Selective Opportunistic Portfolios December 20, 2016

Transcription

1 Selective Opportunistic Portfolios December 20, 2016 Prepared by Morningstar Investment Management LLC on behalf of TD Ameritrade Investment Management, LLC. Economic & Investment Outlook As the S&P 500 stands now, 2016 will be the eighth year of this US bull market. If you consider the total return delivered by S&P 500 since 1928, this will tie the second longest bull run by number of years, following the nine year run from 1991 to 1999 and matching the eight year run from 1982 to We must wait to see how 2017 shapes up, but it does appear that economic growth has strengthened more recently on the back of revised GDP growth and the tightening job market. We saw decent third quarter revenues and earnings growth from S&P 500 companies. And the Federal Open Market Committee reinforced these trends by raising the Fed Funds rate by 0.25 bps last week. All positive signs of an improving economic landscape. Before we dive in to the portfolio discussion, we thought it might be beneficial to touch on a few other key trends that developed over the course of the year: US equities are outperforming US bonds Value is beating growth, across all market cap ranges Small cap stocks have reversed last year s trend, currently beating large cap and mid cap stocks EM equities are outperforming international-developed equities, although both trail US equities Energy, financials, and telecoms have fared the best, while health care, consumer staples and consumer discretionary sectors have lagged EM bonds, high yield, and leverage loans were the bright spots among fixed income asset classes Investment grade credit has performed better than treasury bonds Commodities could post its first positive return since 2010 And investors continue to move money into low-cost passive index-based ETF and MF products This fourth quarter could turn out to be the best performing quarter since Q4 2015, as the S&P 500 index has returned 4.14% quarter-to-date, just outpacing last quarter s.1%. International equities had their only positive quarter of the year during Q, returning 5.80%, but have faltered this quarterto-date as the MSCI EAFE index has lost 1.94% through December 16th. The same can also be said for EM equities as the MSCI EM index has lost 5.21% quarter-to-date after gaining 8.2% last quarter. Arguably, much of this rotation can be derived from the results of the US election and the renewed faith in an improving US economy. Investors appear to be less concerned about valuations than the outlook for growth, given that many broad US equity benchmarks are trading near all-time highs. Also, the Shiller CAPE jumped to 28. this month, its highest mark since May 2002 (see chart below) Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. The information, data, analyses, and opinions stated herein are for informational purposes only and are not a recommendation to buy or sell a specific security, are as of the date published and are subject to change without notice. Morningstar Investment Management obtains data from sources it deems reliable; however, Morningstar Investment

2 Page 2 of 9 Within US sectors we ve seen diverging trends since the US election with Financial, Telecom, and Energy sector stocks all producing double-digits returns, while Consumer Staples and Utilities stocks have generated slightly negative returns. Health care, which was the worst performing sector (and still is year-to-date) prior to election, has seen a modest recovery as Trump has signaled new healthcare policy could be in the pipeline. While US equities have continued to rally, we ve seen US bond prices drop as treasury rates have moved higher. The 10-year rate alone has moved from 1.60% to 2.60%, a full percent, despite the 25 bps move by the Fed. The term spread, the difference between the 10-year treasury rate and the -month treasury rate, stood at 1.40% as of September 0th, compared to 2.14% on December 16th. This move illustrates the increased probability of future Fed Funds rate increases in 2017 and the market s attempt to price in future moves. The Bloomberg Barclay s US Aggregate Bond index has lost 4.05% since the end of Q and.18% since November 9th. While rates have had a negative impact on US investment-grade (IG) bonds, the risk/reward profile of taking on additional duration has become more attractive as the yield curve has steepened. We added some duration back to the portfolio this month given this development, a move discussed more below. While IG bonds have suffered, high yield (or below investment-grade) bonds have continued their strong performance through the election volatility, returning 16.44% year-to-date. Another trend affecting fixed income asset classes, more specifically emerging market (EM) debt, has been the sell-off in EM currencies since the US election. While EM bonds have been one of the strongest fixed income asset classes this year, the recent sell-off has improved the attractiveness of the investment opportunity once again, especially within the local currency universe. Exhibit 2 Cyclically Adjusted Schiller 10 Year Price / Earnings Ratio Price / Earnings Ratio CAPE Rolling Average CAPE Source: Morningstar Direct. Data as of 12/1/2016.

