Investment Pulse Fourth Quarter

While the end of the year is busy with processing RMD’s, charitable gifting and loss harvesting we still find time to dedicate to research.  In the last few months of the year we heard from a wide variety of money managers and got their take on the markets.

Kathleen Gaffney, Portfolio Manager for Eaton Vance

• Kathleen feels like they have reached an inflection point in the bond market, even though fundamentals for the economy are still positive, high yield is selling off and investors seem to be bracing for higher rates to come.

• She feels the risk worth taking at this time is found in the equity markets in companies with good fundamentals.

• There is so much cash on the sidelines now that every time there is a selloff in bonds causing rates to rise there are many buyers swooping in to buy up the bonds bringing the rates right back down.

Joe Zidle of Richard Bernstein advisors

Often seen on CNBC, Joe came to Detroit to share some of his company’s views of the markets in general.  They have many interesting and often differing viewpoints from the consensus. 

• He describes the market now as a secular equity bull.  “Bull markets don't end with skepticism, they end with euphoria.  Markets can't be overvalued if people are uncertain.”

• There is still a lack of capital spending by U.S. companies to invest in the future of their businesses.  94% of S&P 500 companies are putting money into share buybacks and dividends rather than in capital spending. 

• He says we are still early in the business cycle.  Business cycles start here in the U.S., go to Europe and then finally the emerging markets.  They see the emerging markets and China as still “in a bubble” while Europe is still correcting.

Jeff Rosenburg CIO of Fixed Income for Blackrock

Jeff is another expert who is often seen on CNBC.  Jeff stopped worrying about bonds and learned to love them in 2014.

• According to Jeff, where you hold your duration (by maturity) matters as much to returns as how much duration you own.  Active management can help a portfolio by managing this.

• He says high-yield bonds will take on more interest rate sensitivity.   They tend to be shorter maturity bonds as these companies aren’t trusted enough to loan to them for longer periods of time. This will subject them to more interest rate sensitivity than normal when short rates start to rise.

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Why I Disliked my Diversified Portfolio in 2014

Let’s face it; we live in a headline kind of world these days. One of the fastest growing media outlets, Twitter, only allows 140 characters. They might as well rename it “Headwitter”! I was reminded of the power of headlines recently as I was reviewing my personal financial planning; reflecting on the progress I have made toward goals such as retirement, estate, tax, life insurance, and investments. And, after reviewing my personal 401k plan, and witnessing single digit growth, my immediate reaction was probably similar to many other investors that utilize a prudent asset allocation strategy (40% fixed income and 60% equities). I’d be less than candid if I didn’t share that my immediate thought was, “I dislike my diversified portfolio”.

The headlines suggest it should have been a better year. However, knowing that the substance is below the headlines, and 140 characters can’t convey the whole story, my diversified portfolio performed just as it is supposed to in 2014.

The Financial Headlines

The financial news -- whether it be radio, print, or social media -- almost entirely focuses on three major market indexes; the DJIA, the S&P 500 and the NASDAQ. All three are barometers for Large Stocks in the United States; they are meaningless for additional assets found in a diversified portfolio such as international stocks, small and medium size stocks, and bonds of all varieties. It is true that large US stock indexes were at or near all-time highs throughout 2014.  It is also true that many other major asset classes gained no ground or were even negative for the year including: high yield junk bonds, small cap stocks, commodities, metals, energy, international stocks and emerging markets. Moreover, even within US large stocks there was vast disparity as large cap value stocks lagged large growth stocks by almost 50%!

How to Dig Deeper into Strategy & Outlook

Our firm utilizes a variety of resources in developing our economic outlook and asset allocation strategies including research from well-respected firms such as Russell Investments and Raymond James. Review the “Russell Balanced Portfolio Returns” graphic that provides a useful visual on how a variety of asset classes have performed since 2005. (Click below image to enlarge.)

This chart shows the historical performance of different asset classes, as well as an asset allocation portfolio (35% fixed & 65% diversified equities). The asset allocation portfolio incorporates the various asset classes shown in the chart and highlights how balance and diversification can help reduce volatility (risk) and enhance returns.Risk adjusted returns are always a worthy goal and, as I have written in the past, risk is always present and matters.

