capital.
We welcomed two new team members, launched the
MCM front office initiative, and implemented new
back-office technology. Never satisfied, we have some
exciting initiatives planned for 2015.
In March, Cynthia Larson joined the team as an operations
associate. Cynthia’s primary focus is working with MCM’s
wealth managers, investment associates, and custodians,
to execute trades in a timely and accurate manner for our
clients’ portfolios. In June, we welcomed Karen Dreiblatt
to the MCM family as an office administrator in our
Vermont office. Karen is the first point of contact for
visitors and callers in Vermont, and helps coordinate
the many moving parts involved with keeping the office
running smoothly on a daily basis.
In an effort to better organize, develop, and communicate
among the four MCM offices, this fall, MCM saw the
birth of the front office team. The MCM front office
team consists of the four MCM office administrators:
Karen Dreiblatt (Vermont), Emma Lombardi (California),
Jacqueline Rodriguez (New York), and Tiffany McGoff
(Virginia). Brian McGunnigle (director of operations)
provides leadership and guidance to the group, while
Daniel Goldstein (senior managing director) and Susan
Cronin (Board of Advisors) serve as consultants to the
team. This team meets regularly and provides the office
administrators with a more formal platform on which
to collaborate, and improve the consistency of the client
experience across our four offices.
Throughout 2014 our operations team implemented new
performance reporting, trading, and client relationship
management systems in our back office. This allowed us
to enhance our quarterly reports, and begin integrating
our systems behind the scenes. The previous systems
were run in parallel throughout this implementation,
to ensure no disruption to your client experience, and to
confirm the systems were running as we expected them
to. These systems are all in place and stable and in 2015
we are excited to begin enhancing and optimizing them.
One of these enhancements that we announced in 2014,
and are eagerly looking forward to, is the new MCM client
portal, which will allow our clients secure online access
to their portfolio information (asset allocation, holdings,
transactions, performance) and documents that we share
with them, or that they choose to share with us (wills,
trusts, tax returns, etc.). We have been developing this
throughout 2014, and welcome your feedback as you begin
using it later this year. Please let your wealth manager
know if this client portal is something you are interested
in learning more about, and if you would be interested in
becoming an “early adopter” of the system.
As we look forward to 2015, the operations team will
focus on some exciting new initiatives that we believe
will continue to increase our back-office efficiency,
and provide more resources to support client service
and wealth manager activities. First is a document
management system, which we anticipate will help
alleviate some of the pain points involved with the many
internal handoffs of paperwork inherent to our industry.
Additionally, to address one of the many complexities
involved with quarterly reporting, we will be evaluating
report packaging software that promises to simplify this
process. This software would allow us to map reports
to recipients, creating a more efficient process to print,
collate, bind, and mail the reports to you, and anyone
else you have authorized us to send duplicate copies on
your behalf (accountants, trustees, etc.). As always, if you
currently receive hard copies of your quarterly report(s)
and are interested in learning about electronic delivery,
please speak to an MCM wealth manager.
With all this change, we want to be sure we are always
serving you, our clients, with the high standards you’ve
received in the past, expect from us, and deserve. At any
time, please reach out and let us know how we are doing.
SITUS MATTERS
DEL AWA RE DIRECT ED T RUS T S
While we have no formal allegiance to any particular
state, we have generally recommended Delaware,
mostly because the other zero-tax states have merely
“piggybacked” on Delaware trust law, and Delaware has
over 100 years of case law.
that they nominate a Delaware trust company as trustee.
This is true, but Delaware law also allows you to limit
the role of the trustee to an administrator with minimal
authority over a trust. Instead, the creator of the trust
can appoint a directed investment advisor to manage
the money, a directed distribution advisor to disburse
the money, and a trust protector to appoint and replace
any or all of the former. This way, families can still place
their own trusted advisors in each of these roles instead of
granting trust powers to a faceless corporate trust bank.
When directed advisors are appointed, the trust company
is merely an administrative trustee with the primary
duty being to fulfill clerical functions and file the
annual tax return.
Initially, some clients are reticent about moving or
creating trusts in Delaware because the state requires
Further, the distribution advisor and protector do not
have to be fiduciaries on a Delaware directed trust. You
During this past year, we worked diligently on helping
clients determine the most suitable location for their
family trusts. The location of a trust, or “situs,” is an
important issue because it determines what laws will
govern the trust and what state will have tax jurisdiction
over the trust. Taxes levied on trusts vary widely by state,
ranging from as high as 13.3% in California to O% in
Delaware, Florida, Wyoming, and other states.
