Quarterly Investment Strategy
-
Upload
mehorseblessed -
Category
Documents
-
view
6 -
download
2
description
Transcript of Quarterly Investment Strategy
V O L U M E 7 / / I S S U E 4 / / O C T O B E R 2 0 1 5
INVESTMENT STRATEGY OUARTERLY
Investment Strategy Quarterly is intended to communicate current economic and capital market information along with the informed perspectives of our investment professionals. You may contact your financial advisor to discuss the content of this publication in the context of your own unique circumstances. Published 10/01/2015. Material prepared by Raymond James as a resource for its financial advisors.
PAGE 2 INVESTMENT COMMITTEE MEETING RECAP
PAGE 4 ECONOMIC SNAPSHOT
PAGE 14 STRATEGIC ASSET ALLOCATION MODELS
PAGE 15 TACTICAL ASSET ALLOCATION WEIGHTINGS
PAGE 16 ALTERNATIVE INVESTMENT SNAPSHOT
PAGE 16 CAPITAL MARKETS SNAPSHOT
PAGE 17 SECTOR SNAPSHOT
Turn Off The Noise: Are we back to “normal” volatility? PAGE 8
Oversupply:Not just oil’s problem anymore PAGE 12
The Fed: Delayed, but not forgotten PAGE 10
China: Global perspectives on change and challenge PAGE 5
2
INVESTMENT STRATEGY QUARTERLY
ECONOMIC OUTLOOK
Recent volatility in the global equity markets clearly suggests that uncertainty exists among investors. Despite the extreme mid-quarter intraday price swings, the committee is in agreement that the U.S. economic out-look remains bright. “We’ve had very strong job growth, August’s numbers notwith-standing,” says Chief Economist Scott Brown. “I think the focus for U.S. investors on China is misplaced, they’re not really focusing on the real issue, which is our domestic strength.”
Citing concerns over structural reform in Europe, European Strategist Chris Bailey* agreed that, “the clearest eco-nomic growth driver today is the United States. I’m still seeing a real implementa-tion problem in Europe. European governments may sound unified in their rhetoric, but the implementation isn’t there at the moment. And ultimately this will hurt the European economy.” He is more constructive on China’s ability to successfully imple-ment reforms: “I think China ultimately may contribute [to global growth] in a positive fashion.”
FEDERAL RESERVE POLICY
When asked prior to the September FOMC meeting about the timing of Fed action, Brown stated, “Vice-Chair Fischer is clearly suggesting the Fed’s on track to begin raising rates this year. Whether that’s September or not is an open question.” Citing recent global financial market turmoil as a potential cause for delay, he assures that it will be temporary. Brown’s comments held true, as Fed Chair Janet Yellen announced on September 17 that rates would remain unchanged due to the potential impact of soft global growth on the U.S. economy, among other factors. As far as the financial market’s fixation on the topic, Brown expressed that, “the stock market is overly concerned about the Fed. This shouldn’t be a big deal. The initial increase in short-term rates would be a sign that the recovery is well entrenched and the Fed expects that we’re going to see fur-ther improvement down the line.”
From an international perspective, Chris Bailey* sees the eventual rise in U.S. rates creating an opportunity for the dollar to potentially retreat a bit. A slightly lower dollar “would actually be really good for reinforcing the need for structural reform in Europe.” Additionally, it would help reduce global imbalances which have negatively impacted emerging markets and other areas around the world.
ASSET ALLOCATION GUIDANCE
EQUITIES
The committee is neutral on equities overall in the near term. Recent volatility has led to mixed signals between fundamental and tech-nical indicators. Chief Investment Strategist Jeff Saut stated, “I’m having a real hard time because we did get a Dow Theory Sell Signal on August 25. While I’m ignoring this one tem-porarily, if we go below those levels on a closing basis, I’m going to have to honor the sell signal. I don’t want to because I think we’re in a secular bull market.”
Due to market activity in the weeks following the third quarter committee meeting, we are providing updated insights:
“We have been a tad conflicted lately. On one hand, we have long held the belief that we are in the midst of a long-term secular bull market that has years left to run, and that any dips or corrections should be viewed within the con-text of this multi-year uptrend (and this view may still very well end up being correct). However, the other hand has thrown an unwanted variable into the equation by giving us the Dow Theory Sell Signal that we have discussed quite a bit over the last month.
When examining historical market activity similar to what we’ve experienced over the last two months, the results, for-tunately, do not indicate that the bottom is about to drop out of this bull market. This bit of good news obviously isn’t enough for us to completely throw caution to the wind, but it does put the current landscape into context.”
-Andrew Adams, CMT, Equity Research
SEPTEMBER 2015 INVESTMENT STRATEGY COMMITTEE MEETING RECAPSimilar to last quarter, the committee agrees that the Federal Reserve, which delayed the highly anticipated rate hike in September, is the most influential macro-economic factor facing investors as we head into the final quarter of 2015 and early 2016. Other concerns include slowing global economic growth, particularly in China. The committee’s attitude toward real U.S. GDP growth over the next 6-12 months is neutral, with expected annual growth registering in the 2-3% range.
“What drives the markets is
not tied to a single event or
sentiment. The world's
economies are experiencing
proactive intervention from
their central banks including
some of the most influential
institutions: the Bank of Japan,
European Central Bank,
People's Bank of China and the
Federal Reserve. It is difficult
to attribute specific actions to
end results but it could be
argued that the Fed maintain-
ing interest rates at near-zero
for seven years and increasing
their balance sheet to $4.5
trillion infused money into the
system. Equities swelled during
this period arguably not based
on pure profitability.”
DOUG DRABIK, Senior Strategist, Retail Fixed Income
3
OCTOBER 2015
General consensus believes the equity market correction was long overdue and much needed. Ryan Lewenza, SVP, Private Client Strategist and Portfolio Manager* is confident that “we’re going to consolidate through this. A seasonally weak September, perhaps even early October, should set us up for a year-end rally. As we all know, October to December is the strongest period for the equity markets, especially when you come off a correction in late September.”
Mike Gibbs, Managing Director of Equity Portfolio & Tech-nical Strategy added, “I’m not ready to toss in the towel yet. The U.S. economy is in good shape and the global economy should give us better data down the road. We have to pay attention to what’s going on and see how things play out…just strap in and be prepared for the next month or two. It could be a fairly volatile ride.”
FIXED INCOME
The committee was evenly split between a neutral and slightly underweight allocation to fixed income. Members suggested that any imminent action by the Fed should not have a discern-ible effect on the overall fixed income markets. Nick Goetze, Managing Director of Fixed Income Services stated, “I think that the impact of an eventual rate change really won’t amount to anything. As I understand it, anything short of 3.25% is accommodative, so when they increase short-term rates by 20 or 50 basis points, I would imagine the Fed’s language there-after will sound something a lot like, ‘we’re going to stop now and we’re going to watch and see what happens’.”
“But in general, if you look at the overall bond market, it's still a very, very safe asset [on a relative basis],” added Goetze. “I think it’s telling you something when a lot of the world is still buying bonds based on the most important premise - being able to get your money back. It’s return of principal, not return on principal.”
Each quarter, the committee members complete a detailed survey sharing their views on the investment environment, and their responses are the basis for a discussion of key themes and investment implications.
