First Quarter 2016 Investment Pulse

Contributed by: Angela Palacios, CFP®

We hit the ground running in the New Year with great insight from outside experts on a wide array of topics ranging from fixed income research to how to conduct a more successful investment committee meeting and nearly everything in between!  Here is a summary of some of the highlights.

Chris Dillon, a global fixed income portfolio specialist with T. Rowe Price

An hour spent listening to Chris was one of the most informative yet exhausting hours of the quarter!  He spent much of his time explaining global complexities within the fixed income markets and how they could affect investors in the coming months.  Of particular interest was a discussion on negative rates and his opinion that we will likely look back on these negative interest rate policies around the world as being completely ineffective.  Also discussed was the coming money market reform here in the U.S. with the formation of Prime Money Markets that will have floating pricing (Net Asset Values).  While these will mostly affect institutional level investors his recommendation was not to purchase these, but they could create a fundamental change in the market place presenting interesting opportunities for short term bond investors.

Bob Collie, Chief Research strategist, Americas Institutional, Russell Investments

Bob discussed the difficulty of working in committees as it isn’t something that comes naturally to most people.  He offered many questions to ask ourselves to understand how our own investment committee measures up to others.  These answers helped identify areas to focus on improving.  Since our investment committee meets at least once a month you can imagine the agendas are usually very packed.  We need to make the most of our time together overseeing portfolios.  Areas we are focusing on improving after listening to Bob have been visioning (what does success of committee work look like), dynamic discussions, and pre-reading of agenda items and background research so we all have time to formulate our points for the discussion ahead of time.  We have already noted improvements during the meeting and outcomes from the meetings.  Hopefully even more improvements are on the horizon!

Jeremy Siegel, Ph.D., Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania and Senior Investment Strategy Advisor, Wisdom Tree

"Bubble, the most overused word in finance today."

He believes the market has an aggregation bias, if there are a few stocks or a sector that has large losses, like energy does now, the entire market can look skewed.  The energy sector is biasing the P-E index of the market upward making it look more expensive as a whole than it really is.  He thinks fundamentals have driven interest rates to zero rather than artificial means, the FED has simply followed suit reducing interest rates along the way.  Economic growth and risk aversion are the most important determinants of real rates.  Increased risk aversion, aging investors, a desire for liquidity and the de-risking of pension funds has increased demand for bonds forcing their yields lower.  Jeremy has always had a very bullish view on the markets and now seemed no different.  He feels returns over the coming years will fall in line with long term averages.

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with and does not endorse the opinions or services of Chris Dillon, Bob Collie, Jeremy Siegel or the companies/organizations they represent. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Past performance is not a guarantee of future results. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Investor Basics: Bank Loans, Interest Rates, and Game of Thrones

Contributed by: Nicholas Boguth

In the spirit of preparing for season six of Game of Thrones, this set of Investor Basics and Investor Ph.D blogs is aimed to discuss bank loans and interest rates with respect to the increasingly popular adventure/fantasy television series. Check out our Director of Investment’s blog “A Game of Negative Interest Rates” HERE.

There are three types of bank loans – 1: Central Bank Loans, 2: Interbank Loans, and 3: Consumer Loans. Each loan is between different parties and has a different interest rate.

Central Banks require commercial banks to meet reserve requirements to ensure their liquidity. At the end of every day, after all of a commercial bank’s clients deposit and withdraw money, if that bank has less than the reserve requirement then it has to borrow money to raise its reserves.

If it has to borrow money to raise its reserves, it has two options. It can either borrow from the Central Bank at the discount rate, or borrow from a fellow commercial bank that has excess reserves at the end of its business day. Commercial banks borrow from each other at the federal funds rate. Currently the discount rate is 1% and the federal funds rate is 0.5%. Obviously, commercial banks prefer to borrow at the lower rate, so interbank lending is much more common than borrowing from the Central Bank. Borrowing from the Central Bank is more of a last resort for commercial banks.

