Eurozone Crisis Report Card

Ryan DresselRyan Dressel, Investment Analyst, Brinker Capital

In January 2013 Amy Magnotta wrote in detail about how the actions of the European Central Bank (ECB) finally gave the markets confidence that policy makers could get their sovereign debt problems under control.[1] The purpose of this blog is to measure the progress of the ECB’s actions, as well as other critical steps taken to resolve the Eurozone crisis.

Maintaining the Euro: A+
The markets put a lot of faith in the comments made by the head of the ECB Mario Draghi in July, 2012. Draghi stated that he would “Pledge to do whatever it takes to preserve the euro.” These words have proven to be monumental in preserving the euro as a currency. Following his announcement, the ECB still had to put together a plan that would be approved by the ECB’s governing council (comprised of banking representatives from each of the 18 EU countries)[2]. The politics of the approval essentially boiled down to whether or not each council member supported the euro as a currency. Draghi’s plan ultimately passed when Germany’s Chancellor, Angela Merkel, endorsed it in September 2012.[3] The stabilization of the euro boosted lending and borrowing for European banks, and allowed governments to introduce necessary economic reforms outlined in the plan.

Since the plan was approved, the euro’s value versus the U.S. Dollar has continued to rise; reaching levels last seen in 2011. There is still some debate as to whether or not the currency will last over the long term, but for now its stability has helped avoid the worst possible outcome (financial collapse). There are several key elections coming up over the next month, which could renew the threat of breaking up the currency if anti-EU officials are elected.

Government Deficit Levels: B
The average Eurozone government deficit came in at 3.0% in 2013, which was down from 3.7% in 2012. Budgets will need to remain tight for years to come.

Corporate Earnings: B
The MSCI Europe All Cap Index has returned 27.46% in 2013 and 5.01% so far in 2014 (as of last week). The Euro area also recorded first quarter 2014 GDP growth at +0.2% (-1.2% in Q1 2013).[4] This indicates that companies in Europe have established some positive earnings growth since the peak of the crisis. On a global scale, Europe looks like an attractive market for growth.

Dressel_EuroZone_ReportCard_5.30.14

Unemployment: C
Unemployment in the Eurozone has stabilized, but has not improved significantly enough to overcome its structural problems. The best improvements have come out of Spain, Ireland and Portugal due to a variety of reasons. In Ireland, emigration has helped reduce jobless claims while a majority of economic sectors increased employment growth. In Spain, the increased competitiveness in the manufacturing sector has been a large contributor. Portugal has seen a broad reduction in unemployment stemming from the strict labor reforms mandated by the ECB in exchange for bailout packages. These reforms are increasing worker hours, cutting overtime payments, reducing holidays, and giving companies the ability to replace poorly performing employees.[5]

Dressel_EuroZone_ReportCard_5.30.14_1[6]

There are also some important fundamental factors detracting from the overall labor market recovery. The large divide between temporary workers and permanent workers in many Eurozone countries has made labor markets especially difficult to reform. This is likely due to a mismatch of skills between employers and workers. High employment taxes and conservative decision-making by local governments and corporations have also created challenges for the recovery.

Additional Reading: Euro Area Labor Markets

Debt Levels: D
Total accumulated public debt in the Eurozone has actually gotten worse since the ECB’s plan was introduced. In 2013 it was 92.6% of gross domestic product, up from 90.7% in 2012. The stated European Union limit is 60%, which reflects the extremely high amount of government borrowing required to stabilize their economies.

Overall Recovery Progress: B-
On a positive note, governments are finally able to participate in bond markets without the fear of bankruptcy looming. Banks are lending again. Unemployment appears to have peaked and political officials recognize the importance of improving economic progress.

Unlike the 2008 U.S. recovery however, progress is noticeably slower. The social unrest, slow decision making, low confidence levels, and now geopolitical risks in Ukraine have hampered the recovery. When you consider the financial state of Europe less than two years ago, you have to give the ECB, and Europe in general, some credit. Things are slowly heading in the right direction.

