WEALTH MANAGEMENT | Q3 13
Strategic research report Longevity and the Future of Retirement John D. Curry Senior Director, CAPTRUST Marketing
A quick googling of the term longevity — meaning long life — yields some interesting results. One article spotlights residents of the Greek island of Ikaria, one of the so-called “blue zones”— small areas around the world where residents frequently outlive their life expectancy by more than a decade.1 Another highlights Texas centenarian Pearl Cantrell, who swears by her daily dose of bacon as a contributor to her long life. “It’s got to be crispy,” she told a recent interviewer.2 A third features genius inventor and entrepreneur Ray Kurzweil, who plans to live forever with the help of 150 pills a day and a supercomputer backup of his brain.3 As interesting — and quirky — as these stories are, seeing them merely as curiosities may cause us to ignore evidence that increased longevity is already underway and that we may enjoy surprisingly long lives. In fact, life expectancy in developed countries like the U.S. has been — and is expected to continue — rising at a rate of 2.5 years per decade: 3 months per year, 6 hours per day.4
In This Issue Letter from the Editor
2
Wealth Management Planning
6
Portfolio Strategy
13
Index Returns
17
Discretionary Research Highlights 18 Investment Asset Classes
20
CAPTRUST News
23
Scientists, medical technologists, and statisticians are clear that increased longevity has already broadly taken root. Life expectancy in developed countries increased by three decades over the course of the 20th century alone. Children born in 1900, 1950, and 2000 in the U.S. were expected to see 47.3, 68.2, and 77.0 years of age, respectively.5 Today, without any further improvement in longevity, three-quarters of newborns will mark their 75th birthdays. More than half of babies born today in rich nations will live for 100 years.6 However, this is not simply a story about better health care for children; much of this increase in longevity is the result of a decline in mortality after age 80, which means that people are living and staying healthy longer.7 Based upon current life expectancy tables, a 65-year old female has a 50 percent likelihood of living to age 88, a 25 percent likelihood of living to 93, and a 10 percent likelihood of living to 97. A 65-year-old man has a 50 percent likelihood of living to age 86, a 25 percent likelihood of living to age 91, and a 10 percent likelihood of living to 95.8 Better elder health care has lengthened lives by allowing earlier diagnoses and better treatment of illnesses such as heart disease, cancer, and diabetes. Public health campaigns against smoking have also aided longevity.9 continued on page 3
letter from the editor
LIVE LONG, AND PROSPER Dear Readers, Andy Rooney once said, “It is paradoxical that the idea of living a long life appeals to everyone, but the idea of getting old doesn’t appeal to anyone.” I agree with my fellow Colgate alumnus Mr. Rooney; aging isn’t very appealing. Tendonitis on both sides of my elbow, a temperamental lower back, and the fact that my 13-year-old daughter now gives me a stroke a round can weigh on a guy. But, as you will see in this quarter’s Strategic Research Report, we need to collectively prepare to live longer, thanks to advances that could sustain lives well past prior norms. Industry veteran John Curry sets the tone with a piece on longevity. Hunter Brackett, Mike Gray, and Mark Paccione all weigh in on how longer lives can impact financial planning. We also address the implications from an insurance perspective. Washington developments take up some shelf space in this issue, with Mike Gray weighing in on tax considerations heading into the year’s final quarter. I provide some insight into the U.S. Federal Reserve, an institution just down the street from the Capitol, which we continue to view as the most significant near-term market driver. We appreciate your feedback and questions, and don’t forget to stretch; you’re likely to be around awhile, which is a very good thing indeed. Onward,
Eric J. Freedman CAPTRUST Chief Investment Officer
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WEALTH MANAGEMENT | Q3 13
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Yet, even today, the idea of retirement is fading—for reasons both good and bad. Many Americans whose savings were adversely affected by market turmoil
72.1 70
60 54.8 50 Source: U.S. Department of Health and Human Services
One result of increasing longevity is a distinctly older America. The U.S. Census Bureau reports there are more Americans age 65 and older than at any time in U.S. history. Its 2010 report indicated there were 40.3 million people age 65 and older in 2010, up from 35 million in 2000 and just 3.1 million in 1900.10 That amounts to more than 13 percent of the U.S. population or more than one in eight Americans. Looking ahead, this number is projected to increase to 54.8 million in 2020 and 72.1 million by 2030 — representing more than 19 percent of the U.S. population of retirement age.11
Figure One: Number of Persons 65+, 1900–2030 80
(in millions)
If you take it as a given that advances in medicine and technology are conspiring to give us longer lives, your likely (and legitimate) next question is: So what? While it is impossible to address the implications of an issue as far-reaching as longevity within this Strategic Research Report, we will attempt to provide a few broad strokes for thinking about longevity’s impact on retirement.
40.3 40 35 31.2 30 25.5
20
16.6 9
10 3.1
4.9
0 1900
1920
1940
1960
1980
1990
2000
2010
2020
2030
Year
over the past decade are choosing to retire later.12 Meanwhile, others — facing the prospect of as many as 30 or 35 years of life post-paycheck — are rethinking the nature of retirement itself. Regardless of the cause, if we do, in fact, live longer and stay active well into our 80s and 90s, it begs the question of how we will spend our time. The supply and demand for labor are central to this debate. As a
demographic cohort, the baby boom generation (the 81 million Americans born between the years of 1945 and 1964) represents 38 percent of today’s working population with almost 60 million participating in the workforce.13 As the boomers begin to retire in the near term — the youngest is approximately 50 years old — employers may be hard-pressed to find suitable replacements.
continued on page 4
3
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As Figure Two suggests, while boomers can be replaced by younger workers, generation X may not be sufficient in size — at “only” 49 million — to sate demand for experienced workers.14
Figure Two: United States Total Labor Force Participation by Generation, 2010
5%
Mature/WWII Generation (age 67+)
As this imbalance plays out, employers will need to reengineer their work arrangements to entice their older and more experienced workers to remain engaged in the workforce. Several broad possibilities exist:
Baby Boomers (age 47-66) 38%
Generation X (age 32-46) 32%
Generation Y/Millennials (age 12-31)
Work longer. Employers may actively encourage employees to continue career work on a full-time basis well beyond today’s average retirement age of 61.15 The prospect of staying active at work while providing additional years of savings and accrual of Social Security benefits may be appealing to many. Some may consider this option for access to affordable health insurance alone. Flexible work arrangements. Fearful of losing their most experienced workers and knowledge base, employers may opt to allow part-time work for employees into their late 60s and early 70s.16 This phased retirement approach will allow these employees to continue working on a basis that helps them maintain social and economic connectivity to their workplace with enough free time to enjoy more traditional retirement pursuits.
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Competition for skilled workers will heat up as some employers provide flexible arrangements and embrace retirement-age employees, while others lag behind the trend. However, many retirement-age workers may choose to embark upon a path entirely different from their chosen career. Options for recareering are numerous and include everything from working at (or starting) a not-for-profit to incubating a new business to returning to school to build an entirely new set of skills and knowledge. The impact of our aging population on Social Security and Medicare, our so-called social safety net, is already front and center in the current U.S. budget debate. A vast number of Americans depend on these programs as their primary means of support in retirement. That number will grow significantly in the future, simply as a function of the number of Americans reaching the ages at which they are eligible to receive benefits. Pundits estimate the long-term deficits of Social Security and Medicare at $9.6 and $34 trillion, respectively, over the next 75 years — unless action is taken to improve their economics.17, 18 Potential fixes for these programs include cutting benefits, means testing, upping eligibility ages, and increasing contribution rates. More than likely, the resolution will be some combination of all of the above. Any resolution will put increased pressure on individuals to take action to plan, save, and invest for their own retirements, either through employer-sponsored retirement plans, personal savings, or a combination of both.
