INVESTMENT REVIEW AMBER CARDEN PRIVATE CLIENT ADVISOR CHARLES D SHEPHERD, CFA PORTFOLIO MANAGER

Transcription

1 INVESTMENT REVIEW PRESENTED TO: AUSTIN COMMUNITY FOUNDATION RELATIONSHIP AMBER CARDEN PRIVATE CLIENT ADVISOR DAVE ZEITZ PRIVATE CLIENT MANAGER CHARLES D SHEPHERD, CFA PORTFOLIO MANAGER JOHN J KELLEY, CFA MANAGING INVESTMENT DIRECTOR MARCH 31, 2017

2 PORTFOLIO STRATEGY AND ASSET ALLOCATION Overweight Equities We continue to expect equities to outperform fixed income. Equities should remain on a longerterm uptrend as U.S. and global expansions gradually continue. U.S. Equities Within equities, we maintain an overweight to U.S. large cap stocks for their high quality, stronger free cash flows and dividend growth. We are also overweight U.S. small caps, as we believe they will be beneficiaries of stronger U.S. growth. We favor a more cyclical and value-oriented portfolio theme. REITs Reclassification Historically, U.S. Trust s strategic asset allocation guidelines (SAAG) included Real Estate Investment Trusts (REITs) within the Real Estate asset category. Our Capital Market Assumptions (CMAs) also supported categorizing REIT securities as Real Estate. Effective in 2017, U.S. Trust SAAG is moving REIT securities from Real Estate to Equities. Emerging Markets International Developed We recommend a slight overweight in international developed equities with a preference for Japan. We acknowledge that Japan s economy has structural impediments to growth such as high debt levels and demographics. However, cyclically, growth there should accelerate on rising global activity, improving domestic demand and a weaker currency. The Bank of Japan s recent monetary policy stance of fading negative deposit rates and targeting the yield curve has been well received by investors. Along with monetary policy, fiscal policy will be supportive of growth. European equities can produce positive returns given that they are cheap, and earnings could surprise on the upside driven by margin expansion and top-line growth. However, we maintain a cautious stance given ongoing stress in the banking sector and a full political calendar over the next six months with crucial votes in Germany and France, and the start of formal negotiations following the triggering of Brexit in the first quarter. Source: GWIM Investment Strategy Committee as of April 11, ARHRW97L TACTICAL SHIFTS December 2016: We shifted to an overweight in equities. Within equities we raised U.S. small caps to overweight. We remain overweight emerging market equities. While emerging market equities continue to face a range of challenges, including low commodity prices, gradual normalization of Federal Reserve interest rate policy, and the structural downshift in China s growth rate, we believe they will benefit from improving economic growth and attractive valuations. TACTICAL SHIFTS March 2017: We shifted to a slight overweight position in international developed equities. Neutral Commodities We are neutral commodities. Commodity prices are likely range bound in the near term, weighed down by global economic policy uncertainty but held up by stable global cyclical momentum. We think oil prices will finish 2017 in the $50 $70 dollar range. Hedge Funds We are neutral hedge funds. We see the environment for active management, and hence hedge funds, improving in 2017 and continue to recommend a diversified approach when investing in this heterogeneous asset class. We have upgraded our view on global equity from neutral to moderately positive. Private Equity We are neutral private equity. The combination of high headline multiples, increased deal competition, and the large capital overhang creates an investment environment that requires a disciplined approach to allocating capital across private equity strategies. Currently, we see opportunities in special situation and private credit. We favor a steady commitment strategy and manager selectivity in diversified PE portfolios. Real Estate We remain neutral in real estate as an asset class. The U.S. commercial real estate (CRE) markets are in the mature phase of the current real estate cycle with continuing positive signs indicating that supply and demand for space are well balanced for most property types. CRE investors should look to current income returns with value growth now mostly driven by increases in rents and cash flow over time. Underweight Fixed Income Slightly short duration is warranted, balancing higher short-term rates in the U.S. and with overwhelming demand for fixed income globally. We continue to prefer credit over Treasuries, with an emphasis on investment-grade corporates, particularly banks, and municipals. TACTICAL SHIFTS December 2016: We have moved further underweight fixed income. Some allocation to Treasuries for liquidity and relative safety; an underweight positioning for corporate high-yield (HY) and an allocation to leveraged loans within HY is advised. Given U.S. dollar strength, we are avoiding non dollar sovereign bonds. We recommend active management more generally to improve potential risk-adjusted returns and a barbell strategy of owning bonds with both longer and shorter maturities should perform better than a bulleted strategy in a rising-yield environment. 3