INVESTMENT STRATEGY COMMITTEE MEMBERS
Andrew Adams, CMT Research Associate, Equity Research
Chris Bailey European Strategist, Raymond James Euro Equities*
Scott J. Brown, Ph.D. Chief Economist, Equity Research
Robert Burns, CFA, AIF® Vice President, Asset Management Services
James Camp, CFA Managing Director of Fixed Income, Eagle Asset Management*
Doug Drabik Senior Strategist, Retail Fixed Income
J. Michael Gibbs Managing Director of Equity Portfolio & Technical Strategy
Kevin Giddis Senior Managing Director, Fixed Income
Nick Goetze Managing Director, Fixed Income Services
Peter Greenberger, CFA, CFP® Director, Mutual Fund Research & Marketing
David Hunter, CFA, CAIA Officer, Institutional Research, Asset Management Services
Nicholas Lacy, CFA Chief Portfolio Strategist, Asset Management Services
Ryan Lewenza, CFA, CMT Senior Vice President, Private Client Strategist and Portfolio Manager, Raymond James Ltd.*
Pavel Molchanov Senior Vice President, Energy Analyst, Equity Research
Paul Puryear Director, Real Estate Research
Jeffrey Saut Chief Investment Strategist, Equity Research
Richard Skeppstrom Managing Director of Investments, Portfolio Manager, Eagle Asset Management*
Scott Stolz, CFP® Senior Vice President, PCG Investment Products
Jennifer Suden, CAIA Director of Alternative Investments Research
Tom Thornton, CFA, CIPM Vice President, Asset Management Services
Anne B. Platt, AWMA®, AIF® – Committee Chair Vice President, Investment Strategy & Product Positioning, Wealth, Retirement & Portfolio Solutions
Kristin Byrnes – Committee Vice-Chair Product Strategy Analyst, Wealth, Retirement & Portfolio Solutions
*An affiliate of Raymond James & Associates and Raymond James Financial Services.
ENERGY
Oil and gas prices are in a bear market, though some of oil’s recent decline is sentiment-driven, as a result of Chinese headlines that pushed equities down as well. Ultimately, we think there will be an oil price recovery toward the end of 2016 as a supply response materializes.
U.S. HOUSING
Director of Real Estate Research Paul Puryear believes that the U.S. housing market is in its best shape in the last 15 years. “We had a great housing boom followed by a lot of vacancy as a result of over financing and, of course, the crash. Consequently, we haven’t seen the buckets of housing, whether it’s rental or owner-occupied housing, line up funda-mentally for quite some time.” Still, “we are in really good shape directionally from an inventory standpoint.”
From a job growth standpoint, the market is positive, yet not as impactful as it has been historically due to the lower mag-nitude of builds compared to past periods. “Nonetheless, household formations and consumer trends should support continued price appreciation. Unless the economy rolls over, things should continue to be pretty good for housing.”
SUMMARY
The fourth quarter will likely shed light on the long-term direction of the economy and financial markets. The com-mittee is hopeful that the consensus view of a positive long-term outlook holds and that this recent correction does not escalate into something worse.
Given the current environment of heightened volatility, our opinions could change as market conditions dictate. Market updates and guidance will be provided by Chief Investment Strategist Jeffrey Saut, should a change of opinion occur in the coming months.
4
INVESTMENT STRATEGY QUARTERLY
STATUSECONOMIC INDICATOR COMMENTARY
PO
SIT
IVE
OU
TLO
OK
GROWTHGDP growth is likely to be restrained somewhat by a fall in net exports and an inventory correction, but consumer spending and business fixed investment should remain relatively strong in the near term.
EMPLOYMENTJob losses remain limited. New hiring appears to have remained moderately strong, led by gains in small and medium-sized businesses.
CONSUMER SPENDING
Nominal wage growth has remained relatively lackluster, but the drop in oil prices has added significantly to consumer purchasing power.
HOUSING AND CONSTRUCTION
Job growth has been supportive and bank mortgage lending has gotten somewhat easier, but we still have a long way to go for a full recovery.
INFLATIONConsumer price inflation has been close to 0% y/y, reflecting the drop in gasoline prices. Pipeline inflation pressures are minimal.
MONETARY POLICY
Fed officials believe that downward pressure on inflation will be transitory, and most expect that it will be appropriate to begin raising short-term interest rates by the end of the year. The pace of tightening should be gradual.
THE U.S. DOLLARThe dollar has been largely range-bound against the major currencies since mid-March, but rallied significantly against the smaller currencies in the late spring and summer.
NEU
TR
AL
OU
TLO
OK
BUSINESS INVESTMENT
The contraction in energy exploration and the soft global economy have been restraints, but orders have picked up somewhat following a poor first half.
MANUFACTURINGAuto production has remained strong, but factory output has been mixed and generally lackluster otherwise (reflecting the impact of a strong dollar).
LONG-TERM INTEREST RATES
Long-term interest rates should drift gradually higher as the economy improves and the Fed starts to raise short-term rates. However, we may continue to see a flight to safety (lower bond yields) on global concerns.
FISCAL POLICYThere is a strong likelihood of a government shutdown over the federal budget and debt ceiling by the end of the year.
REST OF THE WORLD
The outlook for China and other emerging market economies has grown more uncertain, rattling investor nerves. It’s difficult to gauge how much the global economy may slow over the near term.
ECONOMIC SNAPSHOT
The economic outlook is mixed. Softer global growth and a strong dollar are expected to restrain
export growth. However, the domestic economy appears to be in good shape, supported by strong
job growth, accommodative monetary policy, and low oil prices. Fed policymakers expect to begin
raising short-term interest rates by the end of the year, but the pace of tightening beyond the first
move, while data-dependent, is expected to be very gradual.
SCOTT BROWN Chief Economist, Equity Research
5
OCTOBER 2015
A U.S. PERSPECTIVE
– Scott J. Brown, Ph.D.
China has been a key concern for investors in recent months. The
country’s stock market correction and currency adjustment added
to market volatility worldwide. After the Shanghai
Composite Index more than doubled in a year, the
decline in share prices appears to be the unwinding
of a speculative bubble. The currency decline was
not intended to be a competitive devaluation.
Rather, it was an ill-fated attempt to move to a
more market-driven exchange rate. China’s leaders
want the yuan to be seen as one of the world’s key
reserve currencies. The International Monetary
Fund ("IMF") was reported to be considering
whether to add the yuan to its benchmark basket
(along with the dollar, pound, euro, and yen). However, to do so
would require that the exchange rate be set by the market, rather
than at the whim of Chinese officials. This exchange rate experi-
ment didn’t last long, as the currency fell sharply in just two days,
and officials declared the adjustment to be “essentially com-
plete.” These developments were a sideshow, however, to the
more important issue, which is slower growth.
China is making two difficult and potentially dangerous tran-
sitions. The first is that the economy needs to transform from
one being led by export growth and infrastructure spending
to one being led by consumption. That will take some time
and growth could be bumpy along the way. Moreover, sustain-
able growth at the end of the transition is likely to be slower.
China’s growth has averaged about 10% per year over the last
couple of decades, but may slow to 4-6% in the years ahead.
The second is the liberalization of China’s capital markets. Asset
prices need to be determined by the markets, with limited inter-
vention from the government. History has shown that if such a
transition is not carefully coordinated, there can be severe con-
sequences. The government’s clumsy efforts to prevent share
prices from falling and to keep its currency from
weakening too rapidly illustrate the difficulties
and have undermined confidence.
What would a slowdown in China mean for the
U.S. economy? Not much directly. China accounted
for a little over 7% of U.S. exports in 2014, less than
1% of GDP. However, China has been a major
importer of raw materials and many commodity
exporters, such as Australia, Brazil and Canada,
are seeing weakness. So, slower growth in China
will have broad effects on the global economy.
It’s not all bad news. Lower commodity prices, especially the
drop in oil prices, should be beneficial to U.S. consumers and
businesses. That should add to domestic strength in the
months ahead.
A COMMODITY MARKET PERSPECTIVE
– Ryan Lewenza
China’s economic growth and commodity prices are inextri-
cably linked. We often say that “China is the marginal price
setter of commodities.” We say this for a number of reasons.