The third interest rate that banks deal with is the bank lending rate. This is the rate that we, the consumers, see when we walk into a commercial bank and ask for a loan. The discount rate and federal funds rate affect banks’ lending rates, but it is also influenced by how creditworthy the customer is, the banks’ operating costs, the term of the loan, and other factors.

For all you Game of Thrones fans, you can think of the Central Bank like the Iron Bank of Braavos. It is the most powerful financial institution in the world, but it only lends to those that can repay debts (e.g. the Central Bank only lends to commercial banks). Not just anyone can borrow from the Central Bank, but the Lannister’s can because “A Lannister always pays his debts.”  SPOILER ALERT coming for anyone who has not made it through season 5: Remember back to season 5 when the Iron Bank is forcing the Iron Throne to repay one-tenth of their debts? Lord Mace offers that House Tyrell could lend the Lannister’s some money so that they could meet the Iron Bank’s “reserve requirement” of one-tenth. This is interbank lending! Thankfully for us, the cost of borrowing money in real life is only the interest rate, whereas in Game of Thrones it could be one’s life.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc. and an Investment Representative with Raymond James Financial Services.

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This material is being provided for information purposes only. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

Chinese Stock Market Manipulation

Contributed by: Angela Palacios, CFP®

Since last summer the Chinese government has played a very active role in manipulating their own stock market. Which markets are affected can be very confusing as there are many different exchanges and types of shares that can be purchased.

Chinese Equity Markets: A Tutorial

The Shanghai exchange houses the A share stock market. These are the shares of Chinese companies that are available mostly to domestic Chinese investors (who in most cases are prohibited to invest outside of this market) and institutional investors granted special permission by the Chinese government, denominated in their local currency, the Renminbi. This currency is no longer pegged to just the U.S. Dollar but rather to a basket of currencies. See my colleague, Nick Boguth’s blog regarding the state of China’s Currency.

In contrast, the Hong Kong exchange houses the H share market which is shares of Chinese companies available to investors outside China and can be freely traded by anyone. H shares trade in Hong Kong dollars. In contrast to mainland China, Hong Kong dollars are still pegged to the U.S. Dollar.

B shares, while lesser known than A & H shares, are also available and these are Chinese companies with a face value in Renminbi, but trading in U.S. Dollars on the Shanghai exchange. These are available to foreign investors as well as Chinese investors who have foreign currency accounts.

There has been a huge difference in company prices that trade on both A and H share exchanges and there is no channel to arbitrage this away. A shares ran up coming into the summer of 2015 causing a huge imbalance when compared to the H share market. This means investors in the A share portion of the market were paying far more for a company than investors in the H share market. On the flip side the A shares have declined much more sharply than the H share market as well.

The Pressure in China Picks up

China is nearing the end of incredible growth. It built up far too much capacity and credit. As the economic slowdown in China began to accelerate, volatility in the stock market started to pick up in the middle of 2015 spilling over into our markets here in the U.S. The Chinese government has had to step in to stem the bleeding created by A share sellers. 

A Timeline of Market Manipulation

The government became a buyer of shares on the weakest days and then took even further steps last July suspending the holders of 72% of A share stocks the ability to sell their stock for six months. Investors that held at least 5% of a company’s outstanding stock was simply no longer allowed to sell it. Communism at its best! 

In early January 2016 this ban on sales was set to expire and there was much worry that volatility would come back, which it did. At this point, January 4, 2016, the government put controversial breakers in place to halt trading in case of extreme selling on the A share market, disbanding them only four days later after the widespread panic this caused. They ended up suspending/halting trading twice in this short time. In contrast, H share markets were down also on these days but far less than the A share markets before the halt.

In place of the circuit breakers, China came up with a plan to restrict stock sales again by these large shareholders. At this point a stockholder who owns more than 5% of a company is required to sell shares only through private transactions to help avoid shocks to the market.

