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Portfolio review and strategy

By Staff | Aug 19, 2015

U.S. equity markets have been flat since our last report in March. From a macroeconomic perspective, the dramatic rally in the U.S. dollar has subsided, and energy prices have rebounded from the lows seen earlier this year and since have stabilized.

GDP growth remains tepid, and the unemployment landscape continues to improve.

With that said, the fundamentals of the equities we own for our clients remain quite strong. U.S. equity valuations are neither exciting nor excessive at this point.

The chart below reveals a 3-5 year time period that was very pleasing for investors willing to stick with a U.S.-based equity portfolio. Going forward, we believe double-digit annualized returns are less likely.

Nonetheless, we expect the majority of our U.S. equity positions to appreciate at rates that coincide with their underlying earnings growth. We remain comfortable with our allocation to U.S. equities, as well as the individual positions we have selected for our clients’ portfolios.

Bond markets have seen the first bit of volatility in quite some time. Interest rates rose during the second quarter by a relatively large margin.

The yield on the 10-year Treasury note moved higher by approximately 0.5%, a sizeable move in such a short period of time. Anyone who was holding lengthy maturity/long duration bonds has seen the impact on the price of their bonds and/or bond funds.

We have been warning investors for quite some time that when, not if, interest rates rise, bond investors would find themselves earning meager (and in many cases negative) real rates of return.

For this reason, we have avoided traditional fixed-income (bond) investments and will continue to do so until interest rates rise. Instead, we continue to use our high-income strategy as an alternative to traditional fixed-income for clients requiring current income.

Our strategy focuses primarily on securities with consistent (and growing) distributions and utilizes high-quality dividend stocks, preferred stock, REITs, and master limited partnerships (MLPs) in taxable accounts.

Our high-income strategy is also susceptible to movements in interest rates and will become increasingly volatile as interest rates change. Nonetheless, we feel confident we are not exposing clients to the permanent price declines that bond holders will experience if interest rates continue on their current course.

International equity markets were strong in the first half of the year. International markets have been (and remain) far more attractive from a valuation standpoint than domestic equities.

While we expect our international investments to increase in price commensurate with underlying profit growth, it is also reasonable to expect some level of price multiple expansion as Europe continues its “quantitative easing” program.

In other words, investors may be willing to pay more for $1 worth of earnings than they were before.

Within our international allocation, we continue to allocate capital to emerging markets where the overall valuation metrics are most attractive. Our actively managed approach toward international investing continues to add value.