first quarter 2016 - alsworth capital · 2016-05-02 · managed futures funds helped to cushion the...
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Market & Portfolio Strategy Review
First Quarter 2016
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� Market Review
� Investment Outlook & Portfolio Positioning
Agenda
2
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Market Review
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� It was a tale of two halves in the first quarter of
the year as stock markets plunged early on, falling
10% or more before reversing, and staging a
furious rally into quarter end.
� Emerging-markets stocks led the charge, gaining
5.9% for the quarter. Larger-cap U.S. stocks also
finished in the black, up 1.3% while developed
international stocks trailed, down 1.9%.
� A bottoming in oil prices seemed to trigger the
reversal in global stock markets. After reaching its
lowest price since May 2003, oil prices surged
more than 50% through the middle of March.
� Bonds were a main beneficiary of the market
selloff as investors flocked to lower risk asset
classes, but somewhat surprisingly bonds were
able to hold their gains even as risk assets rallied.
� Monetary policy was an important factor this
quarter as investors digested announcements
from the Fed, European Central Bank, and Bank of
Japan.
*Data source information can be found in the disclosure slide
Market Review
4
Asset Class Q1 2016Year-to-Date
(3/31/16)
U.S. Treasurys 3.2% 3.2%
U.S. Investment-Grade Bonds
(Intermediate-Term)3.1% 3.1%
Municipal Bonds 1.7% 1.7%
Floating-Rate Loans 1.5% 1.5%
High-Yield Bonds 3.2% 3.2%
U.S. Larger-Cap Stocks 1.3% 1.3%
U.S. Smaller-Cap Stocks -1.5% -1.5%
Developed International
Stocks-1.9% -1.9%
Emerging-Markets Stocks 5.9% 5.9%
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Stock Markets Got Off to One of Their Worst Starts to a Year Ever Before Reversing
and Rallying Strongly Into Quarter End
5
Source: Morningstar Direct. Using price and U.S. dollar returns.
� The major global stock markets got off to a rocky start for 2016, falling 10% or more through the lows of
February.
� In mid-February, global stock markets reversed quickly and rallied sharply into quarter end. The rally was led by
a strong turnaround in emerging-markets stocks.
-10.3%-12.2% -10.9%
+12.9% +11.8%
+18.8%
-20.0%
-10.0%
0.0%
10.0%
20.0%
U.S. Stocks Developed Int'l Stocks Emerging-Markets Stocks
A Tale of Two Halves
1/1/16 - 2/11/16 2/12/16 - 3/31/16
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A Bottoming in Oil Prices Seemed to Trigger the Reversal in Global Stocks
6
Source: Morningstar Direct. Using price and U.S. dollar returns. Data as of 3/31/2016.
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Managed Futures Funds Helped to Cushion the Selloff in Stocks
7
Source: Morningstar Direct. Using price and U.S. dollar returns.
� Our position in managed futures helped to buffer the downdraft, as the funds were up more than 10% during
the first half of the quarter.
� While the managed futures funds gave up some return as the markets reversed and rallied, in aggregate they
still outperformed U.S. stocks over the full quarter.
� Trend-following strategies have historically offered attractive diversification benefits (almost zero long-term
correlation) to traditional portfolios, with long-term positive returns and a high likelihood of strong relative
performance during equity bear markets.
-10.3%
10.7% 11.2%14.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
U.S. Larger-Cap
Stocks
AQR Managed
Futures
ASG Managed
Futures
PIMCO
Managed
Futures
Returns 1/1/16 – 2/11/16
1.4%
0.2%
6.3%7.0%
0.0%
2.0%
4.0%
6.0%
8.0%
U.S. Larger-Cap
Stocks
AQR Managed
Futures
ASG Managed
Futures
PIMCO Managed
Futures
Returns 1/1/16 - 3/31/2016
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Pension Consulting Alliance, Inc. – Risk Overview
8
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Pension Consulting Alliance, Inc. – Risk Overview
9
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Investment Outlook and Portfolio Positioning
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Outlook: Unchanged
� U.S. Equities: Risk
� Profit margins are well above historical averages and unsustainable
� Stocks are pricey and most likely expected returns from current valuation levels are not encouraging
� Rising interest rates: Risk
� Low returns expected for core bonds over the next five years
� Absolute-return-oriented fixed-income funds can better manage their interest rate sensitivity
� International Equities: Opportunity
� Attractive stock valuations despite recent elevated uncertainty
� Probability is high that market earnings growth will be higher than current depressed levels indicate
� Alternative Strategies: Opportunity
� Better risk-adjusted return potential in volatile equity and bond markets
� Diversification and a source of return independent from traditional stock and bond markets
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The U.S. Economy Appears in Decent Shape, But Growth Remains Subpar Relative
to Previous Expansions
12
Source: Bureau of Economic Analysis. Data as of 12/31/2015.