Source: Bureau of Labor Statistics10
25%
WEALTH MANAGEMENT | Q3 13
While it is hard to imagine not finding a solution for future generations, individuals or families would be wise to do the following: Save as if you plan to live a long time. Rather than leaning on backward-looking benchmarks like the average retirement age or life expectancy, chart your own path. Plan to retire when and how it makes sense for you, and don’t underestimate longevity. Anticipate a retirement that could last 25 or 30 years — just to be on the safe side — and make sure you understand the amount of savings necessary to sustain your lifestyle. Invest for the long haul. While many early- and near-retirees seek refuge from market volatility in a more conservative investment portfolio, they may inadvertently expose themselves to a different set of risks. Notably, they may expose themselves to the risk of running out of money (also known as shortfall risk) and the risk that inflation — especially healthcare inflation — erodes their purchasing power. The prospect of living a long, healthy, and happy life presents an exciting opportunity. While Pearl Cantrell may credit her long and productive life to her threepiece-a-day bacon habit, for most it will not be that simple. Given the likelihood of longer lives and the probability of Social Security and Medicare rollbacks in the future, individuals will bear a larger burden for their retirement and healthcare funding. Financing an extra five or 10 years in retirement will challenge many retirement-age individuals; however, delayed or phased retirement and recareering may be attractive options for those interested in continuing to work — albeit on more friendly terms. For most, it will take thought, planning, and discipline to build a successful retirement. We welcome the opportunity to speak with you more about longevity and its impact on your retirement plan.
Sources: 1
http://www.nytimes.com/2012/10/28/magazine/the-island-where-people-forget-to-die.html
2
http://www.today.com/food/its-got-be-crispy-woman-105-says-bacon-key-longevity1C9846050
3
http://online.wsj.com/article/SB10001424127887324504704578412581386515510.html
4
http://www.demogr.mpg.de/en/laboratories/survival_and_longevity_12/
5
http://www.census.gov/statab/hist/HS-16.pdf, “No. HS-16. Expectation of Life at Birth by Race and Sex: 1900 to 2001”
6
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGCHVoAxPlu8
7
http://www.demogr.mpg.de/en/laboratories/survival_and_longevity_12/
8
Institution Retirement Income Council, “The Problem with Living Too Long”, Volume 2, Number 6, 2010
9
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGCHVoAxPlu8
10
U.S. Department of Health and Human Services, “Administration on Aging, A Profile of Older Americans: 2011”, 2011
11
Ibid.
12
http://www.gallup.com/poll/162560/average-retirement-age.aspx
13
Bureau of Labor Statistics, “Household Data, Not Seasonally Adjusted: Table A-13: Employment Status of the Civilian Noninstitutional Population by Age, Sex, and Race”, 2012
14
Ibid.
15
http://www.gallup.com/poll/162560/average-retirement-age.aspx
16
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGCHVoAxPlu8
17
http://cnsnews.com/news/article/social-security-faces-96t-unfunded-liabilities-83894household
18
http://online.wsj.com/article/SB10001424127887323393804578555461959256572.html
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wealth management planning
THE LONGEVITY TRIFECTA Hunter Brackett, CFA Senior Manager, CAPTRUST Consulting Research Group
R. Michael Gray Senior Vice President, CAPTRUST Financial Advisors
Mark Paccione, CFA, CFP® Director, CAPTRUST Consulting Research Group
As John Curry discussed in this Strategic Research Report’s feature article, longevity has significant implications for the broader economy, but at a more personal level, it also influences individual financial planning decisions. In financial planning circles, we have noticed increasing conversation around the idea of shortfall risk — the risk of running out of money in retirement — and an increased focus on planning strategies to address this important longevityrelated risk. Investors on the cusp of retirement should address three main areas as they develop a retirement distribution strategy — call it a “retirement paycheck” — intended to last as long as they do. The three areas include: Investment management: finding an appropriate mix of assets to fund cumulative financial needs given longer life expectancies. Liquidity management: planning for and managing withdrawals so that sufficient funds are available for both expected and unexpected expenses.
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Risk management: planning for risks and pitfalls such as underestimating retirement expenses or retiring too early. Other risks, such as the risk of unexpected or uncovered healthcare or long-term care costs, should also be considered and managed, as appropriate. We discuss these in a separate article. By developing a comprehensive plan to address the three aspects of this “longevity trifecta,” clients will have a better chance of meeting their retirement goals. Investment Management The first step in creating a reliable retirement paycheck is a well-diversified asset allocation strategy — one that is globally diversified and incorporates the right mix of stocks and bonds. The optimal asset allocation is one that balances the need for growth — given the potential for a 25- or 30-year period in retirement — with the need to limit volatility. Conventional wisdom states that as individuals approach retirement and their investment time horizon
shortens, portfolio allocations should shift away from traditionally riskier asset classes such as equities and toward less volatile areas such as fixed income. We continue to believe that fixed income plays an important role in client portfolios as it provides a cushion during times of economic stress. However, the lower volatility of fixed income normally leads to a trade-off of lower expected returns compared to other asset classes. Contrary to the inclination of some investors as they near retirement, retirees cannot depend on fixed income investments to generate sufficient income. Given longer life expectancies, portfolios that are heavily weighted to fixed income may not generate enough return to meet an investor’s financial needs, especially in light of historically low interest rates. Retirement investors may need to maintain a higher allocation to equities and other traditionally riskier asset classes in order to achieve their financial goals. They will likely need the higher returns provided by these riskier assets to continue to grow their assets. However, volatility, especially when it
WEALTH MANAGEMENT | Q3 13
Figure One shows CAPTRUST’s capital market assumptions, which cover a full market cycle, typically a period of five to seven years. We expect subdued fixed income returns as rising interest rates present a headwind for this asset class. In contrast, we maintain a constructive view on equities as global growth prospects gradually improve and inflation remains well contained. Our risk assumptions (as measured by standard deviation, or the possible divergence of the actual asset class return from its expected return) for equities are considerably higher than fixed income, so this factor should be incorporated into asset allocation decisions. However, Figure One also shows that equities have higher risk-adjusted returns (expected return divided by expected risk) than core fixed income. It is important to state that standard deviation is but one measure of risk, and we view risk through several other lenses, most importantly the concept of permanent capital impairment or loss. Regardless, the investment strategy behind a 25- or 30-year retirement should not be treated as a set-it-andforget-it solution. An investment strategy should be reassessed periodically — every two or three years or even more frequently in the event of significant capital market changes.
Figure One: CAPTRUST Capital Market Assumptions
Asset Class
Return (%)
Risk (%)
Risk-adjusted Return —
1.2%
0.5%
Long-term U.S. Treasury
1.8%
12.1%
0.1
Core Fixed Income
2.5%
5.5%
0.2
U.S. Investment Grade Corporate
3.6%
6.1%
0.4
Long Duration Corporate
5.0%
11.3%
0.3
U.S. High Yield Corporate
7.0%
15.0%
0.4
Emerging Market Debt
5.8%
13.0%
0.4
U.S. Municipal Debt
2.7%
4.9%
0.3
U.S. Large-cap Equity
7.0%
17.4%
0.3
U.S. Mid-cap Equity
7.5%
20.6%
0.3
U.S. Small-cap Equity
7.3%
22.5%
0.3
International Equity — Developed
7.6%
25.0%
0.3
Cash
International Equity — Emerging
9.3%
27.2%
0.3
Private Equity
10.0%
28.8%
0.3
U.S. Public Real Estate
7.2%
22.8%
0.3
U.S. Private Real Estate
6.2%
12.5%
0.4
Commodities
6.0%
19.7%
0.2
Hedge Fund of Funds (Diversified)
4.0%
5.0%
0.6
Source: CAPTRUST Research
generates losses early in retirement, can be particularly damaging to a retirement portfolio.
