Investment Commentary - January 2015

2014 was highlighted by the continued dominance of America’s large cap stock bull market and a bond surprise with US treasuries providing returns to investors. We like to think of markets in cycles and you may be feeling more and more used to stock returns as it’s been more than five years since we had negative returns in US large company stocks (generally). Moreover, you may wonder why you would own anything but US stocks and bonds given a divergence of returns between US large companies and almost everything else.

The Curse of Diversification?

If you have a diversified portfolio of different types of stocks and bonds as we recommend through asset allocation, it may to be frustrating to see the largest US benchmarks with double-digit returns while other different types of stocks have been more mediocre. Using 2014 as an example, small cap stocks as measured by the Russell 2000 were up 4.89% vs. 13.69% for the S&P 500. Meanwhile, foreign stocks as measured by the MSCI All-Cap World Ex-US were down for the year return -3.87%.

As you can see from the chart below, the drop-off was precipitous. While we have made some adjustments to our recommended mix of stocks, we continue to recommend a commitment to diversification.

It is difficult to overstate the power that diversification has in terms of long-term investment returns. By long-term, we don’t mean one year or three years but over decades which is ultimately the time horizon for most of our clients at least for some of your money. Indeed, the SEC refers to “The Magic of Diversification” on their website educating investors. They go on to note, “The practice of spreading money among different investments to reduce risk is known as diversification. By picking the right group of investments, you may be able to limit your losses and reduce the fluctuations of investment returns without sacrificing too much potential gain.” Source.

Bond Redux

While we have been amongst the majority of investors who have been concerned about rising interest rates over the next five to ten years, bonds reiterated their unwillingness to be predictable in 2014 by returning close to their lows in terms of yields. The ten-year treasury yields 1.93% today (January 12). That number seems impossibly low, likely manipulated by a very accommodating federal reserve. It’s not difficult, though, to see why it may stay that low for some time when you notice that the German ten-year bond yields 0.47% and a Spanish bond – much less creditworthy than Uncle Sam – pays just 1.64%.

Predicting short-term bond returns is a fool’s errand. That said, the very low bond yield – about the same as inflation – coupled by forewarning from the federal reserve that rates may go higher this year means our outlook is unchanged. From year-to-year we can’t predict the returns of bonds, but over the next several years, yields will likely go higher. This march higher would be likely to accelerate if there were signs of inflation which seems to be the farthest thing from reality with CPI less than 2% right now. As with all things, it’s healthy to not assume anything.

We have more to share in our investment commentary website http://centerinvesting.com.

• Tim Wyman shares his personal frustration with diversification last year with  “Why I Dislike a Diversified Portfolio…in 2014”

• Our investment strategy quarterly is updated and available

• I share an update on oil prices and other geopolitical events and how they might affect markets

• Angie Palacios has a research roundup from the second half of 2014

• On a housekeeping note, we have established an informational page for tax information

You will not find us making predictions for investment returns in 2015. We can predict that your commitment to financial planning coupled with a long-term outlook when working with us to make investment decisions will have a positive impact on your ability to meet your financial and life goals. We appreciate your partnership and trust in allowing us to work together to meet your needs.

As always, please don’t hesitate to contact us for any questions or conversations.

On behalf of everyone here at The Center,

Melissa Joy, CFP®
Director of Wealth Management

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 & Center for Financial Planning, Inc. 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 risk and you may incur a profit or loss regardless of strategy selected. 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. 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 Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. 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. C15-001750

Important Information for Tax Season 2014

As you prepare for the 2014 tax season, here is some information that you may find beneficial.

Our team is available to assist you with your tax reporting needs. Please don’t hesitate to reach out with questions. We are also happy to coordinate with your CPA or tax preparer on your behalf if you make this request.

2014 Raymond James Form 1099 mailing schedule

• 2/17- Mailing of original Form 1099s

• 3/2 - Begin mailing delayed and amended Form 1099s

• 3/16 - Final mailing of any remaining delayed original Form 1099s

Please note the exceptions immediately below:

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows us to extend the mailing date until March 16, 2014 for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts; as well as holding company depositary receipts

• Processing of Original Issue Discount and Mortgage Backed bonds

• Cost basis adjustments

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation

• Adjustments to cost basis (due to the Economic Stabilization Act of 2008)

• Changes made by mutual fund companies related to foreign withholding

• Tax-exempt payments subject to alternative minimum tax

• Any portion of distributions derived from U.S. Treasury obligations

What can you do?

You should consider talking to your tax advisor about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2014.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax advisor about the requirements to re-file based on your individual tax circumstances.

Additional information can be found at http://www.raymondjames.com/taxreporting.htm.

We hope you find this additional information helpful. Please call us if you have any questions or concerns during tax season.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

Surprise, Surprise – Oil & Global Geopolitical Showdowns

We have mentioned in past commentaries the surprise turn in US energy production over the last several years. It turns out energy markets aren’t done with surprises as a combination of pressure from Saudi Arabia to reduce oil prices, lower demand at home and abroad, and a variety of other factors has resulted in a precipitous decline in oil prices. Six months ago, crude oil traded near $100. Today (as of January 12th) oil is trading around $46 (source: Bloomberg.com).

This surprise has had a real impact on markets with both winners and losers. You can probably feel the “win” at the pump as your gas bills have likely been cut almost in half. This is a real bonus in US consumer pockets and in the past it has meant good things to our consumer-driven economy.

It may not be a surprise that oil was about to throw us a loop when you consider that commercials were starting to infiltrate CNBC and Bloomberg suggesting that you can buy your own oil well. This reminds me of direct to consumer gold infomercials a few years back. Oil-rich areas of the country and energy-specific stocks will be calculating new scenarios for the future with significant changes to their assumptions. It will take a while to muddle through the winners and losers with the new energy prices, but stock markets have been wary of the decline which has been welcomed by volatility and down days.

Other surprises have been geopolitical in nature. Ukraine-Russia conflict, terrorism in Europe, two Malaysian air tragedies, these just touch the surface of headlines that have touched our psyche and somewhat rattled markets. Studies of market returns after geopolitical events such as wars and military actions have shown that stocks as measured by the S&P can initially dip but typically recover in a short but unpredictable period of time (Sources: Talha Khan, Capital Markets Group; Mark Haefele, UBS, S&P Capital IQ).

Disciplined investors can take advantage of disruptive forces in markets. Maintaining investments and rebalancing offer opportunities to stay the course and buy low while selling high. If you’d like to discuss specific scenarios and events, please don’t hesitate to reach out to your planner or our investment team.

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.

Required Disclaimers: Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. Investments in the energy sector are not suitable for all investors. Further information regarding these investments is available from your financial advisor. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed web sites or their respective sponsors. Raymond James is not responsible for the content of any web site or the collection or use of information regarding any web site's users and/or members. C15-001751

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.