February/March, 2017
I
ACTIVE VERSUS PASSIVE RETURN DRIVERS: A YEAR-END UPDATE
By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC n July of 2016, a special report “Active Vs. Passive: A Three-Club Headwind”, published by The Leuthold Group, studied the recent performance advantage of passive indexes over actively managed funds. In short, market conditions play a significant role in determining which side comes out on top. Nine metrics were examined and a strong relationship between the prevailing market environment and the relative Active Versus Passive, continued on page 10
HOW MUCH MONEY IS LOST WHEN INTEREST RATES RISE? By Stephen B. Blumenthal, Founder and CEO, CMG Capital Management Group, Inc.
Bonds, bond funds and bond Exchange-Traded Funds (ETFs) lose money when rates rise. The chart on page 14 was posted just a few days before Treasury yields hit a 35-year yield low of 1.37%. What it shows is how much money is lost when rates rise. If one’s starting point was a yield of 1.40% (top half of chart), as it was on July 11, 2016, and rates rose to 2.40% (which they did) one’s loss would be -8.84% if one How Much Money, continued on page 14
TILT TOWARD BETA
IMPACT ON U.S. INTEREST RATES?
By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC
As Edited by Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc. China has cut its holdings of U.S. Treasuries to $1.05 trillion as of November 2016, its lowest level since May 2010. Since peaking at $1.32 trillion in November 2013, the Chinese have sold $267 billion of U.S. Treasuries in an effort to support its own currency. The Federal Reserve Board (Fed) had profits of $92.0 billion in 2016 (to be returned to the U.S. Treasury Department), largely from interest income it had earned on the $3.7 trillion of Treasury notes and bonds purchased during the six years of “Quantitative Easing” (QE) that ended on October 31, 2014. Over the last eight calendar years (2009 to 2016), the Fed has returned $657 billion of mostly interest it earned to the U.S. Treasury Department, equal to $82 billion a year. Over the 18 years prior to QE (i.e., 1991 to 2008), the Impact on U.S., continued on page 14
Stock market valuations certainly show no lack of investor confidence: each of our “Big Six” valuation measures now resides in either its ninth or tenth historical decile. Instead, the subdued nature of investor attitudes shows up only when comparing values within the stock market. Specifically, there’s a gaping historical spread between Price-To-Earnings (P/E) ratios on Low Volatility stocks and their High Beta counterparts. While the Trump rally has certainly favored the latter cohort, it’s done little to close the disparity shown in the chart on page 16“Low Volatility Premium Remains Huge”. It may seem irresponsible for us to be recommending a heavier tilt toward “beta” as the bull market approaches its eighth birthday. But valuation risks within the market are diametrically opposed to those observed in the late 1990s, when the mantra was growth at any price. This decade’s obsession has been with safety and income, an understandable (but ultimately exaggerated) response to the Great Recession, a “New Normal” recovery, and the tiny coupons available on bonds. Despite a setback in both Consumer Tilt Toward Beta, continued on page 16
THE GLOBAL INVESTMENT PULSE, February/March 2017
1
ABOUT LEGEND FINANCIAL ADVISORS, INC.® Legend Financial Advisors, Inc.® (Legend) is a Non-Commission, Fee-Only, Fiduciary U.S. Securities and Exchange Commission registered investment advisory firm with its headquarters located in Pittsburgh, Pennsylvania. Legend provides Personalized Wealth Management Services Including Financial Planning And Investment Management Strategies to affluent and wealthy individuals as well as business entities, medical practices and non-profit organizations as well as retirement plans. Legend and its award-winning advisors are Fiduciaries.
FIVE REASONS TO CHOOSE LEGEND 1. Legend is a Non-Commission, Fee-Only, Fiduciary advisory firm. Fee-Only means Legend is compensated exclusively by client fees. Unlike Legend, fee-based advisors and brokerage firms have numerous conflicts of interest due to the fact that they receive commissions. 2. Members of Legend’s Financial Advisory Team have been selected by National Publications such as Worth, Medical Economics and Barron’s more than 60 times as “The Best Financial Advisors In America”. 3. Unlike most advisory firms and all brokerage houses, Legend and its advisors have chosen to be governed by the Fiduciary Standard of Law. Fiduciaries are required to work in their clients’ best interests at all times. 4. Legend designs dynamic, creative and personalized financial planning and investment solutions for its clients. 5. Legend emphasizes low-cost investments where possible that are allocated and traded in an income tax-efficient manner.
ABOUT EMERGINGWEALTH INVESTMENT MANAGEMENT, INC. EmergingWealth Investment Management, Inc. (EmergingWealth), is the sister firm of Legend Financial Advisors, Inc.® (Legend) and is a Non-Commission, Fee-Only Securities and Exchange Commission (SEC) registered investment advisory firm. EmergingWealth provides Investment Management services to individuals as well as business entities, medical practices and non-profit organizations whose wealth is emerging. All investment portfolios are sub-advised by Legend. Both Legend and EmergingWealth share a common advisory team, Investment Committee and Fee Schedule.
LOUIS P. STANASOLOVICH, CFP®, EDITOR Louis P. Stanasolovich, CFP® is founder, CCO, CEO and President of Legend Financial Advisors, Inc.® (Legend) and EmergingWealth Investment Management, Inc. Lou is one of only four advisors nationwide to be selected 12 consecutive times by Worth magazine as one of “The Top 100 Wealth Advisors” in the country. Lou has also been selected 13 times by Medical Economics magazine as one of “The 150 Best Financial Advisors for Doctors in America”, twice as one of “The 100 Great Financial Planners in America” by Mutual Funds magazine, five times by Dental Practice Report as one of “The Best Financial Advisors for Dentists In America” and once by Barron’s as one of “The Top 100 Independent Financial Advisors”. Lou was selected by Financial Planning magazine as part of their inaugural Influencer Awards for the Wealth Creator award recognizing the advisor who has made the most significant contributions to best practices for portfolio management. He has been named to Investment Advisor magazine’s “IA 25” list three times, ranking the 25 most influential people in and around the financial advisory profession as well as being named by Financial Planning magazine as one of the country’s “Movers & Shakers” recognizing the top individuals who have done the most to advance the financial advisory profession. 2
THE GLOBAL INVESTMENT PULSE, February/March 2017
RETURN AND RISK
By Stephen B. Blumenthal, Founder and CEO, CMG Capital Management Group, Inc. Return Potential: Price-To-Earnings Ratio (P/E) is calculated by smoothing 10-year earnings. Monthly P/Es (1881 to December 31, 2016) are then sorted into five quintiles, lowest P/E to highest P/E (when reading the chart below, from left to right). A high P/E means that the market is expensively priced. The blue bars then show the subsequent 10-year average annualized real total returns that
were achieved sorted by quintile. Note the number at the top of each blue bar. That’s the average subsequent return in each valuation quintile. See the red “We are here” projecting 2.2% annualized real returns over the next 10 years. Past history is no guarantee to what the next 10 years will look like, but I wouldn’t stray too far from that bet. I think it is best to play defense and be in a position to play offense when we get to the “We’d be better off here.”
Source: This article was excerpted from “Thought – Word – and Action”, by Stephen B. Blumenthal, Founder and CEO, CMG Capital Management Group, Inc., (On My Radar, January 20, 2017), www.cmgwealth.com COPYRIGHT 2017 CMG CAPITAL MANAGEMENT GROUP, INC. REPRINTED WITH PERMISSION OF CMG CAPITAL MANAGEMENT
GROUP, INC.