Do you recall 2008-2009 or how about the lost decade of 2000-2010? If you “see” a pattern in asset class returns over time, please look again. There is no determinable pattern. Asset class returns are cyclical and it’s difficult to predict which asset class will outperform in any given year. A portfolio with a mix of asset classes, on average, should smooth the ride by lowering risk over a full market cycle. I’d suggest if there is any pattern to see, it would be that a diversified portfolio should provide aless volatile investment experience than any single asset class. A diversified portfolio is unlikely to be worse than the lowest performing asset class in any given year, and on the flip side it is unlikely to be better than the best performing asset class. Just what you would expect!

Staying Focused & Disciplined

The current environment reminds me of the strong US stock market experienced in the late 1990’s.  During that time, unfortunately some folks were willing to abandon discipline because of increased greed or conversely, increased fear. Currently I sense an interesting phenomenon, an increase in fear. Not of markets going down, but rather a fear of being left behind in such a strong US stock market. As important as it is not to panic out of an asset class after a large decline, it remains equally important not to panic into an asset class. I believe maintaining discipline in both environments is critical to investment success.

Like the late 1990’s, many folks have taken note of the S&P 500’s outperformance of many other asset classes over the last five years and wonder why they should invest in anything else. The question is understandable. If you find yourself asking the same question, you might consider the following:

• The S&P 500 Index has had tremendous performance over the last five years, but it’s difficult to predict which asset class will outperform from year to year. A portfolio with a mix of asset classes, on average, should smooth the ride by lowering risk over a full market cycle.

• Fundamentally, prices of U.S. companies are hovering around the long-term average. International equities, particularly the emerging markets, are still well below their normal estimates and may have con­siderable room for improvement.

• U.S. large caps, as defined by the S&P 500 Index, have outperformed international equities (MSCI EAFE) four of the last five years. The last time the S&P outperformed for a significant time 1996-2001, the MSCI outperformed in the subsequent six years.

Managing Risk

Benjamin Graham, known as the “father of value investing”, dedicated much of his book, The Intelligent Investor, to risk.  In one of his many timeless quotes he says, “The essence of investment management is the management of risks, not the management of returns.”  This statement can be counterintuitive to many investors.  As I have shared before, risk does not have to be an alarm; rather a healthy dose of reality in all investment environments. That’s how we meet life’s financial goals. Diversification is about avoiding the big setbacks along the way – it doesn’t protect against losses – it is used to manage risk.

So, if you are feeling like I did initially about your portfolio, hopefully after review and reflection you might also change your perspective like I did from “I dislike my diversified portfolio” to “My diversified portfolio - just what I would expect”. As always, if you’d like to schedule some time to review anything contained in this writing or your personal circumstances, please let me know. Lastly, our investment committee has been hard at work for several weeks and will be sharing 2015 comments in the near future. Make it a great 2015!

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

Required Disclaimer: This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Tim Wyman and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The NASDAQ Composite Index is an unmanaged index of securities traded on the NASDAQ system. MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Raymond James is not affiliated with Benjamin Graham.

Investment Pulse: What we’ve heard in the Third Quarter

While the quarter started quietly, as summer was in full swing, it ended with a bang as Bill Gross announced his departure from PIMCO.  As summer travel and vacations died down, we ramped up our travel to collect insights from some of the world’s largest money managers.

Socially Responsive Investing with Neuberger Berman

In early August The Center’s Investment Committee had the opportunity to speak one-on-one with the management of Neuberger Berman’s long-time successful Socially Responsive Investing (SRI) strategy.  Since this is an area that seems to be gaining in interest from our clients, we talked with some of the most successful investors to get their take on how they do it.

•  Process: They look for areas of business that have tailwinds and find the best positioned companies.  They analyze the companies for 13-15 months.  Once a company meets their expectations, it is added to their prospect list (173 names currently).  When looking to buy they ask, “Why is the price attractive?”; “Is something broken (based what they know about the company)?”; “Does the stock have value criteria?"

• SRI has five avoidance points:  alcohol, tobacco, weapons, nuclear power, and gambling.  The investment team wants a management team that makes thoughtful, long-term, fundamental decisions.