First, the combination of China’s large population, rising stan-
dards of living, and urbanization has led to an insatiable
demand for commodities. Second, related to this point, China
represents roughly 50% of annual global demand for key com-
modities like steel, cement, and copper among others. Third,
China has been investing in infrastructure at an incredible
rate, building roads, airports, and high-speed rail, to support
What would a slowdown
in China mean for the
U.S. economy? Not much
directly. China accounted
for a little over 7% of U.S.
exports in 2014, less than
1% of GDP.
Scott J. Brown, Ph.D., Chief Economist, Equity Research Ryan Lewenza, CFA, CMT, Senior Vice President, Private Client Strategist and Portfolio Manager, Raymond James Ltd.*Chris Bailey, European Strategist, Raymond James Euro Equities*
SCOTT BROWN Chief Economist, Equity Research
*An affiliate of Raymond James & Associates and Raymond James Financial Services.
China: Global perspectives on change and challenge
6
INVESTMENT STRATEGY QUARTERLY
the continued urbanization and growth of the country. To put
this into context, China’s investment as a percentage of GDP is
51%, compared to the U.S. at 17%. While some of these invest-
ments were surely dubious (i.e., China’s ghost cities), many of
these investments were critical in the advancement and growth
of the nation. Finally, as the saying goes “a picture is worth a
thousand words.” In the chart below, China’s GDP growth is
overlayed with the year-over-year change in commodity prices.
Note the high correlation between the two. As China’s growth
accelerated, commodity prices rose, and as China has slowed,
commodity prices have come under pressure. Putting it all
together, it becomes clear that the outlook for China will largely
drive the outlook for commodities. And on that, it should come
as no surprise that as China’s GDP growth has slowed from an
average of 9.4% in the 2000s to 7% in 2015, that demand for com-
modities has waned, and prices have fallen.
The question then is “what is the outlook for China’s growth?”
China is currently undergoing a massive transformation. This
transformation in part explains the deceleration of economic
COMMODITY PRICES MIRROR CHINA'S ECONOMIC GROWTH
REASONS WHY CHINA IS THE MARGINAL PRICE SETTER OF COMMODITIES
UNITED STATES
17%CHINA
51%
1. The combination of China’s large population, rising standards of living, and urbanization has led to an insatiable demand for commodities.
2. China represents roughly 50% of annual global demand for key commodities such as steel, cement, and copper, among others.
3. China has been investing in infrastructure at an incredible rate, building roads, airports and high-speed rail, to support the continued urbanization and growth of the country.
4. As China’s growth accelerated, commodity prices rose, and as China has slowed, commodity prices have come under pressure.
activity. The other key drag on economic growth has been the
notable decline in export growth. Following China’s inclusion in
the World Trade Organization in 2001, real exports rose at a stag-
gering 25% per year until 2007. Since 2014, real export growth has
slowed significantly to 3.5%. Our view is that while China should
avoid a hard landing, economic growth should continue to slow,
possibly to a more sustainable mid-single digit growth rate.
Given this slowdown, we have maintained a cautious view of
commodities, which is one factor in our recommendation to
underweight the materials sector. It is also why we continue
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
4%
8%
12%
16%
1996 1998 2001 2004 2006 2009 2012
Commodity Research Bureau Commodity Index Y/Y % Chg (left axis) China GDP Y/Y % Chg (right axis)
INVESTMENT AS A PERCENTAGE OF GDP
China (continued)
7
OCTOBER 2015
KEY TAKEAWAYS:
• A slowdown in China would not mean much for the U.S. economy directly. China accounted for a little over 7% of U.S. exports in 2014, less than 1% of GDP.
• Putting it all together, it becomes clear that the outlook for China will largely drive the outlook for commodities.
• Given the slowdown in China, we have maintained a cautious view of commodities.
• Europe’s trade links with China remain a medium-term tailwind rather than a headwind as the ending of recent over-reliance on the Middle Kingdom’s economic development can actually be turned into an impetus for further required European reform.
Out of danger, however, comes opportunity. Policy makers –
especially in the euro area – seem more enthused by crisis
moments. Europe probably needs a second (or extended)
dose of quantitative easing support and it certainly needs
structural reform initiatives that improve the region’s flexi-
bility, dynamism and competitiveness. A Chinese slowdown
should boost the likelihood of both events. The most difficult
aspect to predict is timing. The fastest agents of change are
once again likely to be individual companies rather than gov-
ernments and that should support a more thematic or specific
investment approach to European assets versus a more blunt
index-wide approach.
Europe’s trade links with China remain a medium-term tailwind
rather than a headwind as the ending of recent over-reliance on
the Middle Kingdom’s economic development can actually be
turned into an impetus for further required European reform. In
the meantime, it also implies the announcement of a further slug
of quantitative easing support, making the economic and finan-
cial policy-making debate in the region a continued differentiator
from current policy in the United States.
to recommend to our Canadian clients to look outside of
Canada more, focusing on the better positioned U.S. and
European equity markets.
A EUROPEAN PERSPECTIVE
– Chris Bailey
“When written in Chinese, the word ‘crisis’ is composed of two
characters. One represents danger and the other represents
opportunity” - John F. Kennedy
Europe’s economic revitalization strategy over the past couple
of years has been as much about stimulating exports via a low
euro as it has been about expanding unorthodox monetary
policy via quantitative easing and other support measures. A
by-product of this has been the rapid build-up in the share of
exports to emerging markets as a percentage of European
countries’ GDP. Last year, German exports to emerging mar-
kets were equivalent to over 10% of their GDP and for the
broader euro area, just over 8% of regional GDP. By contrast,
the equivalent statistic for the U.S. is 4%. Unsurprisingly, the
majority of demand for European exports comes from China.
The current Chinese economic challenges are therefore poorly
timed for European economies as it lessens one of the positive
growth drivers for the region and therefore places more
emphasis on local regional drivers. Given we have previously
chronicled challenges with coordinating pan-European stim-
ulus and structural reform policies, this development is a
headwind for European growth levels. Earlier in the month, the
President of the European Central Bank, Mario Draghi, reduced
expectations for 2015-17 euro area growth, citing the chal-
lenging global backdrop. There is little doubt that the
combination of a Chinese slowdown and a disappointing appli-
cation of European structural reform initiatives has impacted
this action. Little wonder that rumors about a second wave of
quantitative easing in Europe have heightened.
8
INVESTMENT STRATEGY QUARTERLY
WHERE ARE WE NOW?
The Shanghai Composite Index continues to display height-
ened volatility, yet remains up around 30% over the last year,
as of late-September. Brown makes an important point, noting
that, “China’s stock market decline is not really indicative
of economic weakness, nor is it necessarily going to cause
economic weakness. That said, Chinese growth has slowed.”
European Strategist Chris Bailey opines that, “President
Xi of China is actually making pretty good progress on its
structural reform.” Furthermore, Bailey finds the likelihood of
successful reform much greater for China than for Europe.
U.S. equity markets have since followed suit, with the Dow
Jones Industrial Average recovering from late-August lows,
but volatility remains elevated. General consensus believes
that recent U.S. market activity, while unpleasant, is a healthy
correction and a normal part of the equity market cycle.
Still, it can be alarming for those who don’t understand the
phenomenon of a correction. Any sustained period of price
appreciation, as seen in China as stocks began skyrock-
eting in mid-2014, is a warning to many astute investors that
a correction may be near. Corrections are necessary when
General consensus believes that recent market activity, while unpleasant, is a healthy correction and a normal part of the equity market cycle.
WHAT HAPPENED LAST QUARTER?
June 12, 2015 marked the beginning of a significant correction in China’s stock market which
spanned most of the summer months. Despite several attempts by the Chinese government to
halt the sell-off, the Shanghai Composite Index lost nearly 43%, peak-to-trough. Roughly two
months later, on August 17, the Dow Jones Industrial Average embarked on a more muted cor-
rection, losing 10% over the course of seven consecutive trade days.
