Going for Gold: A Mid-Year Update

More than 10,000 athletes from 186 countries will battle for their respective medals. In exciting news for many sports enthusiasts, Rio 2016 is bringing back rugby and golf, which haven’t been seen in the summer games since the early 1900s. The stark contrast between these two sports exemplifies investors’ experiences with the markets in the first half of 2016. The first quarter was a bit like rugby – the market was thrown to the ground with a rough start to the year. It may have felt like your portfolio was being tackled, but by the end of the first quarter the market almost fully recovered. The second quarter was a bit more like the quiet game of golf – much more calm with the drama saved until the end with the Brexit decision in the UK jolting markets just before the quarter-end. Despite that volatility, markets bounced back in the final days of the quarter. As you can see in the illustration below, diversifiers such as alternatives helped to smooth out some of the volatility and boost portfolio returns. With the exception of international stock markets, most markets ended the quarter in positive territory.

Mountain View

Themes in 2016

  1. All eyes will be on the Fed to see how they navigate through the low interest rate environment. After hiking rates in December for the first time since 2006, lower interest rates abroad and several countries moving to negative interest rates have put pressure on the Fed to delay additional rate hikes.

  2. Emerging markets, which were hit hardest by falling oil prices, and commodities have both changed course as the downturn in oil finally reversed. Oil prices will continue to be sensitive to output decisions by Saudi Arabia and other OPEC nations as well as other supply disruptions, such as the wildfires in Canada.

  3. As the year progresses we may have a better idea of how the decision for Britain to exit the European Union will affect the country and the global economy.

  4. The labor market showed mixed signals. Although the unemployment rate dropped to a fresh low of 4.7% in May, job growth slowed significantly from previous months due to workers who gave up looking for work no longer being counted in the labor force. There are also signs of a tighter labor market with job openings at an all-time high of 5.8 million, meaning companies may be struggling to fill open positions. The interpretation of these measures will have important implications for the Fed’s decisions on interest rate policy in the coming months.

  5. The focus will shift to the presidential election as we get closer to November. Each candidate would have a different set of priorities given the stark differences between their platforms.

Markets ended the second quarter on fragile ground and there may be continued volatility as events unfold at home and abroad. We believe the best approach to dealing with any market hiccups is to stay diversified across asset classes, including some often overlooked asset classes such as international small cap that can be great diversifiers for long-term investors. The next page illustrates the expansive reach across markets and securities which Savant incorporates into your portfolio.

Diversification: Worth a Gold Medal

You’ve probably heard the expression, “don’t put all your eggs in one basket.” Your mother probably gave you that wise advice at some point in your life. Savant takes this maxim to the next level with the way we allocate portfolio assets. Studies show that asset allocation has the largest impact on portfolio returns. Other strategies, like stock picking or market timing, make up (or take away) smaller portions of the overall return for an investor. For that reason, Savant invests the most time in properly allocating portfolios and strives for “gold medal” worthy diversification.

The diagram below gives you an illustration of how we build Savant portfolios. We utilize 16 different asset classes with nearly 43,000 unique positions to diversify your portfolio and give you exposure to stocks of different sizes and styles, various bond maturities and types, and alternative investments such as real estate, commodities, and managed futures. The goal of putting these all together is a portfolio designed to maximize long-term return while controlling risk.

Look at U.S. Stocks for example. Our diversification in this area is not limited to only the 500 largest companies in the U.S. like the S&P 500. We use funds that give us exposure to 4,400+ different companies! These companies are organized into four categories: U.S. Large, U.S. Large Value, U.S. Small, and U.S. Small Value. We do this to protect our clients from having too much exposure to any one stock or sector. The same philosophy applies to the other asset classes on this diagram for Developed International Stocks, Emerging Markets Stocks, Bonds, Real Estate, Commodities, and Managed Futures.

Our goal is to put asset classes together in portfolios that react differently to changes in market conditions. The positive effects of this strategy can be illustrated by envisioning a vendor selling umbrellas and sunglasses. His two wares have very low correlation to one another as they each generate sales under different weather conditions. The vendor thus reduces his risk of losing money on any given day. In portfolio design, correlation describes this relationship in terms of the rise and fall of different investments or, more precisely, different asset classes. As markets evolve over time, the relationships between asset classes change as do the returns we can expect. Our job is to measure and evaluate these changes and determine how to best put the asset classes together to produce the highest risk-return benefit for our clients.

Mountain View

Source: Morningstar Direct. Indices used in above graphs: U.S. Large-S&P 500, U.S. Large Value-MSCI U.S. Prime Market Value, U.S. Small-Russell 2000, U.S. Small Value-MSCI U.S. Small Value, Int’l Large-MSCI EAFE, Int’l Large Value-MSCI EAFE Value, Int’l Small-S&P EPAC Small, Int’l Small Value-S&P EPAC Small Value, Emerging Mkts-MSCI Emerging Markets, TIPS-Barclays Gbl Infl Linked US TIPS, Short-Term Bonds-Ibbotson 1 Yr Treasury Const Mty, Interm-Term Bonds-Barclays Interm-Term Govt/Credit, Int’l Bonds-JPM GBI Global Ex US Hdg, Global REITs-S&P Global REIT, Commodities-Bloomberg Commodity, Managed Futures-Credit Suisse Mgd Futures Liquid.

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