95
105
115
125
135
145
155
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41
Current Expansion vs. Last Seven Expansions
Real GDP
Current Expansion
1961 Expansion
1970 Expansion
1975 Expansion
1980 Expansion
1982 Expansion
1991 Expansion
2001 Expansion
Quarters After Recession Ends
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Household Balanced Sheets are Solid and Consumers Have Reduced Their Debt
Load Considerably Since the Financial Crisis
13
Source: Board of Governors of the Federal Reserve System. Data as of 12/31/2015.
8%
10%
12%
14%
16%
18%
1980 1985 1990 1995 2000 2005 2010 2015
Financial Obligations Ratio Household Debt Service Ratio
30%
50%
70%
90%
110%
130%
1952 1962 1972 1982 1992 2002 2012
Household Debt as a % of Disposable Personal Income
138.2%
104.7%
� Household debt as a percentage of disposable income fell to its lowest level since 2002, while household net
worth hit an all-time high of $87 trillion – 25% above its previous high before the financial crisis.
� Thanks in part to all-time low interest rates, household debt-service payments and financial obligations as a
percentage of disposable income remain around all-time lows.
� Consumers are conservatively positioned and have the ability to increase their spending and/or borrowing if
they choose to do so.
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The Labor Market Continues to Improve
14
Source: Board of Governors of the Federal Reserve System. Data as of 12/31/2015.
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Inflation is Rising But Still Below the Fed’s Preferred Levels
15
Source: U.S. Bureau of Economic Analysis. Data as of 2/29/2016.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1995 2000 2005 2010 2015
Core PCE Core CPI
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Shrinking Profit Margins Are Pressuring Earnings Growth – And Potentially Stock Prices
16
Source: Robert J. Shiller and Standard & Poor’s. Data as of 12/31/2015.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
1973 1978 1983 1988 1993 1998 2003 2008 2013
Ne
t M
arg
ins
S&P 500 Net Margins Average Net Margins
Historically, very high profit margins have been followed by sharp
declines in company profitability.
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Earnings and Revenue Growth Were Disappointing in 2015
17
Source: S&P Dow Jones Indices. *Estimates. Data as of 4/12/2016.
Consensus estimates are for earnings and sales growth to
jump 28% and 3.5% next year. This seems overly optimistic
given low economic growth and declining profit margins.
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Accommodative Monetary Policy and a Weaker Currency Should Provide Support for the
European Economy
18
0.80
1.00
1.20
1.40
1.60
2000 2005 2010 2015
EU
R/U
SD
The Euro-U.S. Dollar Exchange Rate
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016
10-Year Government Bond Yields
United States
France
Germany
Switzerland
� The European economy continues to deal with a number of challenges, but rock bottom interest rates,
a cheaper currency, and low oil prices should provide support in the near term.
� In addition, the ECB expanded their QE program to include buying debt issued by non-bank
corporations – which reduced corporate borrowing costs and should provide a small short-term boost
to the economy.
Source: Bloomberg. Data as of 3/31/2016.
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Valuations for European Stocks are Attractive, Both in Absolute
Terms and Relative to U.S. Stocks
19
Source: BCA Research and Thomson Reuters. Data as of 3/31/2016.