AVERAGE 10-YEAR S&P 500 ANNUALIZED REAL TOTAL RETURN BASED ON PRICE/AVERAGE 10-YEAR EARNINGS 11.1 10.8 10.5 10.2 9.9 9.6 9.3 9.0 8.7 8.4 8.1 7.8 7.5 7.2 6.9 6.6 6.3 6.0 5.7 5.4 5.1 4.8 4.5 4.2 3.9 3.6 3.3 3.0 2.7 2.4 2.1 1.8 1.5 1.2 0.9 0.6 0.3 0.0
10.8
Latest Price/Average 10-Year Earnings December 31, 2016 = 27.9* *Earnings estimate used for latest completed quarter
We’d be better off here
7.4 6.4 5.4
We are here
2.2
Cheapest 20.0%
Second Cheapest 20.0%
Third Cheapest 20.0%
Fourth Cheapest 20.0%
Most Expensive 20.0%
Average P/E = 8.7
Average P/E = 12.4
Average P/E = 15.6
Average P/E = 18.5
Average P/E = 26.1
11.1 10.8 10.5 10.2 9.9 9.6 9.3 9.0 8.7 8.4 8.1 7.8 7.5 7.2 6.9 6.6 6.3 6.0 5.7 5.4 5.1 4.8 4.5 4.2 3.9 3.6 3.3 3.0 2.7 2.4 2.1 1.8 1.5 1.2 0.9 0.6 0.3 0.0
Concept Courtesy of Plexus Asset Management As of: January 20, 2017 COPYRIGHT 2017 CMG CAPITAL MANAGEMENT GROUP, INC.
Source: Robert Shiller, Irrational Exuberance, Standard & Poor’s, Bureau of Labor Statistics, Ned Davis Research via CMG Capital Management Group, Inc. On My Radar, January 20, 2017, www.cmgwealth.com REPRINTED WITH PERMISSION FROM NED DAVIS RESEARCH AND CMG CAPITAL MANAGEMENT GROUP, INC.
PULSE THE GLOBAL INVESTMENT PULSE, February/March 2017
3
S&P 500 MEDIAN PRICE-TO-EARNINGS RATIOS (NDR CALCULATIONS)
Monthly Data 1964-03-31 to 2017-01-31
S&P Monthly Close (2017-01-31 – 2278.87) 1,585
1,585
1,000
1,000
631 398
631
251
251
158
158
100
100
398
63
63 S&P Monthly Close (2017-01-31 – 2278.87)
30
+35.0
25 +25.0 20 15 10 5
+15.0
30
Overvalued
25
52.9 – Year Median = 16.9
Median
20 15
-15.0
Bargains
10
-25.0
1965
5 1970
1975
As of: February 3, 2017 COPYRIGHT 2017 CMG CAPITAL MANAGEMENT GROUP, INC.
4
Very Overvalued
1980
1985
1990
1995
2000
Price Move Of: -3.3% to Overvalued (+1SD)=S&P 500 Level of 2203.67 -26.0% to Median Fair Value=S&P 500 Level of 1686.36 -48.7% to Undervalued (-1SD)=S&P 500 Level of 1169.06
2005
2010
2015
Source: S&P Dow Jones Indices, S&P Capital IQ Compustat, Ned Davis Research via CMG Capital Management Group, Inc. On My Radar, February 3, 2017, www.cmgwealth.com REPRINTED WITH PERMISSION FROM NED DAVIS RESEARCH AND CMG CAPITAL MANAGEMENT GROUP, INC.
THE GLOBAL INVESTMENT PULSE, February/March 2017
PERFORMANCE OF PRECIOUS METALS DURING BEAR MARKETS IN STOCKS Bear Market Dates
S&P 500
Gold
January 11, 1973 to October 3, 1974
-48.2%
138.8%
September 21, 1976 to March 6, 1978
-19.4%
53.8%
November 28, 1980 to August 12, 1982
-27.1%
-46.3%
August 25, 1987 to December 4, 1987
-33.5%
6.2%
July 16, 1990, October 11, 1990
-19.9%
6.8%
July 17, 1998 to August 31, 1998
-19.3%
-5.8%
March 24, 2000 to October 9, 2002
-49.1%
12.1%
October 9, 2007 to March 9, 2009
-56.8%
25.5%
April 29, 2011 to October 3, 2011
-19.4%
7.8%
Medians
-29.6%
7.8%
Source: The Leuthold Group, LLC, Perception Express, September 9, 2015,
As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC
http://leuth.us/stock-market
REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
AND YOU THOUGHT INTEREST GENERATING RETURNS WERE BAD FOR THE PAST 20 YEARS! Global Yields Are Still Below Long-Term Averages 5.13
4.99 4.29 3.88 3.52
3.35
3.27
3.36
2.61
2.45 1.65 1.23 0.44 0.09 Japanese Government German 10-Year Bund 10-Year Bond
U.S. 10-Year Treasury
Bloomberg Barclays Bloomberg Barclays Global Aggregate Bond U.S. Aggregate Bond Index Index
Current As Of January 31, 2017
Bloomberg Barclays U.S. Credit Index
Bloomberg Barclays Corporate Bond Index
20-Year Average
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. Performance returns for periods of less than one year are not annualized. As of: February, 2017 COPYRIGHT 2017 STATE STREET GLOBAL INVESTORS
Source: Bloomberg Finance, L.P. as of January 31, 2017 via State Street Global Investors, February, 2017 Chart Pack REPRINTED WITH PERMISSION FROM STATE STREET GLOBAL INVESTORS
THE GLOBAL INVESTMENT PULSE, February/March 2017
5
SECULAR BEAR MARKET WATCH April 1, 2000 to January 31, 2017 (16 years and 10 months) Annual Compound Return
Total Return
Consumer Price Index (Inflation)
2.10%
41.85%
90-Day Treasury Bills Index-Total Return
1.58%
30.20%
Barclays Aggregate Bond Index-Total Return
5.13%
132.38%
High Yield Corporate Bond Index – Total Return
9.13%
335.63%
S&P Leveraged Loan Index – Total Return
4.99%
127.08%
HFRX Global Hedge Fund Index
2.37%
48.35%
S&P 500 Index (U.S. Stock Market)
4.52%
110.64%
MSCI EAFE Index (Developed Foreign Equities)
3.00%
64.47%
MSCI Emerging Market Index (Equities)
6.35%
182.12%
Newedge CTA Index (Managed Futures)
4.69%
116.36%
Dow Jones–UBS Commodity Index-Total Return (USD)**
-0.70%
-11.10%
Dow Jones U.S. Real Estate Index-Total Return (USD)**
10.71%
454.93%
9.10%
334.12%
Gold Bullion As of: January 31, 2017
Compound and Total Returns include reinvested dividends. MSCI Indexes do not include dividends prior to 2002. Newedge Index is equally-weighted. COPYRIGHT 2017 LEGEND FINANCIAL ADVISORS, INC. ® ** USD = U.S. Dollar REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ® Source: Bloomberg Investment Service
6
THE GLOBAL INVESTMENT PULSE, February/March 2017
“Do You Want A Second Opinion?” To see if your investment portfolio is built to navigate the pitfalls and opportunities ahead, call us today for a “Free Second Opinion” at (412) 635-9210.
