WEALTH MANAGEMENT | Q2 12
Strategic research report You’ve Got Mail — Proceed with Caution Increased financial identity theft calls for heightened investor awareness Karen O. Denise Senior Manager, CAPTRUST Wealth Client Services
The term doppelganger is defined as “an apparition or double of a living person.”1 It’s originally a German word that literally means “double-goer” or “double-walker.” This concept appears in literature and cinema as the proverbial evil twin, with examples including the short story “William Wilson” by Edgar Allan Poe, and the 2010 thriller Black Swan starring Natalie Portman. In popular culture, the protagonist is often plagued by visions of his or her lookalike, with the specter usually signifying some type of diabolical foreshadowing for the hero or heroine. Sometimes these malicious alter egos assume the lead character’s identity, representing themselves as the heroes while in reality their true character is anything but heroic. Obviously, these are fictional examples of doppelgangers, but as many individuals know all too well, the threat also applies to us in our everyday lives in the form of identity fraud. In fact, a report administered by Javelin Strategy and Research states that over 11 million Americans were subject to identity fraud in 2011.2
In This Issue Market News
2
Wealth Management Planning
4
Portfolio Strategy
12
Index Returns
15
Asset Allocation Research
16
Discretionary Research Highlights 18 Investment Asset Classes
20
CAPTRUST in the News
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As financial identity fraud commonly goes, criminals attempt to take over a person’s identity by illegally acquiring personal information in an attempt to conduct unauthorized transactions within the individual’s financial accounts. Criminals use various methods to commit identity fraud. One technique involves “phishing,” or the act of obtaining another’s account information under false pretenses. The fraudster might send what appears to be a very legitimate email, ostensibly from someone at a financial institution, requesting personal information such as a Social Security number, brokerage account information, or the size of an investment portfolio. Others have even received emails that claim their account will be closed if certain information is not updated. After the recipient unknowingly clicks on a provided link within the email to update the information, the deceiver then takes this knowledge and uses it to assume the victim’s financial identity. Another increasingly disturbing trend involves fraudulent individuals “hacking” into an investor’s email account and sending messages to the investor’s Financial continued on page 3
MARKET NEWS
In the second quarter, global financial markets gave back some of early 2012’s strong gains across riskier asset classes. Three principal issues surrounded the investment climate: (1) European sovereign and financial sector woes; (2) slowing economic growth from emerging markets, particularly China; and (3) increased concerns regarding the second half of 2012 for the U.S., including political developments that could dramatically shape markets. The combination of a presidential election showdown and the pending “fiscal cliff” will make the coming investment period a challenging one as investors weigh how much news flow has been priced into global markets versus what potential risks, both upside and downside, are not yet reflected in asset classes. We expect a volatile capital markets environment for the near term.
Major Asset Class Returns 18%
Q2-12 2012
14.90%
15% 12% 9.49%
9.38%
8.53%
9%
3.38% 3%
3.71% 2.06% 2.37%
0.99%
-0% -3%
-2.75%
-3.12%
-3.47% -4.55%
-6%
0.03% 0.04%
-2.30% -3.70%
-6.85% -9% S&P 500
Large Cap Stocks (R1000)
Source: MPI Stylus Pro
6%
Small International Fixed Real Commodities Fund of Cash Cap Equities Income Estate (DJ-UBS) Funds (Merrill Lynch Stocks (MSCI (BC (Wilshire (HFRI 3-month (R2000) EAFE) Aggregate) REIT Composite) T-Bill) Index)
Index performance depicts historical performance and is not meant to predict future results. Index averages are provided for comparison purposes only. The information and statistics in this report are from sources believed to be reliable, but are not warranted by CAPTRUST Financial Advisors to be accurate or complete.
All Publication Rights Reserved. None of the
The opinions expressed in this report are subject to change without notice. This material has
material in this publication may be reproduced
been prepared or is distributed solely for informational purposes and is not a solicitation
in any form without the express written
or an offer to buy any security or instrument or to participate in any trading strategy. The
permission of CAPTRUST: 919.870.6822
information and statistics in this report are from sources believed to be reliable, but are not warranted by CAPTRUST Financial Advisors to be accurate or complete. Performance
©2012 CAPTRUST Financial Advisors
data depicts historical performance and is not meant to predict future results. CAPTRUST Financial Advisors, Member FINRA/SIPC.
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continued from page 1
Advisor from the contact list or email addresses easily found in the “Sent Items” folder. Because the bogus email appears to be from an address the financial institution has on record, it may look credible. The thief, posing as the legitimate investor, requests that the financial institution transfer funds out of the brokerage account into a third-party bank account. Several federal agencies have recently issued statements about an alarming swell in the number of reports involving investor accounts being compromised in this manner. The following list outlines what are considered to be general best practices for protecting one’s personal financial information. • Do not share your user names or passwords, and
unknown identity of other computers or connected users who may have malicious intent. • Avoid using public computers to access personal financial information. Users do not have any control over how these computers are secured, and using them is risky. • Check the authenticity of any secure web site by verifying the site’s SSL certificate. A legitimately secure site will have a valid SSL certificate from a third-party provider that is easily viewed by clicking on the padlock icon in your Internet Explorer address field. • Remain proactive about examining your financial accounts. Review your monthly transaction activity
do not save them on your hard drive. Sharing this
and always alert your financial institution if you see
information with others, even those you trust,
transactions you do not recognize.
relinquishes your complete control over your accounts. • Safeguard your computer with personal firewalls and security software. These measures can help prevent
• Review your credit report for any suspicious activity; you may order a free credit report annually by either calling 1.877.322.8228 or visiting annualcreditreport.com.
personal computer compromise, or help prevent malicious programs from transferring personal data over the Internet, in the event of a compromise. • Change your account passwords periodically (every 60–90 days). This will decrease the likelihood of misuse if your passwords are accidentally disclosed. • Use a password at least eight characters long consisting of at least three of the four primary character types: uppercase and lowercase letters, numbers, and special characters. These complexities will decrease the likelihood of your password being guessed or hacked.
At CAPTRUST, we take the matter of financial fraud attempts very seriously. Our employees are trained to recognize potential fraud attempts by identifying red flags commonly found in potentially hacked emails. It is also our policy to verbally confirm any money movement [request] prompted by email. We also have the ability to exchange sensitive Client information (e.g., attachments including account and Social Security numbers, letters of authorization, etc.) via encrypted emails and document exchange using a secure file transfer. We facilitate a very thorough process to confirm that your funds are distributed only as you instruct and that your personal information is protected.
• If you receive emails requesting personal information from a financial institution, always contact your trusted financial representative via phone before responding to validate the request. • Be prudent when using wireless connections. Avoid connections advertised as “free.” Using these publicly
Should you have any questions, please contact us. We will gladly explain our policies to safeguard your information. For more tips, you can also visit captrustadvisors.com/account as well as the Federal Trade Commission’s Consumer Protection site at ftc.gov/bcp.
available Internet connections is risky given the
Source: 1
The Oxford English Dictionary.
2“
2012 Identity Fraud Report: Social Media and Mobile Forming the New Fraud Frontier.” Javelin Strategy and Research.
3
wealth management planning
THINK LIKE A SCOUT R. Michael Gray, CPA, PFS Senior Vice President, CAPTRUST Financial Advisor
As a child of two hardworking parents who ran a retail shop, I had to choose between scouting, other extracurricular activities, and my beloved team sports due to the demanding nature of the family business. The latter prevailed, but luckily, because many of my teammates also participated in scouting, I picked up some secondhand exposure to fundamental Boy Scout practices and traditions. I remember their long-standing motto, “Be Prepared,” which encourages the importance of understanding your situation and how it might change, maintaining a mentality of being ready to react. The current uncertainty we face with our income tax laws, the so-called “taxmageddon,” is a good reason to think like a Scout throughout the remainder of 2012. While it is impossible to know the ultimate outcome, it is possible to understand and prepare for potential outcomes and evaluate actions that may make sense depending on your individual circumstances. Several potential scenarios exist, including expiration or extension of the Bush-era tax cuts, adoption of proposed legislation (like President Obama’s proposed budget), and introduction of completely new legislation. Additionally, the recent Supreme Court ruling on the constitutionality of President Obama’s Patient Protection and Affordable Care Act (PPACA) adds tax considerations. Many worry that political intractability will lead to gridlock and that nothing will occur prior to year-end. By default, taxpayers would face pre-Bush-era tax policies in 2013 and possibly PPACA taxes as well. Specifically, if the Bush-era tax cuts expire, expect three primary impacts on 2013 income taxes: • The maximum rate on ordinary income would increase from 35% to 39.6%. • The maximum rate on qualified dividends would increase from 15% to 39.6%. • The maximum rate on long-term capital gains would increase from 15% to 20%.
