Brexit and Market Implications Special Commentary & Webinar June 27, 2016 SR# 904360
Today s Speakers Envestnet PMC Zachary Karabell Head of Global Strategy, Envestnet As Head of Global Strategy, Mr. Karabell helps shape and communicate Envestnet's investment perspective and deep research capabilities to clients and the media alike and advises the Investment Committee of Envestnet PMC in connection with PMC's portfolio solutions. Brandon Thomas Chief Investment Officer, Envestnet PMC Mr. Thomas is responsible for all aspects of PMC's investment management and research capabilities. Primary among those responsibilities include the development of PMC's investment policy, implementation of the firm's investment management and research offerings, and the development of new investment products, including alternative investment strategies. Tim Clift Chief Investment Strategist, Envestnet PMC Mr. Clift is responsible for research and consulting services for the organization. He leads a team of analysts who are responsible for the selection and monitoring of investment managers and a team of consultants who support institutional and advisory clients. 2
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Brexit and Market Implications Special Commentary & Webinar For any technical difficulties, please contact: Madeline Smith: madeline.smith@envestnet.com Listen-only mode Q&A at the end 4
Special Commentary
Market Volatility Elevated, But Not Extreme CBOE S&P 500 Volatility Index (VIX) VIX Index The CBOE Volatility Index (VIX) is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500 Index option bid/ask quotes. 6
U.S. Stocks Continue to Outperform Domestic Stocks Still Favored as Int l Economies Struggle S&P 500 Index S&P 500/MSCI ACWI ex-us The S&P 500 Index is an unmanaged index comprised of 500 widely held securities considered to be representative of the stock market in general. The MSCI All Country World Index Ex-US Index is a market-capitalization-weighted index designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies, and includes both developed and emerging markets. 7
EM Performing Relatively Well after Brexit EM Rebounding in 2016 Following Long Period of Underperformance MSCI Emerging Markets Index MSCI EM/MSCI EAFE The MSCI EAFE Index is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. 8
U.K. Outperforming Europe Investors Seeing Brexit as a Positive for the U.K.? FTSE 100 Index FTSE 100/Euro Stoxx The FTSE 100 Index (FTSE 100) is a share index of the 100 companies listed on the London Stock Exchange (LSE) with the highest market capitalization. The Euro Stoxx Index is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within Eurozone nations. 9
Small Caps Outperforming YTD Larger, Liquid Issues Expected to Outperform During Uncertainty Russell 2000 Index R2000/R1000 The Russell 1000 Index is a market capitalization-weighted benchmark index made up of the 1000 largest U.S. companies in the Russell 3000 Index. The Russell 2000 Index is an unmanaged index considered representative of small-cap stocks. 10
Value Outperforming Growth YTD However, Stable Earnings Growers are Favored in Volatile Markets Russell 3000 Value Index R3000 Value/R3000 Growth The Russell 3000 Value Index is a market-capitalization weighted equity index based on the Russell 3000 Index and includes stocks from the Russell 3000 Index with lower price-to-book ratios and lower expected growth rates. The Russell 3000 Growth Index is a market capitalization weighted index based on the Russell 3000 index and includes companies that display signs of above average growth and is used to provide a gauge of the performance of growth stocks in the U.S. 11
Low Volatility Stocks Performing Well Low Vol/Low Beta Generally Outperform Over Time S&P 500 Low Volatility Index S&P 500 Low Vol/S&P 500 The S&P 500 Index is an unmanaged index comprised of 500 widely held securities considered to be representative of the stock market in general. The S&P 500 Low Volatility Index measures performance of the 100 least volatile stocks in the S&P 500. The index benchmarks low volatility or low variance strategies for the U.S. stock market. 12
Credit Spreads Remaining Stable Spreads Have Not Expanded Significantly as a Result of Brexit Barclays US Corp HY YTW 10-Yr Treasury Yield Spreads remain stable 13
Credits Holding Up Well Relative to Treasurys ishares 7-10 Year Treasury ETF (IEF) IEF/iShares iboxx Inv Grade Bond ETF 14
U.S. Yield Curve Flattening Demand for 10-Year Increasing as Investors Seek Safe Yield 10-Year Treasury Yield 10-Yr. 2-Yr. Spread 15
Other Safe Havens Not Offering Yield Germany, Japan Yields Are Now Negative Germany 10-Year Yield Japan 10-Year Yield 16
Domestic, Int l. Bonds Performing Together Globally Diversified Bond Exposure Warranted ishares Barclays US Agg Bond ETF (AGG) AGG/Vanguard Total Intl Bond ETF (BNDX) 17
Commodities Have Stabilized in 2016 Advances in Crude Oil, Gold Have Helped Performance Bloomberg Commodity Index (BCOM) BCOM/S&P 500 The S&P 500 Index is an unmanaged index comprised of 500 widely held securities considered to be representative of the stock market in general. The Bloomberg Commodity Index (formerly the Dow Jones-UBS Commodity Index) tracks prices of futures contracts on physical commodities on the commodity markets and is designed to minimize concentration in any one commodity or sector (currently 22 commodity futures in seven sectors). 18
REITs Continue to Benefit from Low Interest Rates FTSE NAREIT All Equity REITs Index NAREIT/S&P 500 The FTSE NAREIT All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. Equity REITs. Constituents of the Index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property. The S&P 500 Index is an unmanaged index comprised of 500 widely held securities considered to be representative of the stock market in general. 19
Summary No Need to Re-Orient Allocation as a Result of Brexit Brexit not causing significant reversals in established performance trends. Equities: U.S. equities likely to continue to be favored over international stocks. Emerging markets have performed well relative to developed markets. Domestically: Large and liquid tends to outperform small and illiquid during market dislocations. Value performing well relative to growth YTD, however, investors may seek out the safety of sustainable earnings growers during volatile periods. Stocks exhibiting low volatility tend to perform well over time, and especially so in times of uncertainty. Fixed Income: Credit spreads remain stable; no extreme flight to quality. Global fixed income diversification warranted. Commodities, REITS performing well. Overall, diversification remains essential. 20
