QUARTERLY MARKET OUTLOOK THIRD QUARTER CLS-7/11/2017

Transcription

1 QUARTERLY MARKET OUTLOOK THIRD QUARTER 2017

2 Contents How did the markets perform? How did CLS portfolios perform? What is CLS thinking moving forward? What is CLS doing with portfolios? CLS Investment Themes CLS Monthly Perspectives

3 Summary Market Outlook Stocks: stay global We expect below-average returns from U.S. equities We expect better returns from international equities Bonds: be flexible Return expectations are also tempered Bonds still have a role, but investors need to be active with bond positioning CLS Investment Themes Global Value: emphasize securities with lower valuations than the overall market Smart Beta: emphasize smart beta ETFs Creative Diversification: active management of fixed income; use of alternatives CLS Resource: CLS Monthly Perspectives

4 Market Review: Performance Q Source: Morningstar Direct Performance as of 6/30/2017

5 What Worked in Q2 2017

6 What Didn t Work in Q2 2017

7 What Worked in 2017

8 What Didn t Work in 2017

9 Stocks: U.S. Earnings Growth Reported earnings were negative for most of 2016, but the data is improving Earnings are forecasted to grow at an increasingly faster pace throughout 2017 S&P 500 Earnings Growth Monthly Data 3/31/1927 to 5/31/2017 Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to

10 Stocks: Emerging Markets Earnings Growth Emerging market earnings growth is really starting to pick up momentum It recently crossed 5% which has historically been positive for market performance Y/Y Earnings Growth: % Gain/Annum % of Time Emerging Markets Year-Over-Year Earnings Growth Monthly Data 4/30/1997 to 5/31/2017 Above 20% Between 5% and 20% Between -20% and 5% % and Below Copyright 2017 Ned Davis Research, Inc. Further distribution prohibited without permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to

11 Domestic Stocks: Not on Sale The U.S. market is at high relative valuations as compared to most international markets Currently expensive, trading at a premium of 17% to the world

12 Stock Market Outlook: CLS Forecast Return expectations based on risk premium, valuations, technical, and various adjustments Expected returns for international markets are 2-7% higher than those for the U.S. CLS Scores for Broad Asset Classes Chart Source: Morningstar, Bloomberg, Ned Davis Research, Affiliates, and MSCI, as of 5/31/2017 For a complete explanation of the CLS Score, please see page 70 of this Reference Guide.

13 Top Three Investment Concerns at CLS U.S. Stock Market Valuations Still at elevated relative levels Relative valuation levels usually means to expect below-average U.S. market returns CLS emphasizes international equities Global Debt Levels Historically high levels, which are still rising High debt levels have been associated with lower overall economic growth CLS emphasizes emerging market equities, which tend to have higher growth and lower debt levels Investor Expectations and Emotions Increased volatility and potentially below-average domestic returns This increases the need for financial advisors and money managers to set realistic expectations and coach investors through difficult times CLS emphasizes the importance of staying balanced and globally diversified

14 CLS Investment Themes Global Value Smart Beta Creative Diversification

15 CLS Investment Themes: Global Value We currently favor value stocks more than growth stocks. In a global economic environment that is improving, value stocks generally perform better. Global Value

16 CLS Investment Themes: Global Value Emerging markets are on sale and are currently trading at a significant discount to the world Within the U.S., valuations for financials look relatively attractive

17 CLS Investment Themes: Smart Beta Smart Beta CLS emphasizes factor-based ETFs, known as smart beta ETFs Smart beta ETFs have a rules-based approach to building a portfolio, which emphasizes a factor, such as value, dividend yield, or high quality. Smart beta captures the essence of active management, but at a fraction of the cost.

18 7 Key Factors of Smart Beta An important subset of smart beta is factors, which are broad, persistent drivers of risk and return. The seven factors CLS tends to emphasize are:

19 Factors Work - Equity Strong bias toward positive relative returns Even stronger bias when factors are equal weighted Strongest bias when stock market is down Excess Returns vs. MSCI ACWI Source: Morningstar Direct as of 5/31/2017. MSCI All Country World Factor Indexes relative to the MSCI All Country World Index (Gross Returns).

20 Factors Work - Fixed Income Cyclicality of returns is apparent like with equity factors Strong bias toward positive relative returns Even stronger bias when factors are equal-weighted Excess Returns vs. Cash Source: Morningstar Direct as of 5/31/2017. IA SBBI US LT Govt TR USD Index and BofAML US HY Master II TR USD Index relative to the BBgBarc US Treasury Bill 1-3 Mon TR USD Index.