www.legend-financial.com THE GLOBAL INVESTMENT PULSE, February/March 2017
7
U.S. SMALL CAP TO U.S. LARGE CAP HISTORICAL PRICE TO EARNINGS (P/E) RATIO U.S. Small Cap Valuations Cheaper Than U.S. Large Stocks By 2.0% Small Cap P/E Premiums Small Cap P/E > Large Cap P/E
Based on Non-Normalized Trailing Operating Earnings Small Cap: Leuthold 3000 Small Cap Large Cap: Leuthold 3000 Large Cap
120
120
110
110 Median Premium 3.0%
100
100
90
90
80
80
70
70 Small Cap P/E Discounts Small Cap P/E < Large Cap P/E
60
60 1983
1986
1989
1992
1995
1998
As of: March 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
2001
2004
2007
2013
2016
Source: The Leuthold Group, LLC, Perception Express, March 7, 2017, http://leuth.us/market-internals REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
HISTORICALLY SPEAKING, VALUATIONS ARE RICH S&P 500 GAAP* PRICE-TO-EARNING RATIOS (P/E) AT BULL MARKET TOPS SINCE WORLD WAR II
35
30
30
Average: 19.2X 23.8
25
25.6 25
23.4
18.1
20
35
31.7
*GAAP = Generally Accepted Accounting Principals
P/E RATIOS
2010
19.1
19.9
18.7
20
17.4 13.8
15
15
10.0
9.6
10
10
5
5
0
0 1948
1956
1961
1966
1968
1973
As of: January 24, 2017 REPRINTED WITH PERMISSION FROM CMG CAPITAL MANAGEMENT GROUP, INC
8
THE GLOBAL INVESTMENT PULSE, February/March 2017
1980
1987
1990
2000
2007
2017
Source: CFRA, S&P DJ Indicies via CMG Capital Management Group, Inc., On My Radar, February 3, 2017, www.cmgwealth.com COPYRIGHT 2017 CMG CAPITAL MANAGEMENT, INC.
FED WATCH INTEREST RATES AS OF FEBRUARY 28, 2017 0.50% to 0.75%
Fed Funds Rate Range:
1.25%
Fed Discount Rate:
2017 UPCOMING FED MEETINGS SCHEDULE March 14-15 May 2-3 June 19-20 July 25-26 September 19-20 October 31/November 1 December 12-13 PROBABILITY OF A MARCH-2017 FED FUNDS RATE HIKE
110.0% 105.0%
98.0%
100.0% 95.0% 90.0% 85.0% 80.0% 75.0% 70.0% 65.0% 60.0% 55.0% 50.0% 45.0% 40.0% 35.0% 30.0%
As Of: March 7, 2017 Source: Bloomberg
3/6/2017
3/2/2017
2/26/2017
2/22/2017
2/18/2017
2/14/2017
2/10/2017
2/6/2017
2/2/2017
1/29/2017
1/25/2017
1/21/2017
1/17/2017
1/13/2017
1/9/2017
1/5/2017
20.0%
1/1/2017
25.0%
Source: Bloomberg THE GLOBAL INVESTMENT PULSE, February/March 2017
9
Active Versus Passive, continued from page 1
performance of active managers was found. The conclusion was that just as market conditions cycle, so does the active/passive return spread. Investors are wise not to chase the winning style but to diversify their portfolios using both types of funds. Below is a year-end update on the factors we determined were important to the active/ passive relationship. The market environment and the success of active managers changed significantly in late 2016. The three-club headwind facing active managers has calmed and is even showing signs of becoming a tailwind, a welcome relief to active managers looking to make up some ground in 2017. The original study evaluated the nine metrics shown in Table 1 and classified them as either “favorable to active” or “favorable to passive”. Back in March 2016, only two of nine factors were “favorable to active”, but by the end of 2016 the count had risen to six of nine as seen in Chart 1. (Please refer to the July 2016 report for metric definitions and the rationale behind each.) Note that the recent “passive winning” window closed in the fourth quarter, which scored as a “draw” under the methodology. The original research identified three factors that seemed to have lower explanatory power, so Chart 2, at the bottom of page 11, was created using just the six strongest signals; this tally was zero-for-six in March 2016, but rallied to a robust five-out-of-six by year end. The six strongest metrics are identified in Table 1 under “Favorable to Active”. Please note the robust relationship between market factors and the active/passive performance derby. Six of the nine signals switched signs during the latter half of 2016. The three signals relating to “size”
Chart 1
FACTORS BENEFITTING ACTIVE
100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Dec-91
Jun-93
Dec-94 Jun-96 Dec-97 Jun-99
Passive Wins
Dec-00 Jun-02
Dec-03
Active Wins
Jun-05 Dec-06 Jun-08 Dec-09 Jun-11
Dec-12
Jun-14
Dec-15
% of Factors Helpful to Active Management Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
As of: February 11, 2017
TABLE 1: CURRENT CONDITIONS
Favorable To Active
Favorable To Passive
Small Cap beating Large Cap
Cash losing to S&P 500
Value beating Growth
EAFE losing to S&P 500
Equal Weighted beating Cap Weighted
“The Rest” losing to Negative Earners
% of S&P 1500 outperforming S&P 500 “The Rest” beating Largest 25 Companies “The Rest” beating Price-To-Earnings Ratio > 40
As of: February 11, 2017
Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
Active Versus Passive, continued on page 11
10
THE GLOBAL INVESTMENT PULSE, February/March 2017
Active Versus Passive, continued from page 10
changed to favor active management, as Small Caps excelled in the fourth quarter; the Russell 2000 outpaced the S&P 500 by 5.0%. Mega Cap tech companies such as Alphabet, Amazon, and Facebook lagged badly, and the S&P 500’s “Largest 25” underperformance extended to non-tech stalwarts including J&J, Visa, Wal-Mart, and Coca Cola. Two of the three valuation signals also favor active management; in fact, Value outperformed across the size spectrum in the fourth quarter, allowing the Value vs. Growth metric to turn toward cheaper stocks for the first time since late 2013. Today, the only strong signal not favoring active management is EAFE vs. the S&P 500. International equities lagged throughout 2016 and didn’t participate in the Trump rally, leaving them 11.0% behind domestic stocks for the year. Meanwhile, the only factor switching from pro-active management to propassive was “The Rest” vs. companies with
negative earnings. The short roster of negative earners is populated by Energy companies, and their rally flipped this indicator in favor of passive. Needless to say, cash was once again a millstone in active portfolios. The rally in active-favorable factors was accompanied by concurrent improvement in the performance of actively managed funds over the second half of 2016. The original study left off in a period when the factor count favored passive, and just 20.0% of active managers were outperforming on a one-year trailing basis. That ratio held in the third quarter but improved to 43.0% in the fourth quarter. Looking at just the fourth quarter, 55.0% of active managers outperformed the index. It appears that the strength and direction of the market-environment wind is having the expected effect on the active/passive comparison. The shift in the metrics began with the
February 2016 lows and was reinforced by an oil price recovery, the bottoming of interest rates, and the Trump rally late in the year. These forces could easily run well into 2017 and, absent a narrow run in the Mega Caps, one should not be surprised to find our metrics continuing strong in favor off “active”, and perhaps even experience a shift to a green “active wins” regime on the chart. Source: This article was excerpted from “What Comes After The Momentum Meltdown?”, by Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC, (Perception Express, February 7, 2017), http://leuth.us/stock-market COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC
Chart 2
FACTORS BENEFITTING ACTIVE FOR SIX STRONGEST SIGNALS 100.00% 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Dec-91
Jun-93
Dec-94 Jun-96 Dec-97 Jun-99
Passive Wins As of: February 11, 2017
Dec-00 Jun-02
Dec-03
Active Wins
Jun-05 Dec-06 Jun-08 Dec-09 Jun-11
Dec-12
Jun-14
Dec-15
% of Factors Helpful to Active Management Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
PULSE THE GLOBAL INVESTMENT PULSE, February/March 2017
11
THE RISKS OF TRADING EXCHANGE-TRADED PRODUCTS By James J. Holtzman, CFP®, Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.
