2013 Third Quarter
Economic Outlook

www.Leefin.com
2

Past results do not guarantee future returns. All data presented herein is
subject to change. We can not guarantee the ...
Market Performance ~ 5-Year
Cumulative Performance ~ Jun 2008 – Jun 2013

www.Leefin.com
Market Performance ~ 1-Year
Monthly Performance ~ Jul 2012 - Jun 2013

www.Leefin.com
Market Performance ~ Fixed Income 1-Year Return
Monthly Performance ~ Jul 2012 – Jun 2013

www.Leefin.com
Market Performance – Asset Class Returns

Sources: Russell, MSCI, Dow Jones, Standard and Poor’s, Credit Suisse, Barclays ...
Fixed Income Market Performance

Sources: Barclays Capital, FactSet, J.P. Morgan Asset Management
Data are as of 09/30/12
...
Economic Indicators

N/A – Data not yet released
GDP (Gross Domestic Product): reflects the value of all goods and service...
2013 Outlook

www.Leefin.com
Returns in Different Inflation Environments – 40 Years

Sources: BLS, Barclays Capital, Robert Shiller, Federal Reserve, S...
LFC Goes Beyond Traditional Diversification
Traditional Diversification Relies On
Traditional Equity

Traditional Fixed In...
Traditional Portfolio Including Alternatives

• Large Cap
• Emerging
Markets
• Growth
• Value

• Treasuries
• High-Yield
•...
Portfolio Positioning, Diversification & Outlook
Cash and Other Investments
• View cash and cash-like investments as an as...
Tax-Exempt Municipal Bonds

www.Leefin.com
Portfolio Positioning, Diversification & Outlook
Taxable Bonds
• Implemented in client accounts primarily through our shor...
Taxable Bond Returns

Sources: BLS, Barclays Capital, Robert Shiller, Federal Reserve, Strategas/Ibbotson, Standard and Po...
Portfolio Positioning, Diversification & Outlook
Absolute Return
• Implemented in client accounts primarily through our mu...
Positive Hedge Fund Returns by Strategy 1997-2011

www.Leefin.com
Portfolio Positioning, Diversification & Outlook
Equity
• Implemented in client accounts primarily through our mutual fund...
Annual Returns and Intra-year Declines

www.Leefin.com
Returns by Market Cap
5-Year
Returns

S&P 600 - Small Cap

www.Leefin.com

1-Year Returns

S&P 500 – Large Cap

S&P 400 – ...
Portfolio Positioning, Diversification & Outlook
Real Assets
• Implemented in client accounts primarily through our multi-...
Real Assets Increasing

Source: USDA, BP Statistical Review of World Energy, J.P. Morgan Asset Management
Data are as of 1...
Yield Discussion
Understanding the concept of yield and its relationship to total return, cash
flow, and withdrawal rates ...
Impact of Rising Rates on Bonds
The general rule of thumb states that if bond yields rise then prices must fall.
While hig...
Bond Income and its Relationship to Returns
 During the past 20 years, income played a dominant

role in the median total...
Bond Sectors & Rising Rates

Source: Natixis Global Associates

The MSCI World Index is a free float-adjusted market capit...
DJIA Historical
Dow Jones Industrial Average Range Bound for 12 Years

www.Leefin.com

28
Equity Returns Are Not Normal or Random

Magnified at right

The red line suggests that the likelihood you will see an S&P...
Bond Returns in Rising & Falling Interest Rate Markets

www.Leefin.com
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LFC Economic Outlook 3Q 2013

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Investment & Economic Outlook - 3Q 2013

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LFC Economic Outlook 3Q 2013

  1. 1. 2013 Third Quarter Economic Outlook www.Leefin.com
  2. 2. 2 Past results do not guarantee future returns. All data presented herein is subject to change. We can not guarantee the accuracy of any data obtained from a third party. www.Leefin.com
  3. 3. Market Performance ~ 5-Year Cumulative Performance ~ Jun 2008 – Jun 2013 www.Leefin.com
  4. 4. Market Performance ~ 1-Year Monthly Performance ~ Jul 2012 - Jun 2013 www.Leefin.com
  5. 5. Market Performance ~ Fixed Income 1-Year Return Monthly Performance ~ Jul 2012 – Jun 2013 www.Leefin.com
  6. 6. Market Performance – Asset Class Returns Sources: Russell, MSCI, Dow Jones, Standard and Poor’s, Credit Suisse, Barclays Capital, NAREIT, FactSet, J.P. Morgan Asset Management. Data are as of 09/30/12 www.Leefin.com
  7. 7. Fixed Income Market Performance Sources: Barclays Capital, FactSet, J.P. Morgan Asset Management Data are as of 09/30/12 www.Leefin.com
  8. 8. Economic Indicators N/A – Data not yet released GDP (Gross Domestic Product): reflects the value of all goods and services produced in a year. GNP (Gross National Product): includes GDP, plus any income earned by residents from overseas investments, minus income earned within the domestic economy by overseas residents. TED Spread: TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract. Eurodollar futures contracts represent LIBOR. The TED spread measures liquidity perception and credit risk among banks. T-Bills are considered risk-free and LIBOR is the rate charged by banks to lend to other banks on a 90 day term. When the spread gaps out, banks are requiring more interest from each other to compensate for perceived risk and illiquidity on other banks balance sheets. Inflation/(Deflation): no calculation, a positive number represents inflation and a negative number represents deflation Volatility (Vix): The VIX is a forward looking index constructed by the CBEO. Using the implied volatilities of a broad range of S&P 500 index