2Q12 Market Outlook March 2012 - Brinker...

2Q12 Market & Economic OutlookBill Miller Chief Investment OfficerStuart P. Quint III, CFAInternational Strategist

For use with existing Brinker Capital clients and their financial advisors.

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Disclosure

This report is intended to provide opinions and analysis of the general conditions of the market and economy, but is not intended to provide recommendations or personalized investment advice. Statements referring to future actions or events, such as the future financial performance of certain asset classes or market segments, are based on the current expectations and projections about future events provided by various sources, including Brinker Capital's Investment Management Group. These statements are not guarantees of future performance and actual events may differ materially from those discussed. This commentary includes statistical information obtained from various third-party sources. Brinker Capital believes those sources to be accurate and reliable; however, we are not responsible for errors by third-party sources on which we reasonably rely. Performance data represents general indexes representative of certain asset classes and are not indicative of actual past performance of any specific portfolio managed or sponsored by Brinker Capital. Any securities or sectors mentioned are based on relative newsworthiness and may or may not reflect holdings in an actual portfolio. Past performance is no guarantee of future results. Individuals should consult the advice of their financial advisor before making investment decisions.


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U.S. Economy: Improving

ISI’s diffusion index calculation methodology and data points are proprietary. The following definitions are applicable to this concept.

The Diffusion index represents economic strength minus weakness. Said another way, it measures the percentage of individual cases that are positive when compared with those that are negative over a defined period.

Indexes are unmanaged and investors are not able to invest directly into any index.

Source: ISI Group


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International Economies: Improving




Source: ISI Group


5

Emerging Market Economies: Improving




Source: ISI Group


6

Global Economy: Improving




Source: ISI Group


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Earnings Revisions: Slowing to single digits

Source: ISI Group, First CallFor use with existing Brinker Capital clients and their financial advisors.

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Portfolio implementation of valuation, technical and hot spot analysis: Neutral / Overweight

Domestic Equity

Q1 Earnings QE3 2012 Presidential

election Energy Jobs Housing

Valuation 200 Day Moving Average

Hot Spots


Too far above the 200 SMA

Stocks look fairly valued but cheap when compared to Treasury bonds

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

1,1001,100

1,1501,150

1,2001,200

1,2501,250

1,3001,300

1,3501,350

1,4001,400

©FactSet Research Systems

S&P 500 (SP50)23-Mar-2011 to 23-Mar-2012 (Daily) High:1414.00 Low: 1074.77 Last: 1397.11

Price Price - Moving Average 50 Day Price - Moving Average - 200 Day

For use with existing Brinker Capital clients and their financial advisors. 9

Portfolio implementation of valuation, technical and hot spot analysis:Neutral / Underweight

International Developed Equity

European elections: Greece (April), France (May)

Major Euro bond yields no longer panicking

Japan – trade deficits and slower rebuilding?

Rolling PIG-outs to continue


Hot Spots

Overall attractive but country dependent

Near-term, USD strength a headwind


650650

700700

750750

800800


MSCI EAFE (990300)23-Mar-2011 to 23-Mar-2012 (Daily) High:818.62 Low: 633.47 Last: 749.93


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Portfolio implementation of valuation, technical and hot spot analysis:Reducing Overweight

Emerging Equity Markets


Hot Spots

Valuations attractive vs. history and other markets

Fundamentals slowing but still reasonable


Central banks can still cut interest rates to help growth

Worries moving from Europe to China

Long-term flow of funds still favorable

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar36,00036,000

38,00038,000

40,00040,000

42,00042,000

44,00044,000

46,00046,000

48,00048,000

50,00050,000


MSCI EM (Emerging Markets) (891800)23-Mar-2011 to 23-Mar-2012 (Daily) High:49202.62 Low: 37371.42 Last: 45274.36


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Portfolio implementation of valuation, technical and hot spot analysis:Underweight

Fixed Income

Whither QE3? US GDP growth

suggest 10-year at least 3% (summer 2011 levels)

Corporate fundamentals solid, but fairly valued Coupon return, little

principal gain Retail investor

massively overweight fixed income


Hot Spots

Treasuries: central banks fixing prices with QE, expensive

Corporate Bonds: Fair value

Municipals: Mixed


Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar104104

105105

106106

107107

108108

109109

110110


Barclays Capital US Aggregate (LHMN0001)23-Mar-2011 to 23-Mar-2012 (Daily) High:110.05 Low: 104.23 Last: 108.07


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Portfolio implementation of valuation, technical and hot spot analysis:Neutral / Mixed

Real Assets - Commodities

Valuation200 Day Moving

Average Hot Spots

Oil is pricey apart from Mideast conflict

Base metals and agriculture catalyst specific and depend on global growth hanging in