Further complicating matters for China, government officials made a surprising move by devaluing
the yuan, China’s national currency. Chief Economist Scott Brown, Ph.D. explains the failed experi-
ment: “They were not trying to boost exports by weakening their currency. What they were trying to do
was move towards a free-floating currency - to have a market-based determination of the exchange
rate.” What was actually an attempt to implement positive structural reform quickly turned into a
misinterpreted signal by investors that further economic slowdown was to be expected.
Kristin Byrnes, Committee Vice-Chair, Product Strategy Analyst, Wealth, Retirement & Portfolio Solutions
the markets become saturated with investors attempting to
take advantage of inflated asset prices rather than trading
on fundamentals. Eventually, the “bubble bursts,” removing
speculators from the market and paving the way for a return
to a “normal” investment environment.
Turbulent markets following a quiet period of general price
appreciation with low interest rates can be troublesome for
investors who have become complacent with the current envi-
ronment. In turn, they may have overextended their portfolio’s
risk profile in an attempt to stretch for yield or increase total
return. Director of Mutual Fund Research & Marketing Peter
Greenberger reminds us that it is in moments like this that
Warren Buffett’s investment acumen holds true: “Only when
the tide goes out do you discover who’s been swimming naked.”
WHERE ARE WE HEADED?
So what does this say about the future state of the equity mar-
kets? Chief Investment Strategist Jeff Saut reiterated his
long-term bullish stance, stating, “To a long-term bull, which
is what I am, what happened over the last several weeks is just
Turn Off The Noise: Are we back to “normal” volatility?
9
OCTOBER 2015
CBOE VOLATILITY INDEX (VIX) Through September 2015
The CBOE Volatility Index® (VIX)® is based on the S&P 500® Index (SPX), and esti-mates expected volatility by
averaging the weighted prices of SPX puts and calls over a wide range of strike prices.Aug.
1995Aug.1997
Aug.1999
Aug.2001
Aug.2003
Aug.2005
Aug.2007
Aug.2009
Aug.2011
Aug.2013
0
20
40
60
80
Aug.2015
KEY TAKEAWAYS:
• “China’s stock market decline is not really indic-ative of economic weakness, nor is it necessarily going to cause economic weakness. That said, Chinese growth has slowed.” - Scott Brown, Ph.D.
• General consensus believes that recent market activity, while unpleasant, is a healthy correction and a normal part of the equity market cycle.
• “During this period, over the next three-six-nine months possibly, the markets have the potential to be more volatile as investors wait and try to get clarity on just what is really happening around the world.”- Mike Gibbs
• Given that the short-term market outlook is unclear - as policies unfold at home and abroad - now is an oppor-tune time to reevaluate current portfolio positioning.
VIX 20-Year Average
noise. Our belief is that this is a pull-back in an ongoing sec-
ular bull market that still has another eight or nine years left to
run, providing the averages don't close below August 25 lows of
15,666 on the Dow and 7,466 on the Dow Transportation Index.”
Managing Director of Equity Portfolio & Technical Strategy
Michael Gibbs agreed that this was an ordinary correction,
pointing out that it takes time for markets to settle after a sig-
nificant loss. “During this period, over the next three-six-nine
months possibly, the markets have the potential to be more
volatile as investors wait and try to get clarity on just what is
really happening around the world.” He is confident that as
time plays out, “Everything will be fine with economic growth.
The global economy is still set to grow at 2-3%, as is the U.S.
economy, and typically you do not see a bear market in stocks
when the economy is growing.” Brown concurs, assuring that
“despite all of this noise, underlying it all is a domestic outlook
from the U.S. which is still very, very promising.”
As Gibbs emphasized, “The one thing that investors despise
is uncertainty.” Given that the short-term market outlook is
unclear - as policies unfold at home and abroad - now is an
opportune time to reevaluate current portfolio positioning. In
particular, comparing the current risk profile of the portfolio to
that of the investor’s risk tolerance can identify mismatches that
require repositioning. Whether it’s paring back or mitigating
current risk levels, participating in the glut of buying opportu-
nities available in oversold markets, or simply staying on track;
managing expectations surrounding risk/return objectives
is central to reducing investor surprise, panic, and emotional
decision-making during volatile market environments.
10
INVESTMENT STRATEGY QUARTERLY
The Federal Reserve has not raised short-term interest rates since June 2006. The U.S. central bank last
lowered the target range for federal funds (the overnight lending rate) to 0-0.25% in December 2008
and has kept it there since. The economic recovery, now more than six years along, has made substantial
progress. Job growth has been strong in the last couple of years and slack in the labor market has been
reduced considerably – with further slack expected to be removed over the next year. Fed officials need
to set monetary policy based on where the economy is expected to be 12 to 18 months ahead. Hence,
it is appropriate for policymakers to consider embarking on a gradual normalization. The first step is to
raise the federal funds target range.
tantrum.” Bond yields rose, emerging econo-
mies experienced financial strains, and the
Fed ultimately delayed, but did not perma-
nently postpone, its tapering of QE3.
This time around, bond yields haven’t taken off,
but stock market participants here and abroad are
still nervous. If not for the recent global financial
volatility, the Fed would likely have begun raising
short-term interest rates in September.
Why raise rates? The Fed would not be “hit-
ting the brakes” so much as “starting to take
the foot off the gas pedal.” Inflation isn’t
really a problem. The strong dollar and lower
commodity prices put downward pressure on consumer
price inflation in the near term, but the Fed views that as
transitory. Oil prices won’t fall forever and should stabi-
lize. The dollar has been range-bound against the major
currencies since March, but has rallied sharply against
other currencies in recent months. Those currencies
accounted for 57% of U.S. imports in 2014. A rate increase
would boost the dollar somewhat, adding downward pres-
sure on inflation, but much of that may already be priced
into the markets.
Fed officials believe that the precise timing
of the initial move should not be important.
What matters is the pace of tightening, and
officials expect rate hikes to be very gradual.
However, financial market participants
believe that timing matters a lot. Recent
signs of softness in emerging-market econo-
mies suggest that the global economy may
be fragile and that a Fed rate hike could
make conditions worse, adding to recent
market volatility. The Fed’s focus is clearly
on the domestic economy, which appears to
be in good shape, but officials do need to
take into account how overseas reactions to
Fed action might influence things here.
If this sounds vaguely familiar, it’s because we went through
a similar situation in 2013. At that time, the Fed was in the
middle of its third large-scale asset purchase program, also
known as QE3. The Fed was contemplating reducing the
current monthly pace of $85 billion in asset purchases, but it
couldn’t stop all at once and decided to taper the rate of
asset purchases over time. Simply mentioning the reduction
in the pace of purchases sent financial markets into a “taper
The decision is not so
easy given all the data that
contests the policy. The
Fed has extended a very
open and accessible policy
and will likely raise by year
end; however, there are
compelling reasons to
think they will not have
too many consecutive
or significant increases.
DOUG DRABIK Senior Strategist, Retail Fixed Income
Scott J. Brown, Ph.D., Chief Economist, Equity Research
NON-TRADITIONAL FIXED INCOME (continued)
The Fed:Delayed but not forgotten
11
OCTOBER 2015
The labor market is the widest channel for inflation pres-
sure. Wage growth has remained lackluster, but should
eventually pick up as the job market improves further. A
number of Fed officials have been surprised that we
haven’t seen strong wage growth, given the drop in the
unemployment rate and strong pace of growth in nonfarm
payrolls over the last year. There may be a number of fac-
tors (for example, the decline in union power or the ability
of firms to cast a wider net when hiring) that are limiting
wage pressures.