1. Trading Volume: c. Investors can be caught paying 10.0%+ premiums or selling at 10.0%+ discounts relative to the N.A.V. when trading Exchange-Traded Products.
a. Exchange-Traded Products with low trading volume can significantly deviate from the Net Asset Value (N.A.V.) of the fund.
d. Failing to acknowledge these anomalies in the marketplace can severely impact the returns of an investment strategy that utilizes Exchange-Traded Products.
2. Premiums/Discounts to N.A.V. a. Investors must understand how to buy and sell Exchange-Traded Products without paying premiums and selling at discounts to the fund’s N.A.V. b. Supply and Demand for Exchange-Traded Products shares dictate the share price, not just the N.A.V.
COPYRIGHT 2017 LEGEND FINANCIAL ADVISORS, INC. ® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.® PULSE
MUNICIPAL TAX EQUIVALENT YIELD / BARCLAYS U.S. CORPORATE BOND YIELD
1.8
Yield Ratio Median: 1.15
1.6
After Municipals Were Beaten Up Badly During November And The First Half Of December, They Rose In Price During The Second Half Of December, But Have Fallen Since. As A Result, They Are Not As Unattractive As They Were A Few Months Ago, But They Are Getting Closer To That Point Again.
1.4
1.2
1.0
Feb-17: 1.25
0.8
1980
1983
1986
1989
As of: March 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
12
1992
1995
1998
2001
2004
2007
2010
2013
2016
Source: The Leuthold Group, LLC, Perception Express, March 8, 2017, http://leuth.us/bond-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
THE GLOBAL INVESTMENT PULSE, February/March 2017
MONTHLY RISK AVERSION INDEX (RAI)
RISK INDEX DECREASED TO LOWEST LEVEL EVER Note: The Risk Aversion Index combines ten market-based measures including various credit and swap spreads, implied volatility, currency movements, commodity prices and relative returns among various high- and low-risk assets.
4
4
3
3
2
2
1
1
0
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: The Leuthold Group, LLC, Perception Express, March 7, 2017,
As of: March 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
http://leuth.us/bond-market
REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
BARCLAYS U.S. HIGH YIELD BOND MINUS TREASURY BOND YIELD High Yield Bond Yields Decrease Again, But Still Attractive 20
Differential Median: 5.13
15
10
Feb-17: 3.74
5
1987
1989
1991
1993
1995
As of: March 7, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
Source: The Leuthold Group, LLC, Perception Express, March 7, 2017, http://leuth.us/bond-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
THE GLOBAL INVESTMENT PULSE, February/March 2017
13
How Much Money, continued from page 1
were invested in 10-year Treasury Notes and -19.07% (bottom section of chart) if yields on the 30-year Treasury Bond rose to 3.25% (which it nearly did). Further, note the risk of loss if the 10-year rises to 5.40%. Note the -53.90% loss on the 30year if yields rise to 6.25%. A number of pundits are calling for 5.0% yield on the 10-year U.S. Treasury within a few short years. If you are in the “one more big recession” camp that will probably reset equity valuations and if so then interest rates should go lower. Investors should see the chart below and size up the potential risk/reward for themselves. With interest rates just coming off 5,000-year lows, it is best to think about one’s bond exposure as if
one’s retirement wealth is dependent on it…and it is. 2.45% Treasury yields stink and rising inflation will eat into the net real (after inflation) yield and further cause interest rates to spike higher. Treasury yields were north of 5.0% in 2007. It is best to be tactical (trade at opportune moments) with one’s bond exposure. Don’t look at the last 35 years, as many people do, and project it forward. The great bond bull market yield low is likely in. Think differently about how to position that 40.0% of the traditional 60.0% equity, 40.0% bond portfolio.
Source: This article was excerpted from “Looking For A Good Bargain”, by Stephen B. Blumenthal, Founder and CEO, CMG Capital Management Group, Inc., (On My Radar, February 3, 2017), www.cmgwealth.com COPYRIGHT 2017 CMG CAPITAL MANAGEMENT GROUP, INC. REPRINTED WITH PERMISSION OF CMG CAPITAL MANAGEMENT GROUP, INC.
10-Year Treasury Bond assuming a 1.40% Coupon with a 1.40% yield to maturity Yield to maturity Price Change in Price
1.00%
1.40%
2.40%
3.40%
4.40%
5.40%
6.40%
7.40%
103.797
100.000
91.156
83.165
75.940
69.403
63.485
58.124
-8.84%
-16.83%
-24.06%
-30.60%
-36.52%
-41.88%
3.80%
30-Year Treasury Bond assuming a 2.25% Coupon with a 2.25% yield to maturity Yield to maturity Price Change in Price
1.25%
2.25%
3.25%
4.25%
5.25%
6.25%
7.25%
8.25%
124.953
100.000
80.928
66.268
54.929
46.100
39.177
33.705
-19.07%
-33.73%
-53.90%
-60.82%
-66.29%
24.95%
-45.07%
Current 10-Yr. Yield 1.40% Current 30-Yr. Yield 2.25% As of July 11, 2016
As of: February 3, 2017 COPYRIGHT 2017 CMG CAPITAL MANAGEMENT GROUP, INC.
Source: CMG Investment Research via CMG Capital Management Group, Inc. On My Radar, February 3, 2017, www.cmgwealth.com REPRINTED WITH PERMISSION FROM NED DAVIS RESEARCH AND CMG CAPITAL MANAGEMENT GROUP, INC.
PULSE Impact on U.S., continued from page 1
Fed returned an average of just $19 billion a year to the U.S. Treasury. The average interest rate paid by the U.S. Government on its interest bearing debt was 2.232% as of December 31, 2016, less than half of the 5.034% paid as of December 31, 2006, i.e., 10 years ago.
