CHRISTOPHER S. BACH, the Founder and President of The Symphony Wealth Management Group, LLC, has over 20 years’ experience in the financial services and wealth management profession. He served as Managing Vice President for USAllianz Investor Services, and was Vice President and Director of National Development for Triad Advisors. More

TWST: Would you first explain the relationship between Symphony Wealth Management and Breen Financial Corp. and how you both fit into that picture?

Mr. Breen: Breen Financial is the subadvisor to the Symphony Wealth Management Ovation Fund, a fund of exchange traded funds. I met Chris a couple of years ago and he was interested in starting a fund of ETFs, an asset allocation based fund. Breen Financial has been managing asset allocation with ETFs for several years under a couple of different approaches and so it was a nice combination. I’m going to let Chris talk a little bit about Symphony Wealth and about his experience in distributing investment products.

Mr. Bach: My background has basically been in various areas of the securities business, but most recently in the distribution of investment products. I understand the distribution aspect very well from dealing with products from a broker/dealer standpoint to actually wholesaling and managing wholesalers. Jamie has the management expertise and I have the distribution expertise, so between the two of us, we figure we can actually get a fund distributed. We can create a quality fund that can potentially create a lot of value for the client and the advisor and create a distribution team to distribute that fund. As far as Symphony, Symphony was really created for the sole purpose of creating this type of fund. Jamie’s dad was Head of Finance and Head of Doctoral Studies at Kellogg and actually created a lot of the foundation of investment management philosophy in the 1960s with a group of other well-known Chicago academics. We realized there was a need for the Fund because we’ve heard a million times before that 90% of your deviation in performance is due to your asset allocation and less than 5% is stock selection. Most managers don’t beat their indices, so why not asset allocate with indices? It’s a very simple concept for individuals to understand and for advisors to understand. It just makes a lot of sense.

TWST: What brought about the decision to create and then launch the Ovation Fund this past January?

Mr. Breen: About five years ago, we began to manage asset allocation portfolios using exchange traded funds and, to answer that question, you really have to appreciate the importance of ETFs coming to the marketplace as they have. In our view, exchange traded funds are the most important and most exciting development in our industry in 30 or 40 years. It’s impossible to overstate the importance that the creation of ETFs has had on the industry landscape. With the advent of ETFs have come many exciting opportunities for investors, one of them being the ability to readily create asset allocation portfolios. For years, the people who have been behind modern portfolio theory have talked about the importance of diversification, have talked about the importance of allocation and the exchange traded funds are the other shoe dropping. It’s giving practitioners the ability to do what the theoreticians have said is important to do for the last 20 or 30 years, so the fact that the exchange traded funds have come onto the scene really opened a myriad of opportunities for practitioners. One of them is certainly the ability to create a commingled fund, a vehicle that will give individual, smaller investors the opportunity to have strong asset allocation. Asset allocation and diversification does not guarantee profits or guarantee against loss but can help control the risks and volatility associated with investing in the market. The creation of ETFs was what gave us the opportunity. Having done some work in this area for the last five years, managing asset allocation portfolios using ETFs on platforms such as the AssetMark platform, we realized that a fund was the logical next step and so from our perspective at Breen Financial, we felt it was time for a fund like this to exist. Clearly Chris, on his own, had come to the same conclusion.

