Market & Portfolio Strategy Review First Quarter 2016 Agenda - - PowerPoint PPT Presentation

Market & Portfolio Strategy Review

First Quarter 2016

Market Review Investment Outlook & Portfolio Positioning

Agenda

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Market Review

• It was a tale of two halves in the first quarter of

the year as stock markets plunged early on, falling 10% or more before reversing, and staging a furious rally into quarter end.

• Emerging-markets stocks led the charge, gaining

5.9% for the quarter. Larger-cap U.S. stocks also finished in the black, up 1.3% while developed international stocks trailed, down 1.9%.

• A bottoming in oil prices seemed to trigger the

reversal in global stock markets. After reaching its lowest price since May 2003, oil prices surged more than 50% through the middle of March.

• Bonds were a main beneficiary of the market

selloff as investors flocked to lower risk asset classes, but somewhat surprisingly bonds were able to hold their gains even as risk assets rallied.

• Monetary policy was an important factor this

quarter as investors digested announcements from the Fed, European Central Bank, and Bank of Japan.

*Data source information can be found in the disclosure slide

Market Review

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Asset Class Q1 2016 Year-to-Date (3/31/16) U.S. Treasurys 3.2% 3.2% U.S. Investment-Grade Bonds (Intermediate-Term) 3.1% 3.1% Municipal Bonds 1.7% 1.7% Floating-Rate Loans 1.5% 1.5% High-Yield Bonds 3.2% 3.2% U.S. Larger-Cap Stocks 1.3% 1.3% U.S. Smaller-Cap Stocks

• 1.5%
• 1.5%

Developed International Stocks

• 1.9%
• 1.9%

Emerging-Markets Stocks 5.9% 5.9%

Stock Markets Got Off to One of Their Worst Starts to a Year Ever Before Reversing and Rallying Strongly Into Quarter End

5 Source: Morningstar Direct. Using price and U.S. dollar returns.

The major global stock markets got off to a rocky start for 2016, falling 10% or more through the lows of February. In mid-February, global stock markets reversed quickly and rallied sharply into quarter end. The rally was led by a strong turnaround in emerging-markets stocks.

• 10.3%
• 12.2%
• 10.9%

+12.9% +11.8% +18.8%

• 20.0%
• 10.0%

0.0% 10.0% 20.0% U.S. Stocks Developed Int'l Stocks Emerging-Markets Stocks

A Tale of Two Halves

1/1/16 - 2/11/16 2/12/16 - 3/31/16

A Bottoming in Oil Prices Seemed to Trigger the Reversal in Global Stocks

6 Source: Morningstar Direct. Using price and U.S. dollar returns. Data as of 3/31/2016.

Managed Futures Funds Helped to Cushion the Selloff in Stocks

7 Source: Morningstar Direct. Using price and U.S. dollar returns.

Our position in managed futures helped to buffer the downdraft, as the funds were up more than 10% during the first half of the quarter. While the managed futures funds gave up some return as the markets reversed and rallied, in aggregate they still outperformed U.S. stocks over the full quarter. Trend-following strategies have historically offered attractive diversification benefits (almost zero long-term correlation) to traditional portfolios, with long-term positive returns and a high likelihood of strong relative performance during equity bear markets.

• 10.3%

10.7% 11.2% 14.0%

• 20.0%
• 10.0%

0.0% 10.0% 20.0% U.S. Larger-Cap Stocks AQR Managed Futures ASG Managed Futures PIMCO Managed Futures

Returns 1/1/16 – 2/11/16

1.4% 0.2% 6.3% 7.0% 0.0% 2.0% 4.0% 6.0% 8.0% U.S. Larger-Cap Stocks AQR Managed Futures ASG Managed Futures PIMCO Managed Futures

Returns 1/1/16 - 3/31/2016

Pension Consulting Alliance, Inc. – Risk Overview

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Pension Consulting Alliance, Inc. – Risk Overview

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Investment Outlook and Portfolio Positioning

