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1
Managing Client Assets with an Eye Toward Fed Tapering
You are now logged in to ATG Legal Ed Connect.
Managing Client Assets with an Eye Toward Fed TaperingJuly 24, 2013
Program TimeToday’s presentation will begin at 12:00 noon.
Sound QualityTo improve sound quality, please close all other applications.
Printed MaterialsWe sent you a link to printable notes pages for this presentation in the email message confirming your registration for this program.
Problems?If you experience any problems during this presentation, please call 800.252.0402, then press “0” for the operator.
2
Managing Client Assets
With an Eye Toward Fed Tapering
presented by
with
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33
Today’s Agenda
•Introduction Christopher LaPorta, AFIM, CTFA - Senior Portfolio Manager and Trust Officer,
ATG Trust Company
•Background on Financial Counselors, Inc.Eugene Helm, FCI Managing Director – Trust Investment Solutions
•Asset Allocation and Equity MarketsBrian Perott, CFA, FCI Senior Vice President , Managing Director of Core Equity
and Head of FCI’s Asset Allocation Committee
•Fixed Income MarketsGary Cloud
•Questions and AnswersChristopher LaPorta
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Introduction
Christopher LaPorta
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55
Background on
Financial Counselors, Inc.
Eugene Helm
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Financial Counselors, Inc.
• Founded in 1966
• Based in Kansas City, Missouri with Offices in: Overland Park, KansasShelton, ConnecticutHerndon, VirginiaClayton, Missouri
• SEC Registered Investment Advisory Firm
• Owned by MTC Holding Company, which is largely owned by Employees and Directors
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Financial Counselors, Inc.
• Approximately $5 billion in Assets Under Management (6/30/13)
• 53 Employees, 28 are Investment Professionals– 22 Portfolio Managers– 13 CFAs– 13 MBAs– 3 CFPs– Investment Professionals Average more than 20 Years of Industry Experience– Many Portfolio Managers are former Trust Officers
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Investment Solutions
• Accounts are managed with sensitivity to taxes, where appropriate (i.e. low turnover equity portfolios or municipal bond portfolio, retention of securities with low-cost basis)
• Diversification, via a mix of asset classes, that is consistent with each client’s tolerance for risk and investment time horizon
• Transition management that facilitates the gradual implementation of portfolio changes to mitigate tax and trading costs
• Investment recommendations that are consistent with each client’s guidelines, including any socially responsible or green investing preferences
Clients have diverse needs and FCI’s program is flexibly implemented to address those needs. Responding to client-specific issues is a cornerstone of the FCI program.
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Investment Solutions
• A Broad Range of Fiduciary-Quality Investment Solutions
– 4 Proprietary Separate Security Equity Portfolio Styles
– Fixed Income Management Utilizing Taxable and Tax-Exempt Bonds
• Portfolios are Managed According to Prudent Investor Act Standards
• Portfolios can be Managed on a Discretionary (no approval required) or Non-Discretionary Basis (trades Implemented only if approved)
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Global Economy
Gary Cloud, CFA
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Weekly Data 1/08/1999 - 7/12/2013 (Log Scale)
(IE516)
European Central Bank Assets ( ) 3114. 17U.S. Federal Reserve Bank Credit ( ) 3456. 32Bank of Japan Assets ( ) 1893. 70Bank of England Assets ( ) 606. 81
Central Bank Balance Sheets for Selected Countries
Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Existing Single-Family Homes 5/31/2013 = 5.0 Source: Haver Analytics
4 5 6 7 8 9
1011121314
4 5 6 7 8 9
1011121314
New Homes 5/31/2013 = 4.1
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Housing Inventory-to-Sales Ratios
Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
U.S. Treasury Bond Futures (13-Week Perpetual Contract)
NDR Daily Bond Sentiment Composite Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
FCI’s Competitive Advantage: As active portfolio managers, we incorporate historical risk and return characteristics with the current capital market environment to develop a global strategic asset allocation based upon the investment profile for our investors.
FCI’s asset allocation assumptions are forward looking but historically aware. The foundation of our belief is that markets in the long-term are ultimately driven by fundamentals such as:
20 Year Annualized Return as of 12/31/2012Source: JP Morgan
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Asset Allocation
An Active Continual Process
At FCI asset allocation serves as the foundation on which we build comprehensive solutions for clients.