3 ASSET ALLOCATION VS. TARGET As of March 31, 2017 AUSTIN COMMUNITY FOUNDATION BALANCED PORTFOLIO INVESTMENT OBJECTIVE : BALANCED Current Asset Allocation (%) Target Asset Allocation (%) CURRENT ALLOCATION ASSET ALLOCATION RANGE TARGET ALLOCATION DIFFERENCE ASSET CLASS MARKET VALUE % OF PORTFOLIO IPS RANGE MARKET VALUE TARGET MARKET VALUE % OF PORTFOLIO CASH/CURRENCY $367, % 0% % $151, % ($215,582) -2.8% EQUITIES $4,253, % 30.0% % $3,409, % ($843,274) -11.1% FIXED INCOME $2,957, % 27.0% % $3,182, % $225, % REAL ESTATE $0 0.0% 0% % $681, % $681, % TANGIBLE ASSETS $0 0.0% 0% - 7.0% $151, % $151, % TOTAL PORTFOLIO $7,577, % $7,577, % Due to rounding, percentages presented may not add up precisely to the totals provided. Negative values will not be shown in the chart. 5

4 INVESTMENT PERFORMANCE As of March 31, 2017 AUSTIN COMMUNITY FOUNDATION BALANCED PORTFOLIO ASSET CATEGORY MARKET VALUE ALLOCATION YTD % 1 YR % 3 YRS % 5 YRS % SINCE INCEPTION % (01/01/03) Cash/Currency $367, % Day TBill Equities $4,250, % MSCI ACWI (Net) S&P 500 TR Fixed Income $2,944, % BBG BARC Govt/Credit Int Total Portfolio $7,562, % Total Portfolio - Net of Fees 60% MSCI ACWI, 40% BC Int Gov/Cred $7,562, % Past Performance is no guarantee of future results. All returns are gross of fees unless otherwise noted. For periods longer than one year, the return is annualized. Periods less than one year utilize a cumulative return. Returns may include a partial month. Benchmark performance returns for the Since Inception period are based on the inception date of the sector or the account under which they are displayed. Market value does not include accrued income, but is included in the return calculation. * Asset segment started after Total Portfolio inception. "Since Inception" return is calculated from the asset segment inception date. 6