Liquidity Management Proper planning for and management of portfolio withdrawals during retirement is critical to managing longevity risk. Retirees must ensure sufficient funds are available for expected and unexpected expenses that will naturally occur during the golden years. One helpful place to start is the “4 percent rule.” Conventional wisdom suggests that a 4 percent annual portfolio withdrawal rate is sustainable for a 30-year period of retirement, meaning the principal will not be touched and all withdrawals will be funded with investment earnings. While historically low interest rates and elevated market volatility in recent years have caused some to question that assumption, the 4 percent rule is a good rule of thumb. If an annual 4 percent withdrawal from your portfolio covers expected retirement expenses, which include basic living, leisure, taxes, and healthcare expenses, then you should be in good financial shape and be able to meet your retirement needs. Of course, a deeper analysis is recommended to validate that conclusion.
continued on page 8
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Another withdrawal planning method is to calculate the required portfolio return rate based on a more detailed income and expense analysis. To determine the required portfolio return rate, use the following formula: Required Portfolio Rate of Return
(annual expenses – other income*) total portfolio assets
*Other income includes items such as Social Security and pension payments
The required portfolio rate of return indicates the annualized investment return required to meet retirement expenses without touching principal. A required portfolio return rate below 7 percent, for example, is potentially achievable. Return rates above 7 percent may be unrealistic or expose the retiree to too much risk. Another more detailed and thoughtful approach is age banding. In a 2005 Financial Counseling and Planning article, Somnath Basu discusses problems with traditional liquidity management approaches, and proposes a model designed to more accurately model retirement spending reality and retirement savings needs.1
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With age banding, retirement is separated into three distinct phases. In the first phase, approximately ages 65–75, leisure expenses typically increase as new retirees travel more as a result of newfound freedom. The second phase, typically ages 75–85, is a transition period where leisure expenses decrease and medical expenses increase. In the third phase, ages 85–95, medical expenses significantly increase. By estimating these three phases’ cost and discounting them back to present value, according to Basu’s research, one can more accurately determine the savings needed to fund retirement. Assets set aside to fund the three phases can be managed with different investment objectives or buckets using the behavioral finance concept of mental accounting. The first bucket is invested in less volatile, more liquid, and more conservative asset allocations as it funds immediate and near-term expenses. The second bucket can be more aggressively invested, and the third bucket for the final phase can be the most aggressive due to its long time horizon, potentially 20 or more years. An additional benefit to this approach is that the more aggressive third bucket can be invested to grow apace with the healthcare inflation rate, which is significantly higher than the overall inflation rate.
WEALTH MANAGEMENT | Q3 13
As with the investment strategy, liquidity management should be reassessed periodically. To the extent that the capital markets outperformed expectations, it may be possible to increase retirement withdrawals. Conversely, in the event of market declines, it may be necessary to reduce withdrawals to get the strategy back on track. Risk Management In addition to investment and liquidity management, individuals must protect against uncertainties exacerbated by longevity. Underestimating years in retirement is one danger; failing to plan, underestimating expenses, retiring too early, and failing to save enough are additional risks. While planning risks cannot be entirely eliminated, they can be minimized by scrutinizing the most important variables affecting the plan. Although this may be the most important step, 30 percent of households close to retirement have done little to no planning for retirement. The variables can be influenced by others’ retirement experiences, such as parents and older siblings, or unpleasant financial events.2 While the questions are simple, such as target retirement age and desired income, the information’s accuracy is very important. As identified above, understanding your expenses is an essential first step. One potential problem is underestimating retirement expenses. Unfortunately, predicting expenses as we age can be challenging. Inflation is a central consideration as rising inflation may decrease purchasing power if investment earnings do not keep pace with the cost of living.3 Household expenses are normally the largest outlay and tend to decline with age. Healthcare costs are a large component
as well and tend to increase with age. Deciding when to retire should be well thought out as high switching costs exist; going back into the workforce can be difficult. The timing decision touches other retirement math; a good example is taking Social Security as soon as possible (age 62 for now) or delaying payments until a later age in order to receive the full Social Security benefit. Meanwhile, many people have realized their situation will require working longer, but face the question of whether work will continue to be available. Failing to save enough is linked to many other retirement decisions and outcomes. Prior saving habits will influence when one retires as well as what type of lifestyle can be sustained while in retirement. It might be necessary to adjust current spending habits to allow for increased savings and to play catch up in the years leading up to retirement. Longevity presents unique risks for individual financial planning, so a comprehensive strategy is the key to successfully navigating this issue. Conservatively positioned portfolios may protect investors from market volatility, but could expose them to the risk of depleting their retirement savings or failing to keep pace with inflation. Depending on an individual’s risk tolerance, a higher allocation to equities and other historically risky asset classes may help clients meet their financial goals given longer life expectancies. Planning for and managing fund withdrawal during retirement is necessary to ensure sufficient funds are available for expected and unexpected retirement expenses. Risk management is critical to avoid common pitfalls such as retiring too early or underestimating years in retirement. We encourage clients to discuss these issues with their CAPTRUST advisor, so that longevity is incorporated into their current financial plan.
Sources: 1
Basu, Somnath, (2005), “Age Banding: A Model for Planning Retirement Needs.” Financial Counseling and Planning. 16: 29-36
2
Lusardi, (2003), Planning and Saving for Retirement. Dartmouth working paper series
3
Willet, M., (2008), A new model for retirement education and counseling. Financial Services Review, 17, 105-130
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PROTECTION TO LAST A LIFETIME R. Michael Gray Senior Vice President, CAPTRUST Financial Advisors
John D. Curry Senior Director, CAPTRUST Marketing Figure One: Incidence of Major Medical Events (Age 70 and Older) 60%
50%
52%
40%
30% 27% 24%
20%
10%
12%
11%
9%
0%
Healthcare Costs During Retirement On a positive note, it appears that we are not only living longer (well into our 80s), but we are also living better, with much of the “extra time” we are experiencing disability- and disease-free.1 Many health issues that created chronic disability and reduced quality of life for older Americans in the past are no longer as severe. For example, joint replacements are increasingly routine procedures performed with very good results. While that’s certainly good news, the cost of retirement health care may be substantial. The Boston College Center for Retirement Research estimates that a typical couple, both age 65, can expect uninsured healthcare and nursing home costs during retirement to top $260,000.2 Of course, this number is what a “typical couple” might experience. In reality, some will experience fewer health-related events and costs, while others will experience more. For couples age 70 and older, there is a 52 percent probability that one or the other will experience a major medical event of some kind — with heart disease, cancer, diabetes, and stroke leading the way.3 These medical services and, in particular, subsequent rehabilitation costs, may not be fully covered by private health insurance or Medicare.4
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Any Major Medical
Heart
Disability
Cancer
Diabetes
Source: Center for Retirement Research at Boston College
A retirement distribution strategy that encompasses investment management, liquidity management, and risk management, when reviewed and adjusted periodically, can create good results for retirees. When addressing risk management, it is a natural inclination to focus on protecting against unforeseen dangers in the capital markets. Certainly, market-oriented shocks can be damaging to the health of even a well-thought-out plan. But what about the impact of other potential shocks — shocks driven by factors other than the capital markets? Considerations such as healthcare costs, long-term care, unexpected health risks, and longer life spans are all important and manageable.
