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Monthly Archives

September 2014

EWM Number of the Day: 9/30/2014

U.S. Inflation Watch: Price Index for Personal Consumption Expenditures in August-2014

By Inflation Watch

The Fed’s preferred inflation measure, which is the price index for personal consumption expenditures increased 1.5% in August over previous twelve months. August 2014 was the 28th straight month this number has been below Fed’s 2% target. Excluding volatile food and energy prices, the core PCE indicator has also increased at 1.5% year over year. This has slightly decelerated from 1.6% in July’14.

The CPI measure rose 1.7% year over year in Aug’14, which was a marked slowdown from the better than 2% pace recorded in the previous four months.

The CPI measure has historically run about half a percentage point below the PCE price index.

(Source: WSJ)

A Macro View – Trend Spotting

By General

With no evident catalyst, this past week proved to be a quite messy one for equities. Though the week ended calmly, there was heavy selling for much of the week, though not selling characterized by anything resembling panic or intense volatility.

As usual, there were various theories and explanations, ranging from rumors of harsh Russia reprisals against western sanctions to further anticipation of interest rate rises in the U.S. to questions about China’s growth trajectory and the Beijing government response. The week was also capped by the surprise announcement that one of the most influential bond managers in the world – Bill Gross of PIMCO – had decided to leave his longtime firm.  While not a market-moving event in itself, it certainly caught the attention of the investing community.

Earlier in the year, there was frequent chatter that equities were going up too much too quickly. Now, however, with nearly three-quarters of the year passed, we are facing a very decent but hardly excessive year of returns in the high-single digits. Of course, markets might well stage a strong fourth quarter rally. If anything, the fact that indices have barely budged in the past months makes such a rally more credible, not less. Much will depend on fourth quarter earnings and general sentiment.

Similarly, the early year chatter about the coming volatility in bonds has not come to pass. Yields on the U.S. 10-year have been trading in a very narrow band between 2.50% and 3.00% for much of the year. Traders can certainly make money on the basis point moves, but yields remain low and not especially volatile.

There have been several periods of equity surges and sell-off. The first week of August was notably negative, followed by weeks of gains. Much of September was quite strong, followed by this week of sell-offs. It is hard to discern an evident pattern here. Overall, the earnings, revenue and economic picture domestically continue to improve, while the global picture is somewhat more ambiguous.

In short, the trend of gradually rising stocks and static interest rates with a slight bias to the upside remains in place. We all know that multiple factors could alter that trend, but it will take more than a discombobulating week.

EWM Number of the Day: 9/23/2014

Comparing the Nation’s Largest Pension Fund Asset Allocation and Return History to the Endowment Index™

By Alternative Investments, Endowment Index™

The nation’s largest pension fund, the California Public Employees Retirement System, better known as CalPERS has been in the news this week with an announcement that they are going to be liquidating their $4B hedge fund allocation over the next year.  Apparently, the high costs and complexities, combined with their ability to scale the asset class relative to their $300B portfolio just isn’t worth the effort.

While on the surface this may seem like shocking news, in reality, this isn’t surprising – its simply another data point confirming the transition from traditional alternatives to liquid alts is real and likely to continue.  Given the higher costs, and other burdens (K-1 tax returns, lockups, accredited investor mandates, lack of transparency, scandals/Madoff, high minimums, and others) with the partnership form of traditional alternatives, its logical that more advisors and investors will continue to consider liquid alts as either a replacement for their traditional alternatives allocation, or to in an effort to enhance their traditional two-dimensional stock-bond portfolios.

CalPERS announcement prompted us to take a closer look at their portfolio as compared to the Endowment Index™ calculated by Nasdaq OMX®.  The Endowment Index represents the asset allocation portfolio holdings of over institutions managing over $400 billion in total assets.

Endowment Index™ vs. CalPERS Asset Allocation and 10 Year Return History

Endowment Index vs CalPERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*For 10 year period ending June 30, 2014.  Returns are annualized.

Past performance no guarantee of future results.  The above is presented for informational purposes only and is not intended as investment advice.  Index data presented for comparison purposes only. Indexes don’t have fees. You cannot invest directly in an index.  Endowment Index data prior to May 19, 2014 contains backtested data, which contains certain weaknesses.  Click here for additional disclosure on back testing.

EWM Number of the Day: 9/17/2014

Small Business Success Traits

By General, Quotes

Rob Riedl, Director of Wealth Management is featured in an interview conducted by Direct Capital’s Small Business Success experts group, which highlights traits of successful small business owners.  Rob’s comment:

They remained focused on the opportunity to be successful and are not distracted by the possibility of failure. They are always all in and never give up!

The entire list, which includes observations and comments from 49 other small business professionals can be found on the DirectCapital Blog.

A Better Option Than Target-Date Funds

By Retirement

An article titled “A Better Option Than Target-Date Funds” written by Prateek Mehrotra, CIO of ETF Model Solutions and Endowment Wealth Management was recently published in the Industry Voices column on PlanSponsor.com.

In the article, Prateek discusses the following drawbacks of TDFs:

  • TDFs assume a “one-size fits all” and fail to take into account unique risk profiles and investment objectives of participants
  • TDFs mechanical shift to conservative assets in later years sacrifices growth opportunities
  • There is no industry standard for the optimal portfolio allocation
  • TDFs with higher allocations to long-term bonds are more sensitive to interest rate risk

He also suggests that because equity prices are extended, investors in retirement plans might want to consider reducing their interest rate risk and equity risk by diversifying into alternative asset classes with lower correlation to stocks and bonds, such as commodities, real estate, hedge funds and private equity- asset classes to which TDFs do not typically allocate.

The entire article can be read here.