With so much intervention we are left wondering if a free market even exists over there and if there ever was one to begin with. Thankfully the selling pressure has slowed and markets both there and here have quieted down a bit. As always though, it will be interesting to watch how events and markets unfold the remainder of this year!

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.

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“The ABCs of China’s Share Markets by Mark Mobius http://www.cnbc.com/id/

http://www.voyagercapitalmgt.com/an-update-on-china/

http://www.bloombergview.com/articles/2015-07-09/china-shows-how-to-destroy-a-market

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Opinions expressed in the attached articles are those of the authors and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Please include: Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

March Madness: How the Tournament Reflects your Investments

Contributed by: Nicholas Boguth

I usually don’t think about investments when March Madness rolls around, however this year the correlation is hard to get out of my mind. The past year in the markets has mimicked the past year of NCAA men’s basketball. The markets have been volatile since mid-2015 because of China’s shaky economy and the pending rate hike here in the U.S. In August, we watched the S&P 500 drop almost 200 points and investors wondered, “What is going on?!?!” At the same time, the men’s basketball rankings have been more volatile than they ever have been historically. North Carolina owned the #1 ranking title in the preseason, and then was quickly edged out by Kentucky, who got pushed out by Michigan State, then Kansas, then Oklahoma, then Villanova, and finally back to Kansas leaving basketball fans thinking, “What is going on?!?!”

Now it’s March, which means it’s time to fill out your bracket. There are a total of 63 games that will be played to determine the champion. Correctly predicting the outcome of all 63 of those games is about as likely as getting struck by lightning 5 times this year. Warren Buffet, who in the past has offered $1 billion to anyone who filled out a perfect bracket, must have gotten bored with that challenge and instead is offering $1 million every year for life to any of his employees that correctly guess every game in the first 2 rounds correctly (still extremely unlikely). So, what will your strategy be when filling out your bracket?

There is no guaranteed way to make money when investing, just like there is no guaranteed way to pick the final four teams of the tournament correctly. Sure, you can pick the four #1 seeds and hope that they make it to the final four, just like you can look back and pick the 4 investments or securities that performed the best last year and hope that they outperform again this year, but as we all know from the infamous investing disclaimer, “past performance is no guarantee of future results.” In fact, only picking the #1 seeds in the bracket has left you with the correct final four just ONE time in the entire tournament’s history.

So, odds are that you are not going to pick every winner of the tournament. As investors, there is also a slim chance that you pick every one of your investments correctly and every one of them increases year after year. This is why diversification is key—Jaclyn Jackson recently explained this concept in more detail (which can be found here).That is where talking to a NCAA bracket specialist or an investment professional can help. The correct diversification can ultimately help you reach your end goal, no matter who the #1 seed is.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.

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Any opinions are those of Nick Boguth and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Economic and Investment Update for 2016

Contributed by: Angela Palacios, CFP®

In early February, Melissa Joy, CFP®, Partner and Director of Wealth Management at The Center, was joined by David Lebowitz, Vice President and Global Market Strategist for J.P. Morgan, to discuss timely economic and market updates.

David kicked off the presentation by answering 3 questions:

1. Where are we in the (current economic) cycle?

2. What should we watch out for?

3. Where are the opportunities?

J.P. Morgan built a strong case for the U.S. Economy sitting at positive GDP growth (Gross Domestic Product), the improving job market, as well as, corporate profits, and subdued inflation for the foreseeable future.

David also pointed out items to watch out for, such as low oil having a positive effect on consumer’s wallets, the continued higher volatility we are currently experiencing is more in line with history rather than the low volatility environment we have become accustomed to, and being careful of investment biases sneaking into your portfolio causing undue risk.

Opportunities are still out there for investment growth but David stressed that the ride is as important as the destination. A balanced portfolio is like a sword and a shield for investors. Your sword, or equities, has the potential to give you the long term growth needed to help reach goals but your shield, or fixed income can help give you the defense to make your investment journey more comfortable.