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

[1] January 4, 2013. “Is Europe on the Mend?” http://blog.brinkercapital.com/2013/01/04/is-europe-on-the-mend/
[2]
European Central Bank. http://www.ecb.europa.eu/ecb/orga/decisions/govc/html/index.en.html
[3] September 6, 2012. “Technical features of Outright Monetary Transactions. European Central Bank.” http://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html
[4] Eurostat
[5] August 6, 2012. “Portugal Enforces Labour Reforms but More Demanded.” http://www.wsws.org/en/articles/2012/08/port-a06.html
[6] Eurostat (provided by Google Public Data)

Investment Insights Podcast – May 28, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded May 22, 2014), Bill gives a review on the controversial book, Capital in the Twenty-First Century by Thomas Piketty:

What we like: Emphasis on returns to capital (savings); savers will continue to be rewarded.

What we don’t like: Modern-socialistic state belief using high tax rates in order to deal with societal inequalities.

What we are doing about it: We encourage opening savings accounts for children and grandchildren; fund 401(k)s to the max; watching if some of the societal inequalities as outlined by Piketty are dealt with sooner than later.

Click the play icon below to launch the audio recording or click here.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Embracing Innovation: Envestnet Advisor Summit Wrap-up

VradenburgGreg Vradenburg, Managing Director, Investment Services

Last week we were honored to be one of the Premier Sponsors at the Envestnet Advisor Summit in Chicago. The theme of the event was “the next big thing” and it was evident everywhere. Envestnet Chairman and CEO Judson Bergman opened up the conference by talking about how advisors need to be disruptive innovators in order to succeed and overcome looming industry challenges. He stressed the importance of embracing technology, building brand and perfecting marketing and reminded us of past giants such as MySpace, BlackBerry and Blockbuster that did not take these steps and were not aware of happenings in the new markets and seemingly fell behind.

Envestnet President Bill Crager also talked about how the role of the advisor will become increasingly important in the next five years. As older advisors begin to exit the business, Crager projects that the average advisors assets will increase from $90 million today to $145 million in 2020. (Source: “9 Takeaways from the Envestnet Advisor Summit”, Financial Planning, May 20, 2014)

Conference attendees were also introduced to the Envestnet Institute, an online advisor education portal that features white paper, videos and webinars. Brinker Capital is proud to be one of the contributing content partners for this exciting new unified education portal.

Finally we were pleased by the informative “Liquid Alternatives Panel” that our CIO, Bill Miller, participated in. All panelists agreed the education around alternatives is key for both clients and advisors. Alternatives firmly fill a role in a portfolio by providing greater portfolio diversification as well as access to unique opportunities and strategies; however, they are just a piece of the overall pie.

Our thanks go out to Envestnet for hosting such a great event that allowed us to network with colleagues, investment professionals and Envestnet representatives! We look forward to next year’s Advisor Summit!

Investment Insights Podcast – May 13, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded May 12, 2014):

What we like: Bob Doll’s comments on favoring the economy more than the stock market; positive economic data post-winter

What we don’t like: Stock market no longer a bargain, now more fully valued

What we are doing about it: Focus more on larger themes and individual active managers; looking out for potential rise in interest rates during summer

Click the play icon below to launch the audio recording or click here.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Monthly Market and Economic Outlook: May 2014

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

The severe rotation that began in the U.S. equity markets in early March continued throughout April. Investors favored dividend-paying stocks and those with lower valuations at the expense of those trading at higher valuations. Large caps significantly outpaced small caps (+0.5% vs. -3.9%) and value led growth. From a sector perspective, energy (+5.2%), utilities (+4.3%) and consumer staples (+2.9%) led while financials (-1.5%), consumer discretionary (-1.4%) and healthcare (-0.5%) all lagged. Real assets, such as commodities and REITs, also continued to post gains.