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Potential Tax Scenarios for 2013 Pre-Bush-era tax cuts (2001)
Current (2012)
If cuts are allowed to expire (2013)
2013 with PPACA Taxes
Maximum Rate on Ordinary Income
39.6%
35%
39.6%
39.6%
Maximum Rate on Qualified Dividends
39.6%
15%
39.6%
43.4%
20%
15%
20%
23.8%
Tax Scenario
Maximum Rate on Long-Term Capital Gains
Source: www.irs.gov; “Early Look at Possible 2013 Income Tax Changes,” www.FocusFinancialadvisors.com Feb. 2012; CAPTRUST Investment Research. www.gfc.com “Insights on Income Tax Rates to Soar by 2013.”
If the PPACA taxes come along for the ride in 2013, the tax effect would become foreseeably worse. If this were to actually happen, the maximum rates for qualified dividends and long-term capital gains would effectively be 43.4% and 23.8% respectively, due to a new 3.8% Medicare tax on investment income for those with Adjusted Gross Income (AGI) over $250,000. The challenge of being prepared is complicated by the need to think in ways sometimes contrary to a more traditional approach. For example, as year-end approaches, we traditionally look to “harvest” capital losses that can be used to offset realized capital gains. In Client accounts where we have investment discretion, this goal is implemented in different ways, including taking steps to avoid material capital gain distributions from mutual funds. However, if higher rates seem likely in 2013 and beyond, one might take the opposite approach and choose to have a long-term gain taxed at 15% in 2012 and save the capital losses for the future, where they have more value against higher rates. The answer is likely different if the realized capital gains are short-term and using available losses as an offset will make sense. Another call to action may lie with ordinary income, where an element of control over timing exists. Some examples are the exercise of nonqualified stock options, Roth IRA conversions, and bonus payments. The ordinary income from a stock option is triggered at exercise, and the timing of that exercise is up to the option owner. The lever here is the expectation of the tax rate for ordinary income being higher after 2012. As previously
noted, the expiration of the Bush-era tax cuts alone will increase the maximum marginal rate on ordinary income by 4.6%; additionally, if the PPACA taxes survive, we add another 0.9% to Medicare payroll tax for income levels over $250,000. Paying taxes at a rate 5.5% lower might motivate accelerated stock option exercise in 2012. While a bit less time-sensitive, potential tax rate increases may require evaluation of how investment portfolios are constructed. For example, if we have higher marginal rates on ordinary income, municipal bonds’ tax advantage may increase. Similarly, if dividends’ preferential tax treatment is lost, those seeking portfolio income may need to find more efficient ways to achieve this goal. And there are even more potential rule changes. The pre-Bushera tax policy applied an 18% long-term capital gain rate to a security purchased after January 1, 2001, that has been held more than five years. This rule will re-apply in 2013 if the Bush-era tax cuts are allowed to sunset. In conclusion, the uncertainty surrounding the future course of U.S. tax rates could be likened to packing for an adventurous camping trip without knowing the destination’s weather forecast. I believe my loyal Boy Scout friends’ advice would go something like this: Be prepared for multiple environmental conditions and anticipate unforeseen situations that may require skilled action. Such advice is helpful as we wait for electoral outcomes and future legislation to unfold, revealing a set of more definitive conditions.
5
GETTING LIQUID David A. Hood Senior Manager, CAPTRUST Investment Research
Alternative investments have traditionally been reserved only for the most sophisticated institutional and high-networth individual investors. Because of product innovation, that trend is changing. The development of alternative mutual funds and exchange traded funds has brought a once seemingly exclusive investment tool to more investors through “liquid alternatives,” a term we use to describe alternative investment strategies available in daily priced investment vehicles like mutual funds. Liquid alternatives have been a fast-growing and quickly evolving product set since the financial crisis. While the crisis wreaked havoc on so many areas in the investment industry, it provided a catalyst for this segment’s further growth. It also immediately focused investors on liquidity concerns, especially within their alternative allocations. While many investors have continued to believe in these strategies’ investment merits, they have become increasingly leery of their illiquidity. As a result, over the last four years investors have poured assets into liquid alternatives. Last year alone, liquid alternatives soaked up $23 billion in investor inflows. To put that in perspective, investors withdrew $85 billion out of U.S. equity mutual funds during the same time. Liquid alternatives have grown from an asset base of under $40 billion in 2006 to over $120 billion at the end of 2011. The number of available products has also exploded. In 2007, there were only 11 new liquid alternative mutual funds launched. In 2010 and 2011, the industry launched a total of 54 and 79 products, respectively.1 As the origination and growth of liquid alternatives signals a potentially exciting new era for investors, it brings with it a unique set of challenges and risks. On one hand, liquid alternatives eliminate some of the most obvious risks associated with private alternative investments, including
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liquidity risk and transparency issues. However, underneath these simplified vehicles are still complex investment strategies. Additionally, because of the need for liquidity, they may provide investors with only a diluted version of an investment they could access in private form. The fact that most of these products are still in their infancy with little to no public track record to analyze makes life tougher. During the first half of the year, our due diligence team conducted an exhaustive review of the entire liquid alternative universe in order to create a guide to this complex product set. The goal of this project was to strip away any predefined categories and analyze these investments strictly from the bottom up. While Morningstar has developed their own categorization for these investments, which includes seven different categories, we started by identifying the entire opportunity set regardless of assigned category. This was crucial in certain categories. While some of Morningstar’s categories are relatively straightforward and useful, others are more nebulous, nuanced, and complicated. For example, Morningstar’s “multialternative” category captures two different investment strategies that we would consider distinct: fund of hedge funds and multi-strategy. In the first, a manager allocates to a collection of sub-advisors, who often specialize in a particular strategy, region, or industry. With the second, the multi-strategy manager invests directly in complex markets across a number of different hedge fund strategies. While overall portfolio positioning and characteristics could be similar between a fund of hedge funds manager and a multi-strategy manager, the investment strategies themselves are completely different and distinct. We applied our expertise to this analysis, brought from the same methods and comprehensive tools gained from providing coverage and analysis of private alternative products. Today, the current liquid alternative universe consists of around 230 products. For our review, we identified 110 of those that initially met our criteria. After due diligence began, the list quickly shrank to 57. Of those 57, a small subset were identified as true investment opportunities that we would consider for Client portfolios. The prevailing products represent a broad range of alternative investment categories. While many are strategic in nature, a few are more tactical and should be used only to capture a specific opportunity. While we have completed an initial assessment and have identified a number of potential Client solutions, this space continues to grow and evolve. As it does, we will continue to ensure that Client portfolios, where appropriate, maintain exposure to the most skilled managers in the liquid alternatives domain.
As the origination and growth of liquid alternatives signals a potentially exciting new era for investors, it brings with it a unique set of challenges and risks.
Source: 1
Morningstar and Barron’s 2011 Alternative Investment Survey of U.S. Institutions and Financial Advisors, May 2012.