BART KRAFT, MANAGING DIRECTOR AND CHIEF COMPLIANCE OFFICER, AND SCOTT SWENOR, CFO
can structure it so that the administrative trustee and the
directed investment advisor are the only fiduciaries. This
is a role Manchester Capital is happy to accept.
Some clients have also voiced concerns about moving
their assets to a Delaware trust bank where the transaction
fees can be higher and, more importantly, the investment
options can be limited. As clients of Manchester Capital,
you already know that one of the core principles of our
investment program is open architecture, where we can
pursue any manager or investment that we see as the best
and most appropriate for our clients. Thus, we usually set
up single-member LLCs (“disregarded entities” for tax
purposes) to hold the assets of the trust. By using singlemember LLCs, we can use any custodian or investment
anywhere. We generally recommend safe, low-cost
providers with minimal investment limitations. Delaware
trust companies are familiar with this approach and
usually offer lower overall trust fees. Manchester Capital
has been able to negotiate a fixed annual fee on trust assets
for its clients. The Delaware trust companies will just set
up a small cash account for the trust to pay the trust bank
fees and the annual taxes. The only added expense for a
single-member LLC is the annual Delaware LLC tax ($250)
and a Registered Agent Fee ($100).
We even helped some clients evaluate and employ a
relatively new estate-planning technique known as a
Delaware Incomplete Non-Grantor Trust (“DING” Trust).
This type of trust allows clients to avoid state taxes
on assets in their own estate without formally giving
the assets to their heirs (yet). These trusts are not for
everyone, but for those for whom it’s appropriate, they can
save a tremendous amount on state taxes. These trusts
will not work for New York or Vermont residents because
of how these states define a taxpayer. However, they do
work for California residents, who suffer from the highest
individual state tax rates in the country.
The name, Delaware Incomplete Non-Grantor Trust,
is representative of the overall purpose of the trust.
“Incomplete” means there’s no completed gift, so
there won’t be any gift taxes owed. Indeed, the assets
being transferred into the DING Trust are still the
owners’ (i.e., included in their estate) and their heirs will
still benefit from any “step-up” in tax basis at the time
of their passing. It can be most effective for clients who
have already depleted their lifetime gift-tax exemption
(now $5,430,000/individual). “Non-Grantor” means the
trust itself pays the income tax, not the creator of the
trust (grantor). This allows the grantor to avoid paying
taxes to his or her home state on income and gains
inside the trust. Most importantly, the client retains the
ability to change the ultimate beneficiaries through a
Power of Appointment.
The unique provision required for these trusts is a
designated Distribution Committee of “adverse parties.”
This committee must be composed of the currently
designated beneficiaries of the trust. The purpose of this
committee is to approve any distributions from the trust
back to the grantor (creator of the trust). As beneficiaries
of the trust, they are logically deemed to be adverse to any
depletion of the trust assets.
Our clients who have elected to employ DING Trusts have
chosen to fund them with illiquid partnership interests
that generate substantial tax liabilities. Clients have also
considered using assets that are currently earmarked for
their private foundations at their passing. This way, they
can give a little each year to maximize their charitable
giving deduction while avoiding state taxes on the rest.
In sum, DING Trusts can have all the benefits of Directed
Delaware Trusts, including the use of non-fiduciary
“protectors,” non-fiduciary “directed distribution
advisors,” and “directed investment advisors.” And most
importantly, it’s possible to limit the Delaware trust
company trustee to an administrative role, allowing trust
powers (and appointment of such) to remain ultimately in
the hands of trusted advisors.
WELLNESS
IN OUR WORKPL ACE FAMILY
At Manchester Capital, we practice the principle of
putting client interests above all others; treating our
clients as family. With four offices and 33 experienced
professionals behind the scenes, our day-to-day operations
and intensive attention to our clients means extensive
hours logged within office walls and, for some, on the
road. To that end, Manchester Capital believes in not only a
best-in-class experience for our clients, but a family-style
approach to our “people,” and an ever-increasing emphasis
on workplace and employee wellness.
