Asset Management Letter Archive

4Q 2011 Asset Management Letter

January 25, 2012   ·   By   ·   Comments Off on 4Q 2011 Asset Management Letter   ·   Posted in Asset Management Letter Archive

Despite heightened volatility, the S&P 500 index ended the year where it started, with its 2% return coming from dividends. Smaller and mid-cap stocks closed the year down 4.2% and 1.7%, respectively, despite also posting double-digit fourth-quarter gains. Fear over Europe and slowing growth in China dragged foreign stocks down 11.8%, with China concerns and a flight from risk hitting emerging-markets stocks even harder; they fell 18.8%.

High-quality bonds were on the other side of the volatility, with sharp flight-to-safety rallies that helped net the Barclays Aggregate Bond Index a 7.4% full-year gain. Our allocations to flexible bond and absolute-return-oriented fixed income funds hurt performance in our portfolios because they provided less of the short-term protection of high-quality long term bonds, but we remain confident in our belief that our bond allocations will provide better longer-term returns than the pure high-grade benchmark at still-acceptable risk levels. In addition, with the consensus forecasts among the 74 economists polled by Bloomberg at the beginning 2011 for the year-end closing yields of the 2-, 10-, and 30-year Treasuries of 1.10%, 3.75%, and 4.75%, respectively, we did not see a reason to extend duration and purchase long term Treasury bonds. The fact that the actual levels were 0.26%, 1.88%, and 2.90%, respectively, highlighted the under performance of some our active managers. In our opinion this shows the folly of short term forecasts, not a breakdown in logic. Over shorter periods in which investors’ decisions about getting in and out of stocks are driven by macro headlines (often referred to as “risk-on, risk-off”) there is less consideration for fundamentals of individual stocks and bonds. Our experience suggests this creates long-term opportunities, but this can be frustrating over shorter periods.

As the media saturates us with political coverage that will only grow over the coming year, we can relate to the grind a politician faces in staying on message for an extended duration. Our message is not positive enough to get us elected to any office, but we hope it will earn us respect for intellectual honesty and well-reasoned decision making amidst an environment that we expect to be a far longer grind than that of a presidential election year.

The grind we are dealing with—and the same message we’ve been delivering since 2008—is that the developed world took on massive and unsustainable levels of debt that may take a decade or more to fully unwind. We anticipate this will reduce economic growth below the levels we had come to think of as normal; levels which themselves became distorted upward based on the spending of all this borrowed money. Of course, if that debt is reduced going forward as we expect, it would mean less money available to spend. To that end, we feel the money spent will wisely be spent on the high quality offerings carrying low debt levels.

Another way that debt is reduced is through defaults, and this leads us to the reiteration of another very important point, which is that the risk of defaults—such as in Europe—poses a significant threat to the financial system, and in turn to the global economy. Very briefly, investors are afraid that Europe lacks the political unity and possibly even the financial capacity required to provide a sufficient financial backstop for the Eurozone. If correct, that increases the risk of weaker governments defaulting on their debt, making investors demand higher yields for taking on that risk. Those higher yields contribute to a feedback loop that makes a default even more likely, because governments can’t sustain interest payments above a certain level, leading to the conclusion that only some type of unified policy action and intervention can allow governments to roll over all the debt that is coming due.

It is possible that EU policymakers will fail to address the crisis before major economic damage occurs. However, we do not feel that this will be the case. The Eurozone may change the rules or some of the constituents but our reading indicates to us that the benefits of the Euro outweigh the costs for the stronger countries in the Eurozone and, therefore, we believe the Euro will remain in place.

On that note, if European authorities are able to coordinate on action that effectively takes away the perceived risk of larger countries defaulting, we could see a strong rally in stocks; and if the U.S. economy surprises further on the upside, the rally could be even stronger. It’s even possible that there’s enough positive feedback in the global economy that our optimistic scenario of a return to pre-debt-crisis levels of growth plays out. In these outcomes, our management style would likely underperform for a period of time than if we had maintained a more aggressive investment position.

We accept the risk of missing some of the upside for a number of reasons. First, while the odds of a very negative scenario playing out appear relatively low to us, its effects would be highly damaging. Second, our most-likely scenario involves no crisis but slow growth for many years, with mid single digit returns for stocks, and periods of high volatility that create opportunities to add back stocks at more attractive prices. Of course, rest assured our managers are seeking to take advantage of this volatility. Third, our process and the decisions that result reflect our commitment to thorough research, intellectual honesty, and discipline, and we believe this kind of process has the best long-term likelihood of success. Finally, although some might conclude we are wrong if these risks don’t happen it is our job is to make decisions that we believe best serve our clients.

We appreciate your continued confidence. If you have any questions, please don’t hesitate to contact me.

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.

Use of Indexes

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, Morningstar). 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. ” 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