WEALTH MANAGEMENT | Q2 13 In This Issue Letter from the Editor 2 Wealth Management Planning 5 Portfolio Strategy 13 Index Returns 17 Discretionary Research Highlights 18 Investment Asset Classes 20 CAPTRUST News 23 Strategic research report Strategic research report what The New Medicare Tax Means to You R. Michael Gray, CPA, PFS Senior Vice President, CAPTRUST Financial Advisor Chris P. Judy, CPA Managing Partner, Thomas, Judy & Tucker, P.A. With all the attention focused on the tax-rate changes included in the American Taxpayer Relief Act (ATRA), the legislation that narrowly averted the fiscal cliff, some may have forgotten about the new Medicare tax that actually resulted from a piece of legislation passed three years ago — the 2010 Health Care Act. Starting in 2013, high-income taxpayers are subject to a 3.8 percent Medicare “contribution tax on unearned income.” Judging by the number of client conversations and questions we have had on the topic, we thought it might be useful to dedicate some attention to it. We asked Chris Judy, managing partner and certified public accountant at the Raleigh, N.C.-based accounting firm Thomas, Judy & Tucker, P.A., to provide his perspective on this new tax and share a few specific tax-planning strategies. Who Pays This Tax? The new 3.8 percent Medicare contribution tax will affect taxpayers whose adjusted gross income (AGI) exceeds certain thresholds—$250,000 for joint filers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals filing separately. These threshold amounts are not indexed for inflation. Thus, as time goes by, inflation will cause more taxpayers to become subject to the 3.8 percent tax. Your AGI is the bottom line on page one of your Form 1040. It consists of your gross income minus your adjustments to income, such as an IRA deduction. If your AGI is above the threshold that applies to you, the 3.8 percent tax will apply to the lesser of: • Your net investment income for the tax year, or • The excess of your AGI for the tax year over your threshold amount. This tax is in addition to the income tax that applies to that same income. What is Net Investment Income? The definition of net investment income subject to the 3.8 percent tax itself seems to be poorly understood. Interest, dividends, annuities, royalties, rents, continued on page 3
Transcript
WEALTH MANAGEMENT | Q2 13
In This Issue
Letter from the Editor 2
Wealth Management Planning 5
Portfolio Strategy 13
Index Returns 17
Discretionary Research Highlights 18
Investment Asset Classes 20
CAPTRUST News 23
Strategic research reportStrategic research report
what The New Medicare Tax Means to You R. Michael Gray, CPA, PFSSenior Vice President, CAPTRUST Financial Advisor
Chris P. Judy, CPA Managing Partner, Thomas, Judy & Tucker, P.A.
With all the attention focused on the tax-rate changes included in the American Taxpayer Relief Act (ATRA), the legislation that narrowly averted the fi scal cliff, some may have forgotten about the new Medicare tax that actually resulted from a piece of legislation passed three years ago — the 2010 Health Care Act. Starting in 2013, high-income taxpayers are subject to a 3.8 percent Medicare “contribution tax on unearned income.” Judging by the number of client conversations and questions we have had on the topic, we thought it might be useful to dedicate some attention to it.
We asked Chris Judy, managing partner and certifi ed public accountant at the Raleigh, N.C.-based accounting fi rm Thomas, Judy & Tucker, P.A., to provide his perspective on this new tax and share a few specifi c tax-planning strategies.
Who Pays This Tax?
The new 3.8 percent Medicare contribution tax will affect taxpayers whose adjusted gross income (AGI) exceeds certain thresholds—$250,000 for joint fi lers and surviving spouses, $200,000 for single taxpayers and heads of household, and $125,000 for married individuals fi ling separately. These threshold amounts are not indexed for infl ation. Thus, as time goes by, infl ation will cause more taxpayers to become subject to the 3.8 percent tax.
Your AGI is the bottom line on page one of your Form 1040. It consists of your gross income minus your adjustments to income, such as an IRA deduction. If your AGI is above the threshold that applies to you, the 3.8 percent tax will apply to the lesser of:
• Your net investment income for the tax year, or
• The excess of your AGI for the tax year over your threshold amount.
This tax is in addition to the income tax that applies to that same income.
What is Net Investment Income?
The defi nition of net investment income subject to the 3.8 percent tax itself seems to be poorly understood. Interest, dividends, annuities, royalties, rents,
continued on page 3
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letter from the editorletter from the editor
Dear Readers,
It’s hard to believe that the year is more than half over; it seems like just yesterday
that fi scal cliff headlines dominated the newswires, basketball personality Dennis
Rodman embarked on his fi rst diplomatic mission to North Korea, and my kids were
still in school. 2013’s fi rst half was busy enough for everyone. As always, our goal
is to provide private wealth clients with content that is both timely and actionable
given the many crosscurrents enveloping the investment and regulatory climate.
Bond market volatility was a signifi cant second quarter development, with fi xed
income securities hurt by the anticipated Federal Reserve asset purchase slowdown.
I explore this issue in an update to an intra-quarter piece we put out in response to
the recent Fed communique. I also discuss portfolio construction and asset class
performance in my regular Portfolio Strategy article.
Veteran CAPTRUST advisor Mike Gray teams up with Chris Judy of accounting
fi rm Thomas, Judy & Tucker to explore the newly implemented Medicare
contribution tax on investment income. This is an important issue that will impact
many of our clients, and getting in front of strategies may help alleviate its impact.
Their article should prove helpful heading into year end. Finally, CAPTRUST’s
Mark Paccione weighs in on portfolio management disciplines, using a recent
conversation with a friend to highlight all that goes into portfolio construction, asset
deployment, and risk management.
We will keep you apprised of what will be an exciting fi nish to 2013, including
whether or not Rodman takes home the Nobel Peace Prize for which he is currently
angling. As my teenager would say, don’t hold your breath.
Onward,
Eric J. FreedmanCAPTRUST Chief Investment Offi cer
HALFTIME!
WEALTH MANAGEMENT | Q2 13
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continued from page 1
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and net gains from property and securities sales are all considered net investment income for purposes of this tax.
It is important to note that neither income from an active trade or business nor wage income is included in net investment income. However, passive business income is subject to the Medicare contribution tax. This is a very important distinction to recognize when considering strategies for dealing with the Medicare tax.
Are Home Sales Subject to the Tax?
If you sell your primary residence, you may be able to exclude up to $250,000 of gain, or gain of up to $500,000 for joint fi lers, when fi guring your income tax. This excluded gain won’t be subject to the Medicare contribution tax. However, the amount of the gain that exceeds the limit on the exclusion will be subject to the tax. Gain from the sale of a vacation home or other second residence sale, which doesn’t qualify for the income tax exclusion, will be subject to the Medicare contribution tax.
Are Retirement Plan Distributions Taxed?
Distributions from qualifi ed retirement plans, such as pension plans and individual retirement accounts (IRAs), aren’t subject to the Medicare contribution tax. However, keep in mind that those distributions may push your AGI over the threshold that would cause other types of investment income to be subject to the tax.
Tax-Planning Strategies
Investments
The income thresholds that trigger this new tax heighten the need to be proactive with your investment portfolio composition and management. Harvesting capital losses to offset gains may add value by allowing you to lower your AGI below the threshold applicable to you. Taking steps to avoid mutual fund capital distributions may also become more important for the same reason. While some year-end actions will always be available, having a clear picture of not only expected income levels but also its components is now far more important.