Melissa continued with several history lessons stressing the importance of patience and that it often pays off when investing. She discussed top headlines in the news such as the elections and interest rate hikes and how these items will affect investors over the coming year.

Below is a link to the presentation slides referenced throughout that emphasize the key points Melissa and David discussed. As well, there is the recording of the webinar that Melissa and David held, that has further information and discussion.

• Watch the full webinar presentation below

• February 2016 Webinar slides

• J.P. Morgan Guide to the Markets is a widely popular presentation on the state of the economy and various markets.  By clicking on the link you will be taken to the guide in it’s entirety.

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.

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Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Fourth Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®

2016 kicks off with much of the same challenges as have plagued us for the second half of 2015.  The S&P 500 was up for the seventh straight year but that is where the excitement ended.  Broad markets delivered lackluster or negative returns.  The S&P 500 needed all of its dividends to get to a positive 1.38% return for 2015 while the Russell 2000 and MSCI EAFE representing small company stocks and international markets were down 4.42% and .82% respectively.

Volatility really picked up in the third quarter with a large drawdown while in the fourth quarter made up some ground.  We expect volatility to continue into the New Year as the year end brought no significant changes to our outlook.

Liftoff from Zero

The Federal Reserve Board (FED) continues to ease their foot slowly off the accelerator after years of easy money.  In December, The FED increased short term rates for the first time in nearly a decade.  This move was highly anticipated and thus bonds did not have a large knee-jerk negative reaction.  Bond markets had already priced in the rate move before it happened.

Looking forward, The FED is forecasting 4, quarter point rate increases for a total of a 1% rate increase in 2016.  The markets, as measured by interest rate futures, disagree as they are forecasting only .5% increase this year.  If The FED actually increases rates by 1% the bond market will adjust prices to reflect this leading to slight negative pressures on the prices of bonds.  Interest rates on bank accounts will lag behind the increases and likely only move upward slightly and slowly while mortgage rates should also increase slowly.

A bright spot in the bond market

The outlook for municipal bonds continues to be positive.  Puerto Rico announced a default on January 1 of $37 Million in debt but this was widely anticipated and didn’t spread into other markets.  Many municipalities continue to improve balance sheets with increased tax collection and the market as a whole seems to be on solid footing.

Bond Market Illiquidity

The negative performance in energy prices has led to increasing spreads between high yield bonds and investment grade fixed income.  When this occurs, prices on high yield bonds go down and they become harder to sell.  Over the past several years, investors have reached for yield in this category not understanding the risks involved.  This highlights the importance of understanding exactly what exposure you are taking on when investing in fixed income.

View on Emerging markets

Emerging market challenges continue into 2016.  Manufacturing in China continues to slow as well as their Gross Domestic Product growth, GDP, but the government is intervening in their stock market trying to prove they can provide a floor to asset prices. China’s slowdown has had a negative impact on commodity prices along with the glut in the oil market causing oil prices to be at their lowest levels since early 2009. 

These pressures have been brutal to emerging market country currencies that depend on exporting commodities.  In order for there to be a turnaround in this space we would need to see a change in investor sentiment, stronger economic growth, and a weakening of the U.S. dollar which we don’t see as likely in the near term.

The Economy

Locally our economy continues its slow grind in the positive direction.  Consumer spending remains strong with low gas prices and strong job growth increasing households’ purchasing power.  Housing is a bright spot and as rates increase borrowing terms may be relaxed a bit by lenders which would be helpful.  Inflation may start to pick up slightly from very low levels now.  As energy prices find a bottom this would cease being a negative effect on inflation and may even start to add to year-over-year inflation as we start to rise off the bottom.

Here is some additional information we want to share with you this quarter:

Checkout my research summary in the quarterly Investment Pulse.

I delve into Out of the Box Investing with a look at alternative investments.

Melissa Joy, CFP®, Partner, chimes in with a timely reminder of 5 Questions to ask yourself when stocks are down.