International equity markets finished ahead of U.S. equity markets in April, eliminating the performance differential for the year-to-date period. In developed international markets, Japan continues to struggle, while European equities are performing well, helped by an improving economy. After a strong March, emerging markets were relatively flat in April. There has been significant dispersion in the performance of emerging economies so far this year; this variation in performance and fundamentals argues for active management in the asset class. Valuations in emerging markets have become attractive relative to developed markets.

Fixed income notched another month of decent gains in April as Treasury yields fell shutterstock_105096245_stockmarketchartslightly. At 2.6%, 10-year Treasury note yields remain 40 basis points below where they started the year and only 60 basis points higher than when the Fed began discussing tapering a year ago. All fixed income sectors were in positive territory for the month, led again by credit. Both investment grade and high yield credit spreads continue to grind tighter. Within the U.S. credit sector fundamentals are solid and the supply/demand dynamic is favorable, but valuations are elevated, especially in the investment grade space. We favor an actively managed best ideas strategy in high yield today, rather than broad market exposure. Municipal bonds have outpaced the broad fixed income market, helped by improving fundamentals and a positive technical backdrop.

While we believe that the long term bias is for interest rates to move higher, the move will be protracted. Sluggish economic growth, low inflation and geopolitical risks are keeping a lid on rates for the short-term. Despite our view on rates, fixed income still plays an important role in portfolios, as protection against equity market volatility. 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 or stable interest rate environment.

We approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds as we move through the second quarter, with a number of factors supporting the economy and markets over the intermediate term.

  • Global monetary policy remains accommodative: Even with the Fed tapering asset purchases, short-term interest rates should remain near-zero until 2015 if inflation remains low. In addition, the ECB stands ready to provide support if necessary, and the Bank of Japan continues its aggressive monetary easing program.
  • Global growth stable: U.S. economic growth has been slow but steady. While the weather had a negative impact on growth in the first quarter, we expect growth to pick up in the second quarter. Outside of the U.S., growth has not been very robust, but it is still positive.
  • Labor market progress: The recovery in the labor market has been slow, but we have continued to add jobs. The unemployment rate has fallen to 6.3%.
  • Inflation tame: With the CPI increasing just +1.5% over the last 12 months and core CPI running at +1.7%, inflation is below the Fed’s 2% target. Inflation expectations have also been contained, providing the Fed flexibility to remain accommodative.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are flush with cash that could be reinvested, used for acquisitions, or returned to shareholders. Deal activity has picked up this year. Corporate profits remain at high levels and margins have been resilient.
  • Less Drag from Washington: After serving as a major uncertainty over the last few years, there has been some movement in Washington. Fiscal drag will not have a major impact on growth this year. Congress agreed to both a budget and the extension of the debt ceiling. The deficit has also shown improvement in the short-term.
  • Equity fund flows turned positive: Continued inflows would provide further support to the equity markets.

However, risks facing the economy and markets remain, including:

  • Fed Tapering/Tightening: If the Fed continues at the current pace, quantitative easing should end in the fourth quarter. Risk assets have historically reacted negatively when monetary stimulus has been withdrawn; however, this withdrawal is more gradual and the economy appears to be on more solid footing this time. The new Fed chairperson also adds to the uncertainty. Should economic growth and inflation pick up, market participants will shift quickly to concern over the timing of the Fed’s first interest rate hike.
  • Emerging Markets: Slower growth and capital outflows could continue to weigh on emerging markets. While growth in China is slowing, there is not yet evidence of a hard landing.
  • Election Year: While we noted there has been some progress in Washington, market volatility could pick up in the summer should the rhetoric heat up in Washington in preparation for the mid-term elections.
  • Geopolitical Risks: The events surrounding Russia and Ukraine are further evidence that geopolitical risks cannot be ignored.