Tax Area Who is Aff ected? Details
Social Security Payroll Tax All taxpayers earning salary or wages Increase from 4.2% to 6.2% (applies to wages and salary up to $113,700)
Ordinary Income Taxes Taxpayers with taxable income over $400,000 ($450,000 for couples) Highest marginal tax rate increases from 35% to 39.6%
Long-Term Capital Gains and Dividend Taxes
Taxpayers with taxable income over $400,000 ($450,000 for couples) Maximum tax rate increases from 15% to 20%
Phaseout of Itemized Deductions and Personal Exemptions
Taxpayers with adjusted gross income (AGI) above $250,000 ($300,000 for couples)
Tax benefi t of itemized deductions (mortgage interest, charitable donations, property taxes, state/local income taxes, etc.) and personal exemptions (e.g., dependent children) are reduced as income increases; itemized deductions are reduced as much as 80%; personal exemptions may be fully eliminated
Medicare Contribution Tax
Taxpayers with over $200,000 of adjusted gross income (AGI), couples with more than $250,000 of AGI; for trusts and estate, the income threshold is $11,950
3.8% tax on investment income, including taxable interest, dividends, capital gains, rental income, royalties, the taxable portion of income from nonqualifi ed annuities, and income from business activity where the taxpayer is not considered an active participant
Figure One: Summary of Recent Tax Developments
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Municipal Bonds
Income that is exempt from income tax, such as municipal bond interest, is likewise exempt from the 3.8 percent Medicare contribution tax, making municipal bonds potentially more valuable in a portfolio on a taxable-equivalent basis. Thus, switching some of your taxable investments into tax-exempt bonds can reduce your exposure to the 3.8 percent tax. Of course, this should be done with regard to your income needs, risk tolerance, and other investment considerations.
Life Insurance and Annuities
Deferring income until a later date through the use of life insurance or annuities is another strategy to consider. Investment vehicles like low-cost variable annuities provide the ability to shield investment earnings from the tax and could make sense for some individuals.
IRAs
The Medicare tax also makes Roth IRAs more attractive for higher-income individuals because qualifi ed Roth distributions are neither subject to the Medicare contribution tax nor included in AGI. If eligible, individuals may want to make Roth IRA contributions now so that those funds and any appreciation would not be taxable later.
Distributions from traditional IRAs will be included in AGI, except to the extent of after-tax contributions, although they are not subject to the Medicare contribution tax. If you are not required to take minimum distributions, you may want to limit your withdrawals in an effort to stay below the AGI threshold relevant to you. One way to ensure you stay below the threshold is to make retirement distributions directly payable to a charity of your choice. This option only applies to taxpayers who are over 70 1⁄2 and are making required minimum distributions.
Rental Income
In the past, some tax advisors have considered it benefi cial to deal in passive activities; however, for the purposes of the Medicare tax, it is benefi cial to be considered active in your rental or business dealings. Therefore, you may wish to review your activity level in rental and business ventures to consider if aggregation of activities to meet real estate professional and material participation status would be benefi cial. By grouping business activities, you may be able to show material participation of over 500 hours, allowing those businesses to be considered active rather than passive. If you are considered active in a business or real estate activity, income from that activity would not ordinarily be subject to the Medicare tax.
Other Considerations for Business Owners
Business owners should be aware of several additional opportunities as they plan for the new Medicare tax:
• Entity selection is important when considering the impact of the Medicare tax. Currently, S corporation distributions are not subject to the Medicare tax, whereas distributions from C corporations are.
• One may wish to consider a Section 1031 Exchange to delay recognition of a gain on the sale of property.
• An installment sale may be used to spread gains over multiple tax years and avoid generating a large tax hit in a single year.
Our goal is to equip you with a few specifi c ideas that will help start conversations with your tax advisors about the new Medicare tax. These are conversations you should have as soon as possible so that you are in a position to properly consider strategies that will help minimize its impact going forward. Time spent now with both tax and investment advisors could yield lower taxes and better after-tax investment results for 2013 and beyond.
Following a 30-plus-year bull market in the fi xed income or bond market, the path forward is much more uncertain. While investors await the next move for fi xed income, unless bond prices move higher (and, by defi nition, bond yields move lower), historically low interest rates indicate that bonds will offer lower total returns than most bond investors have experienced during recent periods.
May 2013 represented the worst monthly return for the bond market
since the 2008 fi nancial crisis, with the Barclays Capital Aggregate Bond Index (BarCap Agg) losing 1.78 percent. Fears that the U.S. Federal Reserve would soon begin to rein in its bond-buying program hurt fi xed income in general. The 10-year Treasury yield rose from 1.64 percent on May 1 to 2.16 percent on June 1, which in percentage terms was the largest month-over-month increase in yield history. The 10-year Treasury continued its rise in June,
WHAT’S NEXT FOR THE BOND MARKET? Eric J. FreedmanCAPTRUST Chief Investment Offi cer
reaching a high of 2.66 percent before closing the quarter at 2.48 percent. Many yield-sensitive asset classes and sectors fell in sympathy, including corporate bonds, municipal bonds, public real estate, utility stocks, and master limited partnerships. For the quarter, the BarCap Agg was down 2.32 percent. “All things yield” appeared vulnerable as government bond prices sold off and interest rates moved higher.
Where Will Interest Rates Go from Here?
Looking at Figure Two, one can see that since the summer of 2011, 10-year Treasury yields have been fi rmly below 3 percent. This is due to global central banks’ active suppression of interest rates through buying fi xed income securities in the open market in an attempt to encourage lending and spark economic activity. However, the U.S. Federal Reserve has recently hinted that those open market purchases could begin to slow, leaving investors to question who will replace the Fed and buy bonds. This speculation led to the second quarter’s weak bond market returns.
Per Figure Two, it appears we are approaching interest rate levels that are halfway between the lows seen in the summer of 2012 and the higher levels seen before the summer of 2011. From here, rates can do one of three things: move lower, remain fl at, or move higher.
Figure Two: U.S. 10-Year Treasury Yields (January 2010–June 2013)
1.5%
1.0%
0%
4.0%
Yie
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3.0%
2010 2011 2012 2013
0.5%
2.0%
3.5%
2.5%
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Figure One: “All Things Yield” Q2 2013 Performance
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BarCap Aggregate Bond Index
BarCap Municipal
Bond Index
BarCapU.S. Corporate
High Yield Index
S&P U.S. Preferred
Stock Index
Alerian MLP Index
Dow Jones U.S. Real
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BarCap U.S. Treasury: U.S. Treasury TIPS
Index
-2.3%-3.0%
-1.4%
-7.0%
-3.2%
2.0%
-3.3%
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continued from page 5
Let’s Explore the Case for Each Scenario:
• Rates move lower
This scenario could happen for several reasons, most likely driven by economic weakness that causes the Fed and other central banks to continue their bond purchases. Sticky unemployment, a slowing China, continued European market malaise, and weaker equity and riskier asset classes could all cause this development. While this may seem implausible given where interest rates sit right now, we have seen them at even lower levels; the 10-year Treasury touched below 1.4 percent in July 2012, a full percentage point lower than today.
• Rates remain fl at
A goldilocks economy — growing neither too fast nor too slow — where infl ation remains tame (the Bureau of Labor Statistics notes that month-over-month change in the Consumer Price Index has fallen over the past two months) and employment and wage growth remain tepid could cause interest rates to hover at or near current levels.1
• Rates move higher
An economy showing resilience, the Fed backing off its recent bond purchase trend (or anticipation thereof), infl ationary pressures, or asset allocation movement toward riskier asset classes or foreign bonds could all drive interest rates higher. As described earlier, rising prevailing interest rates tend to hurt bondholders.