3 Page of 9 Portfolio Positioning Based on our December review, we continue to see strong equity momentum as identified by our Big Signal methodology. The two main drivers of our Big Signal methodology are momentum and valuation; as mentioned, we continue to see momentum hover at its upper bound. The Shiller CAPE stands at 28., which will keep the current valuation component compressed until we see a significant devaluation event occur. For now, we are maintaining our current equity overweight of 8%. We made some slight tweaks within our sector exposures, moving 1% from Consumer Staples to Financials as intra-asset class momentum has deteriorated for the more consumer defensive names. Emerging markets also continues to see improving intra-asset class momentum warranting a slight increase to its allocation. This move was sourced from Non-US REIT s as our valuationimplied returns and intra-asset class momentum both signal a negative trend. Overall, we maintained our broad US and Non-US equity weights with the overall equity overweight standing at 8%. This overweight is derived from a 2% overweight to US equities and a 6% overweight to Non-US equities, with 5% of that overweight focused on emerging market equities. The portfolios are underweight fixed income, but we continue to utilize a mix of defensive and opportunistic positions. Key defensive positions include allocations to leveraged loans and TIPS to help protect against interest rate changes and surprise inflation, respectively. Alternatively, allocations to emerging market bonds and US high yield serve as our opportunistic tilts. As mentioned above, the prospect of adding a bit of duration back to the portfolio has become more attractive given the move higher in rates and the steepening yield curve. As such, we elected to move % from short-term bonds back into core bonds (as measured by the US Aggregate bond index). Overall, the portfolio will maintain its lower than benchmark interest rate sensitivity which will still provide some downside protection as the Fed continues to normalize rates. Given the overweight to local currency emerging market debt, we should briefly touch on the postelection impact. Trump s more protectionist claims led to major sell-offs in EM currencies leading the JPMorgan GBI-EM Global Diversified USD index to pull back 6.88% since November 9th. This nearterm volatility in currencies doesn t change our investment thesis: primarily, real effective interest rates still appear attractive and secondarily, EM currencies are cheap, and now even cheaper, relative to the US dollar. We will continue to monitor this trend for structural changes that might cause us to adjust our thinking, but for now this remains a high conviction tilt. We don t have any exposure to developed non-us bonds as sovereign bonds in many countries continue their negative yield environments, a characteristic that will act as a headwind for near future. K

4 Page 4 of 9 Exhibit 2 Moderate Growth Opportunistic Portfolio Allocations (%) as of 12/20/2016 and are subject to change without notice. Review your account to determine which Selective Opportunistic Portfolio allocation applies to you. Short Term Tactical Position Relative to Long Term Strategic Target Ticker Asset Class / Sector ETF Used for Modeling Target +/ Previous Month Difference Underweight Target Overweight 10% H 10% XLY US Consumer Discretionary Consumer Discret Sel Sect SPDR ETF 0 - XLP US Consumer Staples Consumer Staples Select Sector SPDR ETF XLE US Energy Energy Select Sector SPDR ETF 0 XLF US Financial Financial Select Sector SPDR ETF 7 1 XLI US Industrial Industrial Select Sector SPDR ETF 2 0 XLV US Health Care Health Care Select Sector SPDR ETF 4 1 XLB US Materials Materials Select Sector SPDR ETF 2 0 XLK US Technology Technology Select Sector SPDR ETF 5 1 XLU US Utilities Utilities Select Sector SPDR ETF 0-1 VOT US Mid Cap Growth Vanguard Mid-Cap Growth ETF 1 VOE US Mid Cap Value Vanguard Mid-Cap Value ETF 5 1 VTWO US Small Cap Stocks Vanguard Russell 2000 ETF 0 - VBK US Small Cap Growth Vanguard Small-Cap Growth ETF 1 1 VBR US Small Cap Value Vanguard Small-Cap Value ETF 2 2 IWC US Micro Cap Stocks ishares Micro-Cap 0 0 EFA Non-US Large Stocks ishares MSCI EAFE 7-2 IQDF Non-US Large Stocks FlexShares Intl Qual Div ETF SCZ Non-US Small Stocks ishares MSCI EAFE Small-Cap 2 0 VWO Emerging Markets Equity Vanguard FTSE Emerging Markets ETF VNQ US Real Estate (REITs) Vanguard REIT ETF 1 0 WPS Non-US Real Estate ishares International Developed Property PSP Global Private Equity PowerShares Global Listed Private Eq ETF 0 0 EMB Emerging Mkts Bonds ishares JPMorgan USD Emerg Markets Bond 0-6 EMLC Emerging Mkts Bonds LC VanEck Vectors JP Morgan EM LC Bd ETF 8 8 BWX Non-US Bonds SPDR Barclays International Trs Bd ETF 0 - JNK High Yield Bonds SPDR Barclays High Yield Bond ETF 5-1 SNLN Leveraged Loans Highland/iBoxx Senior Loan ETF 5 5 BLV Long Term Bonds Vanguard Long-Term Bond ETF 1-2 BND US Agg Bonds Vanguard Total Bond Market ETF 15-6 TIP TIPS ishares TIPS Bond 0 BSV Short Term Bonds Vanguard Short-Term Bond ETF na Cash Equivalents TD Ameritrade FDIC Insured Deposit Account* 1 0 Total Equity Total Fixed Total 100 Prospectus Net Expense Ratio** 0.21 * Cash in a TD Ameritrade FDIC Insured Deposit Account is held at TD Bank, N.A. and TD Bank USA, N.A., affiliates of TD Ameritrade. Deposit accounts offered by participating institutions are eligible for Federal Deposit Insurance Corporation (FDIC) insurance up to $250,000. Limits are per account ownership per institution. Please monitor your entire deposit to ensure it does not exceed the coverage limit. To learn more about FDIC coverage go to ** The expense ratio is a measure of what it costs an investment company to operate an ETF. The weighted average expense ratio is the amount that shareholders pay annually for an ETF s expenses of the underlying funds based on the net expense ratio listed in each fund s prospectus. The cost may include management fees, 12b-1 fees, administrative costs and other various operational expenses. The cost is separate and apart from the Advisory fee.

