nVEST nSIGHTS
DECEMBER 31, 2010
Page 1 of 4
STOCKING UP
Bill Henderly, CFA, Nvest Wealth Strategies, Inc.
IN THIS ISSUE:
STOCKING UP - PG 1
ALL HANDS ON DECK - PG 1
BENCHMARKING - PG 3
FUND PERFORMANCE - PG 4
Delivering financial
peace of mind.
“Risk on; risk off” was a dynamic investment strategy employed by some during 2010. This
short-term “investor” mentality made for a hard-earned performance in client portfolios; albeit
attractive for a second straight year. It felt like a roller coaster – nothing like a straight line.
Investing was complicated by a slow domestic economic recovery with stubbornly high
unemployment, a dramatic political election year, Greece/Ireland sovereign debt issues, and
China’s ever-increasing world influence. The second half of the year was responsible for nearly all
of 2010 investment gains.
The 6.5% S&P 500 rise in December was a healthy boost. This year, December’s performance is
the fourth best since 1928. Only Decembers 1971, ‘87, and ‘91 were stronger. Interesting, in the
year that followed those strong performances (1972, ’88, ’92), the market was up again by an
average of 11%.
In 2010, domestic stocks beat foreign (worried about Eurozone); small company stocks
outperformed large; and growth beat value styles. Our client accounts did not own Treasury
securities which underperformed corporate bonds. All client portfolio objectives provided strong
4Q and full year returns. And, since the start of the New Bull Market (beginning March 9, 2009),
all portfolio objectives have recovered significantly. In fact, all conservative objectives have
recovered their loss of value from the bear market, and the two most growth oriented objectives
are close to full recovery (and our stock components of portfolios are performing ahead of the S&P
500 on the recovery path).
Looking forward, managing investor expectations is important. The easy performance returns for
the New Bull Market have most likely been earned. Though 2010 was not an easy investment
year, we anticipate stocks will beat bonds in 2011 and provide a third consecutive positive
performance year. Meanwhile, it may be a challenge for bonds to earn at best their interest rate
coupon (particularly if interest rates gradually rise). If friends reached for interest yield (since
money market funds pay zilch), they bought duration (maturity); with rising interest rates, the
longer the duration, the worse will be their future bond performance.
We believe bonds that will perform best in 2011 are those that are more stock-like (corporate,
convertibles, and high-yield). The transition started in late 2010 as investors began to stretch for
yield by buying duration and investing in stocks that look like bonds. In essence, investors want
stocks that look like bonds (“safe”), and bonds that look like stocks. That’s a description of
investors searching for yield and/or dividends. (continued on page 2)
ALL HANDS ON DECK
Bill Henderly, CFA, Nvest Wealth Strategies, Inc.
CONTACT US:
2310 Home Road
Delaware, Ohio 43015
740.917.9234
WWW.NVESTWEALTH.COM
Email: [email protected]
2011 is all about consumer spending. And, consumer spending is all about employment (declining
unemployment rates). Without consumer confidence improving (if the employment outlook does
not improve), the economic growth prospects will stall. Should the economic outlook soften, the
stock market rally will turn volatile and uncertain. However, we believe the economic recovery is
turning the corner to expansion.
Business cycles move from recession to recovery; and once recovery levels match prior cycle peaks,
expansion is underway (recession, recovery, expansion). At present, US economic activity (GDP) is
matching the prior peak (before the recession). Expansion (next) should push overall GDP above
prior peaks and unemployment will decline. That will encourage business and consumer sentiment,
and the positive feedback loop continues.
nVEST nSIGHTS
Page 2 of 4
STOCKING UP (continued from page 1)
“investors want stocks that
look like bonds, and bonds
that look like stocks.”
“Stocking up” seems to be the idea “du-jour” for 2011. The current environment requires great skill
when investing in bonds due to expectations for gradually rising interest and inflation rates (the Fed and
government want to “inflate” the economy). Stocks and stock-like investments are expected to
continue providing attractive returns as the economy expands during 2011. Client portfolios are well
positioned to benefit from this shift by investors in the bond and stock market. We carefully manage
portfolio risk via asset mix and tactical exposures, using a variety of different no-load mutual funds. We
also cautiously utilize an alternative investment (or two; like a commodity or futures fund from time to
time) to provide diversification and risk reduction. We keep in mind that alternatives (in general) have no
internal returns (dividends or interest) and they utilize speculation about supply/demand hoping future
prices will be higher than current. Our clients appreciate the wisdom of long-term investing to the folly
of short-term speculation.