COPYRIGHT 2017 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.® PULSE
14
THE GLOBAL INVESTMENT PULSE, February/March 2017
SIR JOHN TEMPLETON’S FAMOUS QUOTE “There’s only one reason a share (of stock) goes to a bargain price: Because other people are selling. There is no other reason. To get a bargain price, you’ve got to look for where the public is most frightened and pessimistic.” “Looking for a good investment is nothing more than looking for a good bargain.” Sir John Templeton Source: These quotes were excerpted from “Looking For A Good Bargain”, by Stephen B. Blumenthal, Founder and CEO, CMG Capital Management Group, Inc., (On My Radar, February 3, 2017), www.cmgwealth.com COPYRIGHT 2017 CMG CAPITAL MANAGEMENT GROUP, INC. REPRINTED WITH PERMISSION OF CMG CAPITAL MANAGEMENT GROUP, INC. PULSE
2.50
The Leuthold Group Copyright® 2017
Earnings Reports Jan-Feb 2017 (Q4 2016 Results)
EARNINGS ADVANCE/DECLINE RATIO First Two Months Of Each Quarterly Period Based On Reported Earnings
2.25
2.00 SOFT LANDING
SOFT LANDING
AVERAGE 1.51
1.75
1.50
1.25
1.00
RECESSION
RECESSION
0.75
RECESSION
0.50
0.25 84 85 86
87 88 89
As of: March 7, 2017
90
91 92 93 94 95 96 97 98 99 00
01 02 03
04
05
06 07
08
09 10
11
12 13
14 15 16
Source: The Leuthold Group, LLC, Perception Express, March 7, 2017, http://leuth.us/market-internals REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
THE GLOBAL INVESTMENT PULSE, February/March 2017
15
Tilt Toward, continued from page 1
LOW VOLATILITY PREMIUM REMAINS HUGE
Staples and Utilities since last summer, the Leuthold 3000 Low Volatility Index still trades at a 99th percentile reading of 22.9x. Meanwhile, the High Beta Index, with current heavy concentrations in Financials and Energy sectors, trades at 19.1x trailing Earnings Per Share (EPS) (34th percentile). We expect this gap to begin to narrow regardless of nearterm Trump-o-nomic trends. Some investors prefer to see market “confirmation” before making a move based on a fundamental or value-based thesis. Fine. That confirmation came in September of 2016, when a shift into High Beta was indicated by our new Allocation Model (or more accurately, a new application of an old model). High Beta has continued to outperform since that signal, but it’s the valuation gap—not the technical trend—that gives us longer-term confidence in this bet. While valuations make the most compelling case for High Beta, there are other, more speculative reasons to emphasize it over Low Volatility in the near term. Much has been made of the post-election rekindling of “animal spirits,” and the Conference Board’s surging Stock Market Confidence Index offers the best evidence of this effect: the latest reading has moved into the zone of “excessive” optimism (See the chart “Conference Board Stock Market Confidence”.). While that might sound ominous, these high-confidence readings have historically been associated with High Beta annualized outperformance of more than 600 points (versus Low Volatility). Stock Market Confidence below that threshold, in contrast, has accompanied High Beta underperformance of a similar magnitude. Confidence, of course, is prone to oscillate in an EKG-like fashion, but the current level is nonetheless bullish for High Beta.
120
25
110
24
Leuthold 3000 High Beta Index – Median Price-To-Earnings on Trailing Earnings Per Share (left scale)
100 90
23 22 21
80
20 19
70
L3000 Low Volatility Index – Median Price-To-Earnings On Trailing Earnings Per Share (right scale)
60 50 40
18 17 16 15 14
30
13 12
20
11
10
10 9 86
88
90
92
94
As of: January 7, 2017 Copyright 2017 The Leuthold Group, LLC
96
98
00
02
04
06
08
10
12
14
16
18
Source: The Leuthold Group, LLC, Perception Express, January 7, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
S&P 500 HIGH BETA / LOW VOLATILITY ALLOCATION MODEL 140 130 120
140 130 120 110
110
100
100
90
90
80
80
70
70
60 50 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 2008
2009
2010
2011
2012
2013
2014
2015
60 50 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6
High Beta/Low Volatility Allocation Model * 2007
*
Switch to High Beta Last September
Total Return Ratio, S&P 500 High Beta/ S&P 500 Low Volatility
2016
2017
Buy High Beta when Total Return Ratio breaks above upper band, and remain positioned there until Ratio drops below lower band, triggering a switch into the Low Volatility Index.
As of: January 7, 2017 Copyright 2017 The Leuthold Group, LLC
Source: The Leuthold Group, LLC, Perception Express, January 7, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
CONFERENCE BOARD STOCK MARKET CONFIDENCE 55
55
50
50
13-Year High
45
45
40
40
35
35
30
30
25
25
20
20
1990 As of: January 7, 2017 Copyright 2017 The Leuthold Group, LLC
2000
2010
Source: The Leuthold Group, LLC, Perception Express, January 7, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
Tilt Toward Beta, continued on page 17
16
THE GLOBAL INVESTMENT PULSE, February/March 2017
FACTOR INVESTING AND THE IMPORTANCE OF MARKET CYCLES By Scott Opsal, CFA, Director of Research, The Leuthold Group, LLC
Summary: While factors do offer excess return they are by no means winners in all seasons. Factor returns are cyclical, volatile, and unstable over time. Factor Investing And The Importance Of Market Cycles: The widespread popularity of smart beta Exchange-Traded Funds (ETFs) demonstrates that factor-based investing has advanced from the province of academia to rank among the most popular investment strategies for institutional and retail investors. Originally of interest to researchers looking to test, and ultimately disprove, the efficient market hypothesis, factor analysis has now become a staple in the toolbox of quantitative and fundamental managers alike. In November’s Perception for the Professional, The Leuthold Group launched the smart beta and factor investing research in which some important questions were raised concerning evaluating these new mass-market quantitative funds. This
month, factor returns and risk were looked into more deeply, with a particular focus on market cycles. The broad acceptance and recent success of factor-based investing creates the behavioral risk that investors will begin to see it as a surefire moneymaker, a cure-all for their portfolio shortcomings. This research explores the cyclicality of factors and discusses how they can be used to build a robust investment strategy; yet it is important that such factors not be viewed as the superheroes of the investment universe. Factor Returns: The research examines eleven smart beta factors (represented by indexes from S&P and MSCI), and presents historical information on return spreads, correlations, and the influence of market cycles on the success of each factor. The factor lineup includes several pairs of related measures: 1) Low Volatility and Minimum Volatility; 2) High Dividend Yield and Dividend Aristocrats; and, 3) Small Cap and Equal Weighted. In the interest of research curiosity, both members Factor Investing, continued on page 18
Tilt Toward Beta, continued from page 16
Table 1
Finally, calendar effects are supportive of High Beta for another four months. Since late 1990, “more than all” of the gains in the S&P 500 High Beta Index have been earned during the November through April period (Table 1). We don’t pretend to understand this… we’re merely the messenger. Source: This article was excerpted from “Tilt Toward Beta”, by Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC, (Perception Express, January 7, 2017), http://leuth.us/stockmarket COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC
Annualized Total Return, November Through April
Annualized Total Return, May Through October
S&P 500
15.3%
4.9%
S&P 500 High Beta Index
22.5%
-2.0%
S&P 500 Low Volatility Index
13.5%
8.4%
Results for December 1990 to date.
