MANAGING THROUGH POLITICAL UNCERTAINTY

Transcription

1 MANAGING THROUGH POLITICAL UNCERTAINTY December 2011 EQUITY ASSET CLASS RETURNS FOR Q Q S&P 500 S&P Mid Cap S&P Small Cap MSCI EAFE MSCI EM -5 Total Return Source: FactSet Research Systems; Please see the end of this presentation for Important Index Information 2

2 THIS IS ALL THE POLITICIANS FAULT! Debt ceiling agreement o o Too little, too late May still come to nothing European policy pronouncements o o Trichet refused to backstop Italy and Spain Collapse in confidence in Euro banking system 3 EUROPE (YES EUROPE) TAKES ACTION! Greece gets a 30% write down of its debt and 130 billion bailout Recapitalization of banks (great start, but more needed) Increase the firepower of the European Financial Stability Facility (EFSF); problem -- who will buy the bonds? 4

3 POLITICAL GAMES VERSUS MARKET CREDIBILITY Source: FactSet Research Systems; Please see the end of this presentation for Important Index Information

4 HERE WE GO AGAIN Equity market rallies fail at 200-day moving averages Italian, Spanish & even French bonds are under severe pressure Draghi buying but not committing Super Committee fails WE NEED GROWTH, WILL CHINA DELIVER? China made some huge lending mistakes in 2009 and 2010 It has since clamped down on all lending -- good and bad -- and it is hurting Underlying driver of growth is still there: urbanization Historical parallel: 1980s US real estate bubble rather than 2000s US bubble

5 WE NEED GROWTH, WILL CHINA DELIVER? China M2 Year over Year % Sept 13% Source: ISI Group US & China Debt as a Percent of GDP Source: IMF and Credit Suisse estimates of provincial debt

6 LONG TERM STRATEGY: PRICE MATTERS! Source: RiverFront Investment Group, CRSP*; Past Performance is no Guarantee of Future Results BONDS ARE VERY, VERY EXPENSIVE Industrial Revolution Great Depression and WWII Current Level 2.0 Source: GMO LLC; Past Performance is no Guarantee of Future Results

7 FINANCIAL REPRESSION: BAD FOR BONDS, GOOD FOR STOCKS Source: CRSP and Riverfront LLC; Past Performance is no Guarantee of Future Results THE FIRST STEP: DIVERSIFY YOUR BOND PORTFOLIO High yield Foreign currencies and foreign bonds Low volatility stocks Problem: short term these asset classes are highly correlated to stocks! High-yield bonds, also known as junk bonds, are subject to greater risk of loss of principal and interest, including default risk, than higher-rated bonds. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability.

8 THE SECOND STEP: CORRECTLY DEFINE SAFETY What do people who retire really need? Income! WHICH IS ASSET CLASS IS BETTER FOR RETIREES? Annual Income (based to ) T bill Income S&P500 Dividends 10 Jan 62 Jan 65 Jan 68 Jan 71 Jan 74 Jan 77 Jan 80 Jan 83 Jan 86 Jan 89 Jan 92 Jan 95 Jan 98 Jan 01 Jan 04 Jan 07 Jan 10 Source: RiverFront Investment Group; Past performance is no guarantee of future results. Dividends are not guaranteed and are subject to change or elimination.

9 RIVERFRONT STRATEGY: Long term: Stocks over bonds High yield & dividends for income investors Tactically: Turmoil in Europe increases odds that the ECB keeps buying (policymakers are scared) But lack of concrete commitment keeps market on edge and volatility high Keep dry powder, react if summer lows hold Disclosures * Information on charts from CRSP: Calculated based on data from CRSP 1925 US Indices Database 2008 Center for Research in Security Prices (CRSP ), Graduate School of Business, The University of Chicago. Large Cap Universe used in the charts is defined by CRSP based on market capitalization. Used as a source for cap-based portfolio research appearing in publications, and by practitioners for benchmarking, the CRSP Cap-Based Portfolio Indices Product data tracks micro, small, mid- and large-cap stocks on monthly and quarterly frequencies. This product is used to track and analyze performance differentials between size-relative portfolios. CRSP ranks all NYSE companies by market capitalization and divides them into ten equally populated portfolios. Alternext and NASDAQ stocks are then placed into the deciles determined by the NYSE breakpoints, based on market capitalization. The series of 10 indices are identified as CRSP 1 through CRSP 10, where CRSP 10 has the largest population and smallest market-capitalization. CRSP portfolios 1-2 represent large cap stocks, portfolios 3-5 represent mid-caps and portfolios 6-10 represent small caps. There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. In a rising interest rate environment, the value of fixed-income securities generally declines. High-yield securities are subject to greater risk of loss of principal and interest, including default risk, than higher-rated securities. Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the potential for illiquid markets and political instability. RiverFront is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of Riverfront manages a variety of asset allocation portfolios utilizing stocks, bonds, and ETFs. The company also offers an ETF exclusive product and two institutional equity portfolios. 18

10 Important Index Information The S&P 500 Index measures the performance of 500 large cap stocks, which together represent about 75% of the total US equities market. The Standard & Poor s MidCap 400 Index measures the performance of about 400 companies, and represents about 7% of the US markets. The Standard & Poor s SmallCap 600 Index measures the performance of about 600 small cap companies and represents about 3% of the US equities markets. The MSCI EAFE Index measures the equity market performance of developed markets, excluding the US & Canada. The index consisted of indices from 22 developed markets. The MSCI Emerging Markets Index measures equity market performance of emerging markets. As of June 2009 the index consisted of 22 emerging market country indices. It is not possible to invest directly in and index. 19