Charles Schwab Launches Windhaven Money Management Solutions

Dynamically managed portfolios have nine-year benchmark-beating cumulative performance

SAN FRANCISCO--()--Charles Schwab has rolled out three new money management solutions for its retail clients that apply a unique approach to investing for growth and risk management. The Windhaven Portfolios™ are the latest example of Schwab’s ongoing commitment to bringing a full-range of institutional-quality portfolio solutions to individual investors looking for broad diversification – at great prices. These latest additions complement Schwab’s existing solutions, including Schwab Managed Portfolios-Mutual Funds, Schwab Managed Portfolios-ETFs and Schwab Private Client, which today collectively contain more than $64 billion1 in client assets.

In November 2010, Schwab acquired the assets and intellectual property of Windward Investment Management, Inc., including its three broadly diversified portfolios which have each out-performed their industry benchmarks cumulatively between 2002 and 2010. The Windhaven Portfolios, which primarily invest in ETFs for their transparency, tax efficiency and affordable cost, feature investment strategies based on management’s 30 years of research into the global financial markets and the complex interplay between asset classes. The portfolios combine the qualities of longer-term core holdings with a dynamic overlay striving to take advantage of economic and market events. The portfolios are made up of highly diversified asset classes including U.S., international and emerging market equities, fixed income, commodities, real estate, and currencies in an attempt to protect against a wide range of risky events. Windhaven updates the three portfolios using its perspectives on the latest economic, market and behavioral data – including inflation, global interest rates, market prices and geopolitical events. It uses a proprietary model that combines quantitative and qualitative elements to rank asset classes that are then proactively overweighted or underweighted based on potential for growth or reduction in portfolio risk over the coming 12-month period.

Stephen Cucchiaro, who has served as chief investment officer for the three portfolios since their inception, and first developed their investment approach while studying math at MIT in the 1970s, said, “Minimizing losses in rough markets is essential to achieving superior long-term success, and traditional asset allocation seriously underestimates real world risk and the probability that large losses will occur. Unlike other investment approaches that win big only to lose big, Windhaven has been able to generate an impressive track record by reducing the extreme lows that are often experienced by less diversified portfolios.”

The Windhaven approach is based on management’s belief that markets are micro efficient but macro inefficient. This means that securities are often efficiently priced within an asset class (e.g., large cap individual stocks), making outperforming an index by selecting individual securities very difficult; it also means markets are often mispriced when compared across asset classes (e.g., international small cap compared to US large cap) creating potential opportunities to take advantage of global market imbalances, lagged effects of monetary policy changes and other economic factors, mood swings in investor behavior, and the cyclical nature of global markets.

Windhaven currently manages more than $4.5 billion in assets from individual investors and trusts, retirement plans, foundations and university endowments. The Windhaven portfolios have investment minimums of $100,000, and pricing for them starts at 95 bps. They are also available to the Registered Investment Advisors who custody with Schwab, for their end clients.

 

Windhaven Cumulative Historical Performance

 
1/1/2002 – 12/31/2010a
 
Each of the three Windhaven portfolios has exceeded benchmarks for cumulative performance. Cumulative performance from Jan. 1, 2002 through December 31, 2010 included the following:
 

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73.7% for Windhaven’s Diversified Conservative Compositee, compared to 62.6% for the Barclays Capital Aggregate Bond Index and 69.4% for Global Conservative Benchmarkf

 

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101.8% for Windhaven’s Diversified Growth Compositeb, compared to 47.0% for a blended index combining the S&P 500 and the Barclays Capital U.S. Aggregate Bondd indices; and compared to 71.4% for the Global Growth Benchmarkc

 

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132.4% for Windhaven’s Diversified Aggressive Compositeg, compared to 30.6% for the S&P 500 Total Return Index and 79.3% for the Global Aggressive Benchmarkh

   
 
 
                           
Windhaven Portfolios Compound Annual Returns as of 12/31/2010:       Last 1 Yr.     Last 3 Yrs.     Last 5 Yrs.     Since 1/1/2002a
Diversified Conservativee       3.8%     2.7%     5.0%     6.3%
Barclays Capital U.S. Aggregate Bond Index 6.5% 5.9% 5.8% 5.6%
Global Conservative Benchmarkf       8.4%     3.5%     5.2%     6.0%
Diversified Growthb 8.0% 1.1% 5.7% 8.1%
Blended (60% U.S. Equities, 40% U.S. Bonds)d 12.1% 1.1% 4.1% 4.4%
Global Growth Benchmarkc       10.6%     0.1%     4.5%     6.2%
Diversified Aggressiveg 9.1% 0.8% 6.9% 9.8%
S&P 500® Total Return Index 15.1% -2.9% 2.3% 3.0%
Global Aggressive Benchmarkh       11.1%     -2.5%     3.7%     6.7%

a The time period shown is the longest time period for which all three Windhaven strategies existed concurrently.

