Investment Insights Podcast – January 31, 2014

Investment Insights PodcastBill Miller, Chief Investment Officer

On this week’s podcast (recorded January 30, 2014):

  • What we like: Acceleration in the sales for companies; Pick-up in housing survey data; States building surplus; Global synchronized recovery.
  • What we don’t like: Emerging markets uncertainty; Investor sentiment too high
  • What we are doing about it: Hedging appropriately in tactical and strategic portfolios; Hedging against emerging market risks; Underlying currents strong.

Click the play icon below to launch the audio recording.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

A Mixed Start to 2014

Ryan Dressel Ryan Dressel, Investment Analyst, Brinker Capital

With 2013 in the rear view mirror, investors are looking for signs that the U.S. economy has enough steam to keep up the impressive growth pace for equities set last year.  This means maintaining sustainable growth in 2014 with less assistance from the Federal Reserve in the form of its asset purchasing program, quantitative easing.  Based on economic data and corporate earnings released so far in January, investors have had a difficult time reaching a conclusion on where we stand.

To date, 101 of the S&P 500 Index companies have reported fourth quarter 2013 earnings (as of this writing).  71% have exceeded consensus earnings per share (EPS) estimates, yielding an aggregate growth rate 5.83% above analyst estimates (Bloomberg).  The four-year average is 73% according to FactSet, indicating that Wall Street’s expectations are still low compared to actual corporate performance.  Information technology and healthcare have been big reasons why, with 85% and 89% of companies beating fourth quarter EPS estimates respectively.

Despite these positive numbers, two industries that are failing to meet analyst estimates are consumer discretionary and materials.  Both of these sectors tend to outperform the broad market during the recovery stage of a business cycle, which we currently find ourselves in.  If they begin to underperform or are in line with the market, then it could indicate the beginning of a potential short-term market top.

S&P500 Index - Earnings Growth vs. Predicted

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There has been mixed data on the macro front as well:

Positive Data

  • Annualized U.S. December housing starts were stronger than expected (999,000 vs. Bloomberg analyst consensus 985,000).
  • U.S. Industrial production rose 0.3% in December, marking five consecutive monthly increases.[1]
  • U.S. December jobless claims fell 3.9% to 335,000; the lowest total in five weeks.
  • The HSBC Purchasing Managers’ Index (PMI) was above 50 for most of the developed and emerging markets.  An index reading above 50 indicates expansion from a production standpoint.  This data supports a broad-based global economic recovery.

Negative Data:

  • The Thomson Reuters/University of Michigan index of U.S. consumer confidence unexpectedly fell to 80.4 from 82.5 in December.
  • The average hourly wages of private sector U.S. works (adjusted for inflation) fell -0.03% compared to a 0.3% increase in CPI for December, 2013.  Wages have risen just 0.02% over the last 12 months indicating that American workers have not been benefiting from low inflation.
  • Preliminary Chinese PMI fell to 49.6 in January, compared to 50.5 in December and the lowest since July 2013.
S&P Performance Jan 2014

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The mixed corporate and economic data released in January has led to a sideways trend for the S&P 500 so far in 2014.  We remain optimistic for the year ahead, but are managing our portfolios with an eye on the inherent risks previously mentioned.

[1]  The statistics in this release cover output, capacity, and capacity utilization in the U.S. industrial sector, which is defined by the Federal Reserve to comprise manufacturing, mining, and electric and gas utilities. Mining is defined as all industries in sector 21 of the North American Industry Classification System (NAICS); electric and gas utilities are those in NAICS sectors 2211 and 2212. Manufacturing comprises NAICS manufacturing industries (sector 31-33) plus the logging industry and the newspaper, periodical, book, and directory publishing industries. Logging and publishing are classified elsewhere in NAICS (under agriculture and information respectively), but historically they were considered to be manufacturing and were included in the industrial sector under the Standard Industrial Classification (SIC) system. In December 2002 the Federal Reserve reclassified all its industrial output data from the SIC system to NAICS.

Investment Insights Podcast – January 24, 2014

Investment Insights PodcastBill Miller, Chief Investment Officer

On this week’s podcast (recorded January 23, 2014):

  • What we like: Strong manufacturing data out of Europe; Global synchronized recovery.
  • What we don’t like: High-sentiment indicators; global markets fairly valued, but need to see faster growth to drive equity prices higher; China slowing
  • What we are doing about it: Minor hedging in some portfolios; buying in the U.S. and European markets; looking at underlying global synchronized recovery as powerful force.

Click the play icon below to launch the audio recording.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

Retirement Planning: Beware of the Boomerang

Sue BerginSue Bergin

Unexpected events wreak havoc on many retirees’ portfolios.  According to a recent study, unexpected life events cost retirees on average $117,000. [1]  While caring for an adult child falls in the “unexpected events” category, recent trends suggest it is becoming a commonplace scenario.