Steve Vannelli, CFA, managing director of GaveKal Capital

On a trip to Denver, CO to visit clients, Matt Chope, CFP®, Partner, spent an afternoon in September with Steve Vannelli, CFA, Managing Director of GaveKal Capital. Matt and Steven discussed many aspects of investment markets, interest rates, and the state of the economy.  Steven shared GaveKal’s proprietary approach to finding what he calls "knowledge leaders" or firms with an R&D intensity greater than that of the industry they are a part of.  He finds a correlation to these innovative companies of higher future sales growth, higher future Return on Assets, and higher market share as well as lower variability to earnings and stock returns.

Steven described how to better understand the intangible investment that many of these companies make, which he says is the key missing element in understanding the true company value. In that, he says, lies the misunderstood inefficiency in the marketplace.

Matt also learned about their proprietary quality models that scrubs the balance sheet, reviews financial leverage, calculates net debt as a percent of capital, and, most notably, intellectual property as a percent of assets of 1600 companies around the world.

Goldman Sachs, Blackrock and JP Morgan on-site visits

Matt continued his busy schedule with due diligence meetings in New York City.  Global macro themes were the main takeaways from his discussions.  Topics ranged from deflation in Europe to the energy revolution in the U.S.

While many of these companies do not currently have representation in our portfolios, the discussions with management are key to us in the overall management of our clients’ investments.  One of the worst risks you can have is the risk you don’t know about. Discussions like those we had in the 3rd quarter help us to understand where potential risks could be coming from.  While we at The Center can’t be on the ground in 20 different countries every year, we have the opportunity to leverage many experts and listen to their sometimes conflicting viewpoints.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios, CFP®, Portfolio Manager and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.

Investment Commentary - September 2014

Clients and Friends,

While much of our communications with you in the last few months have been about The Center’s recent move, our intensive investment focus is always present. The last few months were marked by many insightful conversations with portfolio managers and investment professionals. This reminds me that at our core, our investment process is focused on good old fashioned research whether it comes to the way we construct asset allocation mixes or how we select investments for your portfolios.

Here is some news for you from our investment team:

• We’re more than halfway through 2014 and the financial markets have picked up where they left off last year. Not only are stocks measurably higher this year, but bonds have made a rebound with positive returns as well. We’ve got a new one-page investment dashboard that sums up the current investment world. We’ll update this one-pager each quarter going forward. Let us know what you think of the new look and feel.

• Angie Palacios, CFP® provides a great recap of the Morningstar Investment Conference which is held in Chicago each June. This is a can’t-miss conference each year and 2014 was no exception. She includes notes about employment predictions for the US economy and focus on international as some of the key takeaways this year.

• Our quarterly investment pulse includes recaps from four meetings held here and around Detroit and highlights the extraordinary access we’re able to get to investment professionals because of size and reputation. I particularly enjoyed a meeting with Joseph Brennan and Lee Norton from Vanguard. The discussion was broad and interesting including how Vanguard, known for their preference for indexes, identifies active investment managers for their offerings.  With several other top-notch investors giving us time for lengthy discussion, you can see the quality of discourse we are privileged to entertain.

• Matt Chope shares insight from a conversation with one of his favorite investors – Charles de Vaulx – who is a portfolio manager with IVA.

Do you have investment-related questions for us? Please don’t hesitate to let me or your financial planner know. Thanks again for your trust and commitment to The Center for the opportunity to work with you to pursue achievement of your financial goals!

On behalf of everyone at The Center,
Melissa Joy, CFP®
Partner, Director of Wealth Management
CERTIFIED FINANCIAL PLANNER™

Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2013, Melissa was honored by Financial Advisor magazine in the Research All Star List for the third consecutive year. In addition to her contributions to Money Centered blogs, she writes investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.

Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Melissa Joy and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risks and investors may incur a profit or a loss regardless of strategy selected.

Following Charles de Vaulx for 25 Years

The Center investment committee meets with and interviews dozens of management teams each year. We have face-to-face sessions, conference calls, and trips to company home offices. We recently had a chance to meet with a portfolio manager that we worked with for most of the last quarter century ... Charles de Vaulx. Warren Buffet once said:

A portfolio is much like a bar of soap, the more you touch it the smaller it gets.”

