Asset Director
Third Quarter 2012 Review
Portfolio Commentary
As we near the end of 2012, we face a myriad of unsettling events. Europe is still struggling with its debt crisis as an effective solution continues to allude policymakers. Meanwhile, the ongoing decline in their economic growth is making it extremely difficult to implement and maintain any type of credible fiscal reform.
Evidence of weak economic growth is also prevalent in the United States. Even though we are now four years into an economic recovery, our GDP grew at a meager 2 percent rate in the third quarter. This weak economic growth becomes even more problematic due to the upcoming “fiscal cliff” which will take effect on January 1, 2013. Unless legislative action is taken, it has the potential of pushing our economy back into a recession.
Fortunately, fragments of positive news do exist. The housing recovery continues to build momentum as home sales have increased and prices have edged higher. In addition, our unemployment rate declined to 7.8 percent in September.
Our U.S. investment markets performed relatively well during the third quarter despite this overhang of negative events. The S&P 500 continued its upward advance by achieving a 16.4 percent total return during the first nine months of the year. Despite the negative global environment, it has surged over 100 percent from its low point during March 2009 and needs to advance less than 10 percent to reach its all time high achieved in October 2007.
The broad U.S. fixed income market also provided positive returns during the quarter. The Barclays Aggregate posted a 1.6 percent investment return during the three months. Although the absolute level of Treasury yields did not change materially during the quarter, credit spreads tightened on renewed hope that the debt crisis in Europe was on a path to resolution. As a result, risk-based fixed income assets rallied during the quarter.
As of September 2012, the asset allocation for the OneAmerica Asset Director Portfolio was 59 percent equities, 40 percent bonds and one percent cash. During the quarter we changed our equity focus in technology by increasing our exposure to software and wireless equipment manufacturers while decreasing our weighting to PC manufacturers. We also increased our equity weighting to financial and consumer staple companies while reducing our exposure to discretionary, industrials and health care names. Because spreads continued to narrow, we took some profits on the fixed income side in some higher beta credit names late in the quarter. As a result, the portfolio was underweight credit compared to the Barclays Aggregate as of quarter-end.
Uncertainty remains elevated as we near the end of 2012. It is unlikely that any type of definitive resolution will be achieved in Europe over the near term horizon. The results from the upcoming presidential election and how Congress deals with our own fiscal issues will also have a dramatic impact on investor sentiment. As a result, any type of negative outcome regarding these events has the potential of creating downward pressure on our U.S. investment markets.
Note: The fund listed here is an investment option that is only available through either a registered individual variable annuity contract, a group variable annuity contract, or a variable universal life insurance policy issued by American United Life Insurance Company® (AUL).
Annuity contracts and life insurance policies are long-term products. Care should be taken to verify that these products are suitable for specific long-term needs. All objectives such as time horizons, risk tolerances and costs should be weighed before investing. Variable annuities are tax-deferred investments designed for retirement that are designed to create a fixed or variable stream of income through a process called annuitization and also provide a variable rate of return based on the performance of the underlying investments. Any investment into a variable investment option involves risk, and there is no assurance that the investment objective of any investment option will be achieved. Before investing, you should understand that accounts under variable annuities are subject to market and interest rate risk, including possible loss of principal.
Both variable annuities and variable life insurance policies have limitations. Variable annuities and variable life insurance policies have fees and charges that include mortality and expense, administrative fees, contract fees, the expense of the underlying investment options, and additional charges for riders. The cost of life insurance can vary with such characteristics as gender, relative health and age.
If money is withdrawn from of the annuity early or if a life insurance policy is surrendered, in part or in whole, fees called surrender charges may apply. If the annuitant or insured is not yet age 59½, he or she may also have to pay an additional 10 percent tax penalty on top of ordinary income taxes triggered by the withdrawal. If an early withdrawal is taken, the death benefit and the cash value of the annuity contract or a life insurance policy will be reduced.
As events in life change (e.g., marriage, birth of a child, job promotion, retirement, relocation, etc.), so do an individual’s life insurance needs. Care should be taken in order to evaluate the suitability of a life insurance policy both at the time of issue and over the course of the life of the insured. Market volatility can lead to the necessity of additional premium being required to maintain a variable life policy.
While a participant in a group annuity contract may benefit from additional investment and annuity related benefits under the annuity contract, any tax deferral is provided by the plan and not the annuity contract.
Registered individual and group variable annuities and variable universal life insurance policies are sold by prospectus. Both the product prospectus and underlying fund prospectuses can be obtained from your investment professional or by writing to OneAmerica Securities, 433 N. Capitol Ave., Indianapolis, IN 46204, 1-877-285-3863. Before investing, carefully consider the fund’s investment objectives, risks, charges and expenses. The product prospectus and underlying fund prospectus contain this and other important information. Read the prospectuses carefully before investing.
Registered individual and group variable annuity contracts and variable universal life insurance policies are issued by AUL and registered group variable annuity contracts are distributed by OneAmerica Securities, Inc., Member FINRA, SIPC, 433 N. Capitol Ave., Indianapolis, IN 46204, 1-877-285-3863, which is a wholly owned subsidiary of American United Life Insurance Company® (AUL).