b Performance is based on the actual return of the Windhaven Diversified Growth Composite, net of all fees and expenses.

c The Global Growth Benchmark is composed of 55% MSCI All Country World Index (ACWI), 40% Barclays Capital U.S. Aggregate Bond Index, and 5% S&P Goldman Sachs Commodity Index (GSCI) Total Return Index.

d Blended Benchmark is comprised of 60% S&P 500 Total Return Index and 40% Barclays Capital U.S. Aggregate Bond Index.

e Performance is based on the actual return of the Windhaven Diversified Conservative Composite, net of all fees and expenses.

f The Global Conservative Benchmark is comprised of 20% MSCI ACWI, 75% Barclays Capital U.S. Aggregate Bond Index, and 5% S&P GSCI Total Return Index.

g Performance is based on the actual return of the Windhaven Diversified Aggressive Composite, net of all fees and expenses.

h The Global Aggressive Benchmark is comprised of 70% MSCI ACWI, 20% Citigroup World Government Bond Index (CWGBI), and 10% S&P GSCI Total Return Index.

Indexes are unmanaged and do not incur management fees, costs, and expenses.

Data source: Bloomberg.

About Windhaven

Windhaven Diversified Portfolios strategies are available through Schwab’s Managed Account Connection™ program (“Connection”). Please read Schwab’s disclosure brochure for important information and disclosures relating to Connection and Schwab Managed Account Services™.

Portfolio management is provided by Windhaven, an affiliate of Charles Schwab & Co., Inc. (“Schwab”). Windhaven Investment Management, Inc. is a registered investment advisor and an affiliate of Schwab.

About Charles Schwab

The Charles Schwab Corporation (NYSE:SCHW) is a leading provider of financial services, with more than 300 offices and 8.0 million client brokerage accounts, 1.4 million corporate retirement plan participants, 710,000 banking accounts, and $1.6 trillion in client assets. Through its operating subsidiaries, the company provides a full range of securities brokerage, banking, money management and financial advisory services to individual investors and independent investment advisors. Its broker-dealer subsidiary, Charles Schwab & Co., Inc. (member SIPC, www.sipc.org), and affiliates offer a complete range of investment services and products including an extensive selection of mutual funds; financial planning and investment advice; retirement plan and equity compensation plan services; referrals to independent fee-based investment advisors; and custodial, operational and trading support for independent, fee-based investment advisors through Schwab Advisor Services. Its banking subsidiary, Charles Schwab Bank (member FDIC and an Equal Housing Lender), provides banking and mortgage services and products. More information is available at www.schwab.com and www.aboutschwab.com. (0311-1945)

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Past performance is not necessarily indicative of future returns, and the value of investments and the income derived from them can go down as well as up. Future returns are not guaranteed, and a loss of principal may occur.

Please refer to Windhaven’s ADV Part II for more information.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Windhaven’s portfolio risk-management process includes an effort to monitor and manage risk, but should not be confused with (and does not imply) low risk.

There are risks associated with any investment approach, and Windhaven Portfolios have their own set of risks to be aware of. First, there are the risks associated with the long-term core strategic holdings for each of the strategies. The more aggressive the Windhaven strategy selected, the more likely the portfolio will contain larger weights in riskier asset classes, such as equities. Second, there are distinct risks associated with Windhaven Portfolios’ shorter-term dynamic allocations, which can result in more concentration of the portfolios towards a certain asset class or classes. This introduces the risk that Windhaven could be on the wrong side of a tactical over- or under-weight, thus resulting in a drag on overall performance.

Asset classes and the proportional weightings in the portfolios may change at any time without notice, subject to the discretion of Windhaven Investment Management.

Performance Calculation

The Windhaven Diversified Conservative, Diversified Growth, and Diversified Aggressive strategies’ performance, portfolio characteristics, portfolio volatility, and other portfolio data shown were derived from the Windhaven Diversified Conservative, Diversified Growth, and Diversified Aggressive Composites. The composite performance results for the Windhaven strategies referred to herein include all discretionary, fee-paying accounts within the Diversified Conservative, Diversified Growth, and Diversified Aggressive Strategies, including those of clients that are no longer with the firm. Accounts are included in each composite after the first full month under management up to the present or until the cessation of the client relationship with Windhaven. Investment results are time-weighted performance calculations representing total return. Composites are valued monthly, and portfolio returns are asset weighted by using beginning-of-month market values plus weighted cash flows. Monthly geometric linking of performance results is used to calculate annual returns. Total return figures are calculated using trade date accounting. All realized and unrealized capital gains and losses as well as all dividends and interest from investments and cash balances are included. The performance figures presented are net of brokerage commissions and all other expenses, including the firm’s investment advisory fee.