— Euro Area Shiller P/E Ratio ---- U.S. Shiller P/E Ratio
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Economic Data in Emerging Markets has Modestly Improved
20
— Manufacturing PMI: Emerging Markets ---- Manufacturing PMI: Developed Markets
Source: BCA Research Markit Economics. Data as of 3/31/2016.
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Emerging-Markets Stocks are Trading at Attractive Valuations vs. U.S. Stocks
21
Source: BCA Research and Thomson Reuters, OECO Main Indicators. Data as of 3/31/2016.
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Expect Future Returns of Stocks and Bonds to be Lower than
Experienced Historically
22
1 Projections under our base case, subpar economic scenario as of 3/31/2016.
2 As measured by the Barclays Capital U.S. Aggregate Bond Index.
9.9%
6.6%
4.1%
1.1%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
S&P 500 Investment-Grade Bonds
Historical Returns
(4/1/1986-3/31/2016)
5-Year Projected Annualized Returns
1 2
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Current Portfolio Positioning and Rationale
23
Asset ClassPortfolio Position vs.
Strategic AllocationComments
Fixed-Income:
Traditional Investment-GradeUnderallocated
Low expected returns but important for risk reduction, especially in
deflationary or weak economy
Absolute-Return-OrientedOverallocated
Flexible strategies that can perform well even with rising interest
rates
Floating-Rate Loans (defensive balanced,
conservative balanced, and balanced strategies)Overallocated Protection from rising interest rates with potential for higher returns
Equities:
Larger-Cap U.S. StocksUnderallocated Equities appear overvalued and potential returns low relative to risk
Smaller-Cap U.S. Stocks Underallocated Similar to large cap; more downside in poor economic conditions
Foreign Stocks – Developed MarketsOverallocated Attractive both in absolute terms and relative to U.S. stocks
Foreign Stock – Emerging-Markets Overallocated
Moderately attractive relative to U.S. on risk-adjusted basis; broader
opportunity set and diversification benefits
Alternative Investments:
Alternative Strategies (except Equity strategy)Overallocated Attractive risk-adjusted returns; low correlation to stocks and bonds
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Disclosures
24
Advisory services offered through Alsworth Capital Management, LLC, an
independent Registered Investment Advisory firm. Broker Dealer services
offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Alsworth
Capital Management, LLC and Cadaret, Grant & Co. are separate entities.
Projections and opinions in this presentation are attributed solely to Shane
Alsworth and Alsworth Capital Management, LLC.
*Indexes Used (source Morningstar Direct)
• Domestic Investment-Grade Bonds (Barclays Capital U.S. Aggregate Bond Index): We are currently using the Vanguard Total Bond Market Index Fund
to represent the Barclays Capital U.S. Aggregate Bond Index, an index of domestic investment grade bonds.
• Domestic Larger-Cap Stocks (S&P 500 Index): We are currently using the Vanguard 500 Index Fund to represent the S&P 500, an index of primarily
domestic larger-cap stocks.
• Domestic Smaller-Cap Stocks (Russell 2000 Index): We are currently using the Russell 2000 Index iShares Exchange Traded Fund (ETF) to represent the
Russell 2000, an index of primarily domestic smaller-cap stocks.
• International Developed-Market Stocks (FTSE Developed Markets Index): We are currently using the Vanguard FTSE Developed Markets Index
Exchange Trade Fund (ETF) to represent an index of international developed-market stocks.
• International Emerging-Markets Stocks (FTSE Emerging Markets Index): We are currently using the Vanguard FTSE Emerging Markets Index Exchange
Traded Fund (ETF) to represent an index of emerging markets in international emerging market stocks.
• High-Yield Bonds (Merrill Lynch U.S. High Yield Master Cash Pay Index): We are currently using the Merrill Lynch U.S. High Yield Master Cash Pay
Index to represent an index of domestic high yield bonds.
• Floating-Rate Loans (S&P/LSTA Leveraged Loan Index): We are currently using the S&P/LSTA Leveraged Loan Index to represent an index of floating
rate loans.
• U.S. Treasurys (Barclays US Treasury Index): We are currently using Barclays US Treasury Index
• Municipal Bonds: We are currently using the Barclays Municipal Bond index for municipal bonds