In order to keep portfolio changes to a minimum we spend a lot of time on the front end finding the right minds with an investment philosophy that matches ours.

Charles has represented part of three different teams over the 25-year period, including IVA Funds, but we have followed him. His approach to investing resides in the contrarian, absolute return, low risk, global, alternative asset class emphasis with experience in global value investing.

“The Perennial Bear”

Charles is usually looking at the world with a glass half empty viewpoint. His team was labeled “The Perennial Bear” during the market run up in the 1990’s as the greatest bubble in stocks was building and just before a 12 year bear market in stocks occurred. This was one of the longest bear markets in history. And just before the worst decade of stock returns in U.S. history (not many people realize that Dec 31st 1999 – Dec 31st 2009 produced a lower return in the S&P 500 than the depression period of the 1930s).

According to Charles, it had everything to do with price. People need to pay more attention to the price that is paid for the potential return that can be achieved going forward. That is where the work is done. The rest is patience and time. 

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any opinions are those of Matt Chope and not necessarily those of RJFS or Raymond James.

View from the Morningstar Conference

Nearly 2,000 people gathered at McCormack Place in Chicago this June.  The views of the Chicago skyline, while beautiful, were not the views I flew to Chicago to see.  Advisors, asset managers and press gather once a year at this conference to listen to some of the greatest minds in investing share their views of the markets and economies around the world.  This is one of my favorite conferences of the year. 

We heard from legendary investors including Michael Hasenstab, PIMCO's Bill Gross a.k.a. The Bond King, and AQR's Cliff Asness a.k.a. The Father of Momentum Investing.

Bill Gross: The New Neutral

Keynote speaker, 70-year-old Bill Gross did not disappoint.   Very aware that his image has been dinged in recent months with the departure of his heir apparent Mohammed El Erian, and subsequent departure of $50 billion of money flowing out of his flagship product, he took the stage wearing sunglasses and spent the first 10 minutes of his speech poking fun at himself while jokingly trying to brainwash the crowd and press Manchurian Candidate style.  All fun aside, he came to the conference to coin a new phrase the “New Neutral".  He is encouraging investors to look at interest rates from a different, more muted perspective.  What does this mean for investors?  Overall lower return expectations going forward for stocks and bonds.  This is an extension of PIMCO’s 2009 “New Normal” which stated that economic growth will be sluggish as it has been.

Employment Outlook: Labor Shortages?

Bob Johnson, Morningstar's very own economist, predicted that next summer at this conference the hot topic of discussion will be labor shortages.  He explained that the unemployment rate remains high despite the extremely large amount of open requisitions for new job postings.  He argues that there is a mismatch in job skills causing the unemployment rate to stagnate despite companies needing to hire so many.  He goes on to explain that the Federal Reserve cannot fix this skill mismatch, only the private sector, corporations and individuals, can acquire the necessary skills needed to match people to the needed job openings.

International Opportunities

Emerging markets and Japan were hot topics of discussion.  "Go anywhere" Investment managers, with the world as their oyster, prefer to access emerging markets through companies domiciled in developed markets that derive most of their revenues by selling to emerging market consumers.  Japan was a hotly debated topic, with about half of the experts loving it and half not wanting to touch it with a 10-foot pole.

In addition to these larger investing and macro-economic themes, I also find value in speaking directly with portfolio managers about their investing processes and trying to discover new strategies that may be beneficial to our clients’ portfolios.  There is never a shortage of ideas after a few days spent at Morningstar listening and learning!

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

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Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. Bob Johnson, Michael Hasenstab, Bill Gross, Cliff Asness are independent of Raymond James. Any opinions are those named herein and not necessarily those of RJFS or Raymond James.

The Investment Pulse: What we've heard in the Second Quarter

We’re always very busy with research, but this quarter has been full of broad and diverse perspectives.  In addition to off-site conference attendance, we have also met locally with many experts.