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FRONTLINE PERSPECTIVES: A TIMELY Q&A WITH MOHAMED EL-ERIAN David A. Hood Senior Manager, CAPTRUST Investment Research
Questions abound across global capital markets. The health of the U.S. economy, the future of the Eurozone, a potential “fiscal cliff” late this year, plus a persistently low interest rate environment all present unique challenges and opportunities. How investors prepare for these variables will determine their investment outcomes. As a firm with over $76 billion in Client assets, CAPTRUST has direct access to some of the brightest minds in the asset management industry. This quarter we use that leverage to share macroeconomic perspectives from a renowned thought leader. Mohamed El-Erian is chief executive officer and co-chief investment officer of PIMCO, a Newport Beach-based asset management firm currently managing $1.8 trillion in assets. PIMCO is the manager of the largest bond mutual fund and is one of the largest fixed income asset managers in the world. Mohamed recently joined me to answer a few questions and provide his thoughts on the principal issues facing investors today. Q: Starting first in the U.S., as we’ve passed the midpoint of the year, how healthy is the U.S. economy? Is it finally healthy enough to fly on its own without the help of stimulus and achieve “escape velocity”? Mohamed: There certainly are factors that suggest the U.S. economy is gradually healing, but the deleveraging process is still very much with us and continues to suggest weak growth ahead. Positive factors include healthy corporate balance sheets, significant cash on the sidelines, and data that indicate the housing market is in the process of forming a bottom. But it is unlikely that these factors on their own will propel the U.S. economy to escape velocity given the lack of robust demand and ongoing structural challenges, including stubbornly high long-term unemployment, government debt and deficit issues, clogged credit pipes for mediumand small-scale companies, and inadequate investment in education, worker training, and infrastructure. Also, the risk of collateral damage from Europe cannot be underestimated.
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Q: One of the questions we field often is the possibility of a “fiscal cliff” at year-end and its implications on investment returns. How is PIMCO positioning portfolios for this uncertain event? Mohamed: Economists, including Federal Reserve Chairman Ben Bernanke, are rightly starting to warn that the U.S. faces a worrisome “fiscal cliff” at year’s end. If politicians take no action before the end of the year, tax stimulus and government spending worth approximately 4% of Gross Domestic Product (GDP) are scheduled to be cut. The blunt spending cuts mandated by the 2011 compromise on the debt ceiling along with across-the-board tax increases would derail the U.S. recovery and undermine the well-being of the global economy. Investors should remain defensive, possibly moving up in quality and maintaining broad portfolio diversification. PIMCO is emphasizing liquidity, both for defensive reasons and to take advantage of market dislocations should they occur. This gives us important optionality and flexibility so we can be prepared to capture opportunities should there be policy mistakes. Q: Shifting gears now to Europe, what is PIMCO’s current view on the Eurozone? Will the European Union survive? Mohamed: We believe the status quo is no longer an option for the Eurozone. The Eurozone will either evolve to a less imperfect union or fragment. Our baseline view is that eventually there will be a smaller, less imperfect union anchored by Germany, the owner of the strongest balance sheet in Europe, along with France, Italy, and Spain. For this union to be sustainable, it will have to be underpinned by a much stronger fiscal union as well as greater support for the banking system, adequate mutualization of debt, and greater political integration. All of these solutions are grounded in the sharing of Germany’s balance sheet, and Germany must play a leading role in several of the critical fiscal decisions. In the interim, however, the risk of a disorderly breakup of the Eurozone will remain a key tail risk for global markets for some time to come.
Q: Is there still a chance that global leaders, including in the U.S., are able to work in a synchronized fashion to promote, as you would say, a “virtuous cycle,” where growth and expansion promote regulatory reform, thereby further boosting confidence and stability? Mohamed: In order to promote a virtuous cycle, policy makers need a common analysis, a shared vision, and political consensus for implementation. Unfortunately, policy makers in Washington and Europe have failed over the past few years to address pressing fiscal issues and structural challenges to their economies. They are opting instead for short-term fixes and half measures instead of seriously confronting looming sovereign debt issues. Now they must pivot quickly and respond in a much more comprehensive way. Difficult decisions need to be made to restore the public’s faith in elected leaders and to ensure an orderly solution to the problems facing the global economy. If policy makers continue to opt for political posturing rather than grand bargains, legitimate concerns about growth, jobs, inequality, debt, and deficits will persist and undermine the basic functioning of markets and, in Europe, possibly lead to a disorderly outcome. Q: Today, forecasting policy leaders’ and regulatory officials’ actions are at the center of the investment process. How do you analyze such large non-investment uncertainties, and what changes have you made to adapt to this new reality? Mohamed: It is now almost four years since the full onset of the global financial crisis. The economic and social costs have been immense, and they continue to accumulate. Against this reality, it should come as no surprise that there have been many regulatory policy initiatives at the national, regional, and multilateral levels. Our ongoing assessment of the regulatory landscape now always includes recognition of how much is still in flux and, essentially, both what is unknowable and unquantifiable at this stage. continued on page 10
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From a PIMCO business perspective, we have increased our legal and compliance staff around the world, and doing so has enhanced our ability to monitor and react to regulatory changes in a large number of national jurisdictions. Q: To date, much of the policy response from leaders to the crisis has come in the form of lower interest rates and quantitative easing. Central banks have used these tools to try to lower borrowing costs to encourage growth. The byproduct has been the creation of historically low interest rates. Given the current low level of rates, what role should fixed income play in a portfolio? Mohamed: We believe fixed income will continue to play an important role in portfolios, especially given the uncertainty surrounding the global economy. Despite historically low yields, the fixed income asset class tends to provide investors with liquidity, income, and a cushion against deflation. It also provides important optionality in a world in which volatility is likely to create opportunities down the road. Given our view that consequential risks to the global economy still remain, we suggest investors look to strategies that can take advantage of the changing global opportunity set and have the flexibility to preserve capital during bouts of market volatility. This would suggest an evolution in the way investors have traditionally deployed capital in the fixed income markets.
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Measures that investors might consider include “smart” benchmarks that focus on a country’s contribution to global GDP, an increased allocation to emerging market debt and currencies given favorable growth dynamics, and the use of tail risk hedging to help guard against unexpected shocks. Q: While portfolio liquidity and optionality are important, many investors look to their fixed income allocations for yield. How would you advise a retiree to invest in this low-rate environment with a need for income? Mohamed: We understand that generating a high level of income is often a primary goal for some investors who are looking to preserve their savings and generate reliable, steady cash streams. Given the current low-rate environment, U.S. Treasury securities may not provide investors sufficient income to meet their needs. And traditional credit-centric portfolios could expose a retiree’s principal to substantial risks. We believe that it makes sense to look more broadly at other sectors of the fixed income market and also look outside the U.S. for opportunities to generate income without taking excessive risk. These sectors could include high-quality non-U.S. government bonds as well as inflation-linked bonds and mortgagebacked securities, among other options. We believe it’s important to invest in strategies that maintain flexibility, while
allowing for the generation of attractive income and the diversification of risk away from a single sector. Q: Earlier you mentioned that consequential risks to the global economy still remain and that investors may need to evolve from the ways they have traditionally deployed capital in fixed income markets to consider “smart” benchmarks that focus on a country’s contribution to global GDP. Is the Barclays Capital Aggregate Bond index still an appropriate benchmark for core fixed income managers? Mohamed: As a starting point we can ask ourselves the following question: “Do we want to lend to the countries that have the lowest income growth and the most debt?” That’s the outcome that traditional indices can produce. Global investors need a new approach for allocating capital across regions and countries by being forward-looking and seeking attractive opportunities wherever they are. At PIMCO we have developed the Global Advantage Index (GLADI) to help investors capture investment opportunities in the “New Normal.” The index’s GDP-weighting methodology makes it more inclusive of newly developing countries with stronger underlying fundamentals and avoids an overallocation to debt-laden developed countries. This feature positions investors for future rather than past opportunities.