5 Page 5 of 9 Exhibit Aggressive Opportunistic Portfolio Allocations (%) as of 12/20/2016 and are subject to change without notice. Review your account to determine which Selective Opportunistic Portfolio allocation applies to you. Short Term Tactical Position Relative to Long Term Strategic Target Ticker Asset Class / Sector ETF Used for Modeling Target +/ Previous Month Difference Underweight Target Overweight 10% H 10% XLY US Consumer Discretionary Consumer Discret Sel Sect SPDR ETF 2-4 XLP US Consumer Staples Consumer Staples Select Sector SPDR ETF XLE US Energy Energy Select Sector SPDR ETF 0 XLF US Financial Financial Select Sector SPDR ETF 9 1 XLI US Industrial Industrial Select Sector SPDR ETF 0 XLV US Health Care Health Care Select Sector SPDR ETF 7 1 XLB US Materials Materials Select Sector SPDR ETF 4 1 XLK US Technology Technology Select Sector SPDR ETF 10 1 XLU US Utilities Utilities Select Sector SPDR ETF 0-1 VOT US Mid Cap Growth Vanguard Mid-Cap Growth ETF 5 1 VOE US Mid Cap Value Vanguard Mid-Cap Value ETF 6 1 VTWO US Small Cap Stocks Vanguard Russell 2000 ETF 0-6 VBK US Small Cap Growth Vanguard Small-Cap Growth ETF 2 2 VBR US Small Cap Value Vanguard Small-Cap Value ETF 4 4 IWC US Micro Cap Stocks ishares Micro-Cap 1 0 EFA Non-US Large Stocks ishares MSCI EAFE 12-5 IQDF Non-US Large Stocks FlexShares Intl Qual Div ETF 5 5 SCZ Non-US Small Stocks ishares MSCI EAFE Small-Cap 4 0 VWO Emerging Markets Equity Vanguard FTSE Emerging Markets ETF VNQ US Real Estate (REITs) Vanguard REIT ETF 2-1 WPS Non-US Real Estate ishares International Developed Property PSP Global Private Equity PowerShares Global Listed Private Eq ETF 1 0 EMB Emerging Mkts Bonds ishares JPMorgan USD Emerg Markets Bond 0-2 EMLC Emerging Mkts Bonds LC VanEck Vectors JP Morgan EM LC Bd ETF 1 1 BWX Non-US Bonds SPDR Barclays International Trs Bd ETF 0 0 JNK High Yield Bonds SPDR Barclays High Yield Bond ETF 0-2 SNLN Leveraged Loans Highland/iBoxx Senior Loan ETF 0 0 BLV Long Term Bonds Vanguard Long-Term Bond ETF 0 0 BND US Agg Bonds Vanguard Total Bond Market ETF 0-5 TIP TIPS ishares TIPS Bond 0 0 BSV Short Term Bonds Vanguard Short-Term Bond ETF 0 0 na Cash Equivalents TD Ameritrade FDIC Insured Deposit Account* 1 0 Total Equity Total Fixed Total 100 Prospectus Net Expense Ratio** 0.21 * Cash in a TD Ameritrade FDIC Insured Deposit Account is held at TD Bank, N.A. and TD Bank USA, N.A., affiliates of TD Ameritrade. Deposit accounts offered by participating institutions are eligible for Federal Deposit Insurance Corporation (FDIC) insurance up to $250,000. Limits are per account ownership per institution. Please monitor your entire deposit to ensure it does not exceed the coverage limit. To learn more about FDIC coverage go to ** The expense ratio is a measure of what it costs an investment company to operate an ETF. The weighted average expense ratio is the amount that shareholders pay annually for an ETF s expenses of the underlying funds based on the net expense ratio listed in each fund s prospectus. The cost may include management fees, 12b-1 fees, administrative costs and other various operational expenses. The cost is separate and apart from the Advisory fee.