Nick Boguth, Client Service Associate, giving his insight on Style Box Investing basics.

Check out an article on Diversification from Jaclyn Jackson, Research Associate, to help better understand the benefits.

Vice President and Global Market Strategist for J.P. Morgan, David Lebovitz, and The Center's Melissa Joy, CFP®, will discuss timely market and economic insights. REGISTER for the webinar!

Careful diversification and financial planning are tools to help support investor patience in choppy markets.  Don’t forget Warren Buffett’s wise advice, “The stock market is a device for transferring money from the impatient to the patient.”  Patience remains a cornerstone to our investment process here at The Center. We appreciate your continued trust.   If you have any questions or would like to discuss further, do not hesitate to reach out to us!

On behalf of everyone here at The Center,

Angela Palacios CFP®
Director of Investments
Financial Advisor

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.

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David Lebovitz and JP Morgan are not affliated with Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investing in emerging markets can be riskier than investing in well-established foreign markets. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk, and unique tax consequences. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

Don’t Lose Faith in Diversification

Contributed by: Jaclyn Jackson

As investors, we’ve always been taught that portfolio diversification is essentially for good portfolio performance.  Yet, we’ve experienced three consecutive years that have some of us second guessing that old adage.  Case and point, evaluating the broad bull market from March 2009-December 2012 and the mostly flat market from December 2012–September 2015, it is clear that sometimes diversified asset classes perform well and at other times they do not.  During the period of March 2009 through November 2012, diversification generally helped returns.  From December 2012 until August 2015 diversification away from any “core” asset classes generally hurt returns.

Source: PIMCO

Source: PIMCO

Core asset classes (top) reflect the overall positive direction of the most common markets during both periods. Comparatively, diversified asset classes (bottom) generally helped portfolio returns from 2009-2012 as indicated by the blue lines showing positive returns, but thereafter generally detracted from returns as indicated by the red bars with low to negative performance. Based on this data, it’s easy to consider using a core-only investment strategy without the frills (or frustrations) of diverse investments.  However, there is one key point that we can draw from the diversified asset graph; unlike core assets, diversified assets don’t move in tandem with the market.  Believe it or not, that’s actually what’s great about them.

Many people think diversification is meant to improve returns, but it would be useful to reframe that idea; diversification is meant to improve returns for the level of risks taken. In other words, diversified investments work to balance core investments during down or volatile markets.  Let’s look back at the market bottom of 2009.

The graph illustrates that a non-diversified (stock-only) portfolio lost almost double the amount of a diversified portfolio.  Moreover, the diversified portfolio bounced back to its pre-crisis value more than a year before the stock-only portfolio.  This type of resilience is especially important for retired investors that rely on income from their portfolios. 

Not only is portfolio diversification useful for people who’ve met investment goals, it is equally helpful to long-term investors.  For investors still working toward financial goals, portfolio diversification can help produce more consistent returns, thereby increasing the prospects of reaching those goals.  The diagram below ranks the best (higher) to worst (lower) performance of 10 asset classes from 1995-2014.  The black squares represent a diversified portfolio.

Source: SPAR, FactSet Research Systems Inc.

The black squares generally middle the diagram.  As evident, the range of returns for a diversified portfolio was more consistent than individual asset classes.  Returns with less variability are more reliable for setting long-term investment goals.

Admittedly, portfolio diversification over the last three years has made it difficult for many to stick with their investment strategy.  Yet, portfolio diversification still holds merit: it can help mitigate portfolio risk; it can boost portfolio resilience; and it can provide investors the consistency necessary to set and meet financial goals.