The number of young adults, ages 18 to 31, living with their parent’s increased four percentage points from 2007 to 2012.  Now, over one-third (36%) of the young adults in that age category live with their parents.  Many of these adult children have children of their own, adding layers of both complexity and expense.  Pew Research Center attributes the multigenerational dynamic to declining employment, underemployment, rising college enrollment and declining marriage rates.[2]

In a separate survey, Securian Financial Group found that only 10% of the adult children living with their parents contribute to the household finances (e.g., pay rent).[3]  The Pew study reported that 22% of adult children still received an allowance from parents and 80% of the adult children living at home said they did not have enough money to live the life they wanted. Conversely, only 55% of their independent-living counterparts had the same response.

The boomerang-child pattern is nothing new.  It has surfaced during other economic downturns.  However, experts suggest that there may be some generational dynamics at play associated with this current wave of boomerangs that make it different from others. Those dynamics include a pervasive entitlement mindset, inflated self-esteem, and bumpy on- and off-ramps to the labor force.

Bumpy on-ramps refer to the fact that college graduates are having a difficult time finding employment.  Bumpy off-ramps refer to delayed retirements and boomers having to work longer than originally planned for.

While the debate rages as to the merits of adult children returning to the roost, one point is irrefutable.  Boomerang children create a drag on the parents’ retirement.

Boomerangs & Their ImpactIt is natural to want to help your children, at any age.  The child, however, should know the risks that you, as parents, assume if you agree to the arrangement.  The child probably dwells on the relationship risk potential, but should also be aware of the financial and lifestyle risk impact.

If the new financial impact on the parent is left unsaid, it will go unnoticed.  This fact is supported by Securian’s survey of Millennials who live with their parents.  45% of the surveyed young adult demographic said that their living at home has not financial impact on their parents, and almost half of that group said they weren’t even sure of the impact.

Other interesting stats from Securian:

  • Only 4% acknowledge their parents delayed retirement to accommodate the living arrangement
  • 8% said their parents did not request cost-sharing
  • Only 9% of the parents put a pre-determined end date or set conditions for how long the adult child could stay.

There may be tips and tools out there, but working face-to-face with a financial advisor can help add value.  It’s important to assess the financial risk associated with having an adult child come return to live in your home.  A skilled advisor can help project anticipated increases in living expenses as well as the impact on your retirement. This will help establish parameters, set expectations, deepen the child’s understanding of what is at stake for you, and foster open communications. And maybe even make it an enjoyable living situation for all!

Brinker Capital at the Financial Services Institute OneVoice 2014 Conference

Noreen BeamanNoreen Beaman, Chief Executive Officer

In June, we announced Brinker Capital as a Premier Sponsor of the Financial Services Institute (FSI), a voice of independent financial services firms and independent financial advisors.  FSI’s mission is to ensure that all individuals have access to competent and affordable financial advice, products and services.

FSI’s OneVoice 2014 Conference kicks off next week in Washington, D.C. where Brinker Capital is proud to be a Premier Sponsor as well as a presenter.  OneVoice is FSI’s annual conference for the independent broker/dealer community to network and gain knowledge of the latest within the industry.

FSI OneVoice Conference 2014We are honored to have our Vice Chairman, John Coyne, chosen as a panelist for the Alternative Investment panel; our Vice President of Business Administration, Brendan McConnell, as a panelist to share insight on the latest technology tools to help advisors gain efficiencies; and behavioral finance expert, Dr. Daniel Crosby, as a presenter on understanding investor behavior.

This year’s conference promises to be a good one as FSI celebrates 10 years of advocacy for independent financial service advisors and firms.  We look forward to seeing many of you there!

Technology Watch: Investing Into The Future

Dan WilliamsDan Williams, CFP, Investment Analyst

I recently had the opportunity to attend a conference that centered on the big ideas in technology happening right now. Hearing from such people as Andrew McAfee (author of the 2012 book Race Against the Machine and his most recent The Second Machine Age), Steven Kotler (author of Abundance: The Future Is Better Than You Think), and Charles Songhurst (former Head of Corporate Strategy at Microsoft), I can make a few blanket statements.

First, these guys are humbled, awestruck, and blown away by the advances being made in technology; specifically in robotics, 3D printers, and in general computing power. Second, the individual and the consumer will be empowered by this technology. Lastly, don’t try to pick the winning company, rather win by picking the area as a whole.