Our base case scenario is for rates to rise, but to do so at a gradual pace over the next 18 to 24 months subject to numerous fi ts and starts depending on the economy’s health and central bank involvement. If we are wrong, we suspect it will be because a move higher happens faster than we expect — perhaps accelerated by investor overreaction to market news.
The Need to Gauge Speed
While higher interest rates could hurt bond investors, as Figure Three shows, rising yields do not always translate into bond investor losses. Two key variables will likely determine how acutely rising rates may impact bond investors: the magnitude of the rate increase and the speed at which rates increase. The higher rates move and the shorter the time period, the more painful the experience.
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Dates Number of Months
Increase in the 10-year Treasury
Yield
BarCap Agg Total
Return
6.1.79–2.28.80 9 3.81% -10.73%
6.1.80–8.31.81 15 5.63% -5.81%
5.1.83–5.31.84 13 3.42% -0.85%
1.1.87–9.30.87 9 2.51% -2.88%
10.1.93–10.31.94 13 2.48% -3.07%
1.1.96–5.31.96 5 1.20% -2.53%
10.1.98–12.31.99 15 1.91% -0.40%
3.1.04–4.30.06 26 1.22% 1.83%
12.1.08–3.31.10 16 1.41% 8.76%
5.1.13–5.31.13 1 0.52% -1.78%
Figure Three: Periods Where 10-Year Treasury Yields Increased More Than 0.3% and Corresponding Barclays Capital
Aggregate Index Returns, 1979–2013
WEALTH MANAGEMENT | Q2 13
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continued on page 8
For example, from December 2008 through March 2010, the 10-year Treasury yield rose by almost 1.5 percentage points while the BarCap Agg returned more than 8.7 percent. This was the result of a modest rate increase (as a percent of the starting yield) and a timeframe long enough for coupon payments to outweigh the price decline. Also, because the BarCap Agg is a diversifi ed index that includes corporate and mortgage bonds, some decoupling from government bonds may have occurred.
By contrast, in May, a mere 0.5 percentage-point increase in 10-year Treasury yields set the bond market back as coupons failed to offset falling bond prices over such a truncated period. In addition, since interest rates are very low, the starting yield did not provide much of a cushion against higher rates.
What Can Bond Investors Expect Moving Forward?
CAPTRUST research suggests that current interest rates often portend future returns. As Figure Four displays,
the prevailing interest rate as measured by the 10-year Treasury provides a reasonable approximation of fi ve-year forward annualized fi xed income returns as measured by the BarCap Agg (note that forward returns starting in 2009 are for less than fi ve years and are as of June 7, 2013). So, you would interpret the chart this way: in 1997, the 10-year Treasury started the year yielding 6.43 percent. During the period encompassing 1997–2002, the BarCap Agg delivered a 7.42 percent annualized return.
Figure Four: 10-Year U.S. Treasury Yield Vs. Barclays Capital Aggregate Index Five-Year Forward Return, 1977–2012
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continued from page 7
Over time, the correlation between the 10-year Treasury’s starting yield and fi ve-year forward return has been over 0.9, a strong, positive relationship. Correlation cannot be higher than 1.0, and a correlation of 0.6 to 0.7 is considered high. Therefore, given the 10-year Treasury’s current low level, if the relationship described holds, investors should expect bond portfolios to deliver lower nominal (non-infl ation-adjusted) returns than in prior periods.
Active Manager Investment Perspective
We polled a diverse set of bond portfolio managers for their perspectives on the bond market since the Federal Reserve’s communication, and while their views are subject to change, their perspectives are as follows:
• TCW MetWest’s Steve Kane, who comanages the $25 billion MetWest Total Return Fund, believes there is a 100 percent probability that the Fed will maintain its zero interest rate policy through 2013 — and a 95 percent probability through 2014.
• Jerry Lanzotti, who comanages the Lord Abbett Total Return Fund, thinks the Fed is serious about tapering its bond purchase program and that interest rate volatility will persist along with consequent volatility in other asset classes.
• Managers at Fidelity’s $13 billion Total Bond Fund are most focused on the Fed’s new data-driven approach. They believe, if the Fed tapers on the aggressive end of expectations, the worst case scenario for 10-year yields is a climb to 4 percent from their current mid-2-percent range. Given low core infl ation and growth expectations, they expect a much slower climb in rates going forward.
• Lastly, PIMCO’s Bill Gross believes the Fed’s economic outlook currently driving policy is too optimistic since infl ation is running close to 1 percent. Given this view, in his opinion, the recent yield increase appears overdone.
These perspectives refl ect very conditional and temporal approaches and views, and investors may be left wondering what to do given the uncertain path.
WEALTH MANAGEMENT | Q2 13
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Source:1 http://www.bls.gov/cpi/cpid1304.pdf
Investor Choices
Generally speaking, bond investors have several options available to help combat the impact of rising interest rates on their portfolios:
Option One Do nothing. Either hold individual bonds to
maturity and ignore price noise, mindful of credit
quality, or rely on a diversifi ed mix of bond
funds with a long-term view. Remember, barring
default, an unexpected early bond call, or poor
trading, fi xed income delivers positive absolute
returns regardless of interest rate moves.
Option TwoReduce interest rate sensitivity by raising cash or
seeking shorter-maturity bonds or bond funds.
Option ThreeRotate away from fi xed income and toward
other asset classes while being mindful that
other asset classes possess their own risks.
Option FourAttempt to counteract adverse bond market
movements through hedging techniques
involving inverse bond exchange traded funds,
options, or other tools.
Option FiveAdopt a combination of options two through
four for a portion of the bond portfolio.
In summary, the bond market was especially volatile in the second quarter because of a signifi cant rise in prevailing rates. While interest rates could move in any direction from here, we believe the path forward will most likely be a gradual rise over the next 18 to 24 months. In the end, bond returns will be impacted by the speed of any rate rise; the faster yields rise, the more adverse for investors. Investors can take a number of actions to reduce the potential interest-rate headwind; though, historically low interest rates have indicated that bond investors should expect total returns to be lower than recent years. We encourage you to reach out to your CAPTRUST fi nancial advisor if you are interested in exploring concepts discussed in this article.
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Recently, a friend came to me seeking advice. This friend, a lawyer by trade, has somewhat limited investing knowledge, and despite the rise in the stock market, her investment returns were less than she had expected. In an attempt to invest her portfolio more wisely, she inquired about CAPTRUST’s portfolio management strategies and investment process. The following is a synopsis of our ensuing discussion and CAPTRUST’s philosophy surrounding discretionary portfolio management.
Begin With the End in Mind1
Determine whether the portfolio goal is capital preservation, income, growth, or some combination of the three. One approach is to split the portfolio into three distinct buckets: a liquidity or capital preservation bucket, an income bucket, and a growth bucket. The three-bucket approach breaks the portfolio down into more manageable pieces and clarifi es each investment’s purpose. In addition, it provides confi dence that immediate needs are planned for while decreasing anxiety over a portfolio’s more volatile growth components.
Decide How Much Loss is Tolerable
Investors must be prepared to lose money — at least temporarily. Unless investments are limited to cash, U.S. Treasurys, or FDIC-insured certifi cates of deposit, portfolio volatility and capital loss potential are unavoidable investing byproducts. While all investors desire the highest return possible, it is important to strike a balance between desired high returns and tolerable risk of loss.