As of: January 7, 2017 Copyright 2017 The Leuthold Group, LL C
Source: The Leuthold Group, LLC, Perception Express, January 7, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
PULSE THE GLOBAL INVESTMENT PULSE, February/March 2017
17
Factor Investing., continued from page 17
of each pairing were included. The analysis begins with relative return data shown in Table 1, below, calculated as the monthly spread between the factor’s return and the core or standard index. For ease of interpretation, to approximate annual data, monthly return spreads are multiplied by twelve. The first finding is that, after 35 years of give-and-take, the Value and Growth styles ended 2016 in nearly a dead heat. Thus, as a matter of mathematical form, neither style has any real edge on the core index since the study began in 1981. Chart 1, on the bottom of page 19, illustrates that Value has had a tough go of it over the last decade (lagging
Growth by almost 3.0% per year) until regaining the upper hand in 2016. This pattern highlights the primary theme of the findings: factor returns are cyclical, volatile, and unstable over time. Looking beyond this traditional style distinction, Table 1 indicates that most smart beta factors carry positive excess returns in the range of 1.0% to 2.2%; values consistent with other quantitative research and with The Leuthold Group’s own intuitive expectations of longterm alpha generation from active management. (Yes, factor investing is active management!) Note that factor indexes are long-only portfolios, whereas academic factor research typically goes
long the top ranked securities and short the lowest ranked securities. The longshort nature of academic research means excess return can be captured from both ends of the spectrum, thus academic return results are usually larger than longonly index returns as shown here. The two volatility factors are the only meaningful laggards among the eleven factors, posting negative return spreads of more than 2.0%. This brings to light an important caveat of Low Volatility/ Minimum Volatility investing—the need to differentiate between absolute and riskadjusted results. Low Volatility’s standard deviation of returns is 10.9% compared to the market’s 14.9%, so on a risk adjusted
TABLE 1 Annualized Relative Return
Stnd Dev Absolute Return
Standard Deviation Rel Return
% Months Beating Core
Relative Return Bull Markets
Relative Return Bear Market
Core (absolute return)
11.61%
14.9%
14.9%
N/A
N/A
N/A
Value
0.14%
15.1%
4.1%
50.7%
-0.04%
0.92%
Growth
-0.24%
15.8%
3.9%
48.8%
-0.07%
-0.99%
Equal Weight
1.78%
16.1%
5.3%
50.9%
1.56%
2.78%
Small Cap
2.18%
18.4%
10.8%
53.1%
0.86%
7.72%
High Dividend
1.30%
13.5%
8.8%
47.2%
-2.40%
13.27%
Dividend Aristocrats
2.04%
13.4%
7.4%
53.1%
-1.80%
19.62%
Quality
1.09%
14.8%
3.9%
50.7%
0.07%
5.61%
Momentum
2.19%
16.3%
6.7%
57.0%
1.70%
4.72%
Low Volatility
-2.37%
10.9%
9.4%
45.0%
-7.96%
25.08%
Min Volatility
-2.46%
11.7%
6.9%
44.9%
-5.89%
14.29%
High Beta
1.53%
28.0%
16.7%
47.9%
8.95%
-34.86%
As of: February 11, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC Factor Investing., continued on page 19
18
THE GLOBAL INVESTMENT PULSE, February/March 2017
Factor Investing., continued from page 18
basis the return shortfall is offset by the reduced volatility. Low Volatility/Minimum Volatility may show positive risk-adjusted excess returns because they are low risk strategies (i.e. the risk penalty is much lower), but on an absolute basis Low Volatility/Minimum Volatility does not show excess return. Each investor must decide whether an absolute or risk adjusted perspective best fits their investment circumstances. Dividend strategies also have lower return volatility, not surprising given that a larger portion of their return comes from stable dividend streams. On the flip side, return volatility for High Beta and Small Cap are above the marketâ&#x20AC;&#x2122;s level,
25.0%
indicating that the excess return from these factors is delivered in a bumpier fashion.
up more often than not, and Low Volatility has a difficult time keeping up in rising markets.
The fourth numeric column in Table 1 on the bottom of page 18, shows the percentage of months in which the factorâ&#x20AC;&#x2122;s excess return was positive. Given the positive alpha generally associated with factor returns, the hit ratios are close to 50.0%. Momentum is the standout performer with 57.0% of months showing positive spreads; Small Cap and Dividend Aristocrats also managed to put a little daylight between their hit rates and even money. Volatility measures ranked poorest on this metric, to be expected given that the market is
Reinforcing the theme of this report, factors do offer excess return but they are by no means winners in all seasons, and in the short run are barely better than a coin flip. Bull And Bear Markets: Market phases or cycles are critical to understanding any investment approach. When applying this perspective to factor analysis by identifying bull and bear market phases since 1980 and segmenting factor returns based on
Chart 1 VALUE AND GROWTH Trailing 12-Month Return Relative To Core
20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0%
Value As of: February 11, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
Growth Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC Factor Investing., continued on page 20
THE GLOBAL INVESTMENT PULSE, February/March 2017
19
Factor Investing., continued from page 19
this distinction when observing the last two columns in Table 1 modest alpha most factors are experienced in bull markets. Only High Beta earned more in bull markets than it did overall, posting a 9.0% excess return in up markets. The other ten factors had bull market alphas lower than their overall scores and six are negative. Both dividend measures underperformed in bull markets, and volatility factors lagged significantly. Looking beyond High Beta, Size and Momentum appear to be the next most favorable exposures during bull runs. While factor returns leave something to be desired in bull markets, they blow the doors off in bear markets. Aside from High Beta’s horrific results, most others performed extremely well, led by the dividend and volatility pairs which have double-digit spreads. Quality and Momentum also did nicely, and the Value/Growth style call performed as expected but to a more muted degree than the factors themselves. The lesson from these columns is that factors can hold their own in bull markets (and selectivity is not important as long as you avoid Low Volatility/Minimum Volatility), but they shine in bear market cycles, delivering outstanding value-add across the board. Clearly, understanding market phases is critical to anticipating factors’ excess return going forward. Factor Return Potential: Another perspective on the attractiveness of factor investing is shown with the data in Table 2, above. A metric called “Alpha Potential” defined as the percentage of rolling 12-month windows in which the absolute value of the factor’s excess return exceeded 5.0% was created. This could be 5.0% outperformance (tilt overweight) or 5.0% underperformance (tilt underweight); in either case the goal was to identify how often
TABLE 2 Number of Periods with “Alpha Potential” Value
21.9%
Growth
19.0%
Equal Weight
43.8%
Small Cap
59.5%
High Dividend
42.0%
Dividend Aristocrats
43.1%
Quality
34.4%
Momentum
49.5%
Low Volatility
66.6%
Minimum Volatility
54.2%
High Beta
72.5%
As of: February 11, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
successful factor selection could result in meaningful performance differentials. A factor that hugs the core benchmark offers few opportunities for active management and value-added returns, while a factor that regularly deviates from the core offers more frequent occasions to profit. For example, versus the standard S&P 500, the Equal Weighted S&P 500 had a return spread of more than 500 basis points in nearly 44.0% of all rolling 12-month periods; some spreads were positive, others negative. This ratio can be interpreted as the potential number of periods that provide a consequential reward for getting the factor exposure right. If an investor’s process can tilt toward or away from the factor at the