Stroke
Long-term Care Care in a nursing home or long-term care facility may range from a period of weeks to years. Short-term care can last anywhere from several weeks or a few months during recovery from surgery, illness, or injury. For example, a person may need short-term rehabilitation therapy at a nursing facility after hip replacement surgery and then go home. On the other hand, care in a nursing home may be ongoing for someone who is disabled from a stroke or who has some form of cognitive impairment such as Alzheimer’s disease. Currently, more than 5 million people suffer from Alzheimer’s disease. Nearly 60 percent of the 70-year olds with Alzheimer’s are expected to live more than a decade — with nursing home admission by age 80 expected for 75 percent.5 More generally, about 70 percent of people over age 65 will need some form of long-term care during their lifetime — and more than 40 percent will need care in a nursing home for some period of time.6 Except in very specific circumstances, long-term care costs are not covered by Medicare or private health insurance.7
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Managing Health-related Risks While the numbers presented here may (or may not) sound dire to you, it is precisely the probabilistic aspect of healthcare issues that makes them difficult to plan for. Due to our innate optimism bias, we humans tend to discount the likelihood of bad things happening to us and overestimate the likelihood of positive outcomes. You may already have decided these things couldn’t possibly happen to you. However, the probabilistic aspect of healthcare events is also precisely why it might be worth considering insurance to manage these risks: Disability prior to retirement can severely impact the ability to save sufficiently for retirement and may even force early retirement. It may be possible to mitigate the risk of lost income due to disability by purchasing either an employer-provided or personal disability insurance policy. Uncovered or unexpected healthcare costs can be managed through the purchase of a combination of optional Medicare coverage (Parts B and D) and Medicare supplement insurance.
The cost of long-term care expenses may be eased by purchasing long-term care insurance. While there has been some turmoil among providers of long-term care insurance coverage, primarily due to mispricing of early generations of their policies, some interesting new options are emerging in the form of life insurance policies with long-term care riders. The risk of impoverishing a surviving spouse due to significant end-of-life expenses can be reduced through the use of life insurance. Extra-long Longevity One additional risk to be mindful of is the risk of living a very, very long time — well beyond normal expectations or one’s planning horizon (another thing we humans tend to underestimate). While this may not be relevant or concern the majority of people, individuals with extreme longevity in their families may consider taking steps to manage this risk. To some degree, it can be managed by selecting appropriate asset allocation and withdrawal management strategies; however, planning for a 35- or 40-year retirement period with a desirable margin of safety may require unacceptably low
retirement withdrawal levels, forcing a lifestyle reduction. As an alternative, individuals concerned about this risk may consider insurance products like variable annuities with lifetime income benefits or longevity insurance — an annuity product that provides guaranteed income after attaining a particular age (usually 85). While the longevity trifecta of investment management, liquidity management, and risk management can put you on a path to an effective retirement distribution strategy, it may also be worth addressing a few additional considerations. Healthcare events and the shock of unanticipated and uncovered healthcare costs can put a serious dent into an otherwise sound plan. You may also want to include disability insurance prior to retirement, plus Medicare Part B and D, Medicare supplement, and long-term care insurance coverage during retirement. There is no one-size-fits-all answer; every client’s situation is unique and deserves specific attention to address his or her unique needs, goals, and circumstances. We welcome the opportunity to discuss your concerns and stand ready to help in any way we can.
Sources: 1
Cutler DM, Ghosh K, Landrum MB. Evidence for Significant Compression of Morbidity In the Elderly U.S. Population. National Bureau of Economic Research, 2013
2
Center for Retirement Research at Boston College, Does Staying Healthy Reduce Your Lifetime Health Care Costs?, 2012
3
Center for Retirement Research at Boston College, When the Nest Egg Cracks: Financial Consequences of Health Problems, Marital Status Changes, and Job Layoffs at Older Ages, 2005
4
medicareinteractive.org
5
Alzheimer’s Organization Fact Sheet, March 2013
6
nihseniorhealth.gov/longtermcare/whatislongtermcare/01.html
7
medicare.gov
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TIS THE SEASON TO THINK ABOUT TAX MOVES THAT IS R. Michael Gray Senior Vice President, CAPTRUST Financial Advisors
So, what can be done? One possibility is to recognize capital losses to offset realized capital gains. It may also be possible to avoid pending capital gain distributions from a mutual fund by selling ahead of the dividend record date. These steps will reduce capital gains, the existing tax burden, and possibly the income subject to the 3.8 percent tax. The latter tactic can also be used to decrease taxable dividend income, creating a similar effect.
As year-end approaches so does an opportunity to take steps to minimize the income tax burden your portfolio may produce. The thought process this year has a new twist with the 3.8 percent Medicare contribution tax on net investment income. Actions that made sense before this tax was implemented will likely continue to be beneficial, but it is not a certainty. One approach is to look at ways to avoid or minimize the 3.8 percent tax. The new tax applies to investment income (e.g., taxable interest, dividends, capital gains, plus some others) for joint filers with adjusted gross income (AGI) more than $250,000 and single taxpayers with AGI in excess of $200,000. Income subject to the tax is the lesser of investment income or the amount by which AGI exceeds the threshold. This tax can push a taxpayer’s marginal tax rate to surprising levels.
The wrinkle in planning is the 3.8 percent tax AGI thresholds. It is important to understand not only your other income but also how variable the income can be from year to year. For example, if non-investment income is unusually low and AGI for 2013 will be below the threshold, it might be better to defer capital losses to next year when they can be used to greater benefit. This could be true if next year’s income is expected to return to prior higher levels. This complexity makes it clear that seeking advice from your tax professional is essential.
Figure One: Summary of Medicare Contribution Tax
Medicare Contribution Tax
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Who is Affected?
Details
Couples with more than $250,000 of AGI; for trusts and estates, the income threshold is $11,950; taxpayers with more than $200,000 of adjusted gross income (AGI)
3.8% tax on investment income, including taxable interest, dividends, capital gains, rental income, royalties, the taxable portion of income from nonqualified annuities, and income from business activity where the taxpayer is not considered an active participant
WEALTH MANAGEMENT | Q3 13
portfolio Strategy
CREATIVE THINKING Eric J. Freedman CAPTRUST Chief Investment Officer
I could see the train wreck take shape in slow motion. My wife Jamie’s birthday is September 30, and as I opined in this column four years ago this very quarter, birthdays are a big deal at the Freedman house. While Jamie is not one for drawing attention on her birthday, she puts up with a lot given my hectic work schedule, so our three kids and I really focus on her day. Since I had to be at a client meeting two plane rides away the morning of her birthday, I flew out the Sunday before and was slated to return well after dinner on her actual birthday. Business travel before and during her birthday was the first part of the train wreck, and the potential for marketimpactful Washington shenanigans
was the second, which increased as the government’s fiscal year-end approached with no continuing resolution to avoid a full or partial government shutdown. Of course, the continuing resolution deadline fell on Jamie’s birthday. Given my lack of physical presence that Monday, I had to prepare well in advance and build in contingencies. I got some presents, secured a cake, and gathered the kids’ homemade birthday cards. Perhaps the variable I was most excited about was plotting how Conner, my 6-year-old son, would deliver fresh flowers to Jamie that Monday morning. Just before I left for the airport, I bought a bouquet and
hid them in a secret spot in his room, where the flowers would remain out of Jamie’s sight. Conner was to give them to Jamie when she woke him up for kindergarten the next morning. Should my flights get delayed or canceled, Jamie would at least have some items representative of our affection for her. Given the circumstances, our kids and I agreed that this was about as creative as we could get. In the vein of creativity amid uncertainty, global central banks, including the U.S. Federal Reserve, have been forced into some unconventional thinking about how to steady the broad economy, both during and since the global financial
continued on page 14
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retirement plans), and finally, using more conventional central bank tools to buy securities in the open market in an attempt to hold down borrowing costs.2 These tools were used at times in conjunction with other global central banks (particularly during the crisis’ height), in other periods independently, and at times to the chagrin of other central banks worried about how Fed policy may indirectly affect them.