WEALTH MANAGEMENT | Q2 12
The index also includes broad exposure across fixed income markets and sectors, including inflation-linked bonds and currencies, which can help preserve and enhance purchasing power over the long-term. Q: And lastly, given all that we’ve discussed, have any of these largely macroeconomic issues changed the way PIMCO manages fixed income portfolios or manages risk? Mohamed: We believe the focus on macroeconomic issues gives PIMCO a significant advantage to add value in client portfolios. The current environment reinforces our belief that an investment manager must have a well-informed top-down view, and
supplement this with detailed bottomup analyses. This has been a central tenet in our investment process going back to the founding of the firm. Our investment process starts with an annual Secular Forum in which PIMCO professionals across our twelve global offices gather for a three-day discussion about the future of the global economy and financial markets. The Secular Forum has proven enormously important for PIMCO’s ability to deliver consistent value to our clients. We debate the major trends that will play out over the next three to five years and assess not what should happen but what is likely to happen. Think of the outcome as providing medium-term guardrails for where and
how we invest the funds that have been entrusted to us. While we have not made any significant changes to our risk management process since the global financial crisis, we have continued to invest in human, analytical, and technological resources to continuously enhance our risk management framework. We believe in a “mosaic” approach to analyzing and managing risk that uses many different measures while not relying too heavily on any single one. As the global financial crisis highlighted, any one measure of risk can often be incomplete or even misleading. Risk management always has been as it should be, at the forefront of all that we do at PIMCO.
Dr. El-Erian is CEO and co-CIO of PIMCO and is based in the Newport Beach office. He re-joined PIMCO at the end of 2007 after serving for two years as president and CEO of Harvard Management Company, the entity that manages Harvard’s endowment and related accounts. Dr. El-Erian also served as a member of the faculty of Harvard Business School. He first joined PIMCO in 1999 and was a senior member of PIMCO's portfolio management and investment strategy group. Before coming to PIMCO, Dr. El-Erian was a managing director at Salomon Smith Barney/Citigroup in London, and before that, he spent 15 years at the Mohamed A. El-Erian
International Monetary Fund in Washington, D.C.
Dr. El-Erian has published widely on international economic and finance topics. His book, When Markets Collide, was a New York Times and Wall Street Journal bestseller, won the Financial Times/Goldman Sachs 2008 Business Book of the Year and was named a book of the year by The Economist and one of the best business books of all time by The Independent (UK). He was named to Foreign Policy’s list of “Top 100 Global Thinkers” for 2009, 2010, and 2011. Dr. El-Erian has served on several boards and committees, including the U.S. Treasury Borrowing Advisory Committee, the International Center for Research on Women, the Peterson Institute for International Economics, and the IMF's Committee of Eminent Persons. He is currently a board member of the NBER, the Carnegie Endowment for International Peace, and Cambridge in America. He holds a master's degree and doctorate in economics from Oxford University and received his undergraduate degree from Cambridge University.
11
portfolio Strategy
THE LEADERSHIP CRISIS Eric J. Freedman CAPTRUST Chief Investment Officer
Youth sports have taken a much different turn from what they were in my day (just reading that sentence, and listening to the cracking noise from my right knee as I ascend stairs, confirms that I am officially old). All three of my children, ages 12, 9, and 4, play a variety of sports, leaving my wife and me to help coordinate car pools, tournament sign-ups, and other logistical feats, not the least of which includes halftime and post-game snack detail. Having taken several operations classes in graduate school, I feel I have been reasonably trained for handling this trying schedule. Currently, all three children play soccer, which for the eldest two entails long road trips across state lines (a recent Final Jeopardy! question on TV asked contestants which of the original 13 colonies was the widest, and I correctly blurted “North Carolina!” — my knowledge based 100 percent on experience), and as much as I try to commiserate with fellow road-weary parents, I am told that your kids grow up faster than you know it, so I try to savor every moment. Given the distance of some of these trips, conversations can head into interesting places. I am not allowed to discuss boys with my 12-year-old daughter (I am in a state of suspended disbelief anyway, so I am not sure what I would say), and our musical tastes mostly diverge, but Hailey does like to talk about current events. Given our European heritage, Hailey has always had an interest in the Continent, but the convergence of recent developments and weekly current events assignments in social studies have made today’s European plight of particular interest. Being a rising seventh grader with her mother’s brains, Hailey understands concepts like debt and even productivity differentials across countries. We have kept up a running dialogue during trips about the latest European developments. Hailey’s
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nine-year-old sister Elle is not quite ready for such concepts, but she too knows that part of her dad’s job is to keep aware of current events. When I try to explain to her what is going on in Europe, the most digestible explanation is that it is a leadership crisis. European policy makers have a challenging task assigned to them; the region’s countries have disparate productivity levels, growth potential, and debt characteristics along with minimal fiscal integration — yet they share the euro as the common currency. The original Maastricht Treaty, signed two decades ago at the European Union’s inception, attempted to enforce fiscal rules by imposing penalties on countries whose debt-to – Gross Domestic Product (GDP) percentages exceeded 60% or whose budget deficits exceeded 3%. However, once large countries like Germany and France breached those limits, policy makers looked the other way. German and French leaders missed an opportunity to lead by example, and the initial fiscal control attempts gave way to self-determination, or in Elle’s world, handing in a book report and grading it yourself. The twentieth European Summit since the Greek crisis began in 2009, held June 28–29, 2012 in Brussels, was met with considerable fanfare. Leaders released a statement long on what they intend to do (including the potential for a centralized European bank regulator, easier access to aid capital, and other considerations) yet short on how they will do it. Successful implementation is a cross-country coordination problem, described eloquently in Surowiecki’s The Wisdom of Crowds. Surowiecki details how some groups excel at coordination (schools of fish, New York City pedestrians) while others have had historically weak performance (the fragmented U.S. intelligence operations). Europe’s individual countries are driven first by self-interest and a distant second (or perhaps third) by their common bond as Europeans. Most U.S. citizens view themselves as Americans first and Iowans or South Carolinians second; this identity helps our governments, at least on a relative basis, to react more quickly to crises and coordinate better than Europe. We are in an environment driven by policy makers, so we must consider one other variable: political self-interest. A recent quote by simultaneous Luxembourg and Eurogroup President
Jean-Claude Juncker aptly summarizes this conflict: “We all know what to do. We just don’t know how to get re-elected after we’ve done it.”1 Whether or not all European politicians truly know what to do, Mr. Juncker’s quote does provide insight into why Europe may be focused on certain types of legislation that appear more popular with constituents. Take, for example, the European Court of Justice’s late-June decision that European Union citizens who get sick while on vacation must receive paid time off equivalent to the duration of their illness.2 This benefit is layered on top of the EU minimum of 20 paid vacation days that can be superseded by more favorable national laws like those in France, which allows for ten days of vacation for those working up to 39 hours a week on top of the national 25 day minimum, or Spain, which allows three weeks of vacation for marriage.3 It is hard to compete in a globally integrated marketplace if you are not in the office very often. These are certainly policies that may get you temporarily elected by the beneficiaries of such generosity, but it will also lead to rampant unemployment, lower productivity, and a perpetual state of uncompetitive bliss, which leads to youth unemployment rates of 22% for countries using the euro versus 11% for the total Eurozone. Most strikingly, Greek and Spanish youth unemployment stands at over 50%. These are not levels consistent with leadership and today’s global economic realities. A graduate professor of mine, Dr. Michael Useem, wrote a book called The Leadership Moment, which chronicles nine leaders throughout history and across geographies, detailing moments they faced as leaders and the choices they made, some with favorable results and some with catastrophic implications. Europe is facing its own set of leadership moments, but as we approach the twenty-first European leadership summit, it is time to be long on details and short on promises. I applaud Europe’s focus on work-life balance, but global capital markets and economic forces are indifferent about Europe’s intentions. They seek results. More open labor and trade practices, fewer unsustainable benefits, and a more credible path toward debt reduction are all steps capital markets need to see before we can reverse Europe’s negative feedback loop. Otherwise, investors will cling to political developments, press conference continued on page 14
13
continued from page 13
outtakes, and the “he said, she said” of back room negotiations. Case in point was yours truly on Father’s Day, alternating between the U.S. Open golf tournament and Greek election coverage — not your typical Sunday programming schedule. The U.S. faces its own leadership moments later this year with the presidential election as well as the impending “fiscal cliff.” These events, coupled with the ongoing European saga, will continue to shape markets and portfolios more than anything else. I am encouraged when I read quotes from the likes of Italian Economic Undersecretary Gianfranco Polillo, who states that having Italians work one more week a year would help jump-start productivity, but I fear it may take further market pain to push policy makers into durable reforms. In this environment, we continue to recommend that Clients greatly spread out their portfolio risks; capital market environments driven by policy makers are fraught with volatility and we expect the tugof-war to continue until the hard choices are made. As such, taking heroic stands for or against asset classes may work against you. As an example, the 10-Year U.S. Treasury touched an all-time low yield of 1.44% on June 1, and as paltry as that yield may be, should things deteriorate in Europe, the “fiscal cliff” become a reality, or the global growth picture rapidly decelerate, that yield could go a lot lower. Not having that defensive exposure could hurt when you need it the most.