Fed officials are divided on the perceived risks. The
“hawks” always seem to see inflation around every bend
and want to tighten sooner rather than later. The “doves”
see few signs of upward pressure in inflation in the near
term and are more concerned with signs of slack in the
labor market. Monetary policy will still be very accommo-
dative even after the first few Fed rate hikes.
While global concerns may delay the Fed’s initial rate
increase, it won’t postpone it permanently. As Fed Vice
Chair Stanley Fischer put it in late August, by meeting the
Fed’s objectives (low inflation and maximum sustainable
employment), “and so maintaining a stable and strong
macroeconomic environment at home, we will be best
serving the global economy as well.”
KEY TAKEAWAYS:
• Fed officials believe that the precise timing of the initial move should not be important. What matters is the pace of tightening, and officials expect rate hikes to be very gradual.
• The Fed’s focus is clearly on the domestic econo-my, which appears to be in good shape, but offi-cials do need to take into account how overseas reactions to Fed action might influence things here.
• Monetary policy will still be very accommodative even after the first few Fed rates hikes.
12
INVESTMENT STRATEGY QUARTERLY
Q: U.S. and international oil stockpiles are near record highs.
Why is the market so saturated on the supply side?
A: There are three fundamental reasons why the physical
oversupply of oil is so visible globally. First, Saudi Arabia’s
oil production is running at record-high levels, up 7% year-
over-year, as it continues its price war with non-OPEC
producers such as the U.S., Russia, and Brazil. Saudi
behavior is starting to become irrational, and of course it
cannot keep worsening the oil glut forever. However, as
things stand, we have to assume that its record production
will continue into 2016. Second, Iraq’s production has
soared – which may seem counterintuitive, given the
ongoing headlines about the war with ISIS. On a per-
centage basis, Iraq stands out as the fastest-growing major
oil producer of 2015: up more than 15% year-over-year,
ahead of most expectations. Third, non-OPEC oil supply –
which is two-thirds of the world total – hasn’t yet begun to
exhibit significant declines. To be clear, this will eventually
happen, given the extent to which the entire industry is in
austerity mode, but it will likely be the second half of 2016
before the non-OPEC declines become meaningful.
Q: What will ultimately trigger price recovery in the oil
market, and do you see volatility being a common theme
going forward?
A: It is overwhelmingly supply that is the culprit behind the oil
selloff. The 2015 global oil demand picture (up 2%) looks
much better than we would have predicted a year ago. So it
is supply that will have to “fix” the oil market. The quickest
solution would be for Saudi Arabia to ease off on its over-
production, because – let’s be honest – it is already winning
the price war. But if that does not happen, then it may take
12 to 18 months to rebalance the
market via a decline in non-
OPEC supply. Across non-OPEC
countries, we are seeing huge
declines in oil and gas invest-
ment, drilling activity and project approvals. This will
gradually trigger a supply response – so much so, in fact,
that it’s even possible to imagine points of time towards
the end of this decade when the oil market might be under-
supplied, especially in the event of geopolitical supply
disruptions. In the meantime, however, there is no
escaping the fact that volatility will persist. The negative
economic headlines from China, for example, spurred a
dramatic downturn in equities and commodities alike –
even though the actual impact on Chinese oil demand is
small. On the other hand, in late August, oil prices had
their biggest three-day gain since 1990 amid rumors that
OPEC might be rethinking its production strategy.
Q: What about natural gas? Is it looking better or worse than oil?
A: Unlike oil, there is no such thing as a global market for nat-
ural gas. North America is a single gas market, but Europe
consists of three separate ones, and Asia-Pacific coun-
tries also have different gas price dynamics. It is well
understood that oversupply of shale gas in North America
has pushed prices to historically low levels, but what’s less
well known is that international gas economics are also
starting to look more bearish. Case in point: European gas
demand has had a stunning fall to a 20-year low, due to a
combination of more wind and solar as well as cheap coal.
Europe still relies, to a large extent, on buying gas from
Russia, but its falling consumption means imports are
There is no escaping
the fact that volatility
will persist.
Q&A with Pavel Molchanov, Senior Vice President, Energy Analyst, Equity Research
Oversupply:Not just oil’s problem anymore
13
OCTOBER 2015
down. In Asia, gas demand is growing, but not as fast as
the industry would have hoped. In the meantime, Austra-
lian gas exports are ramping up, and for the first time, the
U.S. Gulf Coast will be exporting some gas to Asia in 2016.
Thus, we cannot blame OPEC for the weakness in gas
prices worldwide, but rather it’s an issue of structural
changes in both supply and demand.
Q: Why are agricultural commodity prices so low, and who are
the winners and losers?
A: Many investors tend to be more familiar with what’s hap-
pening in energy and metals as compared to the agricultural
sector. While they don’t always trade in parallel, over the
past year we’ve seen close correlations among just about all
commodities. In the case of the main staple crops – corn,
wheat, soybeans, sugar cane – prices are at or near the
lowest levels since the global financial crisis of 2008-2009.
As of July, for example, the United Nations’ global food price
index was down 19% year-over-year. Part of the reason is
ample supply. Favorable weather in the Midwest has boosted
U.S. output and exports, though the strong dollar has been a
headwind. In Russia and Ukraine – and, to a lesser extent,
Brazil – weak currencies are enabling especially cheap
exports. Meanwhile, Chinese demand has not been as robust
as expected – as is true of all commodities – leaving global
stockpiles at elevated levels. Low energy prices are also
helping by reducing the cost of fertilizer and transportation.
All this is great news for countries that depend on imported
food: for example, China, Japan and Egypt. On the flip side,
farmers in the top food exporters – the U.S. and Canada,
much of South America, and Russia – are feeling the pres-
sure of lower revenues.
KEY TAKEAWAYS:
• It is overwhelmingly supply that is the culprit behind the oil selloff. So it is supply that will have to “fix” the oil market.
• There is no escaping the fact that volatility will persist.
• Over the past year we’ve seen close correlations among just about all commodities. In the case of the main staple crops, prices are at or near the lowest levels since the global financial crisis of 2008-2009.
14
INVESTMENT STRATEGY QUARTERLY
CONSERVATIVE CONSERVATIVE BALANCED BALANCED BALANCED
WITH GROWTH GROWTH
EQUITY 31% 51% 67% 78% 93%
U.S. Large Cap Equity 18% 31% 35% 35% 42%
U.S. Mid Cap Equity 4% 7% 9% 10% 11%
U.S. Small Cap Equity 2% 3% 5% 6% 7%
Non-U.S. Developed Market Equity 7% 10% 14% 17% 21%
Non-U.S. Emerging Market Equity 0% 0% 4% 6% 8%
Publicly-Traded Global Real Estate 0% 0% 0% 4% 4%
FIXED INCOME 67% 47% 31% 15% 0%
Investment Grade Long Maturity Fixed Income 0% 0% 0% 0% 0%
Investment Grade Intermediate Maturity Fixed Income 39% 27% 17% 15% 0%
Investment Grade Short Maturity Fixed Income 5% 0% 0% 0% 0%
Non-Investment Grade Fixed Income (High Yield) 4% 5% 4% 0% 0%
Global (non-U.S.) Fixed Income 4% 4% 4% 0% 0%
Multi-Sector Bond* 15% 11% 6% 0% 0%
ALTERNATIVE INVESTMENTS 0% 0% 0% 5% 5%
CASH & CASH ALTERNATIVES 2% 2% 2% 2% 2%
STRATEGIC ASSET ALLOCATION MODELS
Raymond James asset allocation targets are based on the contributors’ changing views of the risk and return in the various
asset classes, looking out over three or more years. These models assume fully allocated portfolios and do not take into
account outside assets, additional cash reserves held independent of these fully allocated models or any actual investor’s
unique circumstances. Investors should consult their financial advisor to decide how these models might assist in the
development of their individual portfolios.