appropriate times, a higher alpha potential count is an attractive feature. Of course, a higher percentage of wide relative returns also creates greater tracking error (which some investors may view as a negative feature that accompanies the increased potential for making profitable tilts). Aside from Value and Growth, all the smart beta factors seem to provide plenty of opportunity for active decisions, led by High Beta’s tendency to mistrack the core index by at least 5.0% nearly three-quarters of the time. Factor Correlation: One of the most attractive aspects of factor investing is that the correlation of monthly excess returns across factors is very low. Factor Investing., continued on page 21
20
THE GLOBAL INVESTMENT PULSE, February/March 2017
Factor Investing., continued from page 20
This means diversification can play an important role in portfolio design an multi-factor portfolios are likely to be more attractive than single factor options. Full-period and ten-year correlation tables are provided on the “Appendix” page of this section; and a quick scan of the top two sections reveals broad swaths of negative correlations. An abbreviated look at correlations is shown in Table 3, to the top right, which captures the theme that diversification opportunities abound for portfolios that mix factors together. A clear understanding of market cycles and phases is necessary to properly interpret return correlations, which can be affected by: (a) market conditions; and/or, (b) changing constituents within each factor. Consider, for example, the market’s recent desire for low volatility, high yield, bond substitute equities. Stable dividend payers generated excess return and rising valuations as they gained in popularity, which also impacts historical correlations. The bottom section of the Appendix Table on page 23 measures the change in correlations between the entire time frame and the last ten years. Notice several relationships may have been affected by the low-volatility/high dividend market phase, for example: (1) Value and Size have become less correlated with Low Volatility/ Minimum Volatility and Yield, while Growth has become more correlated, as the dividend payers have become more expensive over time; and, (2) Value and Equal Weight have become more correlated with High Beta, while Growth is less correlated. The High Beta index today is dominated by Financials and Energy due to the macro uncertainty of these sectors. In other times, expect the greatest uncertainty to rest elsewhere, changing the High Beta correlations once again. The Tech Bubble: The exaggerated, even grotesque, return patterns of the tech bubble era distorted all sorts of market metrics and cast doubt on research that includes that period. The concern is whether the return advantage of
TABLE 3 MOST NEGATIVELY CORRELATED FACTORS 1
2
Quality
Momentum
High Dividend
Equal Weighted
Minimum Volatility
Equal Weight
Growth
Quality
Momentum
Small Cap
Quality
Growth
High Dividend
High Dividend
Growth
High Beta
Momentum
High Beta
Growth
Momentum
Quality
Value
Equal Weighted
High Beta
Momentum
Value
Equal Weighted
High Beta
Low Volatility
High Beta
Growth
Small Cap
Min Volatility
High Beta
Growth
Quality
Both Volatility
Both Dividend
Quality
Value * Growth*
Dividend Aristocrats
High Beta
3
*excluding value and growth vs. each other As of: February 11, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
TABLE 4 Annualized Relative Return
Relative Return Ex. Tech Bubble
11.61%
12.44%
Value
0.14%
-0.32
Growth
-0.24%
0.22
Equal Weight
1.78%
1.03%
Small Cap
2.18%
0.73%
High Dividend
1.30%
0.64%
Dividend Aristocrats
2.04%
1.69%
Quality
1.09%
1.13%
Momentum
2.19%
2.04%
Low Volatility
-2.37%
-3.43%
Min Volatility
-2.46%
-3.01%
High Beta
1.53%
1.58%
Core (absolute return)
As of: February 11, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
Factor Investing., continued on page 22
THE GLOBAL INVESTMENT PULSE, February/March 2017
21
Factor Investing., continued from page 21
various factors is primarily due to the tech bubble era, or whether they are robust across the longer time frame. The Tech bubble influence on factor performance by recalculating Table 1 excluding the 12 months on either side of the March 2000 top was examined. Table 4, on the bottom of page 21, presents the original excess return results along with the findings not including those 24 months. Eliminating the tech bubble climax had a slight negative impact on factor spreads overall, but the results generally remain above zero. Ignoring this window of time dampens the overall gains but still leaves some excess return to be had. Interestingly, it was the unwinding of the tech bubble, rather than the run up, that boosted overall factor returns. Several factors have a conservative, blue chip low-risk profile and made tremendous gains as the bubble collapsed. While factors are generally profitable, they do have extended periods of underperformance and can post
significant drawdowns relative to a core index. Continuing the focus on the tech bubble period, the maximum and minimum trailing 12-month return relative to the core index during that market cycle was cataloged. Table 5, below, is divided into two groups; the upper group experienced its high point in relative return before the tech bubble top, while the lower group posted its best numbers after the bubble popped. (High Beta had several highs before the top so it’s included in the upper group.)
Low Volatility, Small Caps, and Value stocks all lagged badly in the upswing but generally earned that back, and more, in the reversal that followed. Investors who prefer modestly valued, blue chip dividend-paying stocks across the market cap spectrum (that is, many fundamental investors) needed remarkable conviction and staying power in the whirlwind months leading up to March of 2000, and those who held fast to their style reaped incredible relative gains on the way back to normalcy.
Consistent with their tendency to hold aggressive names in an up market, High Beta and Momentum performed as expected by reaching their relative highs in early 2000. Quality and Growth peaked in late 1998 just before the market narrowed in the final blow-off stage of the mania. Momentum’s nimbleness in limiting the damage as the market unwound was particularly impressive with its worst 12-month shortfall being just one-third of its maximum relative gain as the market sold off. Dividend Payers,
The tech bubble’s massive factor spreads provide a clear picture of the importance of market cycles on factor returns. Investment styles in general, and factor selection in particular, will always depend on a favorable market phase; the highest ambition for factor investors is to develop a sense of perspective and timing that enables them to tilt for—or against— factors as the market moves through its inevitable cycles.
Table 5 TECH BUBBLE T12 Month Relative To Core Max Gain
High Date
Max Loss
Low Date
Quality
14.8%
December, 1998
-3.0%
January, 2000
High Beta
33.8%
August, 2000*
-33.2%
September, 2001
Momentum
21.8%
February, 2000
-6.5%
June, 2001
Growth
13.6%
December, 1998
-17.6%
February, 2001
Dividend Aristocrats
47.4%
August, 2001
-30.7%
February, 2000
Low Volatility
46.3%
March, 2001
-31.7%
December, 1999
High Dividend
34.5%
August, 2001
-27.0%
December, 1999
Equal Weight
29.2%
February, 2001
-18.6%
January, 1999
Small Cap
29.2%
April, 2002
-37.6%
March, 1999
Minimum Volatility
25.2%
February, 2001
-28.0%
January, 1999
Value
22.8%
June, 2001
-14.0%
January, 1999
* High Beta had similar highs in February and March of 2000 As of: February 11, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
Factor Investing., continued on page 23
22
THE GLOBAL INVESTMENT PULSE, February/March 2017
Factor Investing., continued from page 22
Research Takeaways:
1. For smart beta investors or investors using factors as part of their security selection process, factors have positive alpha over time. 2. Market cycles and phases are critical. Bull market excess returns are skimpy but bear markets can be particularly rewarding for the conservatively biased factors.
Source: This article was excerpted from “FACTOR INVESTING AND THE IMPORTANCE OF MARKET CYCLES”, by SCOTT OPSAL, CFA, DIRECTOR OF RESEARCH, THE LEUTHOLD GROUP, LLC (THE LEUTHOLD GROUP, FEBRUARY 2017), HTTP://LEUTH.US/SPEICAL-INTEREST. COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC
3. Correlation is unstable due to market phases and changing membership within factors. Select your historical timeframe carefully. 4. The ability to successfully tilt toward or away from factors, depending on market conditions, is a valuable skill.