Perceived and actual supply constraints

Rising correlation to equities

Gold – option on more QE, near-term technicalsmixed

Oil – feels heavy, risk of demand destruction if it spikes

Slower China – unequal impact

MLP’s offer yield with growth from organic growth and inflation, but beware of bonds

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Portfolio implementation of valuation, technical and hot spot analysis: Neutral / Mixed

Real Assets – Public Real Estate

Fundamentals solid with tight supply and gradual economic improvement

Equity issuance returning

High sensitivity to interest rates


Hot Spots

In absolute terms, US REIT’s look pricey, relative to fixed income modest value

Internationally some value exists with support from central bank QE (Japan, UK)


Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar150150

160160

170170

180180

190190

200200


Dow Jones US Select REIT (LJMEK)23-Mar-2011 to 23-Mar-2012 (Daily) High:205.60 Low: 151.98 Last: 202.33


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Portfolio implementation of valuation, technical and hot spot analysis:Overweight

Listed Private Equity

Europe No crisis = buy

private equity Yes crisis =

don’t buy private equity


Hot Spots

Companies trading at a 25% to 40%discount to net asset value

Portfolios able to distribute cash; challenge is future growth



77

88

99

1010

1111

1212


PowerShares Global Listed Private Equity Portfolio (PSP-US)23-Mar-2011 to 23-Mar-2012 (Daily) High:12.36 Low: 7.09 Last: 9.38


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Absolute Return

Better than bonds, YTD

Muted absolute returns

Due diligence matters


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2Q12 Themes

Tactically more defensive

Look for income generation

Watch the Fed

Jobs are a source of upside surprise


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GlossaryBarclays Capital Municipal Bond Index – A benchmark index that includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than two years) selected from issues larger than $50 million.Barclays Capital U.S. Aggregate Bond Index – An unmanaged market-value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year.Barclays Capital U.S. Corporate Investment Grade Index: includes publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility, and Finance, which include both U.S. and non-U.S. corporations. The non-corporate sectors are Sovereign, Supranational, Foreign Agency, and Foreign Local Government.Barclays Capital U.S. MBS Index: covers the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The MBS Index is formed by grouping the universe of over 600,000 individual fixed rate MBS pools into approximately 3,500 generic aggregates. The aggregates included in the index are priced daily using a matrix pricing routine based on trader price quotations by agency, program, coupon, and degree of seasoning.Barclays Capital U.S. TIPS Index (Treasury Inflation-Protected Securities) –The Barclays U.S. TIPS Index consists of inflation-protection securities issued by the U.S. Treasury. Barclays Capital U.S. Treasury Index: includes public obligations of the U.S. Treasury with a remaining maturity of one year or more.Dow Jones/UBS Commodity Index – A rolling commodities index composed of futures contracts on 19 physical commodities traded on U.S. exchanges. The Index serves as a liquid and diversified benchmark for the commodities asset class.DJIA (Dow Jones Industrial Average) – The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.Dow Jones-UBS Commodity Index: is composed of futures contracts on physical commodities. The index is composed of commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME).Dow Jones US Select REIT Index: measures the performance of publicly traded real estate securities. The index is designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate. To be included in the index, a company must be both an equity owner and operator of commercial and/or residential real estate. The index includes only REITs and REIT-like securities.Dow Jones US Total Stock Market – The Dow Jones US Total Stock Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The Index was created in 1974.FTSE EPRA/NAREIT Global Real Estate (Financial Times and London Stock Exchange European Public Real Estate Association/National Association of Real Estate Investment Trusts®) –The FTSE EPRA/NAREIT Global Real Estate Index is designed to represent general trends in eligible listed real estate stocks worldwide. Relevant real estate activities are defined as the ownership, trading and development of income-producing real estate. Only closed-end companies listed on an official stock exchange are included in the Index.HFRX Global Hedge Fund Index (Hedge Fund Research Inc.) – The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It comprises eight strategies: convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset-weighted based on the distribution of assets in the hedge fund industry. ISM Manufacturing Index – A monthly index released by the Institute of Supply Management which tracks the amount of manufacturing activity that occurred in the previous month. This data is considered a very important and trusted economic measure. If the Index has a value below 50, due to a decrease in activity, it tends to indicate an economic recession, especially if the trend continues over several months. A value substantially above 50 likely indicates a time of economic growth. The values for the Index can be between 0 and 100.