We see central bank policy as the single largest market driver across asset classes, and we do not crisis. We see central bank policy as the single largest market driver across asset classes, and we do not see that abating for some time. Despite historians’ attempts to compare the crisis with past financial calamities like the Great Depression, the global economy is fundamentally very different now, due to globalization and vastly different industrial and political structures. Central bank leaders like the Fed’s Ben Bernanke and Europe’s Mario Draghi have drawn from past crises, but the playbook is very different today. Accordingly, our investment strategy needs to take into account which central bank policy choices may materialize and their resultant impact on asset classes. The Fed has three objectives when it enacts monetary policy, defined as actions that central banks take to achieve their economic goals (compared with fiscal policy, which refers to spending and tax policy set by the federal government): achieving maximum employment, fostering price stability, and moderating longer-term interest rates.1 These are lofty goals, and the financial crisis proved to be a stern test for the Fed and other market agents; prices plummeted, unemployment moved higher, and longer-term interest rates dropped by almost half from crisis onset to the proverbial eye of the storm. The Fed’s response was indeed creative, deploying three toolsets to offset economic morass: short-term loans for private banks and other central banks, injecting liquidity directly into credit markets (for example, money market funds within
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see that abating for some time.
Fed critics claim that Chairman Bernanke and colleagues have overstepped their monetary policy boundaries. Even Warren Buffett (famed investor and one-time lunch companion of yours truly) called the Fed “the greatest hedge fund in history” at a September event with students, highlighting the Fed’s largesse and ability to generate revenue for the U.S. government through its bond purchase programs.3 Whether one agrees with Mr. Buffett’s characterization or not, the Fed’s size cannot be disputed; through purchasing treasury and mortgage bonds, its balance sheet has increased from $869 billion in August 2007 to more than $3.7 trillion in October 2013.4 Many investors suggest the Fed has limited policy options remaining, considering the size and total time committed thus far, leading them to conclude that the Fed has a very small overall impact in markets today. We disagree, based on market evidence from the end of September. Heading into the Fed’s mid-September policy meeting, most everyone expected the Fed to announce a slowdown from its current $85 billion per month bond buying program given economic data as well as Fed posturing before this meeting and ensuing press conference. However, the Fed chose to continue bond buying at then-existing levels, resulting in the largest intraday price swing in the U.S. bond market in more than two years, based on CAPTRUST research. Markets would not have
WEALTH MANAGEMENT | Q3 13
Figure One: U.S. Inflation Measures, January 2007–September 2013
600
2
500
1
400
0
Index
3
LEFT AXIS
300
-1
CRB Index 200
-2
Inflation Rate (in percent)
700
RIGHT AXIS PCE Year over Year 100
-3
U.S. 3-year Breakevens 0
-4 2008
2009
2010
2011
2012
2013
Year
reacted as sharply if the Fed did not carry market gravitas, thus solidifying our view that Fed policy still dominates asset class movements. The Fed is not alone in its creative thinking. The Bank of Japan has also radically altered its approach to monetary policy, and while its only focus is price stability, recent policy actions have jolted the Japanese economy and capital markets in an attempt to, in the Bank of Japan’s own words, “lead Japan’s economy to overcome the deflation that has lasted for nearly 15 years.”5 The European Central Bank (ECB) has also been forced to think in unconventional means; however, the ECB has been unable to wield as aggressive a posturing as Japan and the U.S. due to political differences across European countries about the correct pan-European response. Irrespective, ECB President Mario Draghi has successfully staved off bond market upheaval in challenged economies like Portugal, Spain, and Italy based on a now
infamous pledge to do “whatever it takes to preserve the euro. And believe me (Draghi), it will be enough.”6 Even the UK has gotten in on the unconventional thinking act, importing former Canadian central bank head Mark Carney as the new Bank of England governor. We see creative thought continuing to evolve, and our market views will be shaped by Fed and global central bank policy. As you can see in Figure One, the Fed faces a conundrum: a growing yet sluggish economy, jolted by trillions of stimulus dollars yet still not reflecting inflationary pressures normally expected after stimulus of such magnitude and duration. Figure One includes a reading from the CRB Index, which measures a broad basket of commodity prices, the Personal Consumption Expenditure (PCE) Index, a favored Fed gauge of household products and service costs, and 3-year breakevens, which reveal forward inflation expectations vis-à-vis bond prices.
continued on page 16
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All three measures remain subdued due to economic growth indices reflecting an abnormal economic environment relative to expectations this far into a recovery. Given this outcome, the Fed and other central banks are unlikely to remove stimulus for a long time. We remain enthusiastic about global stocks, particularly those geared toward long-term secular
However, investors in traditional bond sectors like treasurys and mortgages should continue to expect lower returns than experienced in recent years. Our investment committee, utilizing work done by teammate Hunter Brackett, emphasizes that investors seeking greater portfolio returns must be prepared to accept higher levels of portfolio volatility found in riskier asset classes, thanks to low bond yields. Once the Fed begins to slow its bond market purchases and eventually stop, bond prices could face some challenges.
growth that take advantage of demographics largely unaffected by economic ebbs and flows as well as those with valuation support. So, what to do amid a capital market backdrop dominated by central banks? We believe having a variety of return sources in portfolios is the best path forward. We remain enthusiastic about global stocks, particularly those geared toward long-term secular growth that take advantage of demographics largely unaffected by economic ebbs and flows as well as those with valuation support. While interest rates are low by historical standards, political division could hurt riskier asset classes, making parts of the bond market attractive in the near term.
As for Jamie’s birthday, the flower plan worked like a charm. Conner woke up and got himself dressed for school before Jamie had a chance to wake him, and upon opening his door, there was her baby boy, holding a vase full of flowers with a proud smile on his face. I reminded Jamie of that image when I told her at about 9 pm (a full 90 minutes after I arrived home) that I had to watch C-SPAN for the rest of her birthday night as Congress could not compromise and avoid a partial government shutdown. She smiled and nodded nostalgically as she handed me my pillow. As creatively as I tried to position myself, sleeping on the downstairs couch was particularly uncomfortable that night.