Identify Key Investment Constraints
Liquidity and time horizon are two key investment constraints. For liquidity, consider immediate spending needs. Funds needed in the next 12 months should be set aside in a capital preservation bucket with only cash and cash-like investments allowed. Liquidity needs also affect the investment vehicle decision. For instance, private equity is an attractive opportunity but has a long lockup period and, thus, should not be seeded with funds needed in the next few years. Time horizon dictates how aggressive a portfolio should be.
NO EASY BUTTON: A FIELD GUIDE TO PORTFOLIO MANAGEMENTMark Paccione, CFA, CFP® Director, CAPTRUST Consulting Research Group
One approach is to split the
portfolio into three distinct
buckets: a liquidity or capital
preservation bucket,
an income bucket, and a
growth bucket.
WEALTH MANAGEMENT | Q2 13
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Portfolios with longer time horizons can be more aggressive since they have more time to recover from the inevitable market declines. Retirement presents a unique time horizon challenge as retirees must balance two opposing risks: longevity risk (the risk of outliving your money) and market risk (potential portfolio loss due to adverse market movements).
Implement the Investment Strategy
CAPTRUST begins with top-down asset allocation — which drives the majority of a portfolio’s returns2 — and utilizes investment vehicles and managers that provide broad exposure to an asset class or sub-asset class, such as U.S. equities or mortgage bonds. In cases where we have discretionary authority, CAPTRUST adds value to client portfolios at three distinct levels:
• The fi rst, strategic asset allocation, is the apportionment of funds among six major asset classes, including U.S. equities, international equities, fi xed income, real estate, commodities, and hedge funds and private equity.
• The second value-add is tactical asset allocation, tilting the portfolio toward asset classes and sub-asset classes that are more attractive and away from those with less
opportunity in a given market environment. CAPTRUST utilizes multiple primary and secondary data sources and proprietary research insights to determine strategic and tactical asset allocations.
• The third value-add is investment selection. CAPTRUST has a dedicated investment manager due diligence team that focuses on selecting the best managers for discretionary portfolios. With access to world-class asset managers, our due diligence team provides a distinct edge in understanding a manager’s unique value proposition and investment opportunity set.
Risk Management is Critical
CAPTRUST spends signifi cant time, energy, and resources on risk management to avoid permanent capital loss and achieve the desired return with the least amount of risk. At the portfolio level, CAPTRUST focuses on numerous investment risks, including interest rate, credit, market, manager, sector, and country risks. Almost all bonds have interest rate risk, which represents the possibility for price decline due to rising rates. To manage interest rate risk, CAPTRUST generates duration reports that quantify the interest rate sensitivity of a particular bond holding and the overall portfolio. To manage
continued on page 12
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market risk, CAPTRUST runs beta reports, which measure the tendency of a security’s returns to respond to swings in the market.3 Sector reports detail the U.S. and international equity exposures by sector, such as health care and information technology. Finally, the country risk report decomposes international equity holdings by country of domicile. These risk management reports allow CAPTRUST to anticipate how individual investments — and the complete portfolio — will act in various market environments. More importantly, the reports enable proactive and deliberate portfolio positioning to take advantage of the current market environment.
At a microscopic level, CAPTRUST monitors the daily performance of discretionary models, accounts, and investment managers. We produce daily model performance reports, which record model and manager returns over several trailing time periods. Performance attribution is derived from the daily model performance report, detailing which investments or factors are contributing to and which are detracting from overall performance. Daily account monitoring ensures detection of potential problems quickly and decisively. CAPTRUST also utilizes deviation reports that measure the difference between current positioning and desired positioning. Using account-level reports, we can quickly detect discretionary accounts not performing as expected, identify the issue, and resolve it.
The Wisdom of the Crowd is Invaluable
CAPTRUST has an investment committee made up of senior investment professionals who talk daily and meet formally on a biweekly basis to collaborate on investment theses, glean insights from others, and generally expand the team’s knowledge base. The committee construct also helps us avoid common behavioral biases. Lively, data-driven discussions based on primary and
secondary research minimize the risk of confi rmation bias (the tendency to accept data that confi rms existing beliefs while rejecting data that contradicts them).4 Our belief is that investment decisions should be based on all available data and not just data that confi rms initial views. Further, we hope to avoid falling prey to herding behavior (the tendency for individuals to follow the group’s actions) and eliminate emotions from playing a role in decision making.5
In the end, while my friend was grateful for the insight, I’m not sure it was the simple answer she had hoped for. The key to success as an investor—as in any endeavor—is to become an expert or hire one to work on your behalf. No shortcut, FastPass, or EZ button for instant success exists when it comes to investment portfolio management. The best practices outlined above require a team of experts working in unison toward a common goal: the successful execution of a client’s investment objectives.
Sources:1 Covey, Stephen. The 7 Habits of Highly Effective People. New York: Free Press, 1989.2 Brinson, Gary P., L. Randolph Hood, and Gilbert L. Beebower. 1986. “Determinants of Portfolio Performance.” Financial Analysts Journal, vol. 42, no. 4 (July/August):
39–40.3 http://www.investopedia.com/terms/b/beta.asp4 Kahneman, D. and Tversky, A. (1984). “Choices, Values, and Frames.” American Psychologist, vol. 39, no. 4: 341–350.5 Ibid
continued from page 11
Our belief is that investment
decisions should be based on
all available data and not just
data that confi rms initial views.
WEALTH MANAGEMENT | Q2 13
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My oldest daughter, Hailey, started to really concentrate on golf this year. Many readers who chase after “the little white ball” can attest that golf is a cruel game, even recreationally between friends. Tournament golf, however, can be especially punishing, and I am not just talking about juniors facing the same tough greens, pin positions, and, in some cases, distances as players 50 years their elders. A 7:00 am tee time is not in sync with a 13-year-old’s normal sleep schedule; pre-round breakfast, stretching, and warm-ups necessitate waking up long before the sun.
Living in North Carolina provides Hailey with ample opportunities to play at some of the fi nest courses anywhere, and a few years ago when she fi rst showed interest in playing golf beyond the recreational round with me, my wife, Jamie, and I signed Hailey up for a low-key tournament at a very playable golf course. When the starter announced her name and hometown, followed by claps from the handful of fellow caddie parents standing behind her, Hailey turned to me with
one part anxious, one part proud smile. She ripped her drive down the fairway, and we were off with a spring in our steps. She loved the experience, and I never had more fun on a golf course than when I was carrying her bag that day, helping her with yardages, raking sand traps, and reading putts.
As her play progressed, we scouted additional tourneys, including one hosted by a tour rumored to be a notch above her initial training tournaments. We found a two-day event in Colonial Williamsburg, and on a warm late June day, we headed up for her fi rst round. Her tee time was early afternoon, and as we drove north, my car’s external thermometer rose to 92 degrees. No worries, I thought. I will subtract a few yards per club to adjust to the high humidity. All she has to do is hit shots and stay hydrated. Piece of cake; I had enough sports drinks with me for the entire Commonwealth.
As we approached the fi rst tee, a tour offi cial stopped me and asked where I was going. I told her I was caddying for my
portfolio Strategyportfolio Strategy
ALL-TIME HIGHS? Eric J. FreedmanCAPTRUST Chief Investment Offi cer
continued on page 14
14 WWW.CAPTRUSTADVISORS.COM
daughter, and we were up next. The tour offi cial scowled and spoke into her Secret Service – style microphone, indicating to a colleague that a father was intending to carry his daughter’s bag. “That’s a negative” she quipped. “No caddies allowed. Parents must remain on the cart path at all times and not interact with their children while playing except to deliver snacks.” It had been a hectic week in the offi ce, and I neglected to read the fi ne print. I remember saying to Jamie “We don’t need to bring a push cart with us” just as Hailey’s playing partner strolled by with a shiny red contraption, complete with an umbrella to shade the sun on what turned out to be the hottest June day in Virginia history. “Well, there goes my father-of-the-year nomination,” I muttered sarcastically.
