Asset DirectorThird Quarter 2013 Review
Recent months can be described as eventful, to say the least. The Federal Reserve is unsure as to when they may embark on a change to monetary policy. It could be sooner, or it could be later. All we really know is that it will be “data dependent.”
Congress also moved to center stage since their inability to pass a continuing resolution by September 30, 2013 pushed our nation into a partial shutdown. After 16 days of heated rhetoric, Congress finally passed a bill that reopened the government through January 15, 2014, suspended the debt ceiling through February 7, and established a December 13 target for budget negotiations. The passage allows the U.S. to avoid a default, at least temporarily, and ends the shutdown that may have shaved at least 0.6 percent from fourth quarter economic growth.
The stock market has proved quite resilient in the face of heightened uncertainty. The S&P 500 advanced 5.3 percent during the third quarter and has increased 19.8 percent during the first nine months of 2013. Some of the more cyclical sectors (materials and industrials) led performance during the quarter, while sectors most vulnerable to rising interest rates (utility and telecommunication) reported negative returns, leading to significant underperformance year-to-date.
During 2013, the fixed income market has been materially impacted by FOMC announcements and Congressional deadlock. The Barclays Aggregate Index reported a 0.6 percent return during the third quarter, but still remains in negative territory (-1.9 percent) on a year-to-date basis as of September 2013. High yield bonds continue to perform well as investors aggressively seek yield in a low interest rate environment. During October, the interest rate on one-month Treasury Bills jumped materially due to the rollover risk from a possible federal government default.
As of September 2013, the asset allocation for the Asset Director Portfolio was 60 percent equities, 38 percent bonds and 2 percent cash. During the third quarter, we maintained an overweight position in equities due to a more favorable outlook for equity returns compared to fixed income asset classes. We reduced the portfolio’s equity exposure to the health care and consumer discretionary sectors while increasing the portfolio’s technology weighting.
On the fixed income side, we were duration neutral compared to the Barclays U.S. Aggregate Bond Index. The portfolio remained slightly overweight governments and asset-backed securities while being underweight mortgage-backed securities and emerging markets compared to the index.
As we near the end of 2013, we can expect many activities to be “on hold” as long as political paralysis continues in Congress. The fiscal impasse also reduces the likelihood that the Federal Reserve will start tapering bond purchases during 2013. Fixed income returns will be extremely dependent on the outcome of these near-term events. Although equity returns have managed to brush off the severity of the impending negotiations, the equity market’s relative calm may be masking potential damage ahead.
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).