Our goal is to maximize long term returns while minimizing risk (risk management)
We create investment solutions by employing:Separately Managed AccountsMutual FundsExchange Traded Funds (ETFs)
Clients will receive flexible management focusedon determining optimal strategies considering:
Current capital market assumptionsHistorical risk and return dataEconomic trendsMarket driven opportunistic rebalancing
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Range of Portfolio Diversification
Risk
Re
turn
Higher Potential
Return
Less Risk More Risk
Lower Potential
Return
50% Equity50% Fixed Income
10% Equity90% Fixed Income
100% Fixed Income
70% Equity30% Fixed Income
100% Equity
60% Equity40% Fixed Income
40% Equity60% Fixed Income
30% Equity70% Fixed Income
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Asset Allocation Developments
Federal Reserve contemplated and then publicly discussed a reduction to its Quantitative Easing programs – Tapering?
Bank of Japan “all in” on its bond purchases – Substantial Yen devaluation
China’s restrictive economic policies
Results:Dollar strength against all other major currencies causing poor commodity returns and exacerbating poor international stock returns
Negative returns in interest rate sensitive asset classes
Strong relative returns in the U.S.
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Current Capital Market Environment
• Sovereign Risk• Increasing Regulations• Currency Wars• Inflation
Wild Cards
NegativesPositives
• Increased Taxes and Regulation• Debt Loads-Particularly Federal, State and Local-
Drag on GDP Growth • Limited Corporate Top-line Revenue Growth• Unfavorable Demographics in
Most Developed Economies• Social Unrest-Middle East, Southern Europe• Slowing Growth In Far East, No Growth in Europe
• Massive Global Monetary Stimulus• Stable Domestic Economic Environment• Improving Housing and Automobile Markets• Strong Balance Sheets-Lots of Cash• Historically Low Interest Rates• Reasonable Equity Valuations
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Market Returns: 2nd Quarter and Year-to-Date 2013
As of 6/30/2013
Bonds, Commodities, and Cash
*US dollarsSource: Morningstar
Year-to-Date 2013
2nd Quarter 2013
Value VS. Growth Large Cap vs. Small Cap Domestic vs. International*
Equity Markets
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2013 Year-to-date Global Equity Returns
Source: Bloomberg. Returns data through 6/30/2013.*Not included in the MSCI Developed or MSCI Emerging Market indices.
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Global Equity Markets: Composition
Source: MSCI, IMF, J.P. Morgan Asset Management. Share of global market capitalization is based on float adjusted MSCI data. Share of global GDP based on purchasing power parity (PPP) as calculated by the IMF for 2013. Definition of emerging markets is based on MSCI and IMF data sources. Percentages may not sum to 100% due to rounding. Data as of 6/30/13.
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S&P 500 Performance:
During Rising and Falling Yields
Source: The Bespoke Report.
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Asset Allocation Outlook and Positioning
Higher Equity prices by year end
New 10–year Treasury yield range of 2.2% to 2.8%
Continue to overweight corporate credit (Investment Grade, High Yield, and Floating Rate Bank Notes) within the Fixed Income portion of portfolios
Reduce magnitude of overweight in Emerging Market Equities in favor of U.S. equity markets
Allocations to Unconstrained Fixed Income and Core Plus Equity
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Asset Allocation Current Positions
Under
weightNeutral
Over
weight
Under
weightNeutral
Over
weight
Equities • Fixed Income •Growth • Short-Term
Investment Grade•
Value • Interm.-Term Investment Grade
•
Large Cap • Long-Term Investment Grade
•
Mid Cap • Cash •Small Cap • Commodities •International • Hi-Yield •Emerging Markets
• REITs •
Market Driven Rebalancing (Weighting relative to strategic allocation targets)
As of 6/30/13
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The Case For Diversification
Source: Bloomberg, Northern Trust Global Investments. Year to date returns through 06/28/2013.
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Equity Markets
Brian Perott, CFA
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Equity Outlook
Higher equity prices through year-end
Accommodative Federal Reserve policy
Strength in housing and automobiles
Reasonable valuations
Stable economic environment
Money flows into stocks
Expect “tapering” to have limited impact on equity rally
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Stock Valuation Measures: S&P 500 Index
Source: (Top) Standard & Poor’s, FactSet, Robert Shiller Data, J.P. Morgan Asset Management.Price to Earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months. Price to Book is price divided by book value per share. Data post-1992 include intangibles and are provided by Standard & Poor s. Price Cash divided by consensus analyst cash per share for the next months. Price to Sales is calculated as price divided by consensus analyst estimates of sales per share for the next 12 months. PEG Ratio is calculated as NTM P/E divided by NTM earnings growth. Dividend Yield is calculated as consensus analyst estimates of dividends for the next 12 months divided by price. All consensus analyst estimates are provided by FactSet. (Bottom left) Cyclically adjusted P/E uses as reported
earnings throughout. *Latest reflects data as of 6/30/2013. (Bottom right) Standard & Poor’s, IBES, Moody’s, FactSet, J.P. Morgan Asset Management.Data are as of 6/30/13.