We are optimistic about the prospects for 2011. And, we always invest with discipline, prudence, and
thoughtful attention, with an eye on the future. “investors don’t want to be
short exposure to stocks,
when all hands on deck
appear to be focused on
stimulus and growth.”
ANNOUNCEMENTS:
•
•
•
•
•
•
•
January 17 - Martin Luther King Day:
banks & markets Closed
February 1 - 1Q 2011 Fees collected;
Nvest tax reports sent
Mid-February - Form 1099 mailed by
Schwab
February 21 - President’s Day: banks
& markets closed
Late-March - Mail IRA contributions
for 2010 tax year
April 18 - Deadline to file taxes: 2010
IRA contributions must be received
by Schwab
REMINDER: We will be sending a
new ADV Part 2A & B as required by
the SEC in February.
ALL HANDS ON DECK (continued from page 1)
All hands are on deck to make economic expansion a reality. The current government approach
(following the November election) uses both fiscal (tax rates and spending) and monetary (low interest
rates and QE2) stimulus to boost the economy into expansion (from recovery). Many economists and
strategists are raising/increasing their GDP forecasts (and company earnings estimates) for 2011.
Company earnings and cash have already eclipsed the high levels of 2006, and the US GDP will move
past its peak during 2011. Thus, the stock market is (has been) responding to the expectation of an
expanding economy and corporate earnings.
Political actions will continue to play on 2011 economic prospects. The extension of the Bush tax rates
for two years was a psychological boost, but provides no real incentive change for the economy. Politics
will focus on “the bill coming due” and the huge spending deficit. Obama wants to be re-elected in
2012; so that means enhanced focus on domestic economic growth – income growth. Employment
must improve, and the third year of a President’s term is the year to get it done. Historically the third
year of the President’s term is very often an attractive stock market performance (best of the four) as
action is taken to gain/maintain approval of voters. 2011 is the third year in office for Obama. Add on
an accommodative Fed via low interest rates and QE2 (through first half), and the economy should grow
into expansion mode. But, will the new Republican-led House trim too much the size of government
spending (deficit) to derail stimulative efforts of Obama and the Democrats? How will politics play on
the economy via the size of government debt? We can’t keep “kicking the can down the street”
forever; the “bill is coming due.” And, will the Democrat-controlled Senate, holding a 53 of the 100
senate seats, change the 60-vote rules to pass legislation to a simple majority? The 60-vote rule requires
cooperation to pass legislation; a simple majority would not be market friendly since new policy (creates
uncertainty as “rules” change) is easier to enact.
That’s the US, domestic outlook. Investors are still scratching their heads about the domestic fiscal hole,
soft housing prices and state/local problems. Worry still exists about a spreading Eurozone crisis (needs
its own QE2), China over-tightening to manage inflation (commodity based), and/or an oil price surge.
And, many developing economies (representing 52% of world GDP and 83% of world employment)
have some “overheating” issues like China.
Investing client portfolios in 2011 is (1) all about consumer spending for the US financial markets, and (2)
about allocating portfolio assets into a multi-speed world. Under the New Normal worldview, we expect
developing markets (economies) with low debt to grow faster than developed economies (with heavy
debt). The US and developed European economies will be slower growing in general. The US, in 2011,
could experience a slightly faster GDP growth due to current stimulus actions; but slower growth longer
term. Our tactical strategy continues to emphasize owning about a third of equity exposure in portfolios
devoted to foreign. Less debt, allows less burden for growth. In short, investors don’t want to be short
exposure to stocks, when “all hands on deck” appear to be focused on stimulus and growth.
BENCHMARKING AS OF DECEMBER 31, 2010
Summary of index portfolio returns compiled by Nvest Wealth Strategies, Inc.