5 DISCLOSURES AND DEFINITIONS FTSE NAREIT All REITs Index is a market capitalization-weighted index that and includes all tax-qualified real estate investment trusts (REITs) that are listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market List. The FTSE NAREIT All REITs Index is not free float adjusted, and constituents are not required to meet minimum size and liquidity criteria. HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry. IA SBBI US 30 Day TBill TR USD & BAML U.S. Treasury Bills 3 months Index is the U.S. Treasury Bill index, data from The Wall Street Journal are used for 1977-Present; the CRSP U.S. Government Bond File is the source from 1926 to Each month a one-bill portfolio containing the shortest-term bill having not less than one month to maturity is constructed. (The bill's original term to maturity is not relevant.) MSCI Daily Net World Ex USA USD Total Return Index captures large and mid cap representation across 22 of 23 Developed Markets countries excluding the United States. The index covers approximately 85% of the free float-adjusted market capitalization in each country. MSCI Emerging Markets (MSCI EM) Total Return Net USD Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI Emerging Markets Index consists of emerging markets in Europe, Latin America, and the Pacific Basin. MSCI Europe, Australasia, Far East (MSCI EAFE) Total Return Net USD Index is a capitalization-weighted index that tracks the total return of common stocks in developed-market countries within Europe, Australasia and the Far East. MSCI aims to include in its international indexes 85% of the free floatadjusted market capitalization in each industry group, within each country. MSCI US REIT Index is a free float-adjusted market capitalization index that is comprised of equity REITs. The index is based on MSCI USA Investable Market Index (IMI) its parent index which captures large, mid and small caps securities. It represents about 99% of the US REIT universe and securities are classified in the REIT sector according to the Global Industry Classification Standard (GICS ). It however excludes Mortgage REIT and selected Specialized REITs. Merrill Lynch Small Cap Research Private Equity/ Micro Cap Index is a customized proprietary market capitalization weighted index provided by Bank of America Merrill Lynch Global Research with security market capitalization ranging from $101 Million to $779 Million. Russell 1000 Total Return Index consists of the largest 1000 companies in the Russell 3000 Index. This index represents the universe of large capitalization stocks with a base value of as of December 31, Russell 2000 Total Return Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set. Russell Emerging Markets Total Return Index measures the performance of the investable securities in emerging countries globally. Russell Top 200 Total Return Index measures the performance of the largest cap segment of the U.S. equity universe. The Russell Top 200 Index is a subset of the Russell 3000 Index. It includes approximately 200 of the largest securities based on a combination of their market cap and current index membership and represents approximately 65% of the U.S. market. The Russell Top 200 Index is constructed to provide a comprehensive and unbiased barometer for this very large cap segment and is completely reconstituted annually to ensure new and growing equities are reflected. Russell Midcap Total Return Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000 Index. It includes approximately 800 securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 27% of the total market capitalization of the Russell 1000 companies. The Russell Midcap Index is constructed to provide a comprehensive and unbiased barometer for the mid-cap segment. The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true mid-cap opportunity set. Standard and Poor s 500 Total Return Index measures the performance of the large capitalization sector of the U.S. equity market and is considered one of the best representations of the domestic stock market. Utilizing a market-cap weighting structure, this index invests in 500 of the largest U.S. firms listed on the NYSE (including NYSE Arca and NYSE MKT) or the NASDAQ. Constituents are selected by S&P Dow Jones Indices and must have a 50% public float to be considered for inclusion in the benchmark Standard and Poor s Citi BMI EM Index captures all companies domiciled in the emerging markets within the S&P Global BMI with a float-adjusted market capitalization of at least USD 100 million and a minimum annual trading liquidity of USD 50 million. Standard and Poor s MidCap 400 Total Return seeks to track the performance of mid-cap U.S. equities. The index consists of 400 U.S. stocks that are listed on the NYSE or the NASDAQ. Constituents are selected by S&P Dow Jones Indices and must have an unadjusted market capitalization between $1.4 billion and $5.9 billion to be considered for addition to the benchmark. The index is weighted by market capitalization. Standard and Poor s GSCI is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully collateralized basis with full reinvestment. The combination of these attributes provides investors with a representative and realistic picture of realizable returns attainable in the commodities markets. Individual components qualify for inclusion in the S&P GSCI on the basis of liquidity and are weighted by their respective world production quantities. The principles behind the construction of the index are public and designed to allow easy and cost-efficient investment implementation. Standard and Poor s Small Cap 600 Total Return Index seeks to track the performance of small-cap segment of the U.S equity market. to track the performance of small-cap segment of the U.S equity market. The index consists of 600 US stocks that are listed on the NYSE or the NASDAQ. Constituents are selected by S&P Dow Jones Indices and must have an unadjusted market capitalization between $400 million and $1.8 billion to be considered for addition to the benchmark. The index is weighted by market capitalization. 50/50 NCREIF Property / NCREIF Transaction Based Index (i) Produced quarterly, the NCREIF Property Index (NPI) shows real estate performance returns using data submitted by its Data Contributing Members. The NPI is used as an industry benchmark to compare an investor s own returns against the industry average. (ii) The NCREIF Transaction-Based Index (TBI) is an index based on properties that were in the NCREIF Property Index and were sold that quarter. The index does not replace the NPI. It is a complementary index to the appraisal-based NPI. A transaction-based index is often considered to be more comparable to stock and bond indexes that are transaction-based.

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