Asset DirectorSecond Quarter 2015 Review
Theaters are showing summer movie sequels and apparently Europe has a sequel blockbuster of its own. Greece, with a new government, is fighting austerity and looking for debt reduction. Europe and Germany in particular are trying to keep the euro area together without peripheral contagion. Both the Greeks and the creditors believe they have a basis for a viable plan, but if it seems like you have seen this one before it’s because it has been playing for over five years. Greece and its challenge to stay in the Euro and possibly to remain in the EU makes most of the headlines, but there are other world events that should elicit as much, if not more, conversation. For instance, China’s equity market has experienced a precipitous decline and the Chinese government is attempting to mitigate/manipulate the risk. So far, it has worked to some extent as the Chinese government can be very “persuasive” to equity sellers. As a result of the aforementioned challenges, fundamentals and valuation continue to take a back seat, but they probably shouldn’t from a US investor’s perspective.
In the United States, economic information has generally continued to improve slightly. Consumer confidence trends are good. Existing and pending home sales are providing some additional support. The labor market, although it still has some slack, continues to recover. Retail sales have been uneven recently, but did rebound from the moribund early part of the year.
US equities continued the 2015 upward trend but did not add much in the quarter. The S&P 500 Index advanced just 0.28 percent in the quarter. In the quarter, growth equities further increased their YTD outperformance over value at all market caps. Volatility is on the rise, and the S&P 500 still has not experienced a correction (defined as a price decline of 10 percent or more) since 2011.
The asset allocation for the Asset Director Portfolio at the end of the second quarter of 2015 was 59 percent equities, 37 percent bonds and 4 percent cash. The portfolio maintained a relatively neutral equity position throughout the second quarter. Early in the quarter, we increased the portfolio’s Financial sector equity exposure. Throughout the quarter, we reduced Information Technology, especially some semiconductor names. At the end of June, the portfolio remained overweight Industrials, Information Technology and Financials while remaining underweight Consumer Discretionary, Consumer Staples, and Utilities.
The fixed income portion of the portfolio saw a fairly quiet quarter. As spreads widened, exposure was added to investment grade and high yield credit. The portfolio is slightly short duration but will increase to a neutral duration as rates trade higher. Finally, the portfolio is positioned to add risk if the markets trade off.
Going into earnings season, estimates have been lowered and now do not appear to represent a high hurdle. The strong dollar will provide a drag to multinational enterprises’ earnings, but that may already be baked into street estimates. Companies need to start generating top-line growth rather than just cutting costs and repurchasing stock. If increased growth can finally appear, the Federal Reserve will begin increasing short- term rates which may provide some near-term equity volatility. Even with all of the challenges, relative to bonds, equity valuations still appear attractive.
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 6/30/2015 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.
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