6 Page 6 of 9 Disclosures This report must only be used with existing TD Ameritrade clients enrolled in the Selective Portfolios service and may not be copied or distributed to prospective clients. As a TD Ameritrade Investment Management LLC client, be sure to carefully consider the underlying funds objectives, risks, charges, and expenses. For a prospectus containing this and other important information about each fund, contact a Portfolio Specialist at Please read the prospectus carefully. All investments involve risk, including loss of principle. Past performance does not guarantee future results. There is no assurance that the investment process will consistently lead to successful investing. Asset allocation and diversification do not eliminate the risk of experiencing investment losses. This document contains certain forward-looking statements such as expects, anticipates, believes, estimates, forecasts, and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason. ETFs can entail risks similar to direct stock ownership, including market, sector, or industry risks. Some ETFs may involve international risk, currency risk, commodity risk, and interest rate risk. Trading prices may not reflect the net asset value of the underlying securities. Advisory services provided by TD Ameritrade Investment Management, LLC ( TD Ameritrade Investment Management ), a registered investment advisor. Brokerage services provided by TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade Investment Management provides discretionary advisory services for a fee. Risks applicable to any portfolio are those associated with its underlying securities. For more information, please see the Disclosure Brochure (Form ADV Part 2A). TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank TD Ameritrade. Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. Morningstar Investment Management LLC provides consulting services to TD Ameritrade Investment Management LLC ( TD Ameritrade Investment Management ) by providing recommendations to TD Ameritrade Investment Management regarding asset allocation targets and selection of securities; however, TD Ameritrade Investment Management retains the discretion to accept, modify or reject Morningstar Investment Management LLC s recommendations. Morningstar Investment Management LLC selects securities from the universe of investments made available through TD Ameritrade. In performing its services, Morningstar Investment Management LLC may engage the services of its affiliate, Morningstar Investment Services LLC, a registered investment adviser and subsidiary of Morningstar Investment Management LLC. Neither Morningstar Investment Management LLC nor Morningstar Investment Services is acting in the capacity of advisor to TD Ameritrade Investment Management s clients. Asset Allocation target allocations are subject to change without notice. Morningstar Investment Management LLC establishes the allocations using its proprietary asset classifications. If alternative classification methods are used, the allocations may not meet the asset allocation targets. The Morningstar name and logo are registered marks of Morningstar, Inc. Morningstar Investment Management LLC is not affiliated with TD Ameritrade Investment Management or TD Ameritrade. Investment Products: TDA 270 S 12/22 ARE NOT FDIC INSURED ARE NOT BANK GUARANTEED MAY LOSE VALUE 2016 Morningstar Investment Management LLC. All Rights Reserved. The Morningstar name and logo are registered marks of Morningstar, Inc. Morningstar Investment Management LLC is a registered investment adviser and subsidiary of Morningstar, Inc. The information, data, analyses, and opinions stated herein are for informational purposes only and are not a recommendation to buy or sell a specific security, are as of the date published and are subject to change without notice. Morningstar Investment Management obtains data from sources it deems reliable; however, Morningstar Investment