Overview

This time it is different…or is it?

  • Current markets have many investors feeling that we may be entering a new, never-before-seen investment environment
  • Factors driving this concern include a prolonged bull market and an uncertain geopolitical outlook



Markets are cyclical but investors’ success should not be

  • History demonstrates that markets are cyclical—they rise, fall, and then repeat the process 1
  • Understanding market cyclicality—along with aspects of human nature that can lead to flawed decision making—arms investors with powerful tools for success

1 Please refer to "Markets Are Cyclical: Your Success Should Not Be".



Fixed Income

Following the herd may get you trampled

Passive fixed income investments offer lower fees than active products but pose unique challenges. Active managers address these challenges through security selection, active sector allocation, deliberate positioning on yield curves, managing portfolio duration and tactical buy/sell decisions. Investors should understand the following about passive fixed-income:

  • Varying risk profiles—Indices are designed to track a certain aspect of the fixed income market and some have had a wide range for key measures like duration, current yield and weighted average life
  • ETFs may fall short of representing the intended index—Portfolio turnover, transaction costs and management costs could lead to under-performance

More Risk in a Low-Yield Environment

Passive products that reflect indices such as the Bloomberg Barclays U.S. Aggregate Bond Index are subjecting investors simultaneously to both low yields and elevated risk should rates increase.

Source: Bloomberg, Factset. As of December 31, 2016. Duration is a measure of the sensitivity of the price of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. The yield to worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting. Past performance is no guarantee of future results.







International

Time to rebalance?

Six years of underperformance by international equity relative to domestic equity may have led some investors to minimize rebalancing, resulting in a significant international equity underweight today. Is now the time to rebalance? Investors should consider that U.S. and international equities have historically performed in cycles:

  • Since 1975 the average cycle of U.S. and International equity out-or underperformance is 6.8 years 1
  • In the current cycle, U.S. equities have outperformed for over 7 years 1
  • It is difficult to predict when the current trend will reverse, but history suggests that we are closer to a reversal than another 7+ years of U.S. dominance 1



1 Source: MSCI, Dow Jones, FactSet as of December 31, 2016.

2 Source: MSCI, Standard and Poor’s Corporation, FactSet as of December 31, 2016. Based on 30-years of rolling 5-year annualized performance of the MSCI ACWI ex USA and S&P 500 Indices. Past performance is no guarantee of future results.







Equity Income

Dividend-paying stocks have accounted for a large proportion of the S&P Index’s total return since the early 1970s. Also, as the U.S. population ages, an increasing number of retirees seek to invest in financially strong companies offering the potential for income and growth. Dividend-paying stocks have benefited from:

  • Performance—Over the long term, dividend-paying stocks have delivered higher returns with lower risk than non-dividend payers 1
  • Conviction—Dividend payouts require real earnings, so companies paying consistent dividends are typically financially sound and seek to wisely use free cash flow
  • Demand—Demographic trends favor income-oriented investments; to keep up with inflation, retiring baby boomers increasingly require investments that offer income and growth

1 Source: Ned Davis Research Inc. as of December 31, 2016.

Source: Factset, as of December 31, 2016. Indices are unmanaged, are not available for investment and do not incur expenses. The returns shown do not represent or predict the performance of any fund or other specific investment product. There are no guarantees a company will pay or continue to increase its dividend. Past performance is no guarantee of future results.