Sources:
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1
http://www.federalreserve.gov/faqs/money_12848.htm
2
http://www.federalreserve.gov/monetarypolicy/bst_crisisresponse.htm
3
http://www.bloomberg.com/news/2013-09-20/buffett-says-federal-reserve-is-greatest-hedge-fund-in-history.html
4
http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
5
Bank of Japan Statement on Monetary Policy, October 4, 2013, available at http://www.boj.or.jp/en/mopo/mpmdeci/state_2013/index.htm/
6
Mario Draghi speech to Global Investment Conference in London, July 26, 2012. Available at http://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html
WWW.CAPTRUSTADVISORS.COM
WEALTH MANAGEMENT | Q3 13
index returns
2000 1996
2001 1997
2002 1998
2003 1999
2000 2004
2005 2001
2006 2002
2003 2007
2004 2008
2009 2005
2006 2010
2007 2011
2008 2012
YTD YTD’13
Commodities
Real Estate
Commodities
Small Cap Stocks
Real Estate
Commodities
Real Estate
International Equities
Fixed Income
International Equities
Real Estate
Real Estate
Real Estate
Small Cap Stocks
35.92%
17.12%
5.24%
42.14%
28.48%
8.69%
17.77%
27.69%
Cash
Mid Cap Stocks
Small Cap Stocks
Fixed Income
International Equities
Mid Cap Stocks
40.48%
26.85%
7.84%
17.39%
24.34%
31.84%
12.83%
Real Estate
Fixed Income
26.81% Fixed Income
25.90%
Fixed Income
Mid Cap Stocks
Real Estate
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
Mid Cap Stocks
Large Cap Stocks
3.64%
40.06%
20.22%
12.65%
18.37%
10.26%
-21.34%
28.61%
25.48%
1.50%
17.28%
20.76%
Cash
Real Estate
Small Cap Stocks
Real Estate
Large Cap Stocks
Fixed Income
Small Cap Stocks
Cash
Large Cap Stocks
International Equities
16.42%
10.47%
2.79%
Cash
Small Cap Stocks 2.49%
Fund of Funds
Mid Cap Stocks
4.08%
-5.62%
Small Cap Stocks
Large Cap Stocks -12.45%
Large Cap International Stocks Equities -7.79%
1.51%
Cash
8.25%
-3.02%
International International International International Commodities Equities Equities Equities Equities 16.23% 27.16% 41.41% 17.11% 21.36%
10.25%
Fund of Funds
6.36%
31.49%
8.44%
3.64%
11.63%
47.25%
21.36%
-19.50%
1.68%
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% 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%
Small Cap Stocks
4.34%
4.55%
Cash 3.35%
Fixed Income
Cash
Cash
1.05%
1.44%
6.97%
-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%
Cash
Cash
5.08%
4.71%
Fixed Income
Small Cap Stocks
Mid Cap Stocks
Small Cap Stocks
Fund of Funds
16.10%
-1.55%
16.35%
5.56%
Small Cap Stocks
Fund of Funds
Real Estate
-4.18%
5.25%
3.17%
Real Estate
Fund of Funds
Fixed Income
Fund of Funds
Fixed Income
-37.97%
11.16%
6.54%
-5.51%
4.22%
Mid Cap Stocks
Fixed Income
Fund of Funds
Commodities
Cash
-13.32%
0.11%
-1.57%
-41.46%
Commodities
Real Estate
International Equities
2.07%
-16.82%
0.10%
Large Cap Stocks
International Large Cap Commodities Equities Stocks 18.91% 11.60% -37.60%
4.33%
2.43%
Large Cap Commodities Stocks 16.83% 28.43%
-45.25%
5.93%
5.46%
Cash
Cash
0.21%
0.13%
Cash 0.06%
Fixed Income -1.89%
International Commodities Commodities Equities -1.06% -8.56% -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 (Barclays 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)
Sources: Markov Processes Inc., Bloomberg, Mobius
2013 3RD QUARTER ASSET CLASS RETURNS
INDICES
Q3 ’13
YTD ’13
2012
2011
2010
2009
2008
1-YEAR
3-YEAR
5-YEAR
10-YEAR
S&P 500
5.24%
19.79%
16.00%
2.11%
15.06%
26.46%
-37.00%
19.34%
16.27%
10.02%
7.57%
2.12%
17.64%
10.24%
8.38%
14.06%
22.68%
-31.93%
15.59%
14.94%
9.93%
7.74%
10.82%
24.90%
15.91%
-1.80%
16.91%
43.89%
-40.54%
21.03%
16.77%
12.51%
7.76%
6.02%
20.76%
16.42%
1.50%
16.10%
28.43%
-37.60%
20.91%
16.64%
10.53%
7.98%
8.11%
20.87%
15.26%
2.64%
16.71%
37.21%
-38.44%
19.27%
16.94%
12.07%
7.82%
3.94%
20.47%
17.51%
0.39%
15.51%
19.69%
-36.85%
22.30%
16.25%
8.86%
7.99%
Russell Mid-Cap Index
7.70%
24.34%
17.28%
-1.55%
25.48%
40.48%
-41.46%
27.91%
17.53%
12.97%
10.78%
Russell 2000
10.21%
27.69%
16.35%
-4.18%
26.85%
27.17%
-33.79%
30.06%
18.29%
11.15%
9.64%
Russell 2000 Growth
12.80%
32.47%
14.59%
-2.91%
29.09%
34.47%
-38.54%
33.07%
19.96%
13.17%
9.85%
Russell 2000 Value
7.59%
23.07%
18.05%
-5.50%
24.50%
20.58%
-28.92%
27.04%
16.57%
9.13%
9.29%
AC World Index Free Ex-U.S.
Dow Jones Industrial Average NASDAQ Composite Russell 1000 Russell 1000 Growth Russell 1000 Value
10.17%
10.47%
17.39%
-13.33%
11.60%
42.14%
-45.24%
16.98%
6.43%
6.74%
9.24%
HFRI Fund of Funds
2.13%
5.56%
4.79%
-5.72%
5.70%
11.47%
-21.37%
6.95%
2.62%
2.02%
3.43%
Wilshire REIT Index
-3.04%
2.71%
17.59%
9.24%
28.60%
28.60%
-39.20%
5.26%
12.48%
5.55%
9.42%
Barclays Govt. Intermediate Bond
0.40%
-0.83%
1.73%
6.08%
4.98%
-0.32%
10.43%
-0.80%
1.75%
3.52%
3.76%
Barclays Corporate IG Bond
0.82%
-2.62%
9.82%
8.15%
9.00%
18.68%
-4.94%
-1.58%
4.40%
9.24%
5.27%
Barclays Aggregate Bond
0.57%
-1.89%
4.21%
7.84%
6.54%
5.93%
5.24%
-1.68%
2.86%
5.41%
4.59%
Barclays Intermediate Govt. /Credit
0.62%
-0.84%
3.89%
5.80%
5.89%
5.24%
5.08%
-0.50%
2.41%
4.95%
4.10%
Barclays Muni Bond
-0.19%
-2.87%
6.78%
10.70%
2.38%
12.91%
-2.47%
-2.21%
3.24%
5.98%
4.40% 8.86%
Barclays High Yield
2.28%
3.73%
15.81%
4.98%
15.12%
58.21%
-26.16%
7.14%
9.19%
13.53%
90-Day U.S. Treasury
0.02%
0.06%
0.11%
0.10%
0.13%
0.21%
2.06%
0.10%
0.10%
0.17%
1.70%
Consumer Price Index (Inflation)
0.28%
1.99%
1.74%
2.96%
1.50%
2.72%
0.09%
1.19%
2.34%
1.37%
2.37%
Sources: Morningstar, Mobius, MPI
2013 3RD QUARTER INDEX PERFORMANCE
The information contained in this report is from sources believed to be reliable but are not warranted by CAPTRUST Financial Advisors to be accurate or complete. Index performance depicts historical performance and is not meant to predict future results.
17
CAPTRUST Discretionary research highlights
U.S. EQUITIES • We have carried a bullish posturing on U.S. stocks for
• Political concerns may provide us with an opportunity to
more than a year, emphasizing growth-focused sectors
add to our holdings here, particularly if the U.S. Federal
and a bias toward large-cap over mid- and small-cap
Reserve continues to provide stimulus amid a still-tame
stocks based on more attractive fundamental attributes,
inflation environment.
particularly valuation. • Our bias has been to avoid rebalancing our stock exposure through the recent upturn in equities, but we have recently shored up our sector exposures, deploying a more balanced orientation but still favoring large-cap and high quality.
INTERNATIONAL EQUITIES • We have adopted a more favorable outlook on non-U.S.
• We increased exposure to Japan in light of its aggressive
stocks in the near term, thanks to reasonable valuations in
monetary policy posturing early in the year, but have since
Europe and gradual progress on sustainable economic growth.
dialed back that exposure as we see a more challenging landscape going forward. Japan is a highly consumer-
• While we have seen some incrementally better news out of China, we remain unconvinced that the Chinese economy has turned the corner as it transitions from a
driven economy, and while some of the government’s plans will stimulate the economy, they could also stoke inflation, hurting consumers, and by implication, corporate earnings.
more export-driven economy to one driven by domestic consumer demand; this transition will likely occur, but it will take time and likely follow an uneven path.