*Refer to page 18 for multi-sector bond asset class definition.
15
OCTOBER 2015
OVERALL EQUITYEquities showed increased volatility in 3Q with elevated valuations and negative mo-mentum. Despite these characteristics, it remains one of the few places with positive expected return potential in the near term.
U.S. Large Cap EquityIn sustained periods of volatility, large caps tend to hold up better than their smaller coun-terparts. Valuations are not as expensive as mid and small caps, and if the USD continues to rise, it will likely be at a slower growth rate than experienced over the last 12 months.
U.S. Mid Cap EquityMid caps have seen a substantial run up in valuations over the past 6 years and are currently trading at stretched multiples. The strong momentum tailwind has abated this quarter, suggest-ing that expected returns may not compensate investors for the risk exposure of this segment.
U.S. Small Cap EquityU.S. small caps have been more isolated from the global economy relative to their larger brethren. Pockets of relative attractiveness exist in this space, particularly on the value side. Growth-style, on the other hand, look very expensive making them less attractive.
Non-U.S. Developed Market EquityDouble-digit returns earned in H1 this year were erased in 3Q due to concerns over global growth. Positive growth prospects and quantitative easing remain tailwinds while political unity and structural reform remain concerns.
Non-U.S. Emerging Market EquityThis space is oversold from a market-sentiment standpoint and is due for an eventual rebound. While long-term prospects are attractive, volatility will likely continue in the near term. Opportunities exist for investors who can tolerate near-term instability.
Publicly-Traded Global Real EstateReal estate securities provide diversification benefits against equity risk, but impending ris-ing interest rates could negatively impact these rate-sensitive investments. Still, pockets of growth do exist, particularly outside of the U.S. Active management is recommended here.
OVERALL FIXED INCOMEFixed income will likely react negatively to the Fed raising short-term rates over the next 6-12 months, however, we do not recommend abandoning strategic allocations altogether. A slight underweight in this space seems prudent at this time.
Investment Grade Long Maturity Fixed Income
This is the most attractive part of the yield curve based on forward markets, due in part to ex-pectations that long-term rates will fall as the Fed raises short-term rates. Potential for positive returns in the near term and strong diversification benefits relative to equities make us neutral.
Investment Grade Intermediate Maturity Fixed Income
Intermediate-term bonds are unattractive relative to the long end of the curve and will likely be impacted, to some degree, by the potential rise in short-term rates.
Investment Grade Short Maturity Fixed Income
Short-term fixed income has the lowest duration, but is also the most expensive and overbought. This is a crowded trade and does not have positive prospects once the Fed begins raising short-term rates.
Non-Investment Grade Fixed Income (High Yield)
Spreads are somewhat tight here suggesting investors are not being adequately compensated for the embedded equity risk taken on by these holdings.
Global (non-U.S.) Fixed IncomeWhile QE can be viewed as a headwind for many global bond markets, this low yielding environment does not offer the necessary protection against currency risk. Active management is recommended here.
Multi-Sector Bond*Multi-strategy bonds are likely to outperform core fixed income as interest rates rise. However, they are relatively expensive and tend to provide less diversification from equity downturns due to the embedded equity risk within these strategies.
ALTERNATIVE INVESTMENTSAlternatives have the potential to offer diversification benefits, and profit from market dislocations. Declining intra-stock correlations bode well for L/S Equity strategies while heightened volatility is typically a tailwind to Global Macro/Managed Futures.
CASH & CASH ALTERNATIVESVolatility within the capital markets leads to buying opportunities for those who have cash reserves available to invest.
Refer to back page for model definitions. *Refer to page 18 for multi-sector bond asset class definition.
TACTICAL COMMENTSUN
DE
RW
EIG
HT
SLIG
HT
UN
DE
RW
EIG
HT
NE
UT
RA
L
OV
ER
WE
IGH
T
SLIG
HT
OV
ER
WE
IGH
T
● July 2015 ● Oct. 2015
TACTICAL ASSET ALLOCATION WEIGHTINGS
For investors who choose to be more active in their portfolios and make adjustments based on a shorter-term outlook, the
tactical asset allocation dashboard below reflects the Raymond James Investment Strategy Committee’s recommendations
for current positioning relative to our longer-term strategic models. Your financial advisor can help you interpret each
recommendation relative to your individual asset allocation policy, risk tolerance and investment objectives.
●
●
●
●
●
●
● ●
● ●
●●
●
●
● ●
●
●●
● ●
● ●
16
INVESTMENT STRATEGY QUARTERLY
CAPITAL MARKETS SNAPSHOT
*Total Return
ALTERNATIVE INVESTMENTS
Certain alternative investments could provide valuable diversification benefits and profit from market dislocations. Long/Short Equity strategies have the potential to benefit from declining intrastock correlations. Additionally, elevated levels of volatility are typically a tailwind to Global Macro/Managed Futures strategies.
EQUITY LONG/SHORTWhen markets are driven by fundamentals as opposed to various macro policies and technical factors, correlation among stocks decline and Long/Short Equity managers can potentially benefit from both long and short positions. If headed into a more difficult equity environment, short positions have the ability to protect on the downside.
MULTI-MANAGER/ MULTI-STRATEGY
The Multi-Manager, Multi-Strategy category tends to be a more conservative approach to alternative investing. Many products have relatively low betas and correlation to equities, displaying a volatility profile more akin to fixed income. These strategies may be appropriate for those looking to diversify existing low-volatility holdings.
MANAGED FUTURESManaged futures typically benefit from elevated levels of volatility. Dislocations in the global financial markets and diverging economic policies bode well for these strategies.
EVENT DRIVENEvent-driven funds include various strategies. Currently, the environment is challenging for Distressed managers given the decreased opportunity set. Merger Arbitrage managers have found it difficult to generate noteable performance given tight credit spreads and regulatory concerns. Activism, on the other hand, is a substrategy in which we have high conviction.
EQUITY MARKET NEUTRAL
Similar to Equity Long/Short, Equity Market Neutral funds are likely to perform better in periods when stock prices are trading based upon fundamentals with low intrastock correlation.
COMMODITIESGlobal growth concerns and a glut in oil supply make this a difficult area to be constructive in. Long-Short or Managed Futures strategies may have the ability to profit here, while Long-Only positions are not attractive at this time.
GLOBAL MACROSimilar to managed futures funds, global macro funds typically benefit from elevated levels of volatility. Dislocations in the global financial markets and diverging economic policies bode well for these strategies.
ALTERNATIVE INVESTMENTS SNAPSHOT
This report is intended to highlight the dynamics underlying seven major categories of the alternatives
market, with the goal of providing a timely assessment based on current economic and capital market
environments. Our goal is to look for trends that can be sustainable for several quarters; yet given the
dynamic nature of financial markets, our opinion could change as market conditions dictate. Investors should
consult their financial advisors to formulate a strategy customized to their preferences, needs, and goals.