Risk assets should continue to perform if real growth continues to recover; however, we could see volatility as markets digest the continued withdrawal of stimulus by the Federal Reserve. Economic data will be watched closely for signs that could lead to tighter monetary policy earlier than expected. Equity market valuations are fair, but are not overly rich relative to history, and may even be reasonable when considering the level of interest rates and inflation. Credit conditions still provide a positive backdrop for the markets.

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.

Source:  Brinker Capital

Source: Brinker Capital

Data points above compiled from FactSet, Standard & Poor’s, MSCI, and Barclays. The views expressed are those of Brinker Capital and are for informational purposes only. Holdings subject to change.

Keep a Calm Head in Battle

Dan WilliamsDan Williams, CFP, Investment Analyst

The Battle of Thermopylae, dramatized in the 2007 movie 300, is the story of how a relatively small group of 7,000 disciplined Greeks in 480 B.C. held off a group of 100,000-150,000 invading Persians for three days. Due to the size disadvantage of the Greeks, their eventual defeat at this battle was inevitable. However, this group kept a calm head in battle while the Persian leader Xerxes was said to become so enraged by the delay these Greeks had caused his army that at the battle’s conclusion, he decapitated and crucified King Leonidas of Sparta, the fallen hero of the Greeks, elevating his status as a martyr. While the Greeks lost this battle, at the Battle of Plataea in 479 B.C. the Greek forces won the war. The manifestation of this Greek discipline was the Phalanx formation which lined up troops in close order to form a shield wall defense that marched forward using spears to take down any army in front of them. Given that the Phalanx was only as good as the weakest point, discipline was crucial to its success. This concept was later further refined and improved upon by the Roman legions that used it to great effect to build their empire.

shutterstock_141582367_collegeMay and June mark the end of another school year and the arrival of almost 20 college interns to Brinker Capital. These college students, the most successful not being strangers to discipline, have been exposed to the science of investing in their college courses but have come to Brinker in many cases to help fill the gaps regarding the art of how to identify good investment strategies. To help lay the groundwork for this understanding, we encouraged them to read Money Masters of Our Time by John Train, a book profiling 17 different investment managers of the 20th century.

While all investment managers have proven successful, there was no one right process identified. T. Rowe Price had a process of identifying leaders in very fertile growth areas and holding them long-term until they become mature businesses in a mature industry. Benjamin Graham on the other hand focused on systematically buying the stocks that were thrown away at less than two-thirds of their net current assets and selling once they returned close to intrinsic value. Warren Buffet took a Benjamin Graham initial approach to valuation but then overlaid it with attention given the quality of the businesses and patience to hold these higher quality companies long-term like T. Rowe Price. John Templeton brought a similar attention to valuation and patience but was more willing to go global to find his bargains. George Soros went global as well but speculated more than invested with much more frequent trading in an effort to time the market. This is just to name some of the “money masters” this book discusses.

shutterstock_38215948-soldiersIt is clear that, although all of these managers have been very successful on their own, if hypothetically a super investment management team was able to be formed with these members, the fund would likely suffer from way too many and way too different processes. Like an army with too many generals, having more leaders is not always better. The only element that they seemed to have in common is the fact that they had processes in place that were fundamentally sound and that they stuck to in times of short-term market stress. Some ignored the market swings, some used it as buying opportunities, but all found success by putting their emotions in check when many market participants were caught up in fear or greed. In other words, they had discipline. Like a Roman Phalanx facing down an enemy, a steadfast commitment to a sound plan in the heat of the battle wins the day more often than not.

As such when we evaluate managers this is exactly what we look for. That is to say we need managers to have an effective, sustainable, and proven investment plan and ability to stick to the plan. Much has been made of how individual investors chase performance in good times and break rank at exactly the wrong time in times of stress. While very few of us will prove to be as successful as Warren Buffet, if we can all strive to at least have a plan and stand our ground to keep emotions out of investment decisions we all can be better off.