At the heart of the matter is our belief that the better
the daily experience for our employee family, the better we
can do for our client families. To be sure, the concept of
workplace wellness is not a new one, but in today’s
increasingly paperless and cloud-based business
environment, the vast majority of our job functions
are performed at a computer or on the phone (or both!).
Countless studies have proven that healthy, active
employees are happy, productive ones. With this in mind,
Manchester Capital offers top-notch health benefits
and encourages employees to prioritize and pursue an
active lifestyle, both in and away from the office. The
company provides subsidies for employee fitness club
memberships, and offers a generous vacation policy,
ensuring that each team member gets sufficient “R&R”
time away from the office. Employees have been known to
meet during the weekends to run in road races, or just get
together as a team for dinner to celebrate a particularly
successful project.
In the office, one way in which the company treats its
employees as family involves the encouragement of wellbeing during working hours. Workstations are set up with
productivity in mind, utilizing large computer monitors
that minimize eye strain. In 2014, the Manchester Capital
workstation was raised to a new level (so to speak) with
the piloting of several sit-to-stand desks. Standing while
working allows greater mobility (and further, more
personal interaction with colleagues) and helps to fight
the fatigue caused by hours of computer work. Several
employees have now fully embraced this change, and we
anticipate that there will only be more adopters in the
coming year. In the latter half of 2014, we also introduced
a walking treadmill workstation, which has received very
positive reviews. In 2015, the company will continue to
pursue new wellness initiatives for its employees.
Much like a multi-household family, keeping the
four offices tuned in with each other is geographically
problematic, but Manchester Capital takes this task
very seriously and has implemented strategies to ensure
consistent, equally excellent service regardless of a
client’s “home” office. The entire company meets daily via
video conference to discuss matters of more immediate
importance. Additionally, during these meetings, one
Manchester Capital team member (on rotation) is invited
to share some highlights from his or her current projects.
This allows for inter-office/inter-department transparency
and alignment of team priorities, and we like to think of
it as a “family meeting.” We find that it is invaluable to
maintain this daily line of communication, albeit brief, as
a touch point in uniting our various offices.
This spring, the entire Manchester Capital team will
travel to the Montecito office for an intensive two-day
company retreat. These retreats allow us to really get down
to the fundamentals of who we are as a company, where
we are headed, and how we can make ours the best client
experience available. Equally valuable is the time spent
as a company “family,” where all of our team members are
able to get to know one another better and have that faceto-face time so critical to ensuring a successful, unified
group of professionals to best serve our clients.
“MCM BELIEVES IN NOT
ONLY A BEST-IN-CLASS
EXPERIENCE FOR OUR
CLIENTS, BUT A FAMILYSTYLE APPROACH TO OUR
‘PEOPLE,’ AND AN EVERINCREASING EMPHASIS ON
WORKPLACE AND EMPLOYEE
WELLNESS.”
BLISS BERNAL, OPERATIONS AND COMPLIANCE ASSOCIATE
M A NCHE S T ER C A P I TA L BO A RD OF A D V IS OR S
Howard P. ( “ Pete”) C olh ou n , CFA
CHAIRMAN
Mr. Colhoun spent 20 years at T. Rowe Price Group and over that time was director of investment research, director
of mutual funds, and president and portfolio manager of the New Era Fund. He founded Emerging Growth Partners—a
unique, institutional partnership investing in both public and private small companies. He was a principal participant in Wall
Street Week, a national public television program, for 32 years. Today, he serves on multiple boards, for both for-profit and
nonprofit companies. He is a senior investment advisor to the Gates Family of Colorado. Mr. Colhoun is a graduate of Princeton
University and Harvard Business School, and was a Fulbright Scholar in Norway. He is a founder of a family foundation, and
writes and lectures on the topic of philanthropy.
Pete Dawkins
Mr. Dawkins is a Senior Advisor to Virtu Financial, a
non-bank liquidity provider and trading firm. He began his
career at Lehman Brothers, ran for U.S. Senate for the
state of New Jersey, worked at Bain and Company, became
chairman and CEO of Primerica, and served at Citigroup in
insurance, private banking, and global wealth management.
A 1959 graduate of West Point, he served for 24 years in the
U.S. Army. He led the 82nd Airborne Company and the 3rd
Brigade of the 101st Airborne, was promoted to brigadier
general, taught at West Point, was a White House Fellow,
and served as assistant to the deputy secretary of defense.