More open labor and trade practices, fewer unsustainable benefits, and a more credible path toward debt reduction are all steps capital markets need to see before we can reverse Europe’s negative feedback loop.
I want to write columns rich with charts, data, and provocative hypotheses. I want to drill into specific asset classes and opine on what will fundamentally drive them. But those variables are subordinated by macroeconomic developments, specifically political economy challenges that we will continually digest in our goal to help CAPTRUST Clients navigate through a difficult landscape. We are seeing some progress out of Europe, but we need to see more; the aforementioned U.S. issues await. No rest for the weary, dear travelers; it’s time to put both hands on the wheel and continue on this road trip. We at CAPTRUST are committed to handling whatever roadblocks capital markets may put up, but like a Freedman family weekend soccer excursion to Anytown, North Carolina, it is likely to be a long drive. Just remember, no talking about boys. Sources: 1
http://www.msnbc.msn.com/id/46880512/ns/business/t/analysis-europes-reform-drive-risks-running-outsteam.
2, 3
14
http://online.wsj.com/article/SB10001424052702304782404577490130796396386.html.
WWW.CAPTRUSTADVISORS.COM
WEALTH MANAGEMENT | Q2 12
index returns
2012 2ND QUARTER ASSET CLASS RETURNS 2000 1997
International Commodities Equities 31.84% 30.98% Fund of Funds
Real Estate
26.47%
26.81%
Commodities
Fixed Income
24.35%
2001 1998
2002 1999
2000 2003
2004 2001
2005 2002
2006 2003
2004 2007
2008 2005
2009 2006
2007 2010
2008 2011
YTD
Real Estate
Commodities
Small Cap Stocks
Real Estate
Commodities
Real Estate
International Equities
Fixed Income
International Equities
Real Estate
Real Estate
Real Estate
35.92%
17.12%
5.24%
42.14%
28.48%
8.69%
14.88%
Cash
Mid Cap Stocks
Small Cap Stocks
Fixed Income
Large Cap Stocks
40.48%
26.85%
7.84%
9.38%
12.83% Fixed Income
Mid Cap Stocks
21.26% Large Cap Stocks
Mid Cap Stocks
Mid Cap Stocks
Mid Cap Stocks
Small Cap Stocks
Fund of Funds
Fund of Funds
Real Estate
Mid Cap Stocks
Large Cap Stocks
Small Cap Stocks
3.64%
40.06%
20.22%
12.65%
18.37%
10.26%
-21.34%
28.61%
25.48%
1.50%
8.53%
Cash
Real Estate
Small Cap Stocks
Real Estate
Large Cap Stocks
Fixed Income
Small Cap Stocks
Cash
Mid Cap Stocks
Fund of Funds 2.79%
Cash
Small Cap Stocks 2.49%
Fund of Funds
Mid Cap Stocks
18.23%
4.08%
-5.62%
Cash
Small Cap Stocks
Large Cap Stocks
Fixed Income
Real Estate -4.55%
1.68%
-7.79%
36.74%
18.33%
12.13%
15.46%
Fund of Funds
Large Cap Stocks
Large Cap Stocks
Fund of Funds
Mid Cap Stocks
1.01%
29.89%
11.40%
7.45%
15.26%
International Large Cap Commodities Commodities Equities Stocks 9.15% 23.93% -14.67% 6.27%
-12.45%
Large Cap International Stocks Equities
-0.82%
1.51%
Real Estate
8.25%
-3.02%
International International International International Commodities Equities Equities Equities Equities 16.23% 27.16% 41.41% 17.11% 21.36%
Cash 3.64%
Mid Cap Stocks
5.01%
31.49%
10.25%
6.36%
20.91%
Fixed Income
47.25%
21.36%
8.44%
11.63%
Small Cap Stocks
25.90%
-19.50%
Mid Cap Stocks
Fund of Funds
Fund of Funds
-16.19%
11.62%
6.79%
Small Cap Stocks
Fixed Income
Fixed Income
-20.48%
International Large Cap Commodities Equities Stocks -19.51% -15.11% -21.65%
4.10%
4.34%
Cash 1.44%
-33.79%
Large Cap Small Cap Commodities Stocks Stocks -35.65% 5.77% 27.17%
Fund of Funds
Mid Cap Stocks
10.34%
5.60%
0.10%
7.97%
Large Cap Stocks
Mid Cap Stocks
International Equities
16.10%
-1.55%
3.13%
Small Cap Stocks
Fixed Income
-4.18%
2.37%
International Large Cap Commodities Equities Stocks 18.91% 11.60% -37.60% Real Estate
Fund of Funds
Fixed Income
Fund of Funds
Fund of Funds
-37.97%
11.16%
6.54%
-5.51%
0.99%
Small Cap Stocks
Mid Cap Stocks
Fixed Income
Fund of Funds
Commodities
Cash
4.33%
-1.57%
-41.46%
5.93%
5.46%
-13.32%
0.04%
Commodities
Real Estate
International Equities
Small Cap Stocks 4.55%
Cash 3.35%
Fixed Income
Cash 1.05%
6.97%
Large Cap Commodities Stocks 16.83% 28.43%
2.43%
Cash
Cash
5.08%
4.71%
Fixed Income
2.07%
-16.82%
-45.25%
Cash
Cash
0.21%
0.13%
International Commodities Equities -3.70% -13.33%
Small Cap Stocks (Russell 2000 Index)
Real Estate (MSCI U.S. REIT Index)
International Equities (ACWI Ex-U.S. Index)
Large Cap Stocks (Russell 1000 Index)
Fund of Funds (HFRI FoF Composite Index)
Fixed Income (Barclay’s Capital U.S. Aggregate Index)
Commodities (Dow Jones UBS Commodity Index)
Mid Cap Stocks (Russell Mid Cap Index)
Cash (Merrill Lynch 3-Month Treasury Bill)
Source: Markov Processes Inc., Bloomberg, Mobius
1996 1999
2012 2ND QUARTER INDEX PERFORMANCE Q2-12
2012
2011
2010
2009
2008
2007
1 YEAR
3 YEAR
5 YEAR
S&P 500
-2.75%
9.49%
2.11%
15.06%
26.46%
-37.00%
5.49%
5.45%
16.40%
0.22%
5.33%
Dow Jones Industrial Average
-1.85%
6.83%
8.38%
14.06%
22.68%
-31.93%
8.88%
6.63%
18.25%
2.00%
6.02%
-5.06%
12.66%
-1.80%
16.91%
43.89%
-40.54%
9.81%
5.82%
16.95%
2.43%
7.21%
-3.12%
9.38%
1.50%
16.10%
28.43%
-37.60%
5.77%
4.37%
16.64%
0.39%
5.72%
Russell 1000 Growth
-4.02%
10.08%
2.64%
16.71%
37.21%
-38.44%
11.81%
5.76%
17.50%
2.87%
6.03%
Russell 1000 Value
-2.20%
8.68%
0.39%
15.51%
19.69%
-36.85%
-0.17%
3.01%
15.80%
-2.19%
5.28%
Russell Mid Cap Index
-4.40%
7.97%
-1.55%
25.48%
40.48%
-41.46%
5.60%
-1.65%
19.44%
1.06%
8.45%
Russell 2000
-3.47%
8.53%
-4.18%
26.85%
27.17%
-33.79%
-1.57%
-2.08%
17.80%
0.54%
7.00%
Russell 2000 Growth
-3.94%
8.81%
-2.91%
29.09%
34.47%
-38.54%
7.05%
-2.71%
18.09%
1.99%
7.39%
Russell 2000 Value
-3.01%
8.23%
-5.50%
24.50%
20.58%
-28.92%
-9.78%
-1.44%
17.43%
-1.05%
6.50%
NASDAQ Composite Russell 1000
10 YEAR
AC World Index Free Ex-U.S.