They called Hailey’s name as I was breaking the news to her. “But Dad, I don’t really remember how far I hit each club.” She quickly wrote down the ranges I had memorized, as if cramming before a midterm. I blurted a stream of advice; this would be the last time Hailey and her advanced tournament neophyte father would speak outside of yours truly pouring Gatorade down her parched throat. Just after invoking timeless morsels straight from Ben Hogan’s Five Lessons, I ended my brain dump with “Remember Hailey, golf is like what Papa says all the time don’t let the highs get too high and the lows get too low. Birdies will happen, double-bogeys will happen. Just keep a level attitude and have fun out there.” She nodded, looking one part anxious and two parts overheated; I couldn’t tell if the latter was due to the weather or my ineptitude.
Investors have had their share of highs and lows over the past 10 years. As measured by the S&P 500, U.S. equities hit their all-time high in late May, and as we have documented in several publications, interest rates remain near historical lows despite recent selling pressures. So with U.S. stock and bond prices so high, why are broadly diversifi ed portfolios not following suit? The answer rests in asset class performance outside of the more familiar domestic equity and fi xed income asset categories. Before we
explore those asset classes, let’s take a step back and consider some of the core asset allocation tenets that drive our portfolio construction.
First, no one knows with any degree of certainty what the future holds. While my investment committee and I track key upcoming events like Federal Reserve meetings and macroeconomic statistical releases, we do not know three important things: (1) those events’ outcomes, (2) what the capital market reaction to said events may be, and (3) likelihood of any “unscheduled” events like political tumult in Egypt or an infl uential company’s surprisingly positive earnings preannouncement. Because of future uncertainty, we believe investors should have exposure to a variety of asset classes that protect them in the event of both highs (positive earnings preannouncement) and lows (political unrest). Asset classes tend to react differently to various events, and having a mix of asset classes to absorb whatever event permutations unfold should help investors over time.
Second, irrespective of market events, we want to provide investors with what are termed factor exposures or long-term trends that will benefi t investors.1 Stocks are a great example; they provide access to corporate profi ts, and as long as indices and active managers (stock pickers) capture “winning” companies, having exposure to rising
continued from page 13
WEALTH MANAGEMENT | Q2 13
15
continued on page 16
corporate profi ts over time should lead to positive returns over infl ation. Of course, recessions and other dynamics make stock returns anything but linear, but as long as an investor has an appropriate time horizon to endure stocks’ ebbs and fl ows, they can add value.
Third, when properly deployed, asset allocation can provide a hedge against costs an investor endures. For example, while not appropriate for all investors, commodity investments fl uctuate with prices of assets like oil, industrial metals, agriculture, and other goods. Often these goods are tied directly to inputs that surround an investor’s daily life, so having some offsetting portfolio exposure can help against price fl uctuations, especially when input costs move higher.
Aggregating these three considerations, we strive to create portfolios that incorporate both protection against adverse events and long-term factor exposure. Asset classes can have overlapping factor exposure and the correlations or co-movements between asset classes can fl uctuate, so by no means is the construction process a static exercise.
Figure One, which provides a snapshot of nine different asset classes and one blended portfolio’s returns over the past decade, reveals why having a portfolio construction process with the three principles highlighted can be additive. If you notice where the broad-based asset allocation portfolio (which incorporates each of Figure One’s standalone asset classes) ranks year after year relative to the individual asset
Figure One: Individual Asset Class Vs. Asset Allocation Portfolio Returns
Russell2000
47.3%
MSCIEAFE
39.2%
REITs
37.1%
S&P 500
28.7%
Barclays Agg
4.1%
Cash
1.0%
DJ UBS Cmdty
23.9%
Market Neutral
7.1%
MSCIEME
56.3%
2003 2004
Russell2000
18.3%
MSCIEAFE
20.7%
REITs
31.6%
S&P 500
10.9%
Barclays Agg
4.3%
Cash
1.2%
DJ UBS Cmdty
9.1%
Market Neutral
6.5%
MSCIEME
26.0%
2005
Russell2000
4.6%
MSCIEAFE
14.0%
REITs
12.2%
S&P 500
4.9%
Barclays Agg
2.4%
Cash
3.0%
DJ UBS Cmdty
21.4%
Market Neutral
6.1%
MSCIEME
34.5%
2006
Russell2000
18.4%
MSCIEAFE
26.9%
REITs
35.1%
S&P 500
15.8%
Barclays Agg
4.3%
Cash
4.8%
DJ UBS Cmdty
2.1%
Market Neutral
11.2%
MSCIEME
32.6%
2007
Russell2000
-1.6%
MSCIEAFE
11.6%
REITs
-15.7%
S&P 500
5.5%
Barclays Agg
7.0%
Cash
4.8%
DJ UBS Cmdty
16.2%
Market Neutral
9.3%
MSCIEME
39.8%
2008
Russell2000
-33.8%
MSCIEAFE
-43.1%
REITs
-37.7%
S&P 500
-37.0%
Barclays Agg
5.2%
Cash
1.8%
DJ UBS Cmdty
-35.6%
Market Neutral
1.1%
MSCIEME
-53.2%
2009
Russell2000
27.2%
MSCIEAFE
32.5%
REITs
28.0%
S&P 500
26.5%
Barclays Agg
5.9%
Cash
0.1%
DJ UBS Cmdty
18.9%
Market Neutral
4.1%
MSCIEME
79.0%
2010
Russell2000
26.9%
MSCIEAFE
8.2%
REITs
27.9%
S&P 500
15.1%
Barclays Agg
6.5%
Cash
0.1%
DJ UBS Cmdty
16.8%
Market Neutral
-0.8%
MSCIEME
19.2%
2011
Russell2000
-4.2%
MSCIEAFE
-11.7%
REITs
8.3%
S&P 500
2.1%
Barclays Agg
7.8%
Cash
0.1%
DJ UBS Cmdty
-13.3%
Market Neutral
4.5%
MSCIEME
-18.2%
2012
Russell2000
16.3%
MSCIEAFE
17.9%
REITs
19.7%
S&P 500
16.0%
Barclays Agg
4.2%
Cash
0.1%
DJ UBS Cmdty
-1.1%
Market Neutral
0.9%
MSCIEME
18.6%
2Q ’13
Russell2000
3.1%
MSCIEAFE
-0.7%
REITs
-2.1%
S&P 500
2.9%
Asset Allocation
-0.6%
Barclays Agg
-2.3%
Cash
0.0%
DJ UBS Cmdty
-9.5%
Market Neutral
1.4%
MSCIEME
-8.0%
YTD ’13
Russell2000
15.9%
MSCIEAFE
4.5%
REITs
5.8%
S&P 500
13.8%
Asset Allocation
4.5%
Barclays Agg
-2.4%
Cash
0.0%
DJ UBS Cmdty
-10.5%
Market Neutral
2.2%
MSCIEME
-9.4%
CUM.
Russell2000
152.8%
MSCIEAFE
130.3%
REITs
204.6%
S&P 500
98.6%
Asset Allocation
117.7%
Barclays Agg
65.7%
Cash
18.2%
DJ UBS Cmdty
49.3%
Market Neutral
61.5%
MSCIEME
376.0%
ANN.