JENNIFER SUDEN Director of Alternative Investments Research
EQUITY* AS OF 9/30/2015 3Q15 RETURN 12-MONTH RETURN
Dow Jones Industrial Average 16,284.70 -6.98% -2.11%
S&P 500 1,920.03 -6.44% -0.61%
NASDAQ 4,620.16 -7.26% -0.71%
MSCI EAFE 1,644.40 -10.23% -8.66%
RATES AS OF 9/30/2015 AS OF 6/30/2015 AS OF 9/30/2014
Fed Funds Target Rate 0.25 0.25 0.25
3-Month LIBOR 0.33 0.28 0.24
2-Year Treasury 0.64 0.64 0.58
10-Year Treasury 2.06 2.34 2.51
30-Year Mortgage 3.84 4.17 4.12
Prime Rate 3.25 3.25 3.25
COMMODITIES AS OF 9/30/2015 3Q15 RETURN 12-MONTH RETURN
Gold $1,114.00 -4.87% -8.43%
Crude Oil $45.09 -24.18% -50.54%
17
OCTOBER 2015
SECTOR SNAPSHOT
This report is intended to highlight the dynamics underlying the
10 S&P 500 sectors, with a goal of providing a timely assessment
to be used in developing your personal portfolio strategy. Our
time horizon for the sector weightings is not meant to be short-
term oriented. Our goal is to look for trends that can be sustainable
for several quarters; yet given the dynamic nature of financial
markets, our opinion could change as market conditions dictate.
Most investors should seek diversity to balance risk versus
reward. For this reason, even the least-favored sectors may be
appropriate for portfolios seeking a more balanced equity
allocation. Those investors seeking a more aggressive invest-
ment style may choose to overweight the preferred sectors
and entirely avoid the least favored sectors. Investors should
consult their financial advisors to formulate a strategy cus-
tomized to their preferences, needs and goals.
These recommendations will
be displayed as such:
Overweight: favored areas
to look for ideas, as we expect
relative outperformance
Slight Overweight: next favored areas to look for ideas
Equal Weight: expect in-line relative performance
Slight Underweight: expect relative underperformance in
general, but opportunities exist within select subsectors
Underweight: unattractive expectations relative to the other
sectors; exposure might be needed for diversification
For a complete discussion of the sectors, please ask your financial
advisor for a copy of Portfolio Strategy: Sector Analysis.
J. MICHAEL GIBBS Director of Equity Portfolio & Technical Strategy
RECOMMENDED WEIGHT SECTOR S&P WEIGHT COMMENTS
OVERWEIGHT
INFORMATION TECHNOLOGY 20.2%
Technology remains a favored sector due to attractive relative valuations and healthy balance sheets. Reductions to expected 2015 earnings stabilized and are expected to outpace the flattish earnings for the S&P 500. The jump in relative strength during recent market weakness builds our confidence here.
FINANCIALS 16.5%Our overweight is driven by attractive relative valuation, solid expected earnings growth, and positive benefits to some subsectors (banks) should interest rates rise. The sector was hard hit during the recent market decline. It will need to quickly regain performance.
CONSUMER DISCRETIONARY 13.0%
It is our belief the consumer will spend (job growth, lower energy costs, generally growing economy) thus allowing many subsectors to benefit. Double-digit earnings growth and a declining stock market have pushed relative valuations to a less elevated position.
INDUSTRIALS 10.2%
If the global fears are overdone (our opinion) this group is set up to provide relative performance. The strong USD remains a headwind for manufacturing on the global stage. Any uptick in the fundamentals leaves this sector with plenty of runway before valuation becomes an issue. If recent momentum continues to build, our overweight position may finally be rewarded.
EQUAL WEIGHT
HEALTH CARE 15.3%Fundamental momentum and M&A activity justify our equal weight stance. Relative valuation remains elevated; but rising earnings estimates and M&A activity are supportive of valuation.
CONSUMER STAPLES 9.6%
Potential for less downside keeps us at equal weight during this period of market volatility. Earnings are still anemic at only 1.9% growth.
UNDERWEIGHT
ENERGY 6.9%Excess supply will continue to weigh on fundamentals in the energy space. Lack of clarity as to where fundamentals will bottom results in less confidence in current valuations. The intermediate trend still suggests avoidance of the sector.
UTILITIES 2.9%Earnings are expected to advance meagerly in 2015. The sector has been held back by a general consensus that rising interest rates will negatively pressure stock prices.
MATERIALS 2.9%Deflationary trends in commodities (includes energy) and metals will have a negative impact on the sector. Valuation is compelling as the sector has reached one standard deviation below the long-term average.
TELECOM 2.4%
Two stocks, VZ and T make up over 85% of the index. Valuation has pushed below one standard deviation below the average. Relative performance for the intermediate term is still weak, however the sector does offer capital preservation and quality high dividends for those expecting market weakness.
18
INVESTMENT STRATEGY QUARTERLY
ASSET CLASS DEFINITIONS
U.S. Large Cap EquityRussell 1000 Index: Based on a combination of their market cap and current index membership, this index consists of approximately 1,000 of the largest securities from the Russell 3000. Representing approximately 92% of the Russell 3000, the index is created to provide a full and unbiased indicator of the large cap segment.
U.S. Mid Cap EquityRussell Midcap Index: A subset of the Russell 1000 index, the Russell Midcap index measures the performance of the mid-cap segment of the U.S. equity universe. Based on a combination of their market cap and current index membership, includes approximately 800 of the smallest securities which represents approximately 27% of the total market capitalization of the Russell 1000 companies. The index is created to provide a full and unbiased indicator of the mid-cap segment.
U.S. Small Cap EquityRussell 2000 Index: The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.
Non U.S. Developed Market EquityMSCI EAFE: This index is a free float-adjusted market capitalization index that measures the performance of developed market equities, excluding the U.S. and Canada. It consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
Non U.S. Emerging Market EquityMSCI Emerging Markets Index: A free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of December 31, 2010, the MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.
Real EstateFTSE NAREIT Equity: The index is designed to represent a comprehensive performance of publicly traded REITs which covers the commercial real estate space across the US economy, offering exposure to all investment and property sectors. It is not free float adjusted, and constituents are not required to meet minimum size and liquidity criteria.
CommoditiesBloomberg Commodity Index (BCOM): Formerly known as the Dow Jones-UBS Commodity Index, the index is made up of 22 exchange-traded futures on physical commodities. The index currently represents 20 commodities, weighted to account for economic significance and market liquidity with weighting restrictions on individual commodities and commodity groups to promote diversification. Performance combines the returns of the fully collateralized BCOM Index with the returns on cash collateral (invested in 3 month U.S. Treasury Bills).
Investment Grade Long Maturity Fixed IncomeBarclays Long US Government/Credit: The long component of the Barclays Capital Government/Credit Index with securities in the maturity range from 10 years or more.
Investment Grade Intermediate Maturity Fixed IncomeBarclays US Aggregate Bond Index: This index is a broad fixed income index that includes all issues in the Government/Credit Index and mortgage-backed debt securities. Maturities range from 1 to 30 years with an average maturity of nearly 5 years.
Investment Grade Short Maturity Fixed IncomeBarclays Govt/Credit 1-3 Year: The component of the Barclays Capital Government/Credit Index with securities in the maturity range from 1 up to (but not including) 3 years.
Non-Investment Grade Fixed Income (High Yield)Barclays US Corporate High Yield Index: Covers the universe of fixed rate, non-investment grade debt which includes corporate (Industrial, Utility, and Finance both U.S. and non-U.S. corporations) and non-corporate sectors. The
index also includes Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, 144-As and pay-in-kind bonds (PIKs, as of October 1, 2009) are also included. Must publicly issued, dollar-denominated and non-convertible, fixed rate (may carry a coupon that steps up or changes according to a predetermined schedule, and be rated high-yield (Ba1 or BB+ or lower) by at least two of the following: Moody’s. S&P, Fitch. Also, must have an outstanding par value of at least $150 million and regardless of call features have at least one year to final maturity.
Global (Non-U.S.) Fixed IncomeBarclays Global Aggregate Bond Index: The index is designed to be a broad based measure of the global investment-grade, fixed rate, fixed income corporate markets outside of the U.S. The major components of this index are the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities.