Outlook: Unchanged

• U.S. Equities: Risk
• Profit margins are well above historical averages and unsustainable
• Stocks are pricey and most likely expected returns from current valuation levels are not encouraging
• Rising interest rates: Risk
• Low returns expected for core bonds over the next five years
• Absolute-return-oriented fixed-income funds can better manage their interest rate sensitivity
• International Equities: Opportunity
• Attractive stock valuations despite recent elevated uncertainty
• Probability is high that market earnings growth will be higher than current depressed levels indicate
• Alternative Strategies: Opportunity
• Better risk-adjusted return potential in volatile equity and bond markets
• Diversification and a source of return independent from traditional stock and bond markets

The U.S. Economy Appears in Decent Shape, But Growth Remains Subpar Relative to Previous Expansions

12 Source: Bureau of Economic Analysis. Data as of 12/31/2015. 95 105 115 125 135 145 155 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

Current Expansion vs. Last Seven Expansions Real GDP

Current Expansion 1961 Expansion 1970 Expansion 1975 Expansion 1980 Expansion 1982 Expansion 1991 Expansion 2001 Expansion

Quarters After Recession Ends

Household Balanced Sheets are Solid and Consumers Have Reduced Their Debt Load Considerably Since the Financial Crisis

13 Source: Board of Governors of the Federal Reserve System. Data as of 12/31/2015.

8% 10% 12% 14% 16% 18% 1980 1985 1990 1995 2000 2005 2010 2015 Financial Obligations Ratio Household Debt Service Ratio 30% 50% 70% 90% 110% 130% 1952 1962 1972 1982 1992 2002 2012 Household Debt as a % of Disposable Personal Income

138.2% 104.7%

Household debt as a percentage of disposable income fell to its lowest level since 2002, while household net worth hit an all-time high of $87 trillion – 25% above its previous high before the financial crisis. Thanks in part to all-time low interest rates, household debt-service payments and financial obligations as a percentage of disposable income remain around all-time lows. Consumers are conservatively positioned and have the ability to increase their spending and/or borrowing if they choose to do so.

The Labor Market Continues to Improve

14 Source: Board of Governors of the Federal Reserve System. Data as of 12/31/2015.

Inflation is Rising But Still Below the Fed’s Preferred Levels

15 Source: U.S. Bureau of Economic Analysis. Data as of 2/29/2016. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 1995 2000 2005 2010 2015

Core PCE Core CPI

Shrinking Profit Margins Are Pressuring Earnings Growth – And Potentially Stock Prices

16 Source: Robert J. Shiller and Standard & Poor’s. Data as of 12/31/2015. 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 1973 1978 1983 1988 1993 1998 2003 2008 2013 Net Margins

S&P 500 Net Margins Average Net Margins

Historically, very high profit margins have been followed by sharp declines in company profitability.

Earnings and Revenue Growth Were Disappointing in 2015

17 Source: S&P Dow Jones Indices. *Estimates. Data as of 4/12/2016. Consensus estimates are for earnings and sales growth to jump 28% and 3.5% next year. This seems overly optimistic given low economic growth and declining profit margins.

Accommodative Monetary Policy and a Weaker Currency Should Provide Support for the European Economy

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0.80 1.00 1.20 1.40 1.60 2000 2005 2010 2015 EUR/USD

The Euro-U.S. Dollar Exchange Rate

• 1.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016

10-Year Government Bond Yields

United States France Germany Switzerland

The European economy continues to deal with a number of challenges, but rock bottom interest rates, a cheaper currency, and low oil prices should provide support in the near term. In addition, the ECB expanded their QE program to include buying debt issued by non-bank corporations – which reduced corporate borrowing costs and should provide a small short-term boost to the economy.

Source: Bloomberg. Data as of 3/31/2016.

Valuations for European Stocks are Attractive, Both in Absolute Terms and Relative to U.S. Stocks

19 Source: BCA Research and Thomson Reuters. Data as of 3/31/2016.

— Euro Area Shiller P/E Ratio ---- U.S. Shiller P/E Ratio

Economic Data in Emerging Markets has Modestly Improved

20

— Manufacturing PMI: Emerging Markets ---- Manufacturing PMI: Developed Markets

Source: BCA Research Markit Economics. Data as of 3/31/2016.