INDEX PORTFOLIO
TOTAL RETURN THROUGH 12/31/10
STOCK/BOND
ALLOCATION
Capital
Preservation
0% / 100%
Income
20% / 80%
4QTR
Cumul ati ve
-0 .1 %
Ann ual ized
Cumul ati ve
2 .5 %
Ann ual ized
Balanced
Conservative
35% / 65%
Balanced
50% / 50%
Cumul ati ve
4 .3 %
Ann ual ized
Cumul ati ve
5 .9 %
Ann ual ized
Balanced
Growth
65% / 35%
Growth
80% / 20%
Cumul ati ve
7 .7 %
Ann ual ized
Cumul ati ve
9 .5 %
Ann ual ized
Aggressive
Growth
95% / 5%
Cumul ati ve
Ann ual ized
1 0 .7 %
12 MTHS 3 YEARS 5 YEARS
4 .0 %
1 0 .2 %
2 0 .0 %
4 .0 %
3 .3 %
3 .7 %
7 .2 %
7 .5 %
1 9 .5 %
7 .2 %
2 .5 %
3 .6 %
9 .7 %
6 .0 %
1 9 .4 %
9 .7 %
2 .0 %
3 .6 %
1 1 .4 %
3 .0 %
1 9 .1 %
1 1 .4 %
1 .0 %
3 .6 %
1 3 .4 %
0 .5 %
1 8 .6 %
1 3 .4 %
0 .2 %
3 .5 %
1 5 .7 %
-1 .7 %
1 8 .5 %
1 5 .7 %
-0 .6 %
3 .5 %
1 7 .5 %
-2 .5 %
1 8 .5 %
1 7 .5 %
-0 .8 %
3 .5 %
The index returns reflect returns of various mutual fund averages compiled by Morningstar and allocated as follows: Capital Preservation: 90% Bond Average, 10%
Treasury Bill Index; Income: 80% Bond, 10% Large Cap Growth, 10% Mid Cap Value; Balanced Conservative: 65% Bond, 15% Large Cap Growth, 15% Mid Cap
Value, 5% Small Cap Value; Balanced: 35% Bond, 20% Large Cap Growth, 15% Mid Cap Value, 8% Small Cap Growth, 7% Small Cap Value, 15% International;
Growth: 20% Large Cap Growth, 20% Mid Cap Value, 10% Small Cap Growth, 10% Small Cap Value, 20% International; Aggressive Growth: 10% Bond, 20% Large
Cap Growth, 30% Mid Cap Value, 10% Small Cap Growth, 10% Small Cap Value, 20% International. You cannot invest in these indexes or averages. The level of
diversification represented by these benchmark averages is materially different than actual client accounts; therefore, clients may experienced different levels of performance volatility. Past performance is no guarantee of future results.
Page 3 of 4
SELECTED MUTUAL FUNDS - TOTAL RETURN PERFORMANCE SUMMARY
B ON D F UN D S - T A X A BLE
S TY LE
Taxable Inter mediate Bond A verage
4 TH Q TR
1 2 M TH S
3 Y EA RS
5 Y EA RS
-0.9%
7.7%
5.5%
5.2%
W ells Far go U lt ra Short
AS
0.5%
3 .6%
1.6 %
2.5 %
V ang uard S hor t Federal
A m er ican Ce nt ury Sh ort D urat ion
PIM C O Lo w Du r ation
V ang uard S hor t- Term Inv estm ent Gra de
A m er ican Ce nt ury GN M A Inco m e
W ells Far go G o vernm ent Se curities
PIM C O Real Return
HS
HS
HS
HS
HI
HI
HI
- 0.6%
- 0.1%
0.2%
- 0.1%
0.3%
- 1.3%
- 1.1%
3 .2%
3 .3%
5 .0%
5 .2%
6 .3%
5 .4%
7 .7%
4.3 %
4.6 %
5.5 %
4.6 %
6.4 %
5.5 %
6.2 %
4.9 %
N/A
5.6 %
4.9 %
5.9 %
5.4 %
6.1 %
PIM C O Total Ret ur n
PIM C O Diver sif ied Inc o m e