Mr. Bach: There’s another real reason why this Fund needed to exist. There’s over $300 billion of assets in ETFs now. Most of it is institutional and large client based. The Breens were managing over $300 million of separately managed accounts, where the minimum account size is $100,000. One of the worst pieces of advice that we’ve heard over the years is, ‘Just go buy an S&P 500 Index and you’ll be fine.’ Over 30 or 40 years that may be true, but the problem is, to create a well- diversified portfolio, we believe you need more than just one ETF, you need a basket of ETFs and you need to rebalance that basket of ETFs at least on a quarterly basis. Because ETFs trade like stocks, there are commissions that occur every time there’s a transaction or a rebalancing. If you have 10 different ETFs and you rebalance once a quarter, that’s a buy and a sell for each ETF and that’s 20 transactions a quarter or 80 transactions a year. Even if you’re trading at $15 a transaction, now you’re paying $1,200 in commissions. On a $25,000 account, that’s going to kill your performance. Bundling this up in a mutual fund enables us to give the smaller investor (the investor with $100,000 or less) the opportunity to go into an actively managed portfolio of ETFs that they weren’t able to get into before and that was traditionally open only to institutions and high net worth individuals. The reason you don’t want to just buy the S&P 500 or buy the Russell 3000 is that if you go out and you play 18 holes of golf, each hole is different. You can look at each hole as a period of time. You don’t use the same club throughout all 18 holes. You have a bag of different clubs and each club is used for different situations, so on one hole, you may use three or four different clubs, but over 18 holes, you may use your whole bag of clubs. What we’re now able to do is give the small investor institutional style investing, meaning a well diversified, well allocated portfolio that is rebalanced on a regular basis.

Mr. Breen: A lot of this is demand driven. An advisor kept calling us and saying, ‘We love what you’re doing with our larger accounts. What can you do with our smaller accounts?’ It didn’t take many of those calls before we figured we’d better come up with a vehicle that could accommodate those people because they need help too and we feel that we can provide that help.

TWST: What is the ticker symbol of the Ovation Fund and where can investors buy it?

Mr. Breen: The ticker symbol is SYMAX for the A shares and our focus in marketing is to market the Fund through financial advisors, so the best place to get the Fund is through an advisor that recommends it to a client. It is also available through TD Waterhouse.

Mr. Bach: Not all advisors are able to offer it. If your advisor cannot offer it, you can actually buy it directly at (877) 328-1168. We recommend advisors because buying a fund is important, but it’s also important to get advice going beyond just buying an investment.

Mr. Breen: Of course, if it’s not available through your advisor, tell your advisor to contact their broker dealer and request a selling agreement because it may be a fund worth looking at.

TWST: Is anyone else doing these mutual funds of ETFs or is this a unique investment approach?

Mr. Breen: We are among the first to offer this type of fund and the reason for that is because there’s been a long prohibition that a mutual fund can’t own more than 10% of its holdings in another mutual fund. Technically, an exchange traded fund is a mutual fund and so you couldn’t have had this until quite recently due to SEC exemptive relief given to iShares. During 2005, Barclays Global, which is the producer of the iShares ETFs, got special exemptive relief from the SEC so that funds like ours can hold more than 10% of their positions in a single ETF. At any point in time, our Fund will hold between one and 25 positions, and clearly some of those positions are going to be above 10%. In the case of the Russell 3000, there are 3,000 underlying holdings. While we won’t own any holdings from a pure number of securities perspective, the underlying diversification of our Fund is very, very strong and the SEC clearly saw that the thing they were trying to prevent with these types of regulations really didn’t apply to the iShares products and so for that reason, it was permitted. But because that just occurred last year, we’re among the first in the industry to get one of these guys off the ground.

Mr. Bach: As far as we know, we’re the only dynamic asset allocation fund of ETFs out there. There’s one other fund we know of that focuses on target maturities, which is a completely different animal from what we’re doing.

Mr. Breen: Going back to this idea that the ETF is such an important development in our industry, it’s a wonderful question to ask whether there are other funds like this around. There are not a lot of other funds like this around now. There are one or two. We believe in 10 years, there are going to be many, many funds like this because this is where the future of asset management is going, in our mind.

TWST: How are investors and advisors responding to ETFs these days? Has there been much more investor interest?

