Asset Director

Fourth Quarter 2014 Review
OneAmerica Asset Director

Portfolio Commentary

2014 started with geopolitical conflict, but ended the year with added economic uncertainty.  The US dollar had a strong year rising against every other widely traded currency. When the dollar rises, it places pressure on commodities based in dollars. As such, the price of oil began to fall during the summer and has yet to find a bottom. The price of WTI fell just over 50 percent from June to December 2014. Global growth was inconsistent at best, with developed countries slowly growing but at a declining rate. The US provided some of the best growth in the developed world. On the other hand, Europe’s growth was minimal and Japan fell back into recession. Emerging markets generally grew but at a declining rate.

US equities finished 2014 on a positive note driven by growth that was better than other global markets. The S&P 500 Index advanced 4.9 percent in the fourth quarter and 13.7 percent for the year on a total return basis. Large and mid-capitalization companies performed better than smaller companies for the year based on Russell Indices. Volatility has been generally muted, but appears to be on the climb. The S&P 500 has not experienced a correction (defined as a price decline of 10 percent or more) since 2011.

For the year, interest rates declined rather precipitously in relation to the already historically low rates. On the last day of 2013, the yield on the 10-year Treasury was 3.03 percent then fell to a low of 2.06 percent in mid-December 2014. This decline has bled into the beginning of 2015 with further declines. Coupon return plus the rate decline pushed the Barclays Aggregate Index to a 5.97 percent return.

The asset allocation for the Asset Director Portfolio for year-end 2014 was 61 percent equities, 36 percent bonds and 3 percent cash. During the fourth quarter, the Portfolio achieved attractive returns versus its hybrid benchmark and on a ten-year timeframe ending December 2014. A slight overweight equity position was maintained due to the relative valuation of equities versus fixed income. In terms of equity sector exposure, we reduced the Portfolio’s Consumer Discretionary and Health Care exposure and increased Information Technology and Financials. As of year-end, the portfolio remained overweight Industrials, Information Technology and Health Care while being underweight Consumer Discretionary, Consumer Staples, and Utilities. For the fixed income investments, we remained overweight credit investments all year and pared high-yield into the rally.  The fixed income portion also remained duration neutral for the year.

Investment risk continues to mount as we begin 2015. From a monetary perspective, the Federal Reserve will need to deal with divergent global trends.  The Fed is trying to make a move toward a more neutral policy in 2015 if the data supports such a move, while Europe is likely going to initiate Quantitative Easing. In the case of Japan, it has moved from aggressive stimulus to a sudden fiscal contraction in early 2014 and is now back to an increased asset purchase program. Declining energy prices and limited wage growth could keep inflation below the Fed’s target and may put them on hold in the near-term. Also, a decline in oil and therefore gasoline prices is generally going to be a boost for consumers as they will have more discretionary income to spend which would help economic growth. The question markets have yet to determine is what the true cause of the decline is. Is it more supply or demand generated? OPEC has decided to fight for market share by keeping production levels high (supply), hoping to drive out some higher cost oil production, especially in North America. On the other hand, if the demand for oil is waning, that could be a precursor for slowing global growth which would negatively affect global markets.

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 12/31/2014 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.