Asset Director

First Quarter 2015 Review
OneAmerica Asset Director

Portfolio Commentary

In the United States, it seems like equity investors might be approaching a precipice. All investors, those that were going to invest in equities for long-term appreciation and those forced into equities by the US Federal Reserve’s ultra-low rates will need to decide if future earnings growth will be enough to support current equity valuations. In March, the Fed removed the “patient” language from the minutes giving a signal that they may undertake a small rate increase (“lift-off”.) Working against that proposition is limited inflation, especially wage growth. On the positive side, employment statistics are better, but still have room to improve.

US equities started 2015 on a positive note albeit with a smaller return than global indices. The S&P 500 Index advanced 0.95 percent in the first quarter. Small and mid-capitalization companies easily outperformed larger companies for the quarter based on Russell Indices. Also, growth equities easily outperformed value at all market caps. Volatility, based on the VIX index, continued to fall in the first quarter and now sits below its 200 day moving average. The S&P 500 still has not experienced a correction (defined as a price decline of 10 percent or more) since 2011.

Even with the already historically low rates, the US 10-year rate declined versus year-end. The US 10-year yield fell to a 52-week low of 1.6 percent and finished below 2 percent at quarter-end. This decline has helped the Barclays Aggregate produce a return of 1.6 percent in the first quarter.

The asset allocation for the Asset Director Portfolio at the end of the first quarter of 2015 was 59 percent equities, 38 percent bonds and 3 percent cash. The portfolio maintained a relatively neutral equity position throughout the first quarter. In terms of equity sector exposure, we reduced the portfolio’s Industrial exposure and continued to increase Information Technology.  At the end of March, the portfolio remained overweight Industrials, Information Technology and Health Care while being underweight Consumer Discretionary, Consumer Staples, and Utilities. In the fixed income portion of the portfolio, we remained overweight credit investments and other "spread" products. The portfolio was also slightly overweight US Treasury securities.

Few, if any, asset classes remain cheap, but in search of return in a low-yield environment, investors must take measured risks. Quantitative easing in Europe and Japan, although late to the party, seems to be providing some tailwind.  Investors have taken notice as those markets outperformed the US in the first quarter.  Structural changes will need to follow to move to a more sustainable growth trajectory.  The US has experienced a bit of the reverse as the strong dollar has provided a headwind for multinational companies that have earnings overseas. With the decline in energy prices and the dollar strength, US earnings estimates have been pared. Going forward, lower energy prices and a strong dollar should help consumers’ purchasing power. Equity returns will likely see more volatility in the future, but valuations still appear attractive relative to bonds.

Registered individual variable annuity contracts and variable universal life policies issued by American United Life Insurance Company® (AUL) are distributed by OneAmerica Securities, Inc., Member FINRA, SIPC, a Registered Investment Advisor, 433 N. Capitol Ave., Indianapolis, IN 46204, 1-877-285-3863.

The views expressed in this commentary are those of the author as of 3/31/2015 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation to buy, sell, or hold any specific security. Information provided with respect to the Fund's Portfolio Holdings, Sector Weightings, Number of Holdings, Performance and Expense Ratios are as of the dates described in the article and are subject to change at any time.

Variable products are sold by prospectus. Both the product prospectus and underlying fund prospectuses can be obtained from your investment professional or by writing to 433 N. Capitol Ave., Indianapolis, IN 46204, 1-800-249-6269. 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.

Funds investing in stocks of small, mid-sized, and emerging companies may have less liquidity than those investing in larger, established companies and may be subject to greater price volatility and risk than the overall stock market.

Funds that invest in a concentrated sector or focus on a relatively small number of securities may by subject to greater volatility than a more diversified investment.