Mr. Breen: Certainly there’s been a lot of interest that you can measure in a number of different ways. Probably the most direct way to measure investor interest is to note the explosive growth in assets under management over the last five years. We’ve gone from somewhere on the order of $20-$30 billion to over $400 billion presently invested in exchange traded funds. Clearly the interest has grown with the market. It’s impossible these days to open a trade magazine or watch CNBC for a very long period of time before you see an advertisement for an exchange traded fund. The level of publicity is also growing higher and higher and I think that’s indicative of the increasing interest in the area. This is a very informal sort of survey, but I had an opportunity to sit for about half an hour in the dentist’s chair the other day. CNBC was on and when you’re in the dentist’s chair with your mouth open, you find yourself paying more focused attention to the TV, anything to get your mind off the drill. I was watching the ticker as it went across the screen and I was shocked to see that about every fifth ticker that printed was an ETF ticker. The volume level of ETFs as a percentage of the overall volume of stock trading has gone very much higher. Five years ago, you might have seen an ETF ticker print every two or three minutes and now it’s one in every five tickers that print in my short little time in the dentist’s chair. But it’s an area that’s growing hugely in interest and in its importance to the investment landscape.

TWST: We hear a lot about alternative investments these days. How are ETFs redefining the investment management world at this time?

Mr. Breen: The thing that makes ETFs so important to the investment landscape is that we believe they are a crucial, basic tool that can be used for many different things. As you say, in the world of alternative investments, where people are buying and selling illiquid things very often, cash comes into strategies and there’s not the ability to put the cash to work very quickly. ETFs can provide a ready, easy, simple, liquid way of buying generic exposures that can sit in place until something more specific can be done. Because they can be shorted like a stock, one can create a very diversified short. The flexibility that entails is enormous when it comes to those Portfolio Managers who are working in the more alternative areas. As key as that is and as important a tool as the ETFs are to the alternative managers, we see the ETFs as being a very, very crucial tool for those like us who are focused long term and are trying to create diversified asset allocation with a very efficient and easy-to-implement tool kit.

TWST: With ETFs becoming so popular, do you anticipate that you’re at the head of a crowd that’s going to follow with mutual funds investing in ETFs?

Mr. Bach: I think there are a couple of things. One is that we’re ahead of the game right now because we’re the second one out there. A lot of fund managers pride themselves on stock selection, so they’re going to have to eventually decide whether they’re stock pickers or asset allocators. You can’t say you’re great stock pickers and that means everything and then do an about face and say stock selection only accounts for 5% of your performance and 90% of your performance is due to asset allocation. You have to decide what side of the fence you want to be on. Some are going to try to play both and that’s fine, but I think you may see some people dabble in allocation of ETFs just to get some market share in something that way. We’re going to focus on ETFs and asset allocation as our main marketing strategy, while you may see a fund company introducing one fund out of 30 funds.

Mr. Breen: The landscape in investing is very interesting because, on the one hand, we’ve spent a lot of time at least paying lip service to the idea that asset allocation is the driver of performance and the most important decision that an investor makes. And yet we also have created this idea of the Portfolio Manager as almost a cult of personality. In some regard, those things are in opposition with each other. Empirically, we see the active Portfolio Manager become more like an index every day for a number of reasons, including the illiquidity of the market and the benchmark sensitivity of the manager. And so we see the Portfolio Manager, even as they continue to be highly touted, moving more and more to an index-like framework, and we see allocation increasingly becoming the dominant decision that is made in portfolios. The ETFs hasten that debate along. Because the ETFs are less expensive than actively managed mutual funds and provide exact allocation exposures, they will become the dominant investment approach in our view, so we’re very pleased to be at the early end of a curve that we see accelerating, but we’re in the very early days. To use an analogy about the baseball teams getting ready to break camp, we’re in spring training here and we think that the future is going to be very, very exciting for ETFs and, clearly, there will be many, many players in that area.

TWST: Let’s move on to your investment decision-making process. What ETFs are you looking for and what is the buy discipline?