Emerging-Markets Stocks are Trading at Attractive Valuations vs. U.S. Stocks

21 Source: BCA Research and Thomson Reuters, OECO Main Indicators. Data as of 3/31/2016.

Expect Future Returns of Stocks and Bonds to be Lower than Experienced Historically

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1 Projections under our base case, subpar economic scenario as of 3/31/2016. 2 As measured by the Barclays Capital U.S. Aggregate Bond Index.

9.9% 6.6% 4.1% 1.1% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% S&P 500 Investment-Grade Bonds

Historical Returns (4/1/1986-3/31/2016) 5-Year Projected Annualized Returns

1 2

Current Portfolio Positioning and Rationale

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Asset Class Portfolio Position vs. Strategic Allocation Comments

Fixed-Income: Traditional Investment-Grade Underallocated

Low expected returns but important for risk reduction, especially in deflationary or weak economy

Absolute-Return-Oriented Overallocated

Flexible strategies that can perform well even with rising interest rates

Floating-Rate Loans (defensive balanced,

conservative balanced, and balanced strategies)

Overallocated

Protection from rising interest rates with potential for higher returns

Equities: Larger-Cap U.S. Stocks Underallocated

Equities appear overvalued and potential returns low relative to risk

Smaller-Cap U.S. Stocks Underallocated

Similar to large cap; more downside in poor economic conditions

Foreign Stocks – Developed Markets Overallocated

Attractive both in absolute terms and relative to U.S. stocks

Foreign Stock – Emerging-Markets Overallocated

Moderately attractive relative to U.S. on risk-adjusted basis; broader

• pportunity set and diversification benefits

Alternative Investments: Alternative Strategies (except Equity strategy) Overallocated

Attractive risk-adjusted returns; low correlation to stocks and bonds

Disclosures

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Advisory services offered through Alsworth Capital Management, LLC, an independent Registered Investment Advisory firm. Broker Dealer services

• ffered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Alsworth

Capital Management, LLC and Cadaret, Grant & Co. are separate entities. Projections and opinions in this presentation are attributed solely to Shane Alsworth and Alsworth Capital Management, LLC.

*Indexes Used (source Morningstar Direct)

• Domestic Investment-Grade Bonds (Barclays Capital U.S. Aggregate Bond Index): We are currently using the Vanguard Total Bond Market Index Fund

to represent the Barclays Capital U.S. Aggregate Bond Index, an index of domestic investment grade bonds.

• Domestic Larger-Cap Stocks (S&P 500 Index): We are currently using the Vanguard 500 Index Fund to represent the S&P 500, an index of primarily

domestic larger-cap stocks.

• Domestic Smaller-Cap Stocks (Russell 2000 Index): We are currently using the Russell 2000 Index iShares Exchange Traded Fund (ETF) to represent the

Russell 2000, an index of primarily domestic smaller-cap stocks.

• International Developed-Market Stocks (FTSE Developed Markets Index): We are currently using the Vanguard FTSE Developed Markets Index

Exchange Trade Fund (ETF) to represent an index of international developed-market stocks.

• International Emerging-Markets Stocks (FTSE Emerging Markets Index): We are currently using the Vanguard FTSE Emerging Markets Index Exchange

Traded Fund (ETF) to represent an index of emerging markets in international emerging market stocks.

• High-Yield Bonds (Merrill Lynch U.S. High Yield Master Cash Pay Index): We are currently using the Merrill Lynch U.S. High Yield Master Cash Pay

Index to represent an index of domestic high yield bonds.

• Floating-Rate Loans (S&P/LSTA Leveraged Loan Index): We are currently using the S&P/LSTA Leveraged Loan Index to represent an index of floating

rate loans.

• U.S. Treasurys (Barclays US Treasury Index): We are currently using Barclays US Treasury Index
• Municipal Bonds: We are currently using the Barclays Municipal Bond index for municipal bonds