-7.38%
3.13%
-13.33%
11.60%
42.14%
-45.24%
17.12%
-14.15%
7.43%
-4.18%
7.20%
HFRI Fund of Funds
-2.30%
0.99%
-5.72%
5.70%
11.47%
-21.37%
10.25%
-4.50%
2.17%
-2.04%
3.23%
Wilshire REIT Index
3.71%
14.90%
9.24%
28.60%
28.60%
-39.20%
-17.55%
13.21%
33.62%
2.05%
10.31%
Barclays Govt. Intermediate Bond
1.45%
1.07%
6.08%
4.98%
-0.32%
10.43%
8.47%
5.01%
4.44%
5.77%
4.63%
Barclays Corporate IG Bond
2.52%
4.65%
8.15%
9.00%
18.68%
-4.94%
4.56%
9.71%
10.57%
7.64%
6.60%
Barclays Aggregate Bond
2.06%
2.37%
7.84%
6.54%
5.93%
5.24%
6.97%
7.47%
6.93%
6.79%
5.63%
Barclays Intermediate Govt./Credit
1.48%
2.10%
5.80%
5.89%
5.24%
5.08%
7.39%
5.42%
5.81%
6.01%
5.08%
Barclays Muni Bond
1.88%
3.66%
10.70%
2.38%
12.91%
-2.47%
3.36%
9.90%
7.62%
5.95%
5.28%
Barclays High Yield
1.83%
7.27%
4.98%
15.12%
58.21%
-26.16%
1.87%
7.27%
16.28%
8.45%
10.16%
90-Day U.S. Treasury
0.03%
0.04%
0.10%
0.13%
0.21%
2.06%
5.00%
0.06%
0.12%
0.98%
1.87%
Consumer Price Index (Inflation)
0.45%
2.10%
2.96%
1.50%
2.72%
0.09%
4.08%
2.08%
2.23%
2.03%
2.51%
Source: Morningstar, Mobius, MPI
INDICES
The information contained in this report is from sources believed to be reliable, but not warranted by CAPTRUST Financial Advisors to be accurate or complete. Index performance depicts historical performance and is not meant to predict future results.
15
asset allocation research
We include our asset allocation research for illustrative purposes only. These recommendations are being implemented only in instances where CAPTRUST has been granted full trading discretion on asset allocation decisions within Client portfolios.
10.0%
U.S. Equities
STRATEGY 1
International Equities Fixed Income Hedge Funds / Private Equity Commodities Real Estate
MIN
TARGET
MAX
U.S. Equities
0.0%
0.0%
0.0%
International Equities
0.0%
0.0%
0.0%
Fixed Income
75.0%
90.0%
100.0%
Hedge Funds / Private Equity
0.0%
10.0%
20.0%
Commodities
0.0%
0.0%
0.0%
Real Estate
0.0%
0.0%
0.0%
MIN
TARGET
MAX
0.0%
6.0%
10.0%
90.0%
3.0% 3.0%
6.0% 3.0%
U.S. Equities
STRATEGY 2
20.0%
International Equities Fixed Income
U.S. Equities International Equities
Hedge Funds / Private Equity Commodities Real Estate
65.0%
4.0%
0.0%
3.0%
6.0%
50.0%
65.0%
75.0%
Hedge Funds / Private Equity
5.0%
20.0%
25.0%
Commodities
0.0%
3.0%
6.0%
Real Estate
0.0%
3.0%
6.0%
Fixed Income
3.0% 17.0%
U.S. Equities
STRATEGY 3
16.0%
International Equities 10.0%
Fixed Income Hedge Funds / Private Equity Commodities Real Estate
50.0%
16
WWW.CAPTRUSTADVISORS.COM
MIN
TARGET
MAX
U.S. Equities
10.0%
17.0%
21.0%
International Equities
4.0%
10.0%
14.0%
Fixed Income
30.0%
50.0%
60.0%
Hedge Funds / Private Equity
7.0%
16.0%
21.0%
Commodities
0.0%
4.0%
8.0%
Real Estate
0.0%
3.0%
6.0%
WEALTH MANAGEMENT | Q2 12
4.0%
U.S. Equities
STRATEGY 4
International Equities Fixed Income
U.S. Equities International Equities
Hedge Funds / Private Equity Commodities Real Estate
3.0% 24.0%
MIN
TARGET
MAX
15.0%
24.0%
29.0%
8.0%
16.0%
28.0%
Fixed Income
20.0%
32.0%
38.0%
Hedge Funds / Private Equity
10.0%
21.0%
26.0%
Commodities
0.0%
4.0%
8.0%
Real Estate
0.0%
3.0%
6.0%
21.0%
16.0%
32.0%
U.S. Equities
5.0%
STRATEGY 5
4.0% 28.5%
International Equities
MIN
TARGET
MAX
20.0%
28.5%
35.0%
International Equities
12.0%
20.0%
25.0%
Fixed Income
15.0%
21.0%
25.0%
Hedge Funds / Private Equity
12.0%
21.5%
26.5%
Commodities
0.0%
5.0%
10.0%
Real Estate
0.0%
4.0%
8.0%
21.5%
Fixed Income Hedge Funds / Private Equity Commodities Real Estate
U.S. Equities
20.0% 21.0%
U.S. Equities International Equities Fixed Income Hedge Funds / Private Equity Commodities Real Estate
5.0%
STRATEGY 6 MIN
TARGET
MAX
U.S. Equities
25.0%
32.5%
40.0%
International Equities
16.0%
24.0%
30.0%
Fixed Income
0.0%
11.0%
20.0%
Hedge Funds / Private Equity
15.0%
23.5%
28.5%
Commodities
0.0%
5.0%
10.0%
Real Estate
0.0%
4.0%
8.0%
4.0%
32.5% 23.5%
11.0% 24.0%
5.0%
U.S. Equities
STRATEGY 7
International Equities Fixed Income Hedge Funds / Private Equity Commodities Real Estate
6.0%
MIN
TARGET
MAX
U.S. Equities
26.0%
36.5%
44.0%
International Equities
18.0%
28.0%
34.0%
Fixed Income
0.0%
4.5%
7.0%
Hedge Funds / Private Equity
12.0%
20.0%
25.0%
Commodities
0.0%
6.0%
12.0%
Real Estate
0.0%
5.0%
10.0%
36.5% 20.0%
4.5%
28.0%
17
CAPTRUST Discretionary research highlights
U.S. EQUITIES • We switched from a more defensive posturing early in Q2
• After the initial sharp sell-off in August 2011, we
2010 to a more optimistic orientation in August 2010 and
deployed some more capital into small- and mid-
then an even more optimistic view in early October 2010,
capitalization stocks in a contrarian fashion but reversed
feeling that the market had overshot to the downside.
that positioning a month later fearing more potential downside. While we have not deployed fresh capital into
• In mid-May 2011, we ratcheted back to a more neutral posturing, anticipating a potential growth slowdown as
the U.S., we have rebalanced portfolios back to policy levels and currently favor large-cap and growth.
well as to take profits on our previously held constructive positioning.