Mr. Breen: We have two things that we do in portfolio construction. The first thing we do is make sure that we impose diversification on the portfolio. We believe very strongly in the idea of diversification across asset classes and styles, size categories and what have you. We begin with a size and style categorization of the broad market. We start there for risk control purposes and then we use our valuation work to move the portfolio away from the middle, away from making no over or underweights in any size or style category. If you were to place us on a continuum with the pure strategic allocator who’s just trying to buy a portfolio on the efficient frontier where it’s a long-term estimated frontier, if you place that person at one end of the continuum and the person that moves 100% on the other side, we’re always diversified but we believe in the idea of moving the portfolio on an active basis. We have a valuation model that we build from the individual company up. We score individual companies based on a quantitative, multi-variant factor model that we’ve developed and then we place the individual holdings, having scored them, into the respective ETFs where they are. We have a weighted average of the scores for each ETF and that’s where our over and underweighting come from. Our first step is to create a portfolio of ETFs that replicates the broad market and has a very high correlation to the broad market, concentrating where we can among those ETFs that have high scores and then we overweight those ETFs with the highest scores and underweight those with the lowest. It’s a quantitative approach that takes into account both risk control and the opportunity to add value by finding those areas with the highest expected return. Of course this does not guarantee profits or eliminate losses.

Mr. Bach: I always try to take the technical and put it into what the average client out there can understand in simple terms. Essentially, we look under the hood of the ETFs to see what the underlying holdings are rather than just generally categorizing a mid-cap ETF as being part of the asset allocation. Jamie has done some interesting studies that say not all ETFs are the same, even though they have the same name. For instance, the Russell Mid Cap ETF is significantly different from the S&P Mid Cap ETF. One is not better or worse, but they act differently in different economic and market cycles.

Mr. Breen: Benchmarks are not constructed in the same way. Every provider of benchmarks has a little bit of a different wrinkle when it comes to deciding how they categorize companies in one pot or another or sometimes in more than one pot. Because of that and because the ETFs are designed to emulate the performance of the various benchmarks, our selection rule is one that must account sometimes for the differences in those underlying benchmarks and our solution to that is by going from the bottom up and scoring each individual company, because we can do that and then because of the ability we have to see through to the individual holdings of the ETFs, we can essentially make our decision as to which benchmark provider we think best captures the essence of the style that we’re trying to participate in. The disparity between the various benchmark provider performances is a little larger than what most people think that it is.

TWST: How many ETFs do you generally have in your Fund and is it a fluctuating number?

Mr. Breen: It is a fluctuating number. We’ll have between 15 and 25 ETFs in the portfolio at any given time. Right now we’re at 22 ETFs in the portfolio.

TWST: How do you weight the ETFs?

Mr. Breen: To step back, our portfolio is within what might be called a moderate allocation, meaning that we’re going to be approximately 70% in equity and 30% in fixed income, so the weight of the equity ETFs in aggregate will be around 70% and the weight of the fixed incomes will be around 30%. As to how weighting gets determined beyond that, because we’re very focused on risk control and because the first look is to look at the broad categorization of the marketplace, that will of course drive a larger fraction of the assets into larger cap ETFs. If we were to make no over or underweights, we would be purely capitalization weighted. Now, because we do make over and underweights, we’ll vary somewhat from a pure capitalization weighted approach where, for example, we’d have more in the S&P 500 than the micro-cap. But because we make over and underweight decisions, we will vary from a pure cap weighted framework.

TWST: What about the sell discipline? When do you decide to get out of one of the ETFs?