FIXED INCOME • We increased our weighting to fixed income during
the Fed approaches the end of its bond buying program.
mid-2011, incorporating a diversified approach by sector
We currently have no passively managed bond exposure
and geography using a combination of active and passive
within our discretionary portfolios.
management. We expected a few persistent themes to endure that are accessible via highly skilled managers and were pleased with those results.
• We have emphasized less traditional bond exposure through subsectors, including floating rate bonds, nonagency mortgages, reinsurance, and corporate credit,
• Last quarter, we deemphasized fixed income in favor of international equities with the view that bond yields (which move inversely to price) had further room to increase as
18
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while tempering interest rate sensitivity.
WEALTH MANAGEMENT | Q3 13
HEDGE FUNDS / PRIVATE EQUITY • Hedge fund strategies have had a challenging backdrop in which to operate over the past three years given market
for managers who can generate returns irrespective of broad stock and bond trends.
oscillations, yet we continue to see merit here to diversify away from pure stock and bond exposure.
• Increasingly, investment managers are creating differentiated hedge fund products to the market, and we
• Since the start of this year, we have emphasized more
continue to evaluate new opportunities for investors from
directional hedge fund strategies that would capture
both established entities as well as newly formed firms.
more potential upside in riskier asset classes. That
Finding differentiated ideas in a low-return environment
strategy has been additive, but we continue to search
will remain an important process component for us.
COMMODITIES • We remain long-term bullish on commodities due not
• We have recently deemphasized actively managed
only 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 challenges for most active managers to
But we acknowledge that recent price weakness has been
successfully navigate. Correlations between commodities
disappointing, despite a solid third quarter return.
and more “crowded” active manager positions leave us happy to invest in broad commodity mandates and
• Given the challenging macroeconomic environment and the potential for further growth scares, we expect to see considerable volatility within commodities. We would like
control the overall exposure levels versus leaving that to an active manager. Commodities remain a small portfolio component for us right now.
to see commodities decouple from equity returns and give investors more of a correlation boost than we have experienced since the financial crisis.
REAL ESTATE • We added to real estate positions in mid-2010 based on
• 2013 has been more challenging for REITs, with broad
improved fundamentals as well as attractive yields given
REITs selling off in sympathy with interest rates’ ascent.
subdued interest rates.
We could become more constructive on REITs following their sharp decline from late May through late June,
• Real estate capital raising remains positive, with REITs enjoying plenty of flexibility and the capacity to take
especially if the interest rate picture stabilizes, but we are poised for more volatility in the near term.
an opportunistic view across geographies and property types due to strong cash cushions for many operators.
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, 3rd Quarter 2013
• U.S. stocks continued their ascent higher in the third quarter with the S&P 500 closing up 5.2% for the quarter 2013
Large Value (R1000 Value)
3.94%
20.47%
Large Blend (S&P 500)
5.24%
19.79%
8.11%
20.87%
Mid Value (Russell)
5.89%
22.94%
Mid Blend (Russell)
7.70%
24.34%
Mid Growth (Russell)
9.34%
25.42%
Small Value (R2000 Value)
7.59%
23.07%
Small Blend (R2000 Blend)
10.21%
27.69%
Small Growth (R2000 Growth)
12.80%
32.47%
Large Growth (R1000 Growth)
and 19.8% for the year. Mid- and small-caps were up 7.7% and 10.2%, respectively, for the quarter, bringing both of them up more than 24% for the year-to-date period. • Nine of 10 major S&P 500 sectors were positive in the third quarter, led by materials (+10.3%) and industrials (+8.9%). Telecoms were the sole sector in negative Source: MPI Stylus Pro
Q3 ’13
territory (-4.4%), and utilities were up a scant 0.2%. • Since the U.S. equity market touched its March 2009 low, large-caps, mid-caps, and small-caps are up 174%, 234%, and 233%, respectively, including reinvested dividends.
INTERNATIONAL EQUITIES Market Performance, 3rd Quarter 2013
• Developed and emerging international equities both rose in U.S. dollar terms in the third quarter, with the former 2013
11.61%
16.59%
Pacific Stocks (MSCI Pacific Ex-Japan)
10.36%
5.29%
European Stocks (MSCI Europe Ex-UK)
14.47%
19.01%
6.71%
24.47%
UK Stocks (MSCI UK)
12.05%
12.38%
Emerging Markets (MSCI EME)
5.90%
-4.05%
International Equities (MSCI EAFE)
Japanese Stocks (MSCI Japan)
up 16.6% and the latter down 4.1% for the year-to-date period. The developed equity-focused MSCI EAFE Index has been higher 14 out of the last 18 quarters, while the Source: MPI Stylus Pro
Q3 ’13
MSCI Emerging Markets Index has been higher 13 out of the last 18 quarters. • Japan continued to rally in the third quarter, despite a higher yen relative to the dollar. Japan has rallied 41% this year in local currency, but thanks to a sliding yen, it has gained 24.5% in dollars. • Emerging markets were mostly higher during the quarter with China +12.2% but flat year to date. Russia +13.7% but up just 1% for the year, while India fell 5.3% and is down close to 13% for 2013.
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WEALTH MANAGEMENT | Q3 13
FIXED INCOME Market Performance, 3rd Quarter 2013
• The Barclays Aggregate Bond Index rose 0.60% in the third quarter after falling in the second quarter, putting a dent in 2013
Broad Market (Barclays Capital U.S. Aggregate)
0.57%
-1.89%
Barclays Capital U.S. Treasurys
0.10%
-2.01%
Barclays Capital Mortgage Backed Securities
1.03%
-1.00%
-0.19%
-2.87%
1.10%
-0.74%
2.28%
3.73%
Barclays Capital Municipals Barclays Capital Intermediate Corporates Barclays Capital High Yield
the index’s 1.9% negative return thus far in 2013. Note that the index has not had a negative annual return in 13 years. Source: MPI Stylus Pro
Q3 ’13
• Historically riskier parts of the bond market were rewarded in the quarter, with high yield up 2.3% and emerging market increasing by 1.4%. Treasuries managed a positive 0.10% return but are still down 2% for the yearto-date period. • Research firm ICI’s mutual fund flow data indicated that after the U.S. Federal Reserve opted to resume its bond purchase program in late September, investors finally added to bond funds after two straight months of withdrawals.
HEDGE FUNDS / PRIVATE EQUITY Market Performance, 3rd Quarter 2013
• Hedge fund strategies posted a solid start to 2013, with the HFRI Fund Weighted Composite Index posting a 5.6% return 2013
2.28%
5.58%
HFRI Equity Hedge Index
4.11%
9.18%
HFRI Relative Value Index
1.98%
5.04%
HFRI Fund of Funds Composite Index
2.13%
5.56%
HFRI Fund of Funds Conservative Index
1.54%
5.20%
HFRI Fund Weighted Composite Index
through the end of September, despite a difficult August. • Global macro remained a challenging strategy (-2.7% year to date) after losing 1% for 2012 and registering weak Source: HFRI
Q3 ’13
2010 and 2011 calendar years as global central bank policy and unstable trends continue to impact managers. Equity hedged strategies are up more than 6.6% for the year but have been unable to keep up with global equities after the latter’s strong third quarter performance. Event driven strategies, particularly special situations, are standouts thus far in 2013. • Research firm Prequin highlights that private equity fundraising was strong for the third quarter, particularly in North America, where firms have raised $195 million this year through September 30, just $3 million shy of what they raised for all of 2012.