21 CLS Investment Themes: Creative Diversification Creative Diversification CLS applies creative diversification by utilizing investments that are not correlated to stocks and bonds in order to offset equitydominated portfolios This theme focuses on actively-managed bond, liquid alternative (managed futures), and actively-managed commodity exposure

22 CLS Investment Themes: Creative Diversification How does CLS creatively diversify fixed income? CLS uses actively-managed ETFs, selects attractively-valued fixed income sectors, and manages factor sensitivities What does CLS consider alternatives?

23 CLS Monthly Perspectives: Investment Continuums Within our Risk-Budgeted strategies, the CLS Investment Team actively adjusts exposure to these ten continuums below and other areas of the market. as of 5/31/2017 for our most recent continuums download out Monthly Perspectives piece at CLSinvest.com/monthlyperspectives *The active weights shown are versus a blended index composed of 60% equity and 40% international equity

24 CLS Monthly Perspectives: Investment Continuums Commentary as of 5/31/2017 for our most recent continuums download out Monthly Perspectives piece at CLSinvest.com/monthlyperspectives

25 CLS Monthly Perspectives: Investment Continuums Commentary as of 5/31/2017 for our most recent continuums download out Monthly Perspectives piece at CLSinvest.com/monthlyperspectives

26 CLS Monthly Perspectives: Equity Sector Outlook 1 Sector performance relative to the broad domestic market (as measured by the Russell 3000 Index) measured over 3- and 12-month periods. Outperforming sectors are marked with a (+), underperforming sectors are marked with a ( ). 2 Weightings are as of 5/31/17 and are based on current allocations to CLS s proprietary funds relative to the broad domestic market (Russell 3000 Index). 3 Relative valuation uses a sector price multiple composite (equal weighted average of P/E, P/B, P/CF, P/S and P/D for Morningstar Sectors relative to the Russell 3000 Index) as of 5/31/2017 compared to the historical monthly composite measures since the year We rank the current measures as a percentile of their historic ranges and deem a sector overvalued if 75th or higher percentile ( ), fairly valued between 26th and 74th percentiles (=), and undervalued if 25th percentile or below (+). For our most recent equity sector outlook, download our Monthly Perspectives piece at CLSinvest.com/monthlyperspectives

27 CLS Monthly Perspectives: Fixed Income Sector Outlook 1 Sector performance relative to the broad domestic market (as measured by the Russell 3000 Index) measured over 3- and 12-month periods. Outperforming sectors are marked with a (+), underperforming sectors are marked with a ( ). 2 Weightings and performance are as of 5/31/17 and are based on current allocations to CLS s proprietary funds versus an internal asset allocation benchmark (Neutral View Portfolio). The benchmark includes 45% Barclays Capital Aggregate Bond, 15% Barclays Capital High Yield, 10% 30-Day U.S. Treasury Bill, 10% Barclays Capital TIPs, 10% International Barclays Capital Global Treasury Ex-U.S. Capped, 10% Barclays Capital Emerging Market Bonds. 3 Relative valuation uses 10-year muni ratio for municipal bonds, 10 year breakeven rate for TIPS, current yield for Treasuries, and option adjusted spread for the other segments as of the end of the reporting month compared to the historical levels going back 10 years. We rank the current measures as a percentile of their historic ranges and deem a sector overvalued if 75th or higher percentile ( ), fairly valued between 26th and 74th percentiles (=), and undervalued if 25 th percentile or below (+). For our most recent fixed income sector outlook, download our Monthly Perspectives piece at CLSinvest.com/monthlyperspectives

28 About CLS Founded: 1989 Corporate Headquarters: Omaha, NE Assets Under Management: $7.5B Employees: 80+ Active Broker-Dealer Partners: 400+ Approved CLS Advisors: 2,700+ CLS Investors: 35,000+ (institutional investors include several state 529 plans and several prominent university endowment funds) Portfolio Managers & Analysts: 12 Portfolio Management Credentials: 6 Chartered Financial Analyst (CFA ) Holders 1 Chartered Market Technician (CMT ) 1 Certified Investment Management Analyst (CIMA ) 1 Chartered Alternative Investment Analyst (CAIA) Industry Veterans: Experienced team from Fidelity Management & Research, Goldman Sachs, Russell Investments, E*Trade, Charles Schwab, and TD Ameritrade

29 Awards and Accolades 2016 wealthmanagement.com ETF Strategist of the Year Winner* 2017 Finalist for wealthmanagement.com ETF Strategist of the Year* 3-Time Finalist for ETF.com ETF Strategist of the Year* Social Media: Over 2,000 followers across platforms Rusty Vanneman, CFA, CMT: One of the 2017 Top Ten Portfolio Managers to Watch by Money Management Executive* Paula Wieck, CFA: Money Management Executive s 2017 Top 10 Women in Asset Management Award* CLS is Among the Top 10 shareholders in 56 ETFs We Eat Our Own Cooking: 100% of CLS Portfolio Managers on the AdvisorOne management team own shares (industry average for asset managers is 44%) Investment Team bonuses are performance based versus benchmarks and peer groups over one- and three-year time frames *PLEASE REFERENCE SLIDES 37 & 38 for AWARD INFORMATION

30 Additional Management Options & Partnerships *CLS partners with many other variable annuity providers, qualified retirement plans, broker-dealers, and more. Ask a sales representative for more information.

