robertson, griege & thoele investment market analysis january 2006 2010 investment market review...
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Robertson, Griege & Thoele
Investment Market Analysis January 2006
2010 Investment Market ReviewEconomic Recovery Transitions
To Expansion
2010 Investment Market ReviewEconomic Recovery Transitions
To Expansion
Robertson, Griege & Thoele
• Worries over European sovereign debt levels and austerity programs lead to mid-year selloff
• Assets appreciate in second half as economic data turns consistently positive and fears of a double dip recession subside
• U.S. economy adds over one million jobs but the reality of a slow return to full employment sets in
• Additional Federal Reserve asset purchases results in a strong year end rally in equities and other risk assets
• Extension of Bush tax cuts is passed and additional stimulus enacted after lopsided mid-term election
Summary of 2010
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Robertson, Griege & Thoele
Debt Service Ratio Returning to Normal Levels
Household Debt Service Ratio
3
Due to low interest rates, deleveraging, and foreclosures, households are returning to a more normal debt burden which increases their ability to both save and consume….
Creation of d
ebt bubble se
ts the st
age for fi
nancial c
risis
Bubble bursts and households elim
inate debt
Robertson, Griege & Thoele
Continued Monetary Stimulus
4
Quantitative Easing (2)
…..while the Federal Reserve mitigates the negative impact of this process by supplying liquidity to capital markets.
Robertson, Griege & Thoele
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2010 Market Results
-75.0%
-25.0%
25.0%
75.0%
125.0%
175.0%
Returns By Sector
Q4 2010
2010
Since Market High (Oct 2007)
Since Market Low (March 2009)
Several sectors (technology, consumer discretionary, consumer staples) are close to or above levels seen at the market top in October of 2007.
Robertson, Griege & Thoele
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
S&P 500 Russell 2000 MSCI EAFE NAREIT Equity Reits Barclays Aggregate Bond
Barclays Municipal Bond
2010 Returns by Asset Class
Q4 2010 2010
2010 Market Results
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Large Companies
SmallCompanies
ForeignCompanies
Real Estate
Risk assets, such as equities and real estate, outperformed as markets continued to rally off the 2009 lows.
Robertson, Griege & Thoele
Long-Term Diversified Portfolios
• Modern Portfolio Theory (MPT) widely utilized among sophisticated investors for last 50+ years
• Widespread fear and rare events outside of normal economic cycles disrupt MPT in the very short-run
• Diversification provides the foundation to participate in recovery after turbulent periods
• Fear induced investment decisions and straying widely from a long-term plan can compound mistakes and negatively affect returns over time
• Diversified portfolios outperformed broad-based indices through the recent market cycle
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Robertson, Griege & Thoele
Modern Portfolio Theory in Practice
Diversified Portfolio is rebalanced quarterly and consists of the following indices: 22% S&P 500, 12% Russell 2000, 14% MSCI EAFE, 25% Barclays Capital Municipal Bond, 15% Barclays Capital U.S. Corporate Investment Grade, 6% FTSE NAREIT All REITs, and 6% Dow Jones UBS Commodity
A diversified portfolio has had less volatility and has increased in value since the market peak
November 2007 – December 2010: Statistics
Cumulative Performance
Annualized Performance
Standard
Deviation
Downside
Risk
Beta vs.
Market
Diversified Portfolio 1.36% 0.42% 15.20% 11.54% 0.68
Russell 2000 -0.91% -0.29% 27.66% 20.91% 1.21
S&P 500 -12.77% -4.22% 21.68% 16.19% 1.00
40
50
60
70
80
90
100
110
Oct 2007 Jun 2008 Dec 2008 Jun 2009 Dec 2009 Jun 2010 Dec 2010
Diversified PortfolioRussell 2000S&P 500
Robertson, Griege & Thoele
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The Cycle of Market Emotions
Source: Janus
Point of Maximum Financial Risk
Optimism
Excitement
Thrill
EuphoriaAnxiety
Denial
Fear
Capitulation Relief
Hope
Depression
Despondency
Desperation
Panic
Point of MaximumFinancial
Opportunity
“Temporary setback-I am a long-term
investor.”
“How could I have been so wrong?”
“Wow, am I Smart.”
Optimism
How do you currently feel?
Robertson, Griege & Thoele
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Tax Rates and Confidence
Source: The Tax Foundation, J.P. Morgan Asset Management
However, confidence still in recession territory:
• Unemployment stubbornly high
• Housing remains weak
• Continued deleveraging by households
• Long-term fiscal worries
Extension of the Bush tax cuts and a payroll tax cut has provided a sentiment boost
“It’s never paid to bet against America. We come through things, but it is not always a smooth ride.” – Warren Buffett
Robertson, Griege & Thoele
Equities appear cheap relative to bonds
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Equity Market Valuation
???
Source: Standard & Poor’s, Moody’s, FactSet, J.P. Morgan Asset Management
Things for investors to consider:
• Consistently rebalancing naturally leads to buying low and selling high
• Hedged strategies can lower risk while still allowing investors to participate in up markets
• Often, the best opportunities come from areas that have been shunned by the investing public
"Sustained deflation can be highly destructive to a modern economy and should be strongly resisted“ – Ben Bernanke (2002)
The Fed wants investors to take risk…
… but be careful of overvalued markets.
“…balance sheet policy…adds to household wealth by keeping asset prices higher than they otherwise would be” – Ben Bernanke (2010)
Robertson, Griege & Thoele
Lessons from 2010
• The deleveraging process is long and can cause bouts of high volatility and uncertainty
• It is very difficult to provide excess return through fundamental security selection in markets dominated by macro concerns
• Markets dominated by fear and periods of high correlation among asset classes do not last forever and provide great opportunities to upgrade portfolios
• The best performing markets are not necessarily found in the fastest growing economies
• Corporations are adept at wringing out efficiencies and increasing profitability during difficult periods
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Robertson, Griege & Thoele
• Yields on tax-exempt municipal bonds are compelling relative to Treasuries, especially after the 4th quarter 2010 selloff
• Large-cap, multinational, quality “blue chips” are trading at a discount to the overall market
• Investors continue to be attractively compensated for providing liquidity to companies that traditionally rely on the commercial banking sector
• Non-U.S. dollar denominated and real assets (energy, real estate, etc.) can serve as a hedge against dollar debasement and domestic inflation while also providing income
• Hedged strategies in both equities and fixed income markets allow for the ability to participate in continued expansion yet insulate portfolios from rising interest rates and increased volatility
Investment Themes for 2011
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Risks to Expansion
• Conclusion of quantitative easing results in uncertainty and a decline in asset prices
• Government stimulus wears off without the necessary increase in employment, resulting in very low growth rates
• The housing market reaccelerates to the downside and banks fail to materially boost loan growth
• Global growth engines (emerging Asia and Latin America) cool, depleting a major source of earnings growth for companies
• Sovereign debt, expensive government programs and underfunded pensions roil capital markets
• Geopolitical uncertainties related to instability, nuclear proliferation, terrorism, and protectionism come to a head, creating investor anxiety and fear
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