Mr. Breen: One of the interesting things here and one of the places where I think we would contrast our approach with the traditional portfolio management approach is, we don’t really look at the individual holdings. We don’t sit around the table and say, ‘Let’s buy this one and this one and this one because they hit our buy screens,’ and then wait until one hits the sell screens to sell them. We really don’t think about the problem that way. What we do is we think about what we want the aggregate portfolio to look like from an allocation perspective at all times. We are using individual security analysis work to get us to over and underweight candidates. At all times, we’re thinking about the portfolio as an aggregate, so as an aggregate, we’re thinking about buy and sell decisions in a way that makes the overall asset allocation consistent with what we’re trying to accomplish at any point in time. It may be that we sell an ETF because there’s a better or statistically closer fit to the allocation that we want to have. That sell may not be a negative commentary on the ETF in any way. It may just be that the portfolio is better realized in the aggregate with a different combination. We are also doing quantitative work that speaks to the over and underweight profile, and that changes through time. We might move from a position where small cap value ETFs score very well in our scoring algorithms. That may change and has, in fact, changed. And now we’re in a more style-neutral mode, clearly moving toward a period where you’d expect to see more growth- oriented ETFs in the portfolio. It may be that a sell is because we think that small cap value’s time is over and now it’s time to go to a different style. The buying and the selling comes both to make sure that the aggregate portfolio allocation remains reasonable and then it will be reflective of changing our scoring algorithm.

TWST: What about the risk management techniques that you adopt? How do you control risk in ETF management?

Mr. Breen: Risk is an interesting term and you’ve got to be careful when you talk to money managers about risk. They say that Eskimos have 50 different words for snow. The way that we think about risk in this context is, overall we would like to have the equity/non-equity component be somewhere in the 70-30 range, where the beta of the portfolio will always be maintained somewhere around 0.7-0.75, somewhere in that area. But that’s only one dimension of risk. Another dimension of risk is the level of tracking error the portfolio takes on or how different from an overall market benchmark this portfolio is likely to be as a result of variance in the size and style framework to the benchmark. There, we start with understanding what the portfolio would look like if we didn’t make any bets, any over or underweight decisions, and we add over and underweight on a very controlled basis so that we’re controlling both the equity and non-equity risk of the portfolio at all times, and we’re also controlling the overall difference from the broad market so we’re not making bets that are going to exceed our budget for tracking error. We view our mandate here as one that is seeking to add alpha through active management but is also seeking to never be so far into a corner that it would be difficult for us to recover. We view our mandate as one of both providing a moderate allocation and a very controlled tracking error within that moderate allocation band.

TWST: Who are your typical investors?

Mr. Breen: The perfect investor for our Fund is someone who needs to have a very, very diversified core portfolio but perhaps doesn’t have the level of assets that they would need to be able to accomplish that readily themselves or through an advisor. This might be an individual with an IRA rollover, leaving a company with between $50,000-$200,000 in a 401(k) plan, looking for an opportunity to get some advice from an advisor on their overall financial planning and retirement structure and yet not at a level of assets where they can hire on multiple separate account managers.

Mr. Bach: We understand from conversations with advisors the smaller client gets ignored. Right now, many firms and advisors have or are implementing business plans to have fewer clients with larger assets. That leaves many smaller clients on the side of the road. Those people may be ignored and they don’t have an option. They may potentially go to a bank and a bank advisor may say, ‘Here. Buy the XYZ Fund.’ It’s a large cap blend fund or it’s a large cap value fund or they even buy two funds. That client may never talk to the advisor again; the account may never be rebalanced and they may be left alone for three, four, five or more years without any active management. What we’re able to do now is essentially give a separately managed account the attention that the wealthier individual has typically received and now it’s wrapped inside a mutual fund. So even if that broker at a bank puts $25,000 in our Fund, by the nature of our Fund, it’s going to be an actively managed account where the allocations are going to change depending on the market and the economic environment. That was not available to the smaller client until now.

TWST: You have a good market for appealing to the smaller investors. How do you measure the performance of a fund of ETFs?