31 Subscribe to Market Commentary To receive the CLS Monthly Perspectives, Quarterly Market Outlook and more, visit clsinvest.com/ -subscriptions

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35 Disclosures The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change. No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed here and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.

36 Disclosures The Russell 3000 Index is an unmanaged index considered representative of the U.S. stock market. The index is composed of the 3,000 largest U.S. stocks. The S&P 500 Index is an unmanaged composite of 500-large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. The Russell 2000 is an index comprised of the 2,000 smallest companies on the Russell 3000 list and offers investors access to small cap companies. It is a widely recognized indicator of small capitalization company performance. The MSCI All-Countries World Index, excluding U.S. (ACWI ex US) is an index considered representative of stock markets of developed and emerging markets, excluding those of the US. The MSCI EAFE Index is a composite index which tracks performance of international equity securities in 21 developed countries in Europe, Australia, Asia, and the Far East. The MSCI Emerging Markets Index is a composite index which tracks performance of large and mid-cap firms across 21 countries classified as emerging market countries. The Barclay s Capital U.S. Aggregate Bond Index measures the performance of the total United States investment-grade bond market. The Barclay s Capital 1-3 Month U.S. Treasury Bill Index includes all publicly issued zerocoupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities and represents 20 commodities that are weighted to account for economic significant and market liquidity. An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general. You cannot invest directly in an index. The graphs and charts contained in this work are for informational purposes only. No graph or chart should be regarded as a guide to investing.

37 Award Disclosures Wealthmanagement.com & ETF.com Awards CLS Investments, LLC ( CLS ) was selected as a winner for WealthManagement.com s 2016 Industry Awards in the category, Asset Managers- ETF Strategist. The WealthManagement.com Industry Awards program is an unbiased, third-party organization seeking to recognize companies that support financial advisors. Nominations for the WealthManagement.com Industry Awards were based on a submission from the company describing how it helps financial advisors work with clients. The award goes to the company selected by a Judges Panel made up of ten industry professionals. Winners of the award for each category were announced September 29, WealthManagement.com is not affiliated with CLS. Ratings and awards may not be representative of any one client s experience and are not indicative of CLS s future performance. CLS Investments, LLC is a finalist for ETF.com s ETF Strategist of the Year ETF.com is an unbiased, third-party organization which specializes in providing resources on Exchange Traded Funds. ETF.com Award winners are selected in a three-part process. The process begins with open nominations where interested parties were invited to submit nominations. Self-nominations were accepted. Then the ETF.com Awards Nominating Committee made up of senior leaders at ETF.com and senior members of the FactSet ETF team voted for up to five finalists in each category. The winners are selected from these finalists by a majority vote of the ETF.com Awards Selection Committee, which is a group of independent ETF experts. Committee members recuse themselves from voting in any category in which their firm is named as finalist. ETF.com is not affiliated with CLS. Ratings and awards may not be representative of any one client s experience and are not indicative of CLS s future performance.

38 Award Disclosures Rusty Vanneman Money Management Executive Award CLS Investment, LLC ( CLS ) Chief Investment Officer, Rusty Vanneman, CFA, CMT, was selected as a Top 10 Fund Managers to Watch in 2017 by Money Management Executive. Money Management Executive is an unbiased, third-[arty publication covering the asset management industry. Money Management Executive chose the list of managers to watch by screening Morningstar data from funds with a single manager, ranked as having the best three-year annualized returns in their respective categories. The list of managers was published March 27, Money Management Executive is not affiliated with CLS. Ratings and awards may not be representative of any one client s experience and are not indicative of CLS s future performance. Paula Wieck Money Management Executive Award CLS Investments, LLC ( CLS ) Portfolio Manager, Paula Wieck, CFA, was included in a Top Women in Asset Management in 2017 selected by Money Management Executive. Money Management Executive is an unbiased, third-party publication covering the asset management industry. Money Management Executive editors chose the list of women from nominations that discussed their roles at their asset management company, as well as any community service programs in which they may be involved. The list of managers was published May 1, Money Management Executive is not affiliated with CLS. Ratings and awards may not be representative of any one client s experience and are not indicative of CLS s future performance.