Russell2000
9.7%
MSCIEAFE
8.7%
REITs
11.8%
S&P 500
7.1%
Asset Allocation
8.1%
Barclays Agg
5.2%
Cash
1.7%
DJ UBS Cmdty
4.1%
Market Neutral
4.9%
MSCIEME
16.9%
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25.1%25.1%
Asset Asset AllocationAllocation
12.5%12.5%
Asset Asset AllocationAllocation
8.3%8.3%Asset Asset
AllocationAllocation
15.2%15.2%
Asset Asset AllocationAllocation
7.4%7.4%
Asset Asset AllocationAllocation
-24.0%-24.0%
Asset Asset AllocationAllocation
22.2%22.2%
Asset Asset AllocationAllocation
12.5%12.5%
Asset Asset AllocationAllocation
-0.6%-0.6%
Asset Asset AllocationAllocation
11.3%11.3%
10-yrs. ’03–’12
The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EMI, 25% in the Barclays Capital Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the CS/Tremont Equity Market Neutral Index, 5% in the DJ UBS Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data represents total return for stated period. Past performance is not indicative of future returns. Data are as of 6.30.13, except for the CS/Tremont Equity Market Neutral Index, which reflects data through 2.28.13. “10-yrs” returns represent period of 1.1.03–12.31.12 showing both cumulative (Cum.) and annualized (Ann.) over the period. Data are as of 6.30.13.
16 WWW.CAPTRUSTADVISORS.COM
continued from page 15
classes, it is no worse than sixth place and no better than fourth place. This time period covers a considerably volatile and instructive period in the capital markets for this discussion.
Of course, one cannot directly invest in an index, and these returns are gross of any fees or transaction costs, but many useful takeaways emanate from this illustration. Asset allocation portfolios seek to do what I imparted on Hailey before she began her round that sweltering June day: not allow the highs to get too high or the lows too low. It also shows how individual asset classes can be extremely volatile from year to year and, as a corollary, how fl eeting fi rst- and second-place fi nishes can be. While U.S. stocks as measured by the S&P 500 have had a great year thus far, note they have lagged the broad asset allocation portfolio over the past 10 years by almost 30 percent, and this is a period where U.S. stocks have hit two all-time highs (fi rst in October 2007 and again this May). Note also, emerging market equities, which have had the best cumulative performance of any of these asset classes, have had poor performance so far this year and were sharply negative in 2011. For all the talk of a 30-year-plus bond bull market, broad fi xed income returns as measured by the Barclays Capital Aggregate Bond Index are in seventh place out of nine asset classes, including cash.
Behavioral fi nance, which studies the human mind’s proclivities related to investment choices, provides some clues as to why investors look at trending asset classes and extrapolate how those asset class trends relate to their situation. For example, some investors may look at recent U.S. stock strength and question why their portfolios are not at all-time highs, ignoring other asset class returns. According to psychologists Neal Roese and Kathleen Vohs, hindsight bias occurs when people “knew it all along” or deem an event more predictable after it occurs than before it happens.2 Similarly,
investors may deem that they themselves, their fi nancial advisor, or money manager should have the prescience to know what asset classes will be in fi rst and last place. So, when the fi nancial media cheers all-time highs in a familiar index like the Dow Jones Industrial Average, investors take notice and make inferences about their portfolio performance, perhaps forgetting that other asset classes helped stabilize their portfolios during the dark days of 2000 and 2007.
We continue to see the glass as half full with respect to global capital markets, and we see momentum for both global equities and potential value emerging as the bond market stabilizes. Despite a very experienced investment committee, independent investment research supplemented by outside services, and a deep team at our headquarters and regional offi ces, we do not have perfect foresight about the path forward. We do, however, strive to provide clients with durable portfolio strategies across market dynamics, remaining mindful of fees and our clients’ objectives. Different asset classes will contribute to those objectives over any given time period, despite their popularity or unpopularity at any given moment. While all investors would love to have all of their assets in the best-performing asset class at any given time, the market timing path is fraught with peril and usually, as the Wall Street adage goes, ends in tears.
Hailey’s two-day tournament did not end in tears; she had memorable experiences in Williamsburg that furthered her love for the confounding game of golf. She took her grandfather’s words to heart, letting near birdies and near blowups roll off her back, as well as her old man’s pre-tournament foibles. My eyes get misty whenever I see that ponytail bob up and down as she marches down a tournament fairway sure to present her with challenges and rewards aplenty; I am hard-pressed to fi nd a more beautiful sight.
Sources:1 For further reading, see Fama and French, 1993. “Common Risk Factors in the Returns of Stocks and Bonds.” Journal of Financial Economics, vol. 33, no. 1.2 Roese, Neal and Kathleen Vohs. “Hindsight Bias.” Perspectives on Psychological Science. September 2012, vol. 7, no. 5, pp 411–426.
WEALTH MANAGEMENT | Q2 13
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index returnsindex returns
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2013 2ND QUARTER INDEX PERFORMANCE
The information contained in this report is from sources believed to be reliable but are not warranted by CAPTRUST Financial Advisors to be accurate or complete. Index performance depicts historical performance and is not meant to predict future results.
Small-Cap Stocks (Russell 2000 Index)
Large-Cap Stocks (Russell 1000 Index)
Commodities (Dow Jones UBS Commodity Index)
Real Estate (MSCI U.S. REIT Index)
Fund of Funds (HFRI FoF Composite Index)
Mid-Cap Stocks (Russell Mid-Cap Index)
International Equities (ACWI Ex-U.S. Index)
Fixed Income (Barclays Capital U.S. Aggregate Index)
CAPTRUST Discretionary research highlightsCAPTRUST Discretionary research highlights
• We have carried a bullish posturing on U.S. stocks over the
past year, emphasizing growth-focused sectors and a bias
toward large-cap over mid-cap and small-cap based on
more attractive fundamental attributes, particularly valuation.
• Our bias has been to avoid rebalancing our stock
exposure through the recent upturn in equities. We have
recently shored up our sector exposures, deploying a
more balanced orientation but still favoring large-cap and
high quality.
• We continue to view the U.S. as the most attractive global
equity market, one that we will likely allocate more capital
to pending further developments in the bond market.
• Growth prospects have improved across several regions
relative to a year ago, but we remain concerned about
Southern Europe as well as more sluggish performance
in emerging market equities, which are down for the year.
This is due to concerns about forward growth prospects
and capital fl ight out of emerging assets including stocks,
bonds, and currencies.
• While European valuations appear attractive from a
historical perspective, underlying consumer demand and
employment remain sluggish, leaving the corporate profi t
picture more muddied than in past environments with
similar valuation profi les.
• We increased exposure to Japan in light of its aggressive
monetary policy early in the year but have since dialed
back that exposure as we see a more challenging
landscape going forward.
• We deemphasized fi xed income in the second half of 2010
despite anticipating further federal stimulus in the form of
quantitative easing and open-market bond purchases.
• We increased our weighting to fi xed income during
mid-2011, incorporating a diversifi ed approach by sector
and geography using a combination of active and passive
management. We expected a few persistent themes to
endure within the space that are accessible via highly
skilled managers and were pleased with those results.
• Active management continues to be our preferred access
method, although we have decreased our overall fi xed
income weighting within portfolios, feeling that better
opportunities lie elsewhere. We have also meaningfully
reduced duration and increased exposure to fl oating rate
instruments, anticipating further interest rate volatility
as markets debate the Federal Reserve’s bond-buying
commitment.
U.S. EQUITIES
INTERNATIONAL EQUITIES
FIXED INCOME
WEALTH MANAGEMENT | Q2 13
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• Hedge fund strategies have had a challenging backdrop in
which to operate over the past three years given market
oscillations, yet we see investment merit in certain hedge
fund sub-strategies, particularly those that are less reliant
on overall market direction.