3D PrintingThis last point may seem to some as a “coward’s way out”, but consider the CNN Money article from December 31, 1998, Year of the Internet Stock. In this article Amazon, eBay, AOL,, Cyberian Outpost, and a few other names that have since been lost to history, are listed as stocks that had a great year and are part of the revolution. In the 15 years (1/1/1999 to 12/31/2013) following this article, Amazon and eBay clearly have proven to be the winners among the group, returning a cumulative return of 644.81% and 445.81% respectively as the others essentially went to zero. However, if you broaden the technology space, Apple would have been the big winner with an astonishing 5,569.77% cumulative return for this 15-year period. In other words, the idea that the internet was going to be a game changer in the way we communicate and the technologies we use was right, but our clever execution by picking the few likely winners likely would have missed the boat.

Now, let’s fast forward to today as we stare upon a robotic and biotech revolution. While there are a few select names that seem to be the smart bets to land among the big winners—given the magnitude of impact these two areas will have on the way we live and the uncertainty in the specifics of the path this change will actually take—picking an individual winner involves a level of hubris, while diversification within this idea can add value.

Future of TechnologyI left the conference fully convinced that these concepts, both current and future, are going to change the world; however, I remain very cautious regarding the execution and process. Without giving any type of recommendation, there exists at least half a dozen Biotech-focused ETFs. Late last year, the first robotics-focused ETF (ROBO) was launched—and it won’t be the last. All of these are less exciting answers to investing in new technologies versus trying to pick the winner, but as the American poet Ogden Nash once wrote, “Too clever is dumb.”

Investment Insights Podcast – January 14, 2014

Investment Insights PodcastBill Miller, Chief Investment Officer

On this week’s podcast (recorded January 13, 2014):

  • What we like: Global synchronized recovery
  • What we don’t like: Complacency (too much bullishness) associated with the global synchronization, making the market vulnerable to pullbacks.
  • What we are doing about it: Minor hedging in some portfolios; looking at underlying health of global synchronized recovery as central event, with sentiment as a secondary event.

Click the play icon below to launch the audio recording.

The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.

2013 Review and Outlook

Amy MagnottaAmy Magnotta, CFA, Senior Investment Manager, Brinker Capital

2013 was a stellar year for U.S. equities, the best since 1997. Despite major concerns relating to the Federal Reserve (tapering of asset purchases, new Chairperson) and Washington (sequestration, government shutdown, debt ceiling), as well as issues like Cyprus and Syria, the U.S. equity markets steadily rallied throughout the year, failing to experience a pullback of more than 6%.

Source: Strategas Research Partners, LLC

In the U.S. markets, strong gains were experienced across all market capitalizations and styles, with each gaining at least 32% for the year. Small caps outperformed large caps and growth led value. Yield-oriented equities, like telecoms and utilities, generally lagged as they were impacted by the taper trade. The strongest performing sectors—consumer discretionary, healthcare and industrials—all gained more than 40%. Correlations across stocks continued to decline, which is a positive development for active managers.

YenDeveloped international markets produced solid gains for the year, but lagged the U.S. markets. Japan was the top performing country, gaining 52% in local terms; however, the gains translated to 27% in U.S. dollar terms due to a weaker yen. Performance in European markets was generally strong, led by Ireland, Germany and Spain.  Australia and Canada meaningfully lagged, delivering only mid-single-digit gains.

Concerns over the impact of Fed tapering and slowing economic growth weighed on emerging economies in 2013, and their equity markets significantly lagged that of developed economies. The group’s loss of -2.2% was exacerbated due to weaker currencies, especially in Brazil, Indonesia, Turkey and India. Emerging market small cap companies were able to eke out a gain of just over 1%, while less efficient frontier markets gained 4.5%.

Fixed income posted its first loss since 1999, with the Barclays Aggregate Index experiencing a decline of -2%. The yield on the 10-year U.S. Treasury began rising in May, and moved significantly higher after then Federal Reserve Chairman Bernanke signaled in his testimony to Congress that tapering of asset purchases could happen sooner than anticipated. The 10-year yield hit 3% but then declined again after the Fed decided not to begin tapering in September. It climbed steadily higher in November and December, ending the year at 3.04%—126 basis points above where it began the year.

TIPS were the worst performing fixed income sector for the year, declining more than -8%, as inflation remained low and TIPS have a longer-than-average duration. On the other hand, high-yield credit had a solid year, gaining more than 7%. Across the credit spectrum, lower quality outperformed.

Magnotta_Client_Newsletter_1.7.13_5We believe that the bias is for interest rates to move higher, but it will likely come in fits and starts. Rising longer-term interest rates in the context of stronger economic growth and low inflation is a satisfactory outcome. Despite rising rates, fixed income still plays a role in portfolios, as a hedge to equity-oriented assets if we see weaker economic growth or major macro risks. Our fixed income positioning in portfolios, which includes an emphasis on yield advantaged, shorter duration and low volatility absolute return strategies, is designed to successfully navigate a rising interest rate environment.

We continue to approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds as we begin 2014, with a number of factors supporting the economy and markets.