The investment results shown are not necessarily representative of an individually managed account’s rate of return, and differences can occur due to factors such as the timing of initial investment, client restrictions, cash movement, etc. Securities used to implement the strategies can differ based on account size, custodian, and client guidelines.

Benchmark and Performance

Criteria for choosing the benchmarks for each Windhaven strategy are as follows:

Diversified Conservative — The Barclays Capital U.S. Aggregate Bond Index was chosen as the benchmark for the Diversified Conservative strategy based on the approximate equivalent risk between the benchmark and the strategy and because clients will generally use the Diversified Conservative portfolio as a substitute for or a complement to a bond portfolio.

Diversified Growth — A blended benchmark (60% S&P 500 Total Return Index and 40% Barclays Capital U.S. Aggregate Bond Index) was chosen as the benchmark for the Diversified Growth strategy based on the approximate equivalent risk between the benchmark and the strategy and because clients will generally use the Diversified Growth portfolio as a substitute for a “balanced fund.” Our target risk for the Diversified Growth strategy is “balanced fund” risk.

Diversified Aggressive — The S&P 500 Total Return Index was chosen as the benchmark for the Diversified Aggressive strategy based on the approximate equivalent risk between the benchmark and the strategy and because clients will generally use the Diversified Aggressive portfolio as a substitute for or a complement to an all-equity portfolio.

The benchmarks listed above have not been selected to represent an appropriate benchmark with which to compare an investor’s performance, but rather are disclosed to allow for comparison of the investor’s performance to that of certain well-known and widely recognized indexes. Windhaven’s Diversified Conservative Portfolio does not invest solely in bonds, so its performance relative to the benchmark will be impacted by this difference. Windhaven’s Diversified Growth and Diversified Aggressive strategies do not invest to the same degree as the benchmark in U.S. stocks, so their performance relative to the benchmark will be impacted by this difference. For example, in 2002 and 2008, the S&P 500 Total Return Index declined over 20%. Since Windhaven’s Diversified Growth and Diversified Aggressive strategies do not invest in U.S. stocks to the same extent as their benchmark, the impact of this decline on these strategies was less than on the benchmark.

The following Global benchmarks for each Windhaven™ strategy were chosen for informational and comparative purposes:

Diversified Conservative — The Global Conservative benchmark is composed of 20% MSCI All Country World Index (ACWI), 75% Barclays Capital U.S. Aggregate Bond Index, and 5% Goldman Sachs Commodity Index (GSCI), rebalanced monthly.

Diversified Growth — The Global Growth benchmark is composed of 55% MSCI All Country World Index (ACWI), 40% Barclays Capital U.S. Aggregate Bond Index, and 5% Goldman Sachs Commodity Index (GSCI), rebalanced monthly.

Diversified Aggressive — The Global Aggressive benchmark is composed of 70% MSCI All Country World Index (ACWI), 20% Citigroup World Government Bond Index (CWGBI), and 10% Goldman Sachs Commodity Index (GSCI), rebalanced monthly.

The Global benchmarks reflect a more diversified mix of indexes. Windhaven’s strategies may invest more heavily in real estate and currencies than their Global benchmarks so their performance relative to the Global benchmarks may be impacted by this difference. Windhaven’s strategies may not invest to the same degree as their Global benchmark in stocks, bonds, and commodities, so their performance relative to the benchmark will be impacted by this difference.

Reference to an index or benchmark does not imply that the Windhaven portfolio will achieve returns, experience volatility, or have other results similar to the index. The composition of a benchmark index may not reflect the manner in which a Windhaven portfolio is constructed in relation to expected or achieved returns, investment holdings, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility, or tracking error targets, all of which are subject to change over time. You cannot invest directly in an index.

1 As of March 11, 2011

Contacts

Charles Schwab
Alison Wertheim, 415-667-0475
alison.wertheim@schwab.com
or
SunStar
Melissa Murphy, 703-894-1056
mmurphy@sunstarstrategic.com

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Contacts

Charles Schwab
Alison Wertheim, 415-667-0475
alison.wertheim@schwab.com
or
SunStar
Melissa Murphy, 703-894-1056
mmurphy@sunstarstrategic.com