Vanguard: Active and Passive management discussion

Melissa Joy met with Joseph Brennan and Lee Norton from Vanguard Group in May at our offices. Mr. Brennan runs the Index Equity department. He is responsible for managing index portfolios with the firm. Mr. Norton monitors and reviews management teams on both active and passive strategies at Vanguard. Highlights from the conversation included: 

• With more than $1.5 trillion in index investments, they are one of a very small group of dominant players in the index investing world. We discussed what indexes they decide to make available for investment and how the portfolio review team monitors their internal index teams.
• Vanguard was featured in Michael Lewis’ recent book, Flash Boys. Having read the book, Melissa was curious about their take since they were prominently mentioned. They both acknowledged the real problems uncovered by IEX (a fast growing alternative trading system that avoids dark pools and high frequency trading) which was featured in the book.  They also believed that the desire for an entertaining and appealing financial book may have resulted in some additional hype that might not be warranted.
• We talked about Vanguard’s process for identifying active managers for their funds. Not surprisingly, cost was an important factor in hiring managers. Other factors that were favored included enduring teams, teams from employee-owned firms, and teams with ability to hand off succession from one generation to the next.

JP Morgan: A fixed income discussion

Priscilla Hancock from JP Morgan Asset Management sat down for a conversation about bonds, especially municipal bonds with Melissa Joy and Angela Palacios. We’ve known Priscilla for a while and have heard her speak in 2012. We’ve caught up with her three times since then. She has a great conversational way to talk about bonds and how they typically behave in rising rate environments. With many of the investors we like to speak with, it’s not always the first conversation that brings us the most value – getting to know each other over time provides robust information and is a critical part of our research and monitoring process.  Priscilla shared these perspectives:

• The aging US population is helping to keep bond yields lower. As boomers retire and age, they want more bonds, keeping demand high. Likewise, pensions are working to lock in stock market gains and are snapping up bonds any time rates creep up. It’s an interesting dynamic working against rising rates even though it doesn’t completely compensate for the push to higher rates that will probably occur at some point.
• Municipal bonds were last year’s trash with rising rates and headlines about Puerto Rico and Detroit taking the wind out of the municipal market. We discussed the situation in Detroit and why shifting rules on bankruptcy alarm municipal bond investors. That said attractive tax equivalent yields have increased interest in the municipal bond market and rewarded municipal investors this year.
• Proceed with caution when using passive indexes for bond exposure.  Issuers you want to avoid are the ones issuing the most debt.

Columbia: “Lose less in down markets”

This is not the first time that Scott Davis, Director at Columbia Dividend Income has checked in with us and we find that with time we are able to have more nuanced conversations with the portfolio managers. He noted that although stock prices have been headed north, he’s always reticent. In his words, “I don’t want to party like it is 1999 because it was a hell of a hangover.” He then elaborated saying the time-tested secret of investing is to lose less in down markets. Of concern is increasing merger and acquisition activity. On the more optimistic side of things, Scott says that companies are being run in a manner that’s better than he has seen in his almost 30 year career investing at Columbia. As a dividend-focused investor, Scott reminded us that buying dividends alone without understanding the source of dividends can be a dangerous proposition. He compared it to “picking up nickels in front of a steamroller.”

Water Island Capital: Event-Driven Strategy

Angela sat down with Ted Chen, Portfolio Manager of Water Island Capital’sArbitrage Event Driven Strategy, to discuss equity special situations.  Opportunity can abound here because most money managers don’t understand how to evaluate these situations.  The companies take on a negative stigma creating a potential buying opportunity for someone who specializes in understanding special situations.  We also discussed the volatility in the stock market and how it has become so minimal that the cost of hedging a portfolio is very low right now.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Income from taxable municipal bonds is subject to federal income taxation; and it may be subject to state and local taxes. Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.

Investment Commentary - 1st Quarter 2014

Dear clients and friends,

We’re four months into 2014 and so far there is not much to show for when it comes to year-to-date investment returns. Markets have treaded water in 2014 so far. Looking further out to the last 12 months, 3 years or 5 years and most investors in stocks or a diversified portfolio of stocks and bonds have been rewarded for their commitment to investing.