Mr. Dawkins won the Heisman Trophy, was a Rhodes Scholar,
studied at Oxford, and received a master’s degree and Ph.D.
from the Woodrow Wilson School at Princeton.
Gene Tremblay, CFA
Mr. Tremblay served as a partner and executive at the
Wellington Management Company of Boston, and was the
firm’s director of research and trading until his retirement
in 2003. A chartered financial analyst, Mr. Tremblay
oversaw and directed Wellington’s fundamental, economic,
and quantitative research and trading processes. He is a
graduate of the New Jersey Institute of Technology and the
Harvard Graduate School of Business Administration.
Laurie Thomsen
Ms. Marshall served as general counsel of General Mills
and Avon and is a Harvard and Yale Law School graduate.
She is a director of Ameriprise Financial Inc. and Equifax,
Inc. She is on the board of the Yale Center for the Study of
Corporate Law and is a distinguished advisor to the Straus
Institute for Dispute Resolution. She was a director of the
American Arbitration Association and the Institute for
Conflict Prevention and Resolution, and she served on the
NYSE Legal Advisory Committee.
Laurie Thomsen serves as a director of the Travelers
Companies and MFS Mutual Funds. From 2007 to 2010 she
served as an executive partner at New Profit, Inc. where she
had served on the board for the prior six years. Prior to that
she was a co-founding general partner of Prism Venture
Partners, a venture capital firm investing in healthcare and
technology companies. Ms. Thomsen’s 20-year career in
venture capital began at Harbourvest Partners in Boston
where she was a general partner. She currently serves on the
board of KickStart Intl., uAspire, and Lever. She served many
years on the Williams College Board, Horizons for Homeless
Children, and the Visiting Committee of the Williams College
Museum of Art, and as an overseer at the Isabella Stewart
Gardner Museum. Ms. Thomsen and her husband, Peter, live
in Williamstown, Massachusetts.
Ralph E . Stuart , Jr.
Susan Read Cronin
Siri Marshall
Mr. Stuart is one of the founding partners of Wellington
Management Company of Boston and a 1956 graduate of
Princeton University. Until his retirement in 1997, Mr. Stuart
was responsible for overseeing Wellington’s investment
process. He developed the firm’s investment counseling
service for individuals, and was an original director of the
Wellington Trust Company, a fully integrated investment
affiliate.
Ms. Cronin serves as a director at MCM, where she
participates in client development, client relationship
management, and Manchester Capital’s strategic planning.
She frequently helps interview prospective employees and
board members. She graduated with a B.A. from Williams
College. In her professional life, Ms. Cronin is a bronze
sculptor with galleries located around the country. She is
involved with supporting nonprofits and serves on the board
of the Vermont Studio Center.
CARING FOR OUR FAMILIES
FROM FOUR LOCATIONS
1993
2002
MANCHESTER, VERMONT
2012
2010
MONTECITO, CALIFORNIA
LOC AT ION S /OF F ICE S
NEW YORK, NEW YORK
CHARLOTTESVILLE, VIRGINIA
MONTECITO OFFICE
Manchester Capital Management is, and has been since its
inception, a Family Office dedicated to helping families sustain
their wealth, values, and legacy from generation to generation.
NEW YORK OFFICE
CHARLOTTESVILLE OFFICE
> Montecito, California
> 2013
SN A P SHOT
1157 Coast Village Rd, Suite A
Montecito, CA 93108
{Tel} 805.969.5670 • {Fax} 805.969.5680
> 2014
• Employees - 31
• Employees - 33
• Partners - 11
• Partners - 12
> New York, New York
410 Park Ave, Suite 1610 • NY, NY 10022
{Tel} 212.588.1120 • {Fax} 212.588.1124
> Charlottesville, Virginia
123 East Main St, Suite 1A
Charlottesville, VA 22902
{Tel} 434.260.8293 • {Fax} 434.465.6025
> Manchester, Vermont
3657 Main St. • Manchester, VT 05254
{Tel} 802.362.4410 • {Fax} 802.362.1377
MANCHESTER OFFICE
Manchester Capital Management, LLC
2014 ANNUAL REPORT
Measured Growth
www.mcmllc.com

Annual Report - manchester capital management, llc

Transcription

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