Jaclyn Jackson is a Research Associate at Center for Financial Planning, Inc.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Past performance is not a guarantee of future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

The historical performance of each index cited is provided to illustrate market trends; it does not represent the performance of a particular MFS® investment product. It is not possible to invest directly in an index. Index performance does not take into account fees and expenses. Past performance is no guarantee of future results. The investments you choose should correspond to your financial needs, goals, and risk tolerance. For assistance in determining your financial situation, consult an investment professional. For more information on any MFS product, including performance, please visit mfs.com. Investing in foreign and/or emerging market securities involves interest rate, currency exchange rate, economic, and political risks. These risks are magnified in emerging or developing markets as compared with domestic markets. Investing in small and/or mid-sized companies involves more risk than that customarily associated with investing in more-established companies. Bonds, if held to maturity, provide a fixed rate of return and a fixed principal value. Bond funds will fluctuate and, when redeemed, may be worth more or less than their original cost. Note that the diversified portfolio’s assets were rebalanced at the end of every quarter. Diversification does not guarantee a profit or protect against a loss. to maintain the equal allocations throughout the period. Standard deviation reflects a portfolio’s total return volatility, which is based on a minimum of 36 monthly returns. The larger the portfolio’s standard deviation, the greater the portfolio’s volatility. Investments in debt instruments may decline in value as the result of declines in the credit quality of the issuer, borrower, counterparty, or other entity responsible for payment, underlying collateral, or changes in economic, political, issuer-specific, or other conditions. Certain types of debt instruments can be more sensitive to these factors and therefore more volatile. In addition, debt instruments entail interest rate risk (as interest rates rise, prices usually fall), therefore the Fund’s share price may decline during rising rate environments as the underlying debt instruments in the portfolio adjust to the rise in rates. Funds that consist of debt instruments with longer durations are generally more sensitive to a rise in interest rates than those with shorter durations. At times, and particularly during periods of market turmoil, all or a large portion of segments of the market may not have an active trading market. As a result, it may be difficult to value these investments and it may not be possible to sell a particular investment or type of investment at any particular time or at an acceptable price. https://www.mfs.com/wps/FileServerServlet?articleId=templatedata/internet/file/data/sales_tools/mfsvp_20yrsb_fly&servletCommand=default

Investment Basics: Style Box Investing

Contributed by: Nicholas Boguth

Among the plethora of data points used to describe any security, there are two that are fundamental for a basic understanding of  stocks and bonds. For equities, the two pieces of data are market capitalization (size) and investment style (value/growth). For fixed income securities, the data points are interest rate sensitivity (duration) and credit quality.  These characteristics are important parts of every security’s risk/return profile, and are key in determining if and how an investment should fit in your portfolio.

In order to help investors easily identify these two key characteristics of securities, Morningstar created a useful tool – the style box. There is a separate box for equities and fixed income securities. The equity style box shows value to growth investment styles on the horizontal axis and small to large market caps on the vertical axis.  For fixed income, the horizontal axis shows limited to extensive interest rate sensitivity and the vertical axis shows low to high credit quality.

As investors, the first decision you have to make is to determine your capacity for risk. Once determined, you are able to choose investments that align with the level of risk you are willing to take.  Growth stocks typically carry more risk than value stocks, and small-cap stocks are usually riskier than large-cap.  Bonds can have limited to extensive interest rate risk based on duration (longer duration = more interest rate risk), and a bond with low credit quality is normally riskier than one with high credit quality.  Looking at the style box, this means that a security that falls in the bottom-right square will typically bear more risk (and hopefully opportunity for more return), and a security that falls in the top left box will typically have less risk. 

The style box is especially useful because not only does it indicate those fundamental data points of a single security, but you can plot all your investments on it to see the characteristics of your entire portfolio as well.   Not every individual security chosen for your portfolio has to match your exact risk profile.  In fact, when you build a portfolio, you may diversify and end up with securities that scatter all over the style box.  The suitability of investments refers to your portfolio as a whole, not individual investments, so it is acceptable to have some lower risk and some higher risk securities.  That being said, the style box does not operate on tic-tac-toe-like rules where a diversified portfolio is one with all of the boxes checked off.  It does not explain everything there is to know about a diversified portfolio, but it is a very useful tool that is essential to investment basics.