Multi-Sector BondThe index for the multi-sector bond asset class is composed of one-third the Barclays Aggregate US Bond Index, a broad fixed income index that includes all issues in the Government/Credit Index and mortgage-backed debt securities; maturities range from 1 to 30 years with an average maturity of nearly 5 years, one-third the Barclays US Corporate High Yield Index which covers the universe of fixed rate, non-investment grade debt and includes corporate (Industrial, Utility, and Finance both U.S. and non-U.S. corporations) and non-corporate sectors and one-third the J.P. Morgan EMBI Global Diversified Index, an unmanaged index of debt instruments of 50 emerging countries.
The Multi-Sector Bond category also includes nontraditional bond funds. Nontraditional bond funds pursue strategies divergent in one or more ways from conventional practice in the broader bond-fund universe. These funds have more flexibility to invest tactically across a wide swath of individual sectors, including high-yield and foreign debt, and typically with very large allocations. These funds typically have broad freedom to manage interest-rate sensitivity, but attempt to tactically manage those exposures in order to minimize volatility. Funds within this category often will use credit default swaps and other fixed income derivatives to a significant level within their portfolios.
Alternatives InvestmentHFRI Fund of Funds Index: The index only contains fund of funds, which invest with multiple managers through funds or managed accounts. It is an equal-weighted index, which includes over 650 domestic and offshore funds that have at least $50 million under management or have been actively trading for at least 12 months. All funds report assets in US Dollar, and Net of All Fees returns which are on a monthly basis.
Cash & Cash AlternativesCitigroup 3 Month US Treasury Bill: A market value-weighted index of public obligations of the U.S. Treasury with maturities of 3 months.
KEY TERMS
Long/Short EquityLong/short equity managers typically take both long and short positions in equity markets. The ability to vary market exposure may provide a long/short manager with the opportunity to express either a bullish or bearish view, and to potentially mitigate risk during difficult times.
Global MacroHedge funds employing a global macro approach take positions in financial derivatives and other securities on the basis of movements in global financial markets. The strategies are typically based on forecasts and analyses of interest rate trends, movements in the general flow of funds, political changes, government policies, inter-government relations, and other broad systemic factors.
Relative Value ArbitrageA hedge fund that purchases securities expected to appreciate, while simultane-ously selling short related securities that are expected to depreciate.
Multi-StrategyEngage in a broad range of investment strategies, including but not limited to long/short equity, global macro, merger arbitrage, statistical arbitrage, structured credit, and event-driven strategies. The funds have the ability to dynamically shift capital among the various sub-strategies, seeking the greatest perceived risk/reward opportunities at any given time.
19
OCTOBER 2015
Event-DrivenEvent-driven managers typically focus on company-specific events. Examples of such events include mergers, acquisitions, bankruptcies, reorganizations, spin-offs and other events that could be considered to offer “catalyst driven” investment opportunities. These managers will primarily trade equities and bonds.
Special SituationsManagers invest in companies based on a special situation, rather than the underlying fundamentals of the company or some other investment rationale. An investment made due to a special situation is typically an attempt to profit from a change in valuation as a result of the special situation, and is generally not a long-term investment.
Managed FuturesManaged futures strategies trade in a variety of global markets, attempting to identify and profit from rising or falling trends that develop in these markets. Markets that are traded often include financials (interest rates, stock indices and currencies), as well as commodities (energy, metals and agriculturals).
INDEX DEFINITIONS
Barclays U.S. Aggregate Bond IndexA broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. Securities must be rated investment-grade or higher using the middle rating of Moody’s, S&P and Fitch. When a rating from only two agencies is available, the lower is used. Information on this index is available at [email protected].
DISCLOSURE
All expressions of opinion reflect the judgment of Raymond James & Associates, Inc. and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. The performance mentioned does not include fees and charges which would reduce an investor’s return. Dividends are not guaranteed and will fluctuate. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss. Investing in certain sectors may involve additional risks and may not be appropriate for all investors.
International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging and frontier markets can be riskier than investing in well-established foreign markets.
Investing in small- and mid-cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor.
There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term obligations of the U.S. government.
While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, or state or local taxes. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Municipal bonds may be subject to capital gains taxes if sold or redeemed at a profit.
If bonds are sold prior to maturity, the proceeds may be more or less than original cost. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency.
Commodities and currencies are generally considered speculative because of the significant potential for investment loss. They are volatile investments and should only form a small part of a diversified portfolio. Markets for precious metals and other commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.
Investing in REITs can be subject to declines in the value of real estate. Economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.
High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of your portfolio.
Beta compares volatility of a security with an index.
Alternative investments involve specific risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. Investors should consider the special risks with alternative investments including limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regulatory and reporting requirements. Investors should only invest in hedge funds, managed futures, distressed credit or other similar strategies if they do not require a liquid investment and can bear the risk of substantial losses. There can be no assurance that any investment will meet its performance objectives or that substantial losses will be avoided. The S&P 500 is an unmanaged index of 500 widely held stocks.
The companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.
Investing in the energy sector involves risks and is not suitable for all investors.
The performance mentioned does not include fees and charges which would reduce an investor’s returns. The indexes are unmanaged and an investment cannot be made directly into them. The Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. The NASDAQ Composite Index is an unmanaged index of all stocks traded on the NASDAQ over-the-counter market. The S&P 500 is an unmanaged index of 500 widely held securities. The Shanghai Composite Index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.
MODEL DEFINITIONS
Conservative Portfolio: may be appropriate for investors with long-term income distribution needs who are sensitive to short-term losses yet want to achieve some capital appreciation. The equity portion of this portfolio generates capital appreciation, which is appropriate for investors who are sensitive to the effects of market fluctuation but need to sustain purchasing power. This portfolio, which has a higher weighting in bonds than in stocks, seeks to keep investors ahead of the effects of inflation with an eye toward maintaining principal stability.
Conservative Balanced Portfolio: may be appropriate for investors with intermediate-term time horizons who are sensitive to short-term losses yet want to participate in the long-term growth of the financial markets. The portfolio, which has an equal weighting in stocks and bonds, seeks to keep investors well ahead of the effects of inflation with an eye toward maintaining principal stability. The portfolio has return and short-term loss characteristics that may deliver returns lower than that of the broader market with lower levels of risk and volatility.
Balanced Portfolio: may be appropriate for investors with intermediate-term time horizons who are sensitive to short-term losses yet want to participate in the long-term growth of the financial markets. This portfolio, which has a higher weighting in stocks, seeks to keep investors well ahead of the effects of inflation with an eye toward maintaining principal stability. The portfolio has return and short-term loss characteristics that may deliver returns lower than that of the broader equity market with lower levels of risk and volatility.
Balanced with Growth Portfolio: may be appropriate for investors with long-term time horizons who are not sensitive to short-term losses and want to participate in the long-term growth of the financial markets. This portfolio, which has a higher weighting in stocks seeks to keep investors well ahead of the effects of inflation with principal stability as a secondary consideration. The portfolio has return and short-term loss characteristics that may deliver returns slightly lower than that of the broader equity market with slightly lower levels of risk and volatility.
Growth Portfolio: may be appropriate for investors with long-term time horizons who are not sensitive to short-term losses and want to participate in the long-term growth of the financial markets. This portfolio, which has 100% in stocks, seeks to keep investors well ahead of the effects of inflation with little regard for maintaining principal stability. The portfolio has return and short-term loss characteristics that may deliver returns comparable to those of the broader equity market with similar levels of risk and volatility.
INTERNATIONAL HEADQUARTERS: THE RAYMOND JAMES FINANCIAL CENTER
880 CARILLON PARKWAY // ST. PETERSBURG, FL 33716 // 800.248.8863
RAYMONDJAMES.COM
Articles with bylines are submitted by industry specialists and reprinted with permission. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
©2015 Raymond James Financial Services, Inc., member FINRA/SIPC ©2015 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 15-BDMKT-1921 CW 10/15