• We had emphasized a more conservative hedge fund
orientation recently with a goal of preserving capital
during large down periods in riskier asset classes, but at
the start of this year we opted for more directional hedge
fund strategies that would capture more potential upside
in riskier asset classes.
• We see hedge fund exposure as a decent portfolio
complement to global fi xed income exposure as interest
rates oscillate, and the past quarter showed how several
hedge fund strategies can add value in light of market
choppiness in May and June.
• We remain long-term bullish on commodities due not
only to the demand story but also because of a lack of
infrastructure investment across many key commodities.
We acknowledge that recent price weakness has been
disappointing.
• Given the challenging macroeconomic environment and
the potential for further growth scares, we expect to see
considerable volatility within commodities. We would like
to see commodities decouple from equity returns and
give investors more of a correlation boost than we have
experienced since the fi nancial crisis.
• We have recently deemphasized actively managed
strategies with the view that commodities present
considerable challenges for most active managers to
successfully navigate. Correlations between commodities
and more crowded active manager positions leave us
happy to invest in broad commodity mandates and
control the overall exposure levels versus leaving that to
an active manager. Commodities remain a small portfolio
component for us right now.
• We added to real estate positions in mid-2010 based on
improved fundamentals as well as attractive yields given
subdued interest rates.
• In a low-yield world, REITs retain a strong distribution
profi le while off ering some growth potential, an attractive
combination for a variety of investors that should provide
an underlying bid to the space. However, valuation
metrics appear to be on the richer side, with REITs
delivering a strong 2012 total return.
• 2013 has been more challenging for REITs, with broad
REITs selling off in sympathy with interest rates’ ascent.
We could become more constructive on REITs following
their sharp decline from late May through late June,
especially if the interest rate picture stabilizes.
The foregoing comments demonstrate our firm’s strategic and forward-looking views as they are implemented in cases where clients have contractually granted CAPTRUST
sole tactical discretion over portfolio decisions.
HEDGE FUNDS�/�PRIVATE EQUITY
COMMODITIES
REAL ESTATE
20 WWW.CAPTRUSTADVISORS.COM
investment asset classesinvestment asset classes
U.S. EQUITIES
INTERNATIONAL EQUITIES
• U.S. stocks continued their ascent higher in the second
quarter with the S&P 500 closing up 2.9% for the quarter
and 13.8% for the year. Mid- and small-caps were up 2.2%
and 3.1% respectively for the quarter, bringing both of
them up over 15% for the year-to-date period.
• Seven out of the 10 major S&P 500 sectors were positive
in the second quarter, and fi nancials (the second largest
sector) was the clear leader, up 7.3%, while consumer
discretionary stocks rose 6.8%. Interest-rate-sensitive
utilities fell 2.7% to lead losing sectors.
• Since the U.S. equity market touched its March 2009 low,
large-caps, mid-caps, and small-caps are up 160%, 211%,
and 202%, respectively, including reinvested dividends.
• Developed and emerging international equities both fell
in U.S. dollar terms in the second quarter, with the former
still positive (+4.5%) and the latter more deeply negative
(-9.4%) for the year-to-date period. The developed
equity-focused MSCI EAFE Index has been higher 13 out
of the last 17 quarters, while the MSCI Emerging Markets
Index has been higher 12 out of the last 18 quarters.
• Japan continued to rally in the second quarter, but not
without considerable volatility. Japan has rallied 34% this
year in local currency, but thanks to a sliding yen it has
gained only half as much in dollar terms.
• Emerging markets were noticeably weak within the
quarter, with China (-6.5% following a -4.5% fi rst quarter),
Russia (-8.3%), India (-5.6%), and standout Brazil
(-17.8%) all posting negative returns. Adverse currency
movements and concerns about growth prospects hurt
EM investors in the second quarter, especially from mid-
May through the end of June.
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Market Performance, 2nd Quarter 2013
Market Performance, 2nd Quarter 2013
Large Value (R1000 Value) 3.20% 15.90%
Large Blend (S&P 500) 2.91% 13.82%
Large Growth (R1000 Growth) 2.06% 11.80%
Mid Value (Russell) 1.65% 16.10%
Mid Blend (Russell) 2.21% 15.45%
Mid Growth (Russell) 2.87% 14.70%
Small Value (R2000 Value) 2.47% 14.39%
Small Blend (R2000 Blend) 3.08% 15.86%
Small Growth (R2000 Growth) 3.74% 17.44%
International Equities (MSCI EAFE) -0.73% 4.47%
Pacifi c Stocks (MSCI Pacifi c Ex-Japan) -10.88% -4.60%
European Stocks (MSCI Europe Ex-UK) 0.92% 3.96%
Japanese Stocks (MSCI Japan) 4.42% 16.64%
UK Stocks (MSCI UK) -2.15% 0.29%
Emerging Markets (MSCI EME) -7.95% -9.40%
WEALTH MANAGEMENT | Q2 13
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FIXED INCOME
HEDGE FUNDS�/�PRIVATE EQUITY
• The Barclays Aggregate Bond Index fell for only the
third quarter out of the past 19, falling 2.3% in the second
quarter and 2.4% year-to-date, primarily due to concerns
about the Federal Reserve’s potential bond-buying
slowdown. Note that the index has not had a negative
annual return in 13 years.
• Within the broad fi xed income space, historically riskier
parts of the bond market were mixed this past quarter
despite the run-up in global stocks, with emerging market
debt falling 5.1% but high yield only off by 1.4%. Treasurys
fell almost 2%, and Treasury infl ation-protected securities
(TIPS) fell 7% in the quarter as investors’ infl ation
expectations moved lower.
• Research fi rm ICI’s mutual fund fl ow data in the second
quarter refl ected the sharpest outfl ow in bonds since
October of 2008, perhaps a harbinger of things to come.
• Hedge fund strategies posted a solid start to 2013, with
the HFRI Fund Weighted Composite Index posting a 3.6%
return through the end of June following a slight decline
in the second quarter.
• Global macro remained a challenging sub-strategy
(-1.07% year-to-date) after losing 1% for 2012 and also
registering weak 2010 and 2011 calendar years as global
central bank policy and unstable trends continue to
impact managers. Equity hedged strategies continued
their streak of comparable returns to their global long-
only peers. Event-driven strategies, particularly special
situations, are standouts thus far in 2013.
• Alternatives research fi rm Prequin highlights that private
equity fundraising was strong for the second quarter,
although heavily concentrated within the industry’s
largest players. Only 154 funds received commitments in
the second quarter, the fewest in a quarter since 2003.
continued on page 22
Market Performance, 2nd Quarter 2013
Market Performance, 2nd Quarter 2013
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Q2 ’13 2013
Broad Market (Barclays Capital U.S. Aggregate) -2.32% -2.44%
Barclays Capital U.S. Treasurys -1.92% -2.11%
Barclays Capital Mortgage Backed Securities -1.96% -2.01%
Barclays Capital Municipals -2.97% -2.69%
Barclays Capital Intermediate Corporates -2.38% -1.82%
Barclays Capital High Yield -1.44% 1.42%
HFRI Fund Weighted Composite Index -0.01% 3.59%
HFRI Equity Hedge Index 0.40% 5.34%
HFRI Relative Value Index 0.17% 3.26%
HFRI Fund of Funds Composite Index -0.04% 3.28%
HFRI Fund of Funds Conservative Index 1.41% 4.25%
22 WWW.CAPTRUSTADVISORS.COM
COMMODITIES
REAL ESTATE
• The Dow Jones UBS Commodity Index fell 9.5% in the
second quarter after falling 1.1% in the fi rst quarter. Dollar
strength has hurt so far this year, as has brent crude
falling over 8%.