  • Monetary policy remains accommodative: Even with tapering beginning in January, short-term interest rates should remain near zero until 2015. In addition, the European Central Bank stands ready to provide support, and the Bank of Japan has embraced an aggressive monetary easing program in an attempt to boost growth and inflation.
  • Global growth strengthening: U.S. economic growth has been slow and steady, but momentum has picked up (+4.1% annualized growth in 3Q). The manufacturing and service PMIs remain solidly in expansion territory. Outside of the U.S., growth has not been very robust but is still positive.
  • Labor market progress: The recovery in the labor market has been slow, but stable. Monthly payroll gains have averaged more than 200,000 and the unemployment rate has fallen to 7%.
  • Inflation tame: With the CPI increasing only +1.2% over the last 12 months, inflation in the U.S. is running below the Fed’s target.
  • Increase in household net worth: Household net worth rose to a new high in the third quarter, helped by both financial and real estate assets. Rising net worth is a positive for consumer confidence and future consumption.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are flush with cash that could be reinvested, returned to shareholders, or used for acquisitions. Corporate profits remain at high levels and margins have been resilient.
  • Equity fund flows turn positive: Equity mutual funds have experienced inflows over the last three months while fixed income funds have experienced significant outflows, a reversal of the pattern of the last five years. Continued inflows would provide further support to the equity markets.
  • Some movement on fiscal policy: After serving as a major uncertainty over the last few years, there seems to be some movement in Washington. Fiscal drag will not have a major impact on growth next year. All parties in Washington were able to agree on a two year budget agreement, averting another government shutdown in January. However, the debt ceiling still needs to be addressed.

However, risks facing the economy and markets remain including:

  • Fed Tapering: The Fed will begin reducing the amount of their asset purchases in January, and if they taper an additional $10 billion at each meeting, QE should end in the fall. Risk assets have historically reacted negatively when monetary stimulus has been withdrawn; however, the economy appears to be on more solid footing.
  • Significantly higher interest rates: Rates moving significantly higher from current levels could stifle the economic recovery. Should mortgage rates move higher, it could jeopardize the recovery in the housing market.
  • Sentiment elevated: Investor sentiment is elevated, which typically serves as a contrarian signal. The market has not experienced a correction in some time.

Risk assets should continue to perform if real growth continues to recover, even in a higher interest rate environment; however, we could see volatility as markets digest the slow withdrawal of stimulus by the Federal Reserve. Valuations have certainly moved higher, but are not overly rich relative to history. Markets rarely stop when they reach fair value. There are even pockets of attractive valuations, such as emerging markets. Momentum remains strong; the S&P 500 Index spent all of 2013 above its 200-day moving average. However, investor sentiment is elevated, which could provide ammunition for a short-term pull-back. A pull-back could be short-lived should demand for equities remain robust.

Asset Class Outlook

Our portfolios are positioned to take advantage of continued strength in risk assets, and we continue to emphasize high conviction opportunities within asset classes, as well as strategies that can exploit market inefficiencies.

Asset Class ReturnsAsset Class Returns

What About The Correction?

Jeff RauppJeff Raupp, CFA, Senior Investment Manager

Over the holidays, I spent a lot of time with some family members that I don’t often get to see. We got together, had a little too much to eat and drink, and gave each other updates on what’s happening in our lives. Between the updates on kids, new careers, and new houses (no new spouses or kids this year), we never miss the opportunity to get some free advice from one another.

My two sisters are both in healthcare and handle all questions related to our aches and pains. My cousin the mechanic will venture out to the driveway and listen to the ping in your engine for the cost of getting him a beer. You get the idea.

My contribution is on the investment side, fielding questions about 529 plans, IRA distributions, 401(k) plans, etc. But the biggest question is always some version of “where is the market going?” This year’s edition, fueled by the huge returns in stocks in 2013 (and a good dose of CNBC), was “do you think we’re going to get a market correction?”

Hello, My Name is Free AdviceI suggested that when you look at how far the market has run and the high levels of investor sentiment right now—indicating that a lot of good news is priced into the market— I could easily see the market pulling back 5-10% on some unexpected bad news. The natural response from my family was, “What should I do?” “Nothing,” was my presumably blunt response.

My rationale is this: From a fundamental standpoint, the market looks good. Companies continue to grow earnings at a steady, albeit slow, rate. The market isn’t cheap, but it isn’t expensive either, and rarely does P/E compress without a recession. Speaking of the r-word, GDP growth continues to be sluggish, but it’s positive and expected to increase in 2014. Housing, the root cause of the last recession, continues to improve in spite of rising rates. And the Fed launched the previously-dreaded tapering of its quantitative easing without any market hiccup.

Depending on the attention span of my audience, all of that might boil down to simply saying, “We could get a correction, but if you’ve got at least 6-12 months, I think the market will be positive from here.”

Now, let’s go check out that leak on my car…