Nine months ago “Fiscal Cliff” was the phrase du jour that created a frenzy. Then three months later the media moved its focus to “Sequestration”. Now, the financial media has jumped on the “tapering” (quantitative easing) bandwagon. Strangely, the concept of rising rates that we have discussed for years is causing a flight from bond funds to the tune of $60 billion in the month of June. Some argue that the 32 year bull market in bonds has finally come to an end. We on the other hand try to apply an even keeled approach and while we think it is very sensible for the Treasury market to return to at least recession-like levels of 4% on the ten year Treasury note, we are hesitant to practice clairvoyance and predict when this will occur.
We have instead been tactically underweight in core bonds and overweight in flexible and short duration fixed income funds. In addition, our longstanding bias to short and intermediate term individual bonds has worked together with the bond funds to mitigate interest rate risk. We have felt this was a sensible way to invest in the fixed income market as reduced risk was more important to us than higher yield. For instance, long term treasury bonds, as represented by the iShares Barclays 20+ yr Treasury Bond Index are down 9.8%[i] in the last two months of the quarter, whereas our flexible funds such as JP Morgan Strategic Income, Fidelity Floating Rate and Blackrock Strategic Income are still up for the year. In addition, our underweighted core bond funds such as Fidelity Strategic Income and Pimco Total Return are down for the year respectively, 2.23% and 3.02%, which is in line with the Barclays Aggregate Bond Index (down 2.27% YTDi). Keep in mind these two funds were up 10.76% and 10.36% last year, respectively. Also, don’t forget that we have far smaller percentages in the core funds than we do in the flexible bond funds. However, rest assured we will continue to monitor the core bond funds and look to trim if we do not see them moving to significantly reduce their interest rate risk as they have indicated they would. In all fairness, we have positioned for this for the past two to three years so we are not in need of drastic changes at this point.
The stock market has continued its winning ways in spite of the financial reporting of crisis after crisis. Apparently the U.S centric recovery seems to be afoot as the domestic market performed well with the S&P 500 being up 13.2%i for the year. However, emerging markets (MSCI Emerging Markets) are down 10.89%i for the year and international stocks (MSCI EAFE) are only up 4.1%i. More comparable to our client scenarios, since we hold such large percentages of fixed income in accounts, is the Morningstar Moderate Target allocation which is only up 4.56%i for the year. As another frame of reference, the hedge fund index is only 3.28%i for the year.
We mention these various indices to make sure we keep perspective on how stormy the market has been at times. The past several months have not been clear sailing in the equity markets even though the end result is very positive. With the most recent news reports showing 195,000 new jobs created, unemployment rate at 7.5%, and housing prices increasing nationwide one could make the argument that things are on the upswing. We will skip by how anemic the numbers are, which is difficult for the skeptic in us, and at least admit there is a positive trend in the short term. The question remains, however, with single digit earnings and economic growth and valuations near the historical average, where do we go from here?
While we would be more than happy with returns that race to the sky, we are positioned more conservatively. As one of our managers at FPA funds remarked recently “We want to create a portfolio that’s robust to all eventualities but not ideal to any one workout or situation.” Keeping with the sky metaphor, we are nervous when the sun is shining as clouds may be just on the horizon and we want your holdings to be secure no matter the forecast. Pop-up thunderstorms that may destroy your nest egg are what we prep against daily by using our flexible and conservative managers. In the long run our goal is to position your wealth to prosper no matter the setting.
Please forgive the weather metaphors as we have been trapped inside for the past several weeks due to continued heavy rainfall. We are always here to talk about any financial questions you may have. Obviously, though, you can simply call and talk about the weather if needed.
General Compliance Disclosures
Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.
Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to
January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.
Investment products and services provided by Synovus are offered through Synovus Securities, Inc, Synovus Trust
Company, N.A., GLOBALT, Inc. and Creative Financial Group. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.
The U.S. Securities and Exchange Commission adopted new oversight rules designed to help and protect all investors. These rules generally reflect a reaction to the Madoff and custody scandals, but they do require that we, like all investment firms, adopt new policies and procedures related to verification of your accounts. As such, we request that you take time to compare your account balances and statements from NFS and to contact us if you do not receive those quarterly statements and/or that the values are materially different.”
Cost basis reporting
If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.
[i] The investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. The S&P 500 index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.
Copyright © 2011 Creative Financial Group
All rights reserved.
Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank. You can obtain more information about Synovus Securities, Inc. and its Registered Representatives by accessing BrokerCheck