A rt io Globa l High Incom e
C alam o s C o nver tible Securities
HI
AI
LI
LI
- 0.9%
- 0.1%
2.8%
5.9%
8 .8%
13 .9%
12 .3%
10 .8%
9.1 %
8.8 %
9.6 %
3.3 %
8.1 %
7.4 %
8.8 %
5.7 %
-3.3%
2.2%
3.6%
3.5%
- 0.9%
- 1.2%
- 3.6%
- 4.3%
2 .0%
2 .1%
2 .1%
1 .2%
3.5 %
4.1 %
4.0 %
3.7 %
3.6 %
3.9 %
4.0 %
3.8 %
10.8%
11.4%
15.1%
17.1%
-2.9%
-1.9%
2.3%
2.7%
B ON D F UN D S - T A X E X EM PT
Tax-Free Int erm ediate Bond A ver age
V ang uard M uni Lim it ed Ter m
T. Rowe Pr ice Tax Free S/I
V ang uard M uni In t erm ed iate Term
V ang uard O hio Long -Ter m
HS
HS
HI
HL
S TO CK F U N D S - D O M ESTIC
S& P 500 Index
Equity Fund A verage
Janu s A dvis o r Risk M anaged G row th
M ar sico 21st C entury
Joh n Han co c k Lar ge C ap Equity
LG
LG
LB
11.6%
15.2%
10.6%
17 .5%
17 .0%
14 .2%
- 3 .7 %
- 6 .4 %
- 1 .2 %
1.1 %
3.1 %
9.2 %
V ang uard Index 500
TC W D ividend Focu s
D iam ond H ill Long /Sho r t
M u nder M id-C ap G rowt h
C o lum bia M id- Cap V alu e
C en tu ry Sm a ll-C ap Select
W illiam Blair Sm all- Cap Gr owt h
LB
LV
LV
MG
MV
SG
SG
10.7%
13.7%
4.8%
13.4%
14.5%
16.2%
14.2%
14 .9%
19 .0%
-0 .3%
25 .2%
23 .2%
31 .4%
16 .2%
- 2 .9 %
- 4 .0 %
- 3 .5 %
- 2 .2 %
- 1 .6 %
1.0 %
1.5 %
2.2 %
1.2 %
1.6 %
4.7 %
3.7 %
2.9 %
3.2 %
N eu berger & Berm an G enesis
D iam ond H ill Sm all-C ap
W ells Far go Sm all-C ap V alue
SB
SV
SV
14.1%
11.5%
10.3%
21 .4%
23 .0%
19 .4%
1.0 %
5.5 %
3.8 %
6.1 %
3.9 %
6.9 %
S TO CK F U N D S - I N TERN A TION A L
M organ Stanley EAF E Index (Fore ign)
6.6%
7.8%
-7.0%
2.5%
LV
LV
LV
LV
LG
LG
8.4%
7.7%
7.1%
6.9%
7.3%
9.1%
12 .0%
16 .2%
10 .6%
13 .8%
20 .1%
27 .0%
- 3 .8 %
2.3 %
- 4 .7 %
- 1 .1 %
- 6 .6 %
6.3 %
7.5 %
6.8 %
7.4 %
4.6 %
3.4 %
15.0 %
PIM C O Co m m odit y R eal Re turn
Princet on M anaged Futures *
V ang uard S pec ial H ealth Car e
LB
LB
LG
15.5%
4.6%
4.2%
24 .1%
*6 .1%
6 .2%
- 0 .5 %
N /A
1.6 %
3.4 %
N/A
3.9 %
JP M or gan U S Real Es tate
MV
3.0%
30 .4%
- 0 .6 %
1.9 %
H arbo r Int ernat ion al
O akm ark In ternat ional
A llianz N FJ In ternat ional V alue
Tw eedy Br ow n G lobal Value
W illiam Blair In te rnation al Gr owt h
O ppenheim er D evelop ing M arket s
S TO CK F U N D S - S PECIA LTY
* Reflects P artial Ye ar P erform ance
Nvest Wealth Strategies, Inc.
2310 Home Road
Delaware, Ohio 43015
Ph: 740.917.9234
Email: [email protected]
|
Delivering financial peace of mind.
WHO DO YOU CALL WITH QUESTIONS???
RE: Schwab or NWS Statements: Steve
RE: Portfolio Management & Strategy: Bill
RE: Request Current Disclosure Form ADV Part II: Steve
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