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The Aftermath of the Housing Bubble
Source(Left) National Association of Realtors, Standard & Poor’s, FHFA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, J.P. Morgan Asset Management. Monthly mortgage payment assumes a 20% down payment at prevailing 30-year fixed-rate mortgage rates; analysis based on median asking rent and median mortgage payment based on asking price. (Bottom right) Census
Bureau, National Association of Realtors, J.P. Morgan Asset Management. *2Q13 rent and mortgage payment values are J.P. Morgan Asset Management estimates. Data are as of 6/30/13.
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Mutual Fund Flows
Source: Investment Company Institute, J.P. Morgan Asset Management.Data include flows through May 2013 and exclude ETFs except for the bottom left chart. ICI data are subject to periodic revisions. World equityflows are inclusive of emerging market, global equity and regional equity flows. Hybrid flows include asset allocation, balanced fund, flexibleportfolio and mixed income flows.Data are as of 6/30/13.
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Deploying Corporate Cash
Source: Standard & Poor’s, FRB, Bloomberg, FactSet, J.P. Morgan Securities, J.P. Morgan Asset Management.(Top left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Top right) M&A activity is the quarterly value of deals completed andcapital expenditures are for nonfarm nonfinancial corporate business. (Bottom left) Standard & Poor’s, FactSet, J.P. Morgan AssetManagement. (Bottom right) Standard & Poor’s, Compustat, FactSet, J.P. Morgan Asset Management. Data are as of 6/30/13.
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S&P 500 Index at Inflection Points
Source: Standard & Poor’s, First Call, Compustat, FactSet, J.P. Morgan Asset Management.Dividend yield calculated annualized dividend divided b price provided b Comp stat Forward bottom p calculation Oct. 9, 2002Dividend yield is calculated as the annualized dividend rate divided by price, as provided by Compustat. Forward Price to Earnings Ratio is a bottom-up calculation based on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next 12 months (NTM), and is provided by FactSet Market Aggregates. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future returns. Data are as of 6/30/13.
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S&P 500 Performance:
During Rising and Falling Interest Rates
Source: The Bespoke Report.
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Core Equity - Current Positioning
• Moved to an underweight position in the Consumer Staples sector –stretched valuations with limited growth
• Also underweight Telecommunications and Utilities – stretched valuations and those sectors are interest rate sensitive
• Neutral for most other economic sectors
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4343
Fixed Income Markets
Gary Cloud, CFA
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Fixed Income Performance By Sector
-2.32%
-1.92%
-1.55%
-2.51%
-1.96%
-2.44%
-2.11%
-1.49%
-2.67%
-2.01%
-3.00%
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
Barclays CapitalAggregate Bonds Total
Return
U.S. Treasury U.S. Agency Credit Mortgage Backed
2Q 2013 YTD Through 6/30/2013
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-1.9%
-2.8%
-3.3%
-3.9%
-3.3%-3.4%
-2.0%
-2.7%
-3.5%
-4.0%
-5.0%
-2.0%
1.0%
BarclaysCorporate
Index
Aaa Aa A Baa
2Q 2013 YTD 2013
Investment Grade Corporate Bond
Performance: 2Q and YTD 2013
-3.5%
-4.0%
-3.3%
-2.8%
-1.9%
-4.0%-4.1%
-3.4%
-5.0%
-2.0%
1.0%
BarclaysCorporate
Index
Industrial Utility Finance
2Q 2013 YTD 2013
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0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6m 2yr 5yr 10yr 30yr
12/ 31/ 2012
3/ 31/ 2013
6/ 30/ 2013
Fixed Income Market Review, Municipal
Yield Curves: (Issues Rated AA-)
>Yields on Longer Maturity Municipals Move Higher During 2Q–‘13
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Questions & Answers
Christopher LaPorta
Managing Client Assets with an Eye Toward Fed Tapering
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