Diversification Change in Market Leadership Index 2015 2016 YTD* S&P 500 1.4% 0.8% Russell 1000 0.9% 0.7% DJ Industrial Average 0.2% 1.2% Barclays US Agg 0.6% 4.7% Russell 2000-4.4% 0.0% Barclays US Corp.HY -4.5% 8.9% HFRX Absolute Return 2.9% 0.0% MSCI EM -14.9% 2.5% MSCI EAFE -0.8% -6.9% Source: Bloomberg *Data through 6/23/16 21
Diversification Higher returns, lower risk for the long-term Diversification is intended to smooth out unsystematic risk in a portfolio so that the positive performance of some investments will help offset the negative performance of others. We experience this phenomenon every year. Source: Morningstar Direct index returns. Please refer to the disclosures at the end of this document for a description of the Diversified Portfolio and defined Asset Class Indices. 22
Rebalancing Add rebalancing to further improve long-term performance Systematic rebalancing to keep within a chosen long-term asset allocation further helps portfolios reduce volatility and enhance risk-adjusted returns. Rebalancing can potentially bring higher return (approximately 0.4% more 2 ) and lower downside capture of the market as compared to a portfolio that is not consistently rebalanced. In bear markets, investors that rebalanced annually fared better. While they may not have benefited as much in bull markets, the downside protection outweighed this cost. The Impact of Rebalancing 1 (1) Source: Forbes. Chart shows two portfolios over period between 1985 and 2010. Both portfolios began with a 60/40 mix of stocks and bonds, using S&P500 for stocks and Barclays Aggregate Bond Index for bonds. Rebalanced portfolio was adjusted annually back to its 60/40 target, while the unrebalanced portfolio was never adjusted. (2) Source: https://research.wealthfront.com/whitepapers/investment-methodology/ 23
Q&A
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Brexit and Market Implications For More Information Visit investpmc.com for the latest commentary on the markets and more Learn more about helping clients stay the course amid market volatility: Download ENVESTAT Watch the recorded presentation by Jay Hummel, Managing Director, Envestnet 26
Disclosure Asset Class Returns: 20-Year Snapshot The information provided in the table above is for informational and educational purposes only. It is not intended as and should not be used to provide investment advice and does not address or account for individual investor circumstances. The asset classes described above may not be suitable for all investors and investors should first consult with an investment advisor before investing. Past performance is not indicative of future performance. Indices are unmanaged and their returns assume reinvestment of dividends and do not reflect any fees or expenses. It is not possible to invest directly in an index. Diversification does not ensure a profit or protect against a loss. Source: Morningstar Direct index returns. The Diversified Portfolio is a moderate allocation blend portfolio (60%/40%) with the following allocations: 13% Russell 1000 Value; 9% Russell 1000 Growth; 12% Russell 2000; 17% MSCI EAFE; 4% MSCI Emerging Markets; 5% Dow Jones U.S. Select REIT; 40% BarCap U.S. Agg Bond. Cash - Citi Treasury 3 Month T-Bill Emerging Markets - MSCI Emerging Markets Index International Equity - MSCI EAFE Index Large Cap Growth - Russell 1000 Growth Index Mid Cap - Russell Mid Cap Index REITs - Dow Jones U.S. Select REIT Index Top 200 - Russell Top 200 Index Commodities Bloomberg Commodity TR USD High Yield - BarCap U.S. Corporate High Yield Index Large Cap Core - Russell 1000 Index Large Cap Value - Russell 1000 Value Index Munis - BarCap Municipal Index Small Cap - Russell 2000 Index U.S. Agg - BarCap U.S. Agg Bond Index 27
Disclosure Additional Index Disclosures: The Dow Jones Industrial Average (DOW or DJIA) is an unmanaged index of 30 common stocks comprised of 30 actively traded blue chip stocks, primarily industrials and assumes reinvestment of dividends. The Barclays Capital US Aggregate Bond Index is a market capitalization-weighted index of investment-grade, fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. The Barclays Capital US Corporate High Yield Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody s, Fitch and S&P is Ba1/BB+/BB+ or below; may include emerging market debt. The HFRX Absolute Return Index is a stock index designed to measure the comprehensive overall returns of hedge funds; a composite index made up of five other indexes. This index is used to compare the absolute returns posted by the hedge fund market as a whole against individual hedge funds. 28
Disclosure The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this document is intended to constitute legal, tax, accounting, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment vehicle. Investment decisions should always be made based on the investor's specific financial needs and objectives, goals, time horizon and risk tolerance. The statements herein are based upon the opinions of Envestnet and third party sources. Information obtained from third party resources are believed to be reliable but not guaranteed. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Past performance is not a guarantee of future results. About Envestat Envestat delivers regular digests of business intelligence designed to provide context to the decisions that financial advisors and enterprise business owners face every day. While the regular digests provide insights that revolve around a quarterly theme, our quarterly, Envestat Intersection connects these insights to highlight the significance of the quarterly theme and its impact on advisory practices. The data provided is derived from Envestnet user data composite and has not been independently verified. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT FOR DISTRIBUTION TO THE GENERAL PUBLIC. 2016 Envestnet PMC. All rights reserved. 29
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