I mention this as we have just passed the five year anniversary of market lows in March 2009. I think it’s a healthy exercise to remember today your state of mind five years ago as an investor. Did you feel it was appropriate to put your faith in investment markets at the time? How do you contrast the stress that you may have felt along with most investors to the feelings related to quite positive stock market returns over the last several years?

The past few weeks marked another milestone as you likely filed taxes. High earners saw the bill from new taxes and rates. While tax burdens have become larger for many, the opportunities to manage taxes are coming to the forefront in the wealth management field. Strategies including asset location, cost basis election, and tax-loss harvesting are employed where appropriate.

If you’re a client of The Center, make sure you send a copy of your 2013 tax return. Information from this is used to evaluate your current tax circumstances and helps us to make more informed decisions on your investments and general financial planning strategies both on a before and after-tax basis.

We’ve done some sprucing up on our investment commentary website. Here are some things to look for this quarter:

• A tactical asset allocation dashboard is available with our investment committee’s latest weightings. Today we have bonds slightly underweight due to the low interest rate environment and stocks slightly overweight. We’re concerned about valuations for small company stocks in the US and have underweighted these positions. We are finding international equities more attractive due to valuations and have increased our allocations from underweight to neutral in the last six months.

• We have launched a quarterly investment pulse which gives you some insight to research and conversations with other investment professionals. Angie Palacios’ first edition of this update highlights our thoughts on municipal bonds, stock market valuations, and a manager departure at PIMCO.

• Investment returns as of the end of the first quarter are available along with Raymond James capital markets review summarizing current economic and investment data.

Whether markets are recently up or down, your commitment to a diligent investment process and focus on overall financial goals is to be commended. Please don’t hesitate to let us know if you have any questions regarding general investment strategies as well as your specific portfolio. Thanks as always for your trust and commitment to the financial planning process.

On behalf of everyone at The Center,

Melissa Joy, CFP®
Partner, Director of Investments
CERTIFIED FINANCIAL PLANNER™

Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2013, Melissa was honored by Financial Advisor magazine in the Research All Star List for the third consecutive year. In addition to her contributions to Money Centered blogs, she writes investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.

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Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James. Past performance may not be indicative of future results. You should discuss any tax or legal matters with the appropriate professional. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The Investment Pulse: What we’ve heard in the First Quarter

At The Center each of us spends a substantial amount of time reading, listening to speakers and attending conferences. The goal is to provide our clients with the best possible advice. Here’s a brief summary of the high points the Investment Department has heard this year so far.

Municipal Bonds

In January, Melissa Joy and Angela Palacios spoke with a Municipal bond specialist from T. Rowe Price. We discussed the current environment and what may affect municipal bonds looking ahead.

• Distressing news from Detroit and Puerto Rico last year caused retail investors to flee from municipal bonds in general, creating what many believed to be an excellent investment opportunity.

• This caused unusual cross-over buying which means that investors that typically only invest in taxable bonds were compelled by valuations and yield to purchase tax free bonds for portions of their portfolios. Banks are even utilizing municipal bonds as part of their liquid investment buckets. These are rare events.

• Tax filing time creates buying opportunities for municipal bond investors as taxes are top of mind in the March/April time frame when checks are being written to pay for taxes due.

Stock Market Valuations

There has been much heated debate as to whether the stock market is over or under valued on the fifth anniversary of the bull market. We attempt to review varying arguments in order to make educated decisions on the allocation of our portfolios. One extreme yet interesting view-point comes from Eric Cinnamond, Portfolio Manager for an Aston/River Road fund. Eric has strict valuation guidelines as to what he will and will not pay for small companies and is willing to hold cash in absence of opportunities.

• He has more cash than he ever thought he would have, currently 70% of his allocation. He feels valuations are very bloated and that for valuations to continue to expand, the U.S. economy will have to continue running at peak profits with no recession indefinitely (he did state that these valuations can continue for quite some time before correcting).

• When we get to these points in the market cycle, you start to hear the question, “Is it different this time?” Cinnamond says he is getting this question a lot lately because of his contrarian viewpoint.

• He will continue to hold cash as dry powder to deploy in the event of a market pull back and stands by his process.