INTERNATIONAL EQUITIES • We continue to have a footing in international equities,
• Given demographic factors, international equities remain
yet remain concerned about the overhang surrounding
an important part of our long-term asset allocation
the European Union as well as the potential for Chinese
strategies, but it is challenging to be tactical in such
growth deceleration.
a reactionary market environment, so we continue to retain a quality bias and await better risk/reward setups,
• Valuation is very attractive from a historical standpoint; however, valuation metrics could prove irrelevant should
participating in market upside but with a bias toward reducing exposure.
the European Union’s structure unravel or additional financial system stress unhinge the potential for a “muddle through” type of recovery.
FIXED INCOME • We de-emphasized fixed income in the second half of 2010
• The consensus view is for higher interest rates, and we
despite anticipating further federal stimulus in the form of
have been contrarian in our thinking that bond yields are
quantitative easing and open market bond purchases.
unlikely to rise quickly as capital markets will likely remain uneasy as 2012 unfolds. Unease regarding European policy
• We have since increased our weighting to fixed income, incorporating a diversified approach by sector and geography using a combination of active and passive management. We expect a few persistent themes to endure within the space that are accessible via highly skilled managers.
18
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maker decisions and the U.S. presidential election all factor into our thinking that bonds should retain a prominent place in portfolios.
WEALTH MANAGEMENT | Q2 12
HEDGE FUNDS / PRIVATE EQUITY • Hedge fund strategies have had a challenging backdrop in
• Should risk assets overshoot to the downside following
which to operate over the past three years, given market
our expectation for additional macro headline concerns
oscillations. Yet we see investment merit in certain hedge
and the potential for more subdued earnings season
fund sub-strategies, particularly those that are less reliant
guidance from global companies, we may look to deploy
on overall market direction.
capital into more market-directional strategies. But for now we remain focused on more defensive strategies.
• We have emphasized more conservative hedge fund strategies recently, with a goal of preserving capital during large down periods in riskier asset classes versus strategies that have higher equity market gearing or economic sensitivity.
COMMODITIES • We remain long-term bullish on commodities, not only
• We have recently de-emphasized actively managed
due to the demand story but also because of a lack of
strategies with the view that commodities present
infrastructure investment across many key commodities.
considerable macro challenges for most active managers to successfully navigate. Correlations between
• Given the challenging macro environment and the potential for further growth scares, we expect to see considerable volatility within commodities, especially within the precious metals should the U.S. Dollar rally
commodities and more “crowded” active manager positions leave us happy to invest in broad commodity mandates and control the overall exposure levels versus leaving that to an active manager.
relative to other major currencies, driving commodity costs higher for non-Dollar holders.
REAL ESTATE • We added to real estate positions in mid-2010 based on
• Recent capital raising success across the REIT complex
improved fundamentals as well as attractive yields given
in late 2011 and thus far in 2012 leaves operators poised
subdued interest rates.
for opportunistic purchases and increased flexibility, but we remain watchful of investors chasing what has been
• In a low-yield world, REITs retain a strong distribution profile while offering some growth potential, an attractive combination for a variety of investors that should provide an underlying bid to the space.
a strong asset class since the financial crisis; last quarter reflected another period of relative strength that could reverse should valuation become overly stretched.
The foregoing comments demonstrate our firm’s strategic and forward-looking views as they are implemented in cases where Clients have contractually granted CAPTRUST sole tactical discretion over portfolio decisions.
19
investment asset classes
U.S. EQUITIES Market Performance, 2nd Quarter 2012
• U.S. equities recorded their first negative quarter in the last three, with the S&P 500 falling a modest 2.8% after Q2 ’12
2012
Large Value (R1000 Value)
-2.20%
8.68%
Large Blend (S&P 500)
-2.75%
9.49%
posting much weaker intra-quarter losses, at one point dropping 8.8% from April to early June on weakening macroeconomic data.
Large Growth (R1000 Growth)
-4.02%
10.08%
• Four of the ten major S&P 500 sectors were positive
Mid Value (Russell)
-3.26%
7.78%
in the second quarter, with the traditionally defensive
Mid Blend (Russell)
-4.40%
7.97%
telecom, utilities, consumer staples, and health care
Mid Growth (Russell)
-5.60%
8.10%
Small Value (R2000 Value)
-3.01%
8.23%
Small Blend (R2000 Blend)
-3.47%
8.53%
Small Growth (R2000 Growth)
-3.94%
8.81%
Source: MPI Stylus Pro
sectors higher from last quarter. Financials (-6.8%) and technology (-6.7%) were the weakest performers after being the strongest to start the year. • Since the U.S. equity market peaked in October 2007, mid- and small-cap stocks have fully recovered their losses when incorporating reinvested dividends. At the end of the quarter, large-cap stocks were 3.4% lower than their 2007 peak.
INTERNATIONAL EQUITIES Market Performance, 2nd Quarter 2012
• Developed and emerging international equities both fell in the second quarter, but have been higher 10 out of the Q2 ’12
2012
last 13 and 10 out of the last 14 quarters, respectively.
International Equities (MSCI EAFE)
-6.85%
3.38%
Pacific Stocks (MSCI Pacific Ex-Japan)
-4.89%
5.82%
terms and 5.1% in local currency terms, behind Germany
European Stocks (MSCI Europe Ex-UK)
-9.34%
1.87%
(-11.7%) and France (-8.2%). In a reversal from last quarter,
Japanese Stocks (MSCI Japan)
-7.30%
3.14%
UK Stocks (MSCI UK)
-3.97%
3.35%
Emerging Markets (MSCI EME)
-8.77%
4.12%
Source: MPI Stylus Pro
• Developed international equities declined 6.9% in Dollar
the Dollar strengthened relative to the Pound and euro but fell against the Yen. • Emerging markets had weak performance, down 8.8% in Dollar terms and matched their developed brethren’s -5.1% local currency decline. Brazil reversed first-quarter strength and fell 18.8%, while Russia felt the commodity price swoon and dropped 14.0%.
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WEALTH MANAGEMENT | Q2 12
FIXED INCOME Market Performance, 2nd Quarter 2012
• The Barclays Aggregate Bond Index had its fourteenth positive quarter in its past fifteen, closing up 2.1% in the 2012
Broad Market (Barclays Capital U.S. Aggregate)
2.06%
2.37%
Barclays Capital U.S. Treasurys
2.83%
1.51%
Barclays Capital Mortgage Backed Securities 1.08%
1.66%
Barclays Capital Municipals
1.88%
3.66%
Barclays Capital Intermediate Corporates
1.58%
4.37%
Barclays Capital High Yield
1.83%
7.27%
second quarter of 2012. The index was up every quarter in 2011. • Within the broad fixed income space, inflation-protected Source: MPI Stylus Pro
Q2 ’12
securities were up 3.2%, Treasury bonds turned in a positive 2.8% quarter and investment-grade corporates were up 2.5%. Mortgage-backed bonds lagged this quarter but are up 1.7% thus far in 2012. • On June 1, a day when the Labor Department released disappointing employment data, the 10-Year U.S. Treasury yield touched 1.44%, an all-time low as investors continue to seek perceived safety in U.S. government bonds relative to other global choices.