• At the sub-index level, energy was weak across the board,
as were industrial metals on global growth concerns,
particularly regarding China, Latin America, and India.
• Precious metals were also hit by dollar strength, with
the index falling 5.5% after posting a 6% return in
2012. Individually, gold and silver fell 22.8% and 30.5%,
respectively, in the quarter as some of the more popular
commodity trades over the past few years fell out of favor.
• Public real estate, as measured by the MSCI U.S. REIT
Index, fell 1.6% for the quarter. REITs underperformed U.S.
equities for only the fourth quarter out of the last nine.
REITs are still positive for the year (+5.94%) and are up
a staggering 204.6% cumulative over the past 10 years
ended December 31.
• Higher interest rates hurt REIT performance as the
10-year U.S. Treasury yield rose from 1.8% to 2.5% in
the second quarter, causing investors to revalue REIT
distributions in light of higher interest rates.
• Several REIT subsectors exhibit attractive fundamentals,
and overall capital positioning is strong for REITs,
but should interest rates continue to migrate higher,
performance could again be vulnerable.
continued from page 21
Market Performance, 2nd Quarter 2013
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Market Performance, 2nd Quarter 2013
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Q2 ’13 2013
Q2 ’13 2013
Dow Jones UBS Commodity Index -9.45% -10.47%
S&P GSCI Commodity Index -5.93% -5.41%
Gold (Spot, $/oz) -22.78% -26.31%
Natural Gas (U.S. Spot Henry Hub) -11.38% 4.28%
Crude Oil (U.S. Spot, WTI Cushing) -0.69% 5.16%
MSCI U.S. REIT Index -1.58% 6.36%
Wilshire REIT Index -1.39% 5.94%
WEALTH MANAGEMENT | Q2 13
23
captrust newscaptrust news
We are honored to have supported these charities during the second quarter of 2013:
• Tisch Brain Tumor Center (at Duke University Children’s Hospital)
• North Carolina Foundation for Public School Children
• Wildwood Hills Ranch
• Read & Feed
• Raleigh Food Bank
• Food Bank of Eastern Michigan
GIVING BACKCAPTRUST GROWTH
CAPTRUST grew in the second quarter with the following new additions to the team
Rush Benton joined CAPTRUST as a senior director of strategic wealth and is responsible for growing the fi rm’s private wealth assets both organically and through acquisition of independent, fee-based registered
investment advisors. Prior to joining the fi rm, Rush served as cofounder and chairman of WealthTrust, one of the fi rst consolidators of registered investment advisors. Rush received a Bachelor of Arts degree in economics from Vanderbilt University.
Danny Lowe joined CAPTRUST as a senior manager, Nonqualifi ed Executive Benefi ts, and oversees the fi rm’s nonqualifi ed deferred compensation offering to include plan design, implementation, fi nancing,
integration, and administration. Prior to joining our fi rm, he worked at the Principal Financial Group as senior executive benefi ts consultant. Danny received a Bachelor of Arts degree in management and society from the University of North Carolina at Chapel Hill and a Master of Business Administration from East Carolina University.
Richard Rush joined CAPTRUST as a senior manager, Investment Research, and manages the fi rm’s emerging market client relationships by providing investment management and consulting services. Prior to
joining our fi rm, he worked at CIG Corporation as the director of Wealth Management. Richard received a Bachelor of Arts degree in political science from St. Mary’s College and a Master of Arts in mathematics from Wayne State University.
FAREWELL TO A DEAR FRIENDJust shy of her 105th birthday, we lost our dear friend Ruby Merritt of Chapel
Hill, N.C. Ms. Merritt had known our CEO Fielding Miller since he was a rookie
stock broker in 1987.
“I have never known a fi ner person than Ruby Merritt. For 26 years I have
had the wonderful privilege of meeting with Ms. Merritt and her family in her
home�—�and many times I brought home one of her priceless pearls of wisdom
to share with my own family. I vividly remember our fi rst encounter, sitting
at her kitchen table. She had her mind made up that she wanted to invest in
tax-free bonds�—�at the highest interest rate going. Ms. Merritt was 78 at the
time so I reminded her that the highest interest rates would be with bonds
that wouldn’t mature for 20 years or more. She just smiled and said, ‘I plan to
be around for a while so let’s get those good rates.’ And that we did. Since
then I have been blessed with a friendship that I will cherish for my lifetime.”
The opinions expressed in this report are subject to change without notice. This material has
been prepared or is distributed solely for informational purposes and is not a solicitation
or an offer to buy any security or instrument or to participate in any trading strategy. The
information and statistics in this report are from sources believed to be reliable but are
not warranted by CAPTRUST Financial Advisors to be accurate or complete. Performance
data depicts historical performance and is not meant to predict future results. CAPTRUST
Financial Advisors, Member FINRA/SIPC.
continued from page 23
RECOGNITION
July 21, 2013 | San Diego
Western Benefi ts Conference
QDIA Due Diligence, New Realities of Cash Equivalents in PlansSpeaker: Mark Davis, Financial Advisor
September 10, 2013 | New York
Global Alpha Forum
Risk Debate: Long-Term Asset Allocation Trends–Risk Allocation vs. Strategic Asset AllocationSpeaker: Ernest Liebre, Financial Advisor
September 15–18, 2013 | Las Vegas
2013 Las Vegas Mid-Sized Retirement & Healthcare Plan Management Conference
Best Practices for Conducting an Advisor Request for ProposalSpeaker: Greg Middleton, Senior Manager
Enhancing Retirement Readiness through a Focus on Total RetirementSpeaker: Pam Popp, Financial Advisor
September 19, 2013 | New YorkLiability Driven Investing ConferenceSpeaker: Grant Verhaeghe, Senior ManagerSpeaker: Ernest Liebre, Financial Advisor
UPCOMING INDUSTRY INVOLVEMENT
The following is a list of topical
discussions to be led by CAPTRUST
at upcoming industry events in the
third quarter of 2013.
PAPERLESS STRATEGIC RESEARCH REPORTWe’ve added an electronic Strategic Research Report off ering in response to our readers’ requests for an eco-friendly alternative. Going forward, you can access our publication on a desktop computer, a tablet, and mobile devices, while also enjoying a robust set of enhanced digital viewing and sharing features. It is our hope that your reading experience will be enhanced through this electronic medium. Please contact your fi nancial advisor or client relationship manager if you would like to subscribe to our electronic Strategic Research Report.
CAPTRUST Honored by the Greater Raleigh Chamber of Commerce
The Greater Raleigh Chamber of Commerce awarded CAPTRUST with an Entrepreneurial Company Award for companies with 101 or more employees at the 29th annual Pinnacle Business Awards event. The event honored local businesses that have showed courage, commitment, and conviction. Entrepreneurial businesses based in the Triangle such as CAPTRUST received awards for their staying power, business growth, community involvement, and innovation along with their steady growth and profi tability.
CAPTRUST CEO Named as Regional Finalist for the 2013 E&Y Entrepreneur of the Year Award®
J. Fielding Miller joined a list of esteemed visionaries nominated as a fi nalist for the coveted Ernst & Young
Entrepreneur of the Year Award® for the Southeast region. The Entrepreneur of the Year Program recognizes business owners who demonstrate creativity, innovation, and personal commitment in turning an idea into a successful and sustainable enterprise.