Bond Giant Woes

In mid-January, PIMCO announced that Mohamed El-Erian resigned his role as co-Chief Investment Officer and Chief Executive Officer for PIMCO funds. While he had only an indirect impact on our PIMCO holdings we are continuing to watch further developments at PIMCO. Bill Gross & Rob Arnott remain the key managers to the PIMCO strategies we utilized for clients. While it currently appears Bill Gross is a difficult personality to work with he continues to provide excellent returns compared to the bond market in general.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Income from taxable municipal bonds is subject to federal income taxation; and it may be subject to state and local taxes. Municipal securities typically provide a lower yield than comparably rated taxable investments in consideration of their tax-advantaged status. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Please consult an income tax professional to assess the impact of holding such securities on your tax liability.

Tactical Asset Allocation Dashboard

The below chart reflects the Center for Financial Planning’s Investment Committee current positioning relative to our longer-term strategic models.

• Maintain a modest equity overweight as Leading indicators suggest better global growth ahead

• Expect equities to outperform bonds and cash and fixed income to underperform

• Continue to favor tactical allocation strategies

• Underweight U.S. equity allocations given relative valuations and we see potentially better opportunities in select international equities.

Asset Class Definitions

Core Bonds: Securities with primary exposure to bonds with historically low default risk and high correlation to Barclay’s U.S. Aggregate Bond Index.  This includes Investment Grade bonds with Intermediate Maturities.  This index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.  These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis.  Municipal Bonds are also included.

Strategic Income: Securities with primary exposure to bonds with less interest rate risk and types of bonds that are less correlated to the Barclay’s U.S. Aggregate Bond Index.  This covers the universe of fixed-rate, non-investment grade debt (High Yield).  Canadian and global bonds (SEC-registered) of issuers in non-EMG countries are included.

U.S. Large Cap Equity: Securities correlated to the Russell 1000 Index: Based on a combination of their market cap and current index membership, this index consists of approximately 1,000 of the largest securities from the Russell 3000. Representing approximately 92% of the Russell 3000, the index is created to provide a full and unbiased indicator of the large cap segment.

U.S. Small/Mid Cap Equity: Securities correlated to Russell Midcap Index: A subset of the Russell 1000 index, the Russell Midcap index measures the performance of the mid-cap segment of the U.S. equity universe. Based on a combination of their market cap and current index membership, includes approximately 800 of the smallest securities which represents approximately 27% of the total market capitalization of the Russell 1000 companies. The index is created to provide a full and unbiased indicator of the mid-cap segment.  Securities also correlated to the Russell 2000 Index.   The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

International Large Cap:  Securities are correlated to the MSCI EAFE.  This index is a free float-adjusted market capitalization index that measures the performance of developed market equities, excluding the U.S. and Canada. It consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

International Small/Mid Cap:  Securities are correlated to the MSCI EAFE Small-Cap Index.  This index is an unmanaged, market-weighted index of small companies in developed markets, excluding the U.S. and Canada.

Strategic Equity:  Securities with exposure to alternative investments that are less correlated to stocks and bonds with expectations and investments that can span across asset classes.  Also includes investments in managed futures.

*This material is for informational purposes only and should not be used or construed as a recommendation regarding any security outside of a managed account. Any opinions are those of The Center for Financial Planning and not necessarily those of Raymond James. Expressions of opinion are as of 03/31/2014 and are subject to change. Diversification and asset allocation do not assure a profit or protect against loss. The prices of small company stocks may be subject to more volatility than those of large company stocks. International investing involves additional risks such as currency fluctuations, differing financial and accounting standards, and possible political and economic instability. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of a portfolio. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. Global bonds tend to be denominated in the currency of the country in which they are issued. Most global bonds have higher default and currency risks than U.S. bond issues. Also, in some cases foreign governments don't allow the purchase of government bonds by non-residents. Managed futures involve specific risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. You should consider the special risks with alternative investments including limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regulatory and reporting requirements. You should only invest in hedge funds, managed futures or other similar strategies if you do not require a liquid investment and can bear the risk of substantial losses. There can be no assurance that any investment will meet its performance objectives or that substantial losses will be avoided. Individuals cannot invest directly in any index. Past performance does not guarantee future results.