Brinker Capital at the Envestnet Advisor Summit 2014 Conference

Jean LynchJean Lynch, Managing Director

Brinker Capital is pleased to be one of Envestnet’s Platinum Sponsors for 2014 and to be supporting the Advisor Summit 2014 for the third year in a row! Envestnet’s Advisor Summit is a great venue to network with our clients who access our investment strategies on the Envestnet platform, other investment professionals, and the Envestnet team. This year’s conference is focused on “The Next Big Idea” and the agenda is packed with innovative sessions that will help advisors elevate their business to the next level.

Brinker Capital’s latest “Big Idea” is the introduction of three new 40-Act liquid alternative mutual funds that leverage the strength of our 25+ years on investment management insight and expertise and more than a decade of embracing alternative investments.  These funds – Crystal Strategy Absolute Income Fund, Crystal Strategy Absolute Return Fund, and Crystal Strategy Leveraged Alternative Fund – are designed to mirror the investment strategy of our Crystal Strategy suite of global macro funds.  While each of these funds have their own specific investment strategies and places within an investment portfolio, they do share certain characteristics including broad asset class exposure, diverse strategies, highly-focused stock selection, portfolio hedging and risk management.  For more information on the funds visit, www.crystalstrategyfunds.com.

If you happen to be at the Advisor Summit, be sure to attend the Liquid Alts and Their Growing Role in Portfolio Construction panel on Thursday, May 15 from 2:00pm – 3:00pm to hear from Brinker Capital’s Chief Investment Officer, Bill Miller, as he discusses how our approach to incorporating liquid alternatives into our investment philosophy may help advisors potentially create better outcomes for clients.


Important Information
Please note that investing in alternative strategies involves a high level of risk and is not suitable for all investors. The Crystal Strategy Funds are subject to investment risks, including possible loss of the principal amount invested and therefore are not suitable for all investors. The Funds may not achieve their objectives. Diversification does not ensure a profit or guarantee against loss.

An investor should carefully consider investment objectives, risks, charges, and expenses before investing. To obtain this and other information about the Crystal Strategy Funds, see the Prospectus available from your financial advisor, visit http://www.crystalstrategyfunds.com, or call (855) 572-1722. Read the Prospectus carefully before investing.

The Crystal Strategy Family of Funds is distributed by ALPS Distributors, Inc., 1290 Broadway, Ste. 1100, Denver, CO 80203.  Separately managed accounts and related investment advisory services are provided by Brinker Capital. ALPS is not affiliated with Brinker Capital and does not distribute separately managed accounts. The Crystal Strategy Family of Funds is new and has limited operating history.

Not FDIC Insured – No Bank Guarantee – May Lose Value.

Investment Risks
Alternative Investment Risk. The Team will seek to manage the Fund to balance the potential risks and rewards that we believe are present at any given time and given market. Due to the use of leverage, the Fund will be more aggressive in nature. Likewise, due to the underlying investment process, we believe that there is a strong likelihood that the Fund will perform notably different than traditional strategies with comparable levels of volatility. Similarly, despite the ability to hedge and shift Fund exposures, due to the leveraged nature of the Fund, risks will be magnified and compounded.

Asset Allocation Risk. Portfolio management may favor one or more types of investments or assets that underperform other investments, assets, or securities markets as a whole. Anytime portfolio management buys or sells securities in order to adjust the Fund’s asset allocation, this adjustment will increase portfolio turnover and generate transaction costs.

Borrowing Risk. Borrowing creates leverage. It also adds to Fund expenses and at times could cause the Fund to sell securities when it otherwise might not want to.

Concentration Risk – Investment Companies. Any investment company that  concentrates in a particular segment of the market (such as commodities, gold-related investments, infrastructure-related companies and real estate securities) will generally be more volatile than a fund that invests more broadly. Any market price movements, regulatory or technological changes, or economic conditions affecting the particular market segment in which the investment company concentrates will have a significant impact on the investment company’s performance. While the Fund does not concentrate in a particular industry, it may hold a significant position in an investment company, and there is risk for the Fund with respect to the aggregation of holdings of investment companies. The aggregation of holdings of investment companies may result in the Fund indirectly having significant exposure to a particular industry or group of industries, or in a single issuer. Such indirect concentration may have the effect of increasing the volatility of the Fund’s returns. The Fund does not control the investments of the investment companies, and any indirect concentration occurs as a result of the investment companies following their own investment objectives and strategies.