Nicholas Boguth is a Client Service Associate at Center for Financial Planning, Inc.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Diversification and asset allocation do not ensure a profit or protect against a loss. Investments mentioned may not be suitable for all investors. Past performance is not a guarantee of future results.

Fourth Quarter Investment Pulse

Contributed by: Angela Palacios, CFP®

During a very busy fourth quarter we spent some time reflecting and learning from respected experts in our industry.

October 15th Charles De Vaulx of IVA (International Value Advisors) visited our offices to participate in The Center’s first annual chili cook off.  While stopping by, Charles discussed his views on global markets and economies as well as the lack of buying opportunities out there yet. 

Charles De Vaulx, Chief Investment Officer and Portfolio Manager for IVA (International Value Advisors)

He debunked the argument by many that low interest rates justify higher price-to-earnings ratios.  He states rates are low because the world is imbalanced and de-leveraging hasn’t actually happened yet.  While many households have de-levered, governments have increased their leverage.  Debt has simply changed pockets but it is still all out there. 

Charles also argued that circumstances are very complex right now with low interest rates, countries devaluing currencies, and deflationary pressures despite the availability of low cost debt.  Even the sharpest minds are struggling knowing what to do right now. 

Some of their best decisions have simply been to stay out of trouble.  They still stand at nearly 40% in cash because they argue cash is what is needed to invest with the buy low/sell high mindset.

Mathew Murphy, Vice President and Global Fixed Income portfolio specialist for Eaton Vance

In December, Jaclyn Jackson listened to Mathew’s views on the global fixed income markets.  He stated the markets are anticipating the Federal Reserve Board (FED) to hike rates twice for a total of .5% increase in 2016. The FED wants to keep monetary policy loose and continue to increase the labor force. 

On inflation, the Fed is targeting is 2% PCU (Personal Consumption Expenditure Index) – which is very difficult to generate.  It is around 1.5% currently.  Fed is continuing to let the economy run hot because of this.  In the 1980s, the dollar was strong and by December 1985 OPEC pumped for market share in the oil markets (similar to today).  The Fed was concerned about strength in the dollar and lowering oil prices.  In 1985, in response the FED stopped hiking rates and inflation began to peak.  Today, Mathew believes the market is not pricing in interest rate hikes correctly; we are at risk of having more.   It is probable the Fed will have to move faster than the market anticipates. 

The credit story remains on a positive note here in the U.S.  Mathew doesn’t see a recession approaching, and he doesn’t think the credit cycle will turn over despite the issues in bond market liquidity in December.

Mark Peterson, Director Investment Strategy and Education from BlackRock on low returns and reaching for risk

Mark feels there is a lot of risk in portfolios today.  Low returns are a concern and causing money managers and individual investors to reach for returns and thus taking on more risk.  Low volatility for years lulled investors into a false sense of security. He favors municipal bonds as he believes they are still reasonably priced and offer tax advantages.  As a result, Mark feels high quality municipals should be a good buffer to stock market volatility.

He also argues traditional equity diversification does not help the way it has in the past; it doesn’t reduce volatility the same way because correlations between markets are so much higher than they were 15-20 years ago.  He suggests the way to combat these changes in your portfolio is to utilize low-volatility equities and alternative equity strategies like Long/short and global macro strategies.

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the professionals listed and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Raymond James is not affiliated with and does not endorse the opinions or services of Charles De Vaulx, Matthew Murphy, Mark Peterson, International Value Advisors, Eaton Vance, or BlackRock. Past performance is not a guarantee of future results. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investments mentioned may not be suitable for all investors. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Out of the Box Investing

Contributed by: Angela Palacios, CFP®

With volatility creeping back into stock and bond markets after a long reprieve since 2008, investors are wondering where they can find returns again that aren’t tied to traditional markets, or have very low correlations.  While there are even more investment options out there than there are stuffed animals on my daughter’s bed, not all are worth your time. Here at the Center we sift through thousands of different investment options and distill them down into options that are potentially worth your time.