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GlossaryISM Non-Manufacturing Index – ISM Non-Manufacturing Index is a gauge of business conditions in non-manufacturing industries, based on measures of employment trends, prices and new orders. Though non-manufacturing sectors make up the majority of the economy, the ISM Non-Manufacturing has less market impact because non-manufacturing data tends to be more cyclical and predictable. However, these sectors do account for a considerable portion of CPI. As a result, the figure gives insight into conditions which can impact output growth and inflationary pressures.LIBOR (London Interbank Offered Rate) – The interest rate offered by a specific group of London banks for U.S. dollar deposits of a stated maturity. LIBOR is used as a base index for setting rates of some adjustable rate financial instruments, including Adjustable Rate Mortgages (ARMs) and other loans.Merrill Lynch 3-7 Year Municipal Bond Index – The Merrill Lynch 3-7 year municipal bond index us a subset of The Merrill Lynch US Municipal Securities Index including all securities with a remaining term to final maturity greater than or equal to 3 years and less than 7 years.MSCI All Country World ex-U.S. (Morgan Stanley Capital International) –The MSCI All Country World Index ex-U.S. is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets, except the U.S. The Index consists of 47 country indices comprising 22 developed and 25 emerging market country indices.MSCI EAFE (Morgan Stanley Capital International Europe, Australasia and Far East) –The MSCI EAFE Index is recognized as the preeminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indices, representing the developed markets outside of North America: Europe, Australasia and the Far East.MSCI Emerging Markets (Morgan Stanley Capital International) –The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2006, the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.NASDAQ (National Association of Securities Dealers Automated Quotations) – The NASDAQ Composite Index is a market-capitalization-weighted, unmanaged index that is designed to represent the performance of the National Association of Securities Dealers Quotation System, which includes more than 5,000 stocks traded only over the counter and not on an exchange. The Index does not include the reinvestment of dividends.Red Rocks Listed Private Equity Index – The Red Rocks Listed Private Equity Index is designed to track the performance of the largest and most liquid publicly traded private equity firms principally invested in the United States and publicly traded private equity portfolios with principal investments in the United States. The publicly traded stocks within the Index are traded on any nationally recognized exchange worldwide.Russell 1000 – Measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization was approximately $13.9 billion; the median market capitalization was approximately $4.9 billion. The smallest company in the Index had an approximate market capitalization of $2.0 billion.Russell 1000 Growth – Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.Russell 1000 Value – Measures the performance of Russell 1000 companies with lower price-to-book ratios and forecasted growth values.Russell Mid Cap – Measures the performance of the 800 smallest companies in the Russell 1000 Index, which represents approximately 30% of the total market capitalization of the Russell 1000 Index. As of the latest reconstitution, the average market capitalization was approximately $5.3 billion; the median market capitalization was approximately $3.9 billion. The largest company in the Index had an approximate market capitalization of $14.9 billion.Russell Mid Cap Growth – Measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth Index.Russell Mid Cap Value – Measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values. The stocks are also members of the Russell 1000 Value Index.Russell 2500 – Measures the performance of the 2,500 smallest companies in the Russell 3000 Index.Russell 2500 Growth – Measures the performance of those Russell 2500 companies with higher price-to-book ratios and higher forecasted growth values.Russell 2500 Value – Measures the performance of Russell 2500 companies with lower price-to-book ratios and forecasted growth values.


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Glossary

Russell Small Cap – Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization was approximately $762.8 million; the median market capitalization was approximately $613.5 million. The largest company in the Index had an approximate market capitalization of $2.0 billion and a smallest of $218.4 million.Russell Small Cap Growth – Measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.Russell Small Cap Value – Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.S&P 500 (Standard & Poor's 500 Index) – An index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. Companies included in the Index are selected by the S&P Index Committee, a team of analysts and economists at Standard & Poor's. The S&P 500 is a market-value-weighted index -- each stock's weight in the Index is proportionate to its market value. Standard & Poor’s/Case-Shiller Home Price Index – The S&P/Case-Shiller Home Price Index measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. The Index uses the repeat sales pricing technique to measure housing markets. The Index is calculated monthly and published with a two-month lag.TED Spread (acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract) – the difference between the interest rates on interbank loans and short-term U.S. government debt. It is an indicator of perceived credit risk in the general economy. Troubled Assets Relief Program (TARP) – A program in which the federal government can buy bad assets from financial institutions, with the government getting stock warrants in return.Two Hundred Day Moving Average - A moving average is the arithmetic average of a given number of past closing prices of a stock or index over a fixed period of time. For example, a 200 day moving average is the average of the past 200 days of closing prices. Jeremy Siegel, Stocks For The Long Run. Edited by Jeffrey Krames. (New York: McGraw-Hill, Second Ed. 1998), p. 246.VIX (Market Volatility Index) – An index designed to track market volatility as an independent entity. The Market Volatility Index is calculated based on option activity and is used as an indicator of investor sentiment, with high values implying pessimism and low values implying optimism.


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For use with existing Brinker Capital clients and their financial advisors. SF 1305 BF 3/28/12

2Q12 Market Outlook March 2012 - Brinker...

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