Derivatives Risk. The Fund’s use of derivatives (which may include options, futures, swaps and credit default swaps) may reduce the Fund’s returns and/or increase volatility. A risk of the Fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Additional, derivatives are subject to liquidity risk, interest rate risk, market risk, credit risk and management risk.

Short Sale Risk. If the Fund sells a security short and subsequently has to buy the security back at a higher price, the Fund will lose money on the transaction. Any loss will be increased by the amount of compensation, interest or dividends and transaction costs the Fund must pay to a lender of the security. The amount the Fund could lose on a short sale is theoretically unlimited (as compared to a long position, where the maximum loss is the amount invested). The use of short sales, which has the effect of leveraging the Fund, could increase the exposure of the Fund to the market, increase losses and increase the volatility of returns.

Investment Objectives
Absolute Income Fund:  The Fund seeks to provide current income and downside protection to conventional equity markets, with absolute (positive) returns over full market cycles as a secondary objective.

Absolute Return Fund:  The Fund seeks to provide positive (absolute) return over full market cycles.

Leveraged Alternative Fund:  The Fund seeks to provide long-term positive absolute return with reduced correlation to conventional equity markets as a secondary objective.

Bridging the Alternative Investment Information Gap

Sue BerginSue Bergin, President, S Bergin Communications

The groundswell of interest in alternative investments continues to build, creating a thirst for clear, comprehensive and client-facing educational materials.

According to Lipper, alternative mutual funds saw the biggest percentage growth of any fund group, with assets under management increasing 41% to $178.6 billion in 2013. A recent report by Goldman Sachs projects liquid alternatives are in the early stage of a growth trend that could produce $2 trillion in assets under management in the next 10 years. In order for this to happen, however, investors must gain a better understanding of how alternative investments work, how they function within a portfolio, and where potential benefits and risks could occur.[1]

EducateAlternative investment strategies are a separate beast than the traditional methods of investing and traditional asset classes that most investors are familiar with. From divergent performance objectives, to the use of leverage, correlation to markets, liquidity requirements and fees, a fair amount about alternatives is different from traditional investments. Understandably, investors have many questions before they can decide whether to and how much of their portfolio to dedicate to alternative investments.

The task of educating investors about alternatives is falling largely on the shoulder of the advisory community. Well over half (60%) of the high-net-worth investors recently surveyed by MainStay Investments, indicated financial advisors as the top resource for alternative investment ideas. Trailing advisors was internet-based research (41%), research papers and reports (35%), and financial service companies (30%).[2]

Historically, advisors have shied away from recommending alternative investment strategies because they are too difficult to explain. The conundrum they now face is that 70% of those advisors surveyed also acknowledge the need to use new portfolio strategies to manage volatility and still seek positive.[3]

Bridge the Education GapIt’s important that advisors start to value the use of alternatives and find ways to bridge the information gap for investors. The good news is that investors have tipped their hands in terms of what they really want to know. According to the MainStay survey, clients want more information in the following areas:

 

  • Explaining the risks associated with alternative investments (73%)
  • Learning about how alternatives work (71%)
  • Finding out who manages the investments (54%)
  • Charting how alternatives affect returns (46%)

[1] http://www.imca.org/pages/Fundamentals-Alternative-Investments-Certificate

 [2] “HNW Investors Turn to Advisors For Alternative Investment Guidance,” InsuranceNewsNet, April 3, 2014.

[3]Few advisers recommend alternative investments: Respondents to a Natixis survey said that they stick to strategies that can be explained to clients more easily,” InvestmentNews, October 24, 2013

The views expressed are those of Brinker Capital and are for informational purposes only.