Appendix Table CORRELATION OF EXCESS MONTHLY RETURNS Value
Div Arist
Equal
Growth
Small 600
Quality
Momen
High Div
Low Vol
Min Vol
High Beta
Value
1.000
0.406
0.587
-0.985
0.205
-0.615
-0.386
0.603
0.385
0.425
0.012
Div Arist
0.406
1.000
0.357
-0.400
0.047
0.062
-0.144
0.816
0.721
0.676
-0.493
Equal
0.587
0.357
1.000
-0.579
0.520
-0.454
-0.256
0.212
0.185
0.306
0.361
Growth
-0.985
-0.400
-0.579
1.000
-0.217
0.629
0.374
-0.593
-0.382
-0.423
-0.003
Small 600
0.205
0.047
0.520
-0.217
1.000
-0.232
0.092
-0.144
-0.005
0.152
0.279
Quality
-0.615
0.062
-0.454
0.629
-0.232
1.000
0.221
0.035
0.022
-0.050
-0.337
Momentum
-0.386
-0.144
-0.256
0.374
0.092
0.221
1.000
-0.168
-0.001
-0.019
-0.256
High Div
0.603
0.816
0.212
-0.593
-0.144
0.035
-0.168
1.000
0.751
0.711
-0.565
Low Vol
0.385
0.721
0.185
-0.382
-0.005
0.022
-0.001
0.751
1.000
0.844
-0.696
Min Vol
0.425
0.676
0.306
-0.423
0.152
-0.050
-0.019
0.711
0.844
1.000
-0.559
High Beta
0.012
-0.493
0.361
-0.003
0.279
-0.337
-0.256
-0.565
-0.696
-0.559
1.000
Average
0.064
0.205
0.124
-0258
0.070
-0.072
-0.054
0.166
0.182
0.206
-0.226
Core Core
As of: February 11, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC Factor Investing., continued on page 24
THE GLOBAL INVESTMENT PULSE, February/March 2017
23
Factor Investing., continued from page 23
CORRELATION OF EXCESS MONTHLY RETURNS LAST 10 YEARS Value
Div Arist
Equal
Growth
Small 600
Quality
Momen
High Div
Low Vol
Min Vol
High Beta
Value
1.000
0.290
0.366
-0.999
0.349
-0.658
-0.634
0.367
-0.201
-0.063
0.511
Div Arist
0.290
1.000
0.009
-0.293
0.055
0.087
-0.284
0.741
0.544
0.608
-0.297
Equal
0.366
0.009
1.000
-0.355
0.642
-0.545
-0.331
-0.270
-0.422
-0.420
0.765
Growth
-0.999
-0.293
-0.355
1.000
-0.345
0.661
0.625
-0.368
0.195
0.056
-0.503
Small 600
0.349
0.055
0.642
-0.345
1.000
-0.386
-0.238
-0.206
-0.254
-0.241
0.485
Quality
-0.658
0.087
-0.545
0.661
-0.386
1.000
0.226
0.095
0.433
0.411
-0.650
Momentum
-0.634
-0.284
-0.331
0.625
-0.238
0.226
1.000
-0.228
0.171
0.073
-0.395
High Div
0.367
0.741
-0.270
-0.368
-0.206
0.095
-0.228
1.000
0.555
0.624
-0.352
Low Vol
-0.201
0.544
-0.422
0.195
-0.254
0.433
0.171
0.555
1.000
0.868
-0.743
Min Vol
-0.063
0.608
-0.420
0.056
-0.241
0.411
0.073
0.624
0.868
1.000
-0.701
High Beta
0.511
-0.297
0.765
-0.503
0.485
-0.650
-0.395
-0.352
-0.743
-0.701
1.000
Average
-0.067
0.146
-0.056
-0.133
-0.014
-0.033
-0.102
0.096
0.115
0.121
-0.188
Core Core
Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
As of: February 11, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
DIFFERENCE BETWEEN FULL PERIOD AND LAST 10 YEARS Value
Div Arist
Equal
Growth
Small 600
Quality
Momen
High Div
Low Vol
Min Vol
High Beta
Value
0.000
-0.115
-0.221
-0.014
0.143
-0.043
-0.248
-0.236
-0.586
-0.488
0.500
Div Arist
-0.115
0.000
-0.347
0.107
0.008
0.025
-0.140
-0.075
-0.177
-0.067
0.196
Equal
-0.221
-0.347
0.000
0.224
0.122
-0.091
-0.075
-0.482
-0.607
-0.726
0.404
Growth
-0.014
0.107
0.224
0.000
-0.128
0.031
0.251
0.225
0.577
0.479
-0.500
Small 600
0.143
0.008
0.122
-0.128
0.000
-0.154
-0.330
-0.061
-0.250
-0.393
0.206
Quality
-0.043
0.025
-0.091
0.031
-0.154
0.000
0.005
0.060
0.410
0.461
-0.313
Momentum
-0.248
-0.140
-0.075
0.251
-0.330
0.005
0.000
-0.060
0.173
0.092
-0.139
High Div
-0.236
-0.075
-0.482
-0.225
-0.061
0.060
-0.060
0.000
-0.196
-0.086
0.213
Low Vol
-0.586
-0.177
-0.607
0.577
-0.250
0.410
0.173
-0.196
0.000
0.024
-0.047
Min Vol
-0.488
-0.067
-0.726
0.479
-0.393
0.461
0.092
-0.086
0.024
0.000
-0.142
High Beta
0.500
0.196
0.404
-0.500
0.206
-0.313
-0.139
0.213
-0.047
-0.142
0.000
Average
-0.131
-0.059
-0.180
0.125
-0.084
0.039
-0.047
-0.070
-0.068
-0.085
0.038
Core Core
As of: February 11, 2017 COPYRIGHT 2017 THE LEUTHOLD GROUP, LLC
Source: The Leuthold Group, LLC, Perception Express, February 11, 2017, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC
PULSE 24
THE GLOBAL INVESTMENT PULSE, February/March 2017
LEGEND FINANCIAL ADVISORS, INC.® & EMERGINGWEALTH INVESTMENT MANAGEMENT, INC.’S INVESTMENT MANAGEMENT SERVICES Legend Financial Advisors, Inc.® (Legend) and EmergingWealth Investment Management, Inc. (EmergingWealth) offer Personalized Investment Management Services to individuals and institutions. Investment portfolios are developed to match the client’s return and risk requirements, which are determined by the clients’ completion of a Risk Comfort Zone Questionnaire, with the guidance of a Legend Wealth Advisor or EmergingWealth Advisor, respectively. Each type of investment portfolio is managed to achieve the short, intermediate and long-term investment objectives of the client, as may be applicable.
INVESTMENT PROCESS Investment Portfolios: Unlike most financial advisory firms that offer one style of investment or portfolio type, we offer a wide array of investment portfolios that usually fit with the large majority of client needs. If necessary, we will create customized solutions as well. For the types of investment portfolios, please see our Investment Portfolios, Potential Return and Risk Spectrum Chart on the next page. For a detailed description of our portfolios, please contact Louis P. Stanasolovich, CFP®, founder, CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at legend@legend-financial.com. Investment Research: Our Investment Committee performs extensive research to identify opportunities, mitigate risks and structure investment portfolios. Emphasis is placed on developing portfolios that maximize the potential return relative to the amount of risk taken. In-depth due diligence including face-to-face interviews in many instances with portfolio managers for open-end mutual funds is performed on each investment we select for a portfolio. Factors (both from a qualitative and quantitative standpoint) that we conduct a thorough analysis of each investment include, but is not limited to, liquidity (including the primary investment and/or the underlying investments, if utilizing pass through vehicles such as openend mutual funds or exchange-traded products), income taxation, all related costs, return potential, drawdown potential (historical declines from peak-to-trough), volatility and management issues (Anything having to do with the management team of a stock, open-end mutual fund or an exchange-traded product.). All portfolios for EmergingWealth are subadvised by Legend. Client Education: Education is very important to us. We are dedicated to educating each client about the different investment portfolio types and how they relate to market volatility, time horizons, and investment returns. It is our goal to ensure that the client understands and agrees with our investment philosophy. Furthermore, we assist each client in selecting a risk tolerance level with which they are comfortable. Ultimately, an investment portfolio is designed to meet the client’s objectives.
PERFORMANCE REPORTING Many investment firms only offer monthly brokerage statements, which provide minimal information; typically only account and investment balances. We, on the other hand, provide detailed quarterly reports that outline performance, income and management fees (among other items) in a simple, easy-to-read report. In addition, each performance report is sent with an extensive index page that illustrates the investment environment during the reporting period.
FEES To find out more about the fees for either Legend or EmergingWealth’s Investment Management services, please contact Louis P. Stanasolovich, CFP®, founder, CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at legend@legend-financial.com. THE GLOBAL INVESTMENT PULSE, February/March 2017
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THE GLOBAL INVESTMENT PULSE, February/March 2017 © 2014 Legend Financial Advisors, Inc. ® All Rights Reserved