HEDGE FUNDS / PRIVATE EQUITY Market Performance, 2nd Quarter 2012
• Hedge fund strategies gave up some of their first-quarter gains, but broad measures remain in positive territory. The 2012
HFRI Fund Weighted Composite Index
-2.88%
1.70%
HFRI Equity Hedge Index
-4.49%
2.09%
HFRI Relative Value Index
0.18%
4.32%
HFRI Fund of Funds Composite Index
-2.30%
0.99%
HFRI Fund of Funds Conservative Index
-1.66%
0.79%
HFRI Fund Weighted Composite and HFRI Fund of Funds Composite Index are both clinging to small year-to-date gains. Relative value strategies have been strong year-todate, but dedicated short and short bias strategies have had performance difficulty. Source: HFRI
Q2 ’12
• As noted over the prior two quarters, volatility fluctuations had been very difficult for most investment managers to navigate as we experienced high correlation across asset classes. With most asset classes reflecting more consistent price biases in the first quarter, managers were able to add some more value than in prior quarters, but this reversed following a volatile second quarter. • Private equity research firm Prequin noted an interesting divergence in private equity fundraising in the second quarter, where the number of private equity funds looking to raise capital reached a record high while those funds completing fundraising hit a record low, indicating that firms continue to leave coffers open in search of opportunities.
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COMMODITIES Market Performance, 2nd Quarter 2012
• The Dow Jones UBS Commodity Index fell 4.6% in the second quarter, leaving it in negative territory year-to2012
-4.55%
-3.70%
-12.38%
-7.23%
Gold (Spot, $/oz)
-4.25%
2.16%
Natural Gas (U.S. Spot Henry Hub)
38.38%
-8.05%
Crude Oil (U.S. Spot, WTI Cushing)
-17.53%
-14.03%
Dow Jones UBS Index S&P GSCI Commodity Index
date after falling 13.4% in 2011. The energy complex was Source: MPI Stylus Pro, Bloomberg
Q2 ’12
hit especially hard (apart from natural gas, which was up over 38.3% in the quarter) despite a massive rip higher on June 29. • Metals fell across the board, with gold the best performer (down 4.3%), while industrial metals fell harder on slowing growth concerns. • Recently, commodities have demonstrated considerably higher correlations to public equities than over longer time periods; correlations between crude oil and U.S. equities were extremely high in the second quarter, higher than the correlation between U.S. stocks and international stocks.
REAL ESTATE Market Performance, 2nd Quarter 2012 Q2 ’12
2012
MSCI U.S. REIT Index
3.75%
14.88%
Wilshire REIT Index
3.71%
14.90%
Source: MPI Stylus Pro
• Public real estate, as measured by the NAREIT Equity REIT Index, increased 4.0% in the second quarter after rising 10.5% in the first quarter and a 15.3% fourth quarter 2011 performance. REITs have outperformed U.S. equities four out of the last five quarters. • Based on Pension Real Estate Association data, commercial mortgage backed security issuance — a gauge of industry health — continued to show robust growth in the second quarter on both a sequential and a year-over-year basis. • REITs continue to have attractive income profiles relative to Treasurys and their capital raising efforts last year, and so far this year provides them with flexibility. Their strong performance relative to other asset classes may leave some concerned about the path forward; however, the market continues to reward their strong fundamentals.
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WEALTH MANAGEMENT | Q2 12
captrust in the news
CAPTRUST GROWTH The CAPTRUST team grew in the second quarter of 2012 with the addition of three key senior management team members.
CONGRATULATIONS
Consulting Research Hunter Brackett Senior Manager, Investment Research Hunter joins CAPTRUST from NCM Capital where, as a sector leader, financials, he managed the firm’s financial sector exposure across all equity portfolios for its institutional and high net-worth Clients. Prior to that he was an associate, large-/mid-cap banks at Lehman Brothers, Equity Research Division and an international corporate banking associate at First Union Corporation. In his new position, he will support our investment research team efforts. Hunter is a graduate of Washington and Lee University with a BA in economics and a MBA from UNC Kenan-Flagler Business School, and holds a CFA designation.
Marketing John Curry Senior Director, Marketing As head of CAPTRUST marketing, John will develop and oversee the firm’s day-to-day and strategic marketing efforts. He joins CAPTRUST from ProShares, where, as head of product management, he worked with product development, branding, marketing, and sales to prioritize marketing efforts, orchestrate product focus, execute campaigns, and support product launches. Prior to that he worked at AllianceBernstein and Putnam Investments, where he was responsible for marketing and product management for various aspects of their retirement businesses. John is a graduate of the University of North Carolina at Chapel Hill with a BS in biology and a MBA from McColl School of Business, Queens University.
Client Services Doreen O’Dowd Senior Director, Client Services In her new position, Doreen will manage and support all our client services efforts. She joins CAPTRUST from Stock Yards Bank and Trust Company, where she developed plan and investment reviews, procedures for processing contributions and distributions, and tracking mechanisms for retention and revenues. She also trained a team of associates, and developed training curricula. Prior to that Doreen worked at ADP Retirement Services.
Doylestown Hospital Awarded for Outstanding Patient Safety and Experience Doylestown Hospital was recently honored as recipient of the 2012 HealthGrades Outstanding Patient Experience Award™ and the 2012 HealthGrades Patient Safety Excellence Award™. Doylestown Hospital is one of only five hospitals to receive the Patient Safety Excellence Award™ four years in a row (2009–2012) and one of only two to be a five-time recipient of the Outstanding Patient Experience Award™ (2009, 2009/10, 2010/11, 2011, 2012) across the state of Pennsylvania. Most significant of all, Doylestown Hospital is one of only eight hospitals nationwide to be a fivetime recipient of the Outstanding Patient Experience Award™ and four-time recipient of the Patient Safety Excellence Award™. HealthGrades, a leading provider of information to help consumers make informed decisions about a physician or hospital, identified 332 hospitals performing in the top 10% in the nation for patient satisfaction, based on survey responses from patients treated at those facilities. Hospitals had to meet bed size, survey-response size, and clinical-quality thresholds in order to be eligible for the award. Information on award recipients and the ratings methodology is available, free to the public, at HealthGrades.com.
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CAPTRUST RECOGNITION CAPTRUST’s Traynor Reitmeier, vice president and Financial Advisor, was recently named one of the Triangle Business Journal’s “40 Under 40,” a list of professionals from the Raleigh, NC area, under the age of 40, who are recognized for their outstanding contributions to their organizations and to the community. “The ‘40 Under 40’ winners are the region’s up-and-coming thought leaders,” says Bryan Hamilton, publisher of the Triangle Business Journal. “Look for them to shape the Triangle’s vision of tomorrow.”
UPCOMING INDUSTRY INVOLVEMENT The following is a list of topical discussions to be led by CAPTRUST at upcoming industry events in the third quarter. CREATING BETTER OUTCOMES THROUGH PLAN DESIGN September 9–12, 2012 | Las Vegas, NV 2012 Las Vegas Mid-Sized Retirement & Healthcare Plan Management Conference For more information, visit www.ucs-edu.net/conferences UNDERSTANDING THE FIVE COMPONENTS OF A SUCCESSFUL NONQUALIFIED DEFERRED COMPENSATION PLAN STRATEGY September 20, 2012 | Dallas, TX Dallas Country Club (CPE credit available for attending event) Presented by Mike Curran, CAPTRUST senior vice president
GIVING BACK CAPTRUST continued its charitable efforts this past quarter through the CAPCommunity Foundation’s involvement with the following organizations and causes: • Big Brothers and Big Sisters of the Triangle • AMRAN Shriners • Hubie Poteat Memorial Foundation • Activate Good
CAPTRUST employees learn more about Read and Feed
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• Triangle Family Services • Easter Seals UPC • Boys and Girls Clubs of Richmond • Payton Wright Foundation
• Read and Feed
• Super Cooper’s Little Red Wagon Foundation
• Royal Family Kids
• Carolina Ball Foundation
• Light the Night
• March of Dimes
• Kid’s Peace
• Walk MS
• YMCA
• Safechild
• Miracle League
• UNICEF
• Boys and Girls Clubs of NC
• Hope Reins of Raleigh
• Hit it Farr for Kirby
• American Diabetes Association
• North Raleigh Ministries
• Harris YMCA
• Camp Firefly
• Junior Achievement