Alternative investments, investments other than traditional, long-only assets like stocks, bonds or cash, take many different shapes and sizes for us.  Over the past 5 or 6 years most alternatives have been a difficult place to make money as any diversification away from the largest companies in the U.S. have produced challenging comparative returns. However, over longer periods of time diversification can pay off. 

Global Macro Tactical Managers

These types of managers can “go anywhere” in the world and buy whatever and wherever they find value.  They can go up and down the capital spectrum of a company buying the debt they issue or use their common stock. These managers can also hold other assets such as cash or gold when they see trouble on the horizon. 

Long/Short Strategies

These types of strategies are similar to “hedge funds” that garner a lot of headlines. They seek to purchase some company stock and own them for their potential upside return but then they can also sell another company’s stock short; selling stock you don’t own, to potentially make money if that stock price goes down. These types of strategies can do well (or poorly) in both up and down markets. Some managers are more aggressive and try to make bets on overall market directions while others try to take a market neutral strategy and provide more bond-like returns and risk.

Real Assets

Physical or tangible assets like commodities, metals, real estate, wine, art, coins, or baseball cards can fall in this category.  Be careful as to not confuse a hobby with investments.  The two can merge but specific knowledge and a lack of emotional attachment must be had by the investor.

Private Equity

Investing in promising private companies can be a source of excellent investor returns. An investor commits a certain amount of money (usually at least $250,000) to a manager for investing in private companies. The money is generally tied up, or illiquid, for 5-8 years. In the end the invested capital and returns are usually paid out after those private companies invested in are taken public or sold off to other private equity investors.  Private equity is generally only available to accredited investors, which the SEC defines as earned income that exceeds $200,000 per year ($300,000 for married couples) for the past 2 years; accredited investors are also expected to earn that same amount of money for the current year or have at least $1,000,000 net worth, exclusive of primary residence. Often private equity firms place even more stringent guidelines on their accredited investors requiring a net worth of $5,000,000 in order to buy in to a strategy.

There are many concerns in the alternative space that must be addressed.  So what makes an alternative investment viable to us and our clients?

Affordability

First and foremost an investment option must be affordable.  Costs can erode much of an investment return especially once inflation is factored in so affordability is of utmost importance. Leverage, using borrowed money to advance returns, can lead to higher costs. For example, coin collecting; a hobby many often try to pass off as investing, is actually very difficult to make money for the masses.  There is a large markup when purchasing coins from a dealer that it is rare to be able to turn around and sell these coins for a profit within reasonable amount of time. 

Liquidity

If you can’t get to your money when you need it, what’s the point?  Think about owning hard assets like real estate.  There can be many complications when trying to sell real estate, ranging from a lack of qualified buyers in an area or a property not meeting inspection requirements etc.  If you are trying to close up a deceased loved one’s estate and most of the assets are tied up in illiquid real estate but the government wants their estate tax payment, this can be a real concern!

Understandable

Often alternative strategies we run into are so difficult to understand how the manager is actually making money or applying an investment concept that it is un-investible to us.  Lack of transparency can also lead to a lack of understanding. Often these managers won’t want to give away their intellectual capital by disclosing what they own. If we cannot understand an investment, when it will do well and when it could underperform, we may risk losing conviction and selling at the wrong time.

Alternative investments should not take the place of all of your traditional investments but rather should be used to diversify your portfolio if appropriate. It’s important to keep in mind that many of these alternative investment strategies are quite young and have bloomed during a market environment that has not been kind to them. To determine which strategies are right for you please speak to your Financial Planner!

Angela Palacios, CFP® is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well as investment updates at The Center.

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http://www.sec.gov/investor/alerts/ib_accreditedinvestors.pdf This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investments mentioned may not be suitable for all investors. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. Past performance is not a guarantee of future results. Diversification and asset allocation do not ensure a profit or protect against a loss.