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COMMODITIES Market Performance, 3rd Quarter 2013 Q3 ’13
2013
2.13%
-8.56%
S&P GSCI Commodity Index
4.78%
-0.89%
Gold (Spot, $/oz)
8.81% -20.55%
Dow Jones UBS Commodity Index
Natural Gas (U.S. Spot Henry Hub)
-2.24%
1.93%
Crude Oil (U.S. Spot, WTI Cushing)
5.98%
11.45%
Sources: MPI Stylus Pro, Bloomberg
• The Dow Jones UBS Commodity Index rose 2.1% in the quarter after falling 9.5% in the second quarter, and despite a positive third quarter, commodities are down more than 8% for the year. Dollar strength has hurt so far this year, as has concern about Chinese demand. • At the subindex level crude and WTI oil were helped by Mideast tensions, and copper staged an impressive intraquarter rally but remains down more than 10% year to date. • Precious metals bounced in the July-September period following significant declines earlier in the year. Gold was up 8.8% and silver up 11.2%, but the two popular commodities have fallen along with investors’ feelings about future inflation; year to date, gold is down more than 20% and silver more than 28%.
Market Performance, 3rd Quarter 2013 Q3 ’13
2013
MSCI U.S. REIT Index
-3.00%
3.17%
Wilshire REIT Index
-3.04%
2.71%
Source: MPI Stylus Pro
REAL ESTATE • Public real estate, as measured by the MSCI U.S. REIT Index, fell 3% in the third quarter. REITs underperformed U.S. equities for the fifth quarter out of the last 10. REITs are still positive for the year (+3.2%) and are up a staggering 199.1% cumulative over the past 10 years ended December 31. • Valuation coupled with interest rate sensitivity are two drivers of shaky REIT returns in recent months, with the sharp move higher in bond yields from May through September weighing on the space. • Commercial mortgage bank security issuance, a gauge of property market deal volume, slowed in the third quarter after a robust start to 2013.
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WEALTH MANAGEMENT | Q3 13
captrust news
CAPTRUST GROWTH CAPTRUST grew in the third quarter with the following new additions to the team. Raleigh, NC Office
Greenwich, CT Office
Craig Harris joined CAPTRUST as a relationship manager, financial advisor, and is responsible for providing retirement plan advisory services to corporate fiduciaries. Prior to joining the firm, Craig served as an associate partner with Aon Hewitt and has worked in the industry since 1990. Craig received a Bachelor of Science degree in business administration with a concentration in finance from Wake Forest University and holds the Certified Employee Benefit Specialist (CEBS) designation.
Ernest Liebré joined CAPTRUST as senior vice president, financial advisor. An industry veteran, Ernest has been providing retirement plan advisory services to corporate fiduciaries since 1967. Prior to joining the firm, Ernest served as founder and managing director of Cambridge Financial Services. Ernest received a Bachelor of Arts degree in economics from Iona College and a Master of Business Administration degree in finance from the University of Chicago.
Robert Eagle joined CAPTRUST as a relationship manager, financial advisor, and has worked in the industry since 1995. Robert is responsible for providing retirement plan advisory services and recently served as senior associate at Mercer. Robert received a Bachelor of Arts degree in economics from the University of North Carolina, Charlotte and holds the Accredited Investment Fiduciary (AIF®), Chartered Mutual Fund Counselor (CMFC), and Chartered Retirement Plans Specialist (CRPS) designations.
Bruce Graham joined CAPTRUST as vice president, financial advisor, and is responsible for providing retirement plan advisory services to corporate fiduciaries, as well as comprehensive wealth management services to high-net-worth investors, private foundations, corporate executives, and business owners. Prior to joining the firm, Bruce served as Senior Managing Director with Clearbrook Global and has worked in the industry since 1981. Bruce received a Bachelor of Arts degree in economics from Bucknell University, as well as a Master of Business Administration degree in finance from NYU Stern School of Business, and is a Chartered Financial Analyst (CFA®).
Lourens Prinsloo joined CAPTRUST as director of application development and is responsible for managing all activities related to the design, development, and implementation of the firm’s applications and analysis function. Prior to joining the firm, Lourens served as assistant vice president, enterprise architect, at First Citizens Bank & Trust Company and has worked in the industry since 1988. He is a graduate of the University of Pretoria (South Africa) with a Bachelor of Science degree in computer science.
RECOGNITION CAPTRUST, for a second time, has been named one of 2013’s “Best Places to Work” by the Triangle Business Journal for excellence in team effectiveness, employee communications, employee engagement, and organizational leadership. CAPTRUST was among several companies in the Triangle area of Raleigh, Durham, and Chapel Hill being honored this year. Winners were determined by Quantum Market Research, an outside research firm hired to conduct and tabulate the feedback from a confidential employee survey.
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WEALTH MANAGEMENT | Q3 13
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GIVING BACK We are honored to have supported these charities during the third quarter of 2013. • A Child’s Place
Team CAPTRUST standing ready at the 2013 Walk for Hope starting line. Courtney McGuirk, Todd and Nicole Jones, Holly and Mark Vickstrom, Chad Day, Ellen Crowley, Mark and Sue Paccione, Abigail and Alton Russell. Not pictured: Allison and Wade Sisson and James and Rebecca Stenstrom
• Hayme Serrato’s Martial Arts
• UNC Lineberger Comprehensive Cancer Center
• All 4 Youth
• Miracle League
• Webb Simpson Challenge Golf Tournament/Retreat
• Jimmy V Foundation
• BackPack Buddies (Inter-Faith Food Shuttle)
• HopeLine
• Great Trail Council Boy Scouts of America
• Council for Children’s Rights
• Children Guidance & Family Solutions
• Walk for Hope (Foundation of Hope)
• Raleigh Rescue Mission
• New Alternatives for Children
• Broughton Caps Club
• SAFEchild
• Boys and Girls Club of Wake County • Taylor Family Foundation
• Kelly Brush Foundation
INDUSTRY INVOLVEMENT September 9–11, 2013 | Orlando, FL PLANADVISER National Conference Team/Practice Building: How do 401(k) Adviser Teams Segment Roles and Responsibilities? Panelist: J. Fielding Miller, Co-founder and CEO Retirement Income: In and Out of Plan Solutions Moderator: John Pickett, Financial Advisor Asset Mix: Are Participants Better Off in a General AssetAllocated Fund like Target-Date Funds or Individualized Managed Accounts? Moderator: Phyllis Klein, Senior Director October 1, 2013 | Chapel Hill, NC North Carolina Investment Institute Conference Best Investment Ideas Speaker: Eric Freedman, Chief Investment Officer October 9, 2013 | Philadelphia, PA PennJerDel Employee Benefits Association (PEBA) The Two Sides of Deferred Compensation Speakers: Danny Lowe, Senior Vice President and Chris Kulick, Financial Advisor
October 17, 2013 | Webinar Mid-Sized Retirement & Healthcare Plan Management Conference Best Practices for Conducting an Advisor Request for Proposal (RFP) Speaker: Greg Middleton, Senior Manager October 22 and 23, 2013 | Clarkston, MI Enhancing Retirement Readiness through Outcomes-Based Plan Management Speakers: John Young, Financial Advisor and Casey Pogodzinski, Financial Advisor November 12, 2013 | Greensboro, NC Mid-Sized Retirement & Healthcare Plan Management Conference Leveraging Your 403(b) Plan Speakers: Jimmy Talton, Financial Advisor and Danny Summerlin, Financial Advisor November 18–19, 2013 | Dallas, TX The 19th Annual National Pension and Institutional Investor Summit Quantifying Success in a DC Plan Moderator: Travis Whitten, Financial Advisor
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been prepared or is distributed solely for informational purposes and is not a solicitation
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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
©2013 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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