Mr. Breen: Our performance is measured the same way that anything else is measured. If one were to invest 70% in the broad equity market and 30% in the broad bond market, it’s our goal after fees to produce a higher rate of return than that static investment would produce. That is what we’re trying to do. We believe that our activity will add value, and we expect to be measured against a benchmark like that. The interesting thing here is that the advent of ETFs makes what we do possible, but it really doesn’t change anything else about investing. The thing that makes the ETFs so important to the development of products in the asset management space is that it allows us to make decisions at the place where we’ve learned decisions should be made. Aside from that, nothing else changes. We expect to add alpha, have a high Sharpe ratio, have a high information ratio and all of those metrics that people use to reasonably measure the performance of investment managers. We’re anxious to be measured against those metrics because we believe that we will add value.

TWST: What do you say to an investor who says, ‘Aren’t ETFs just another way to buy an index fund?’

Mr. Breen: ETFs are another way to buy an index fund in some dimension. However, the average expense ratio of the ETF may be lower than the expense ratio of the like index fund, although that may not last for too long and I know that certainly in some areas, Vanguard has lowered the price of index funds to be competitive with the ETFs. If it went the other way and Vanguard suddenly raised the price of index funds to meet the ETF level, I think your question might be more interesting. But in our opinion, ETFs have driven down prices of index asset management and probably will continue to do so. From the perspective of tax management within ETFs, an individual who buys an ETF establishes their own basis when they buy the ETF as opposed to buying into some previously existing set of gains, potentially. They may be a superior investment from a tax perspective. The other thing, of course, is the pricing of ETFs. I know that we’ve spent an awful lot of time in the last couple of years worrying about the way mutual funds are priced and when they’re priced and who gets to buy them at what time and what price. ETFs trade on the stock exchange just like a stock. There is a market price for them all day long. We now have several years of history with the ETFs that suggest that they do in fact trade in line with the basket of stocks that they’re supposed to track. If they didn’t, of course, the arbitrage opportunity is there and the arbitrage does tend to work. For those who say the ETF is just a glorified index fund, in some regard they’re right, but I would say they’re a superior mouse trap to the standard index fund in a couple of key ways.

TWST: You advocate ‘dynamic asset allocation.’ Why is this an important aspect of your management?

Mr. Breen: If one believed that the relationship between asset classes never changed or that when they do change, those changes are random, then the sort of strategic, find the spot on the long-term efficient frontier where the risk tolerance is acceptable and rebalanced to that portfolio is a perfectly fine approach. But there’s been compelling evidence over the last years that suggests that the risk premiums among asset classes does in fact change periodically. That change is not random and it is somewhat measurable. It’s not perfectly measurable, but it’s somewhat measurable. And as long as that’s the case, with risk premiums shifting along with some ability to measure the shifts in those risk premiums, it only makes sense to follow an active or dynamic approach to allocation. If risk premiums shift and you were efficient yesterday, you’re not efficient today. It makes sense in the environment where there are measurable shifts in the risk and return relationships to move accordingly and so that’s what we do with the Ovation Fund.

TWST: Is there anything else that you would like to add?

Mr. Breen: I would just reiterate how important ETFs are to the landscape of investing. That may be the most important new development that we’ve seen in 30-40 years and the allocation possibilities that arise from ETFs in the marketplace are enormous. We’re very excited to be pursuing this.

Mr. Bach: In a sense, we’ve created a potentially elegant solution to an under-addressed need. We also see this Fund fitting very well into other investment vehicles, such as variable annuities.

TWST: What is the expense ratio and investment minimum for the Fund?

Mr. Bach: That varies. Since it’s a new fund, asset growth over time should result in the Fund’s overall expenses coming down. There a lot of things you have to look at with expenses. Expense ratios are one aspect. We’re in the middle of the pack on expenses.

TWST: Thank you. (PS)

Note: Opinions and recommendations are as of 4/17/06.

CHRIS BACH JAMIE BREEN Symphony Wealth Management Group, LLC The Ovation Fund c/o Unified Fund Service, Inc. PO Box 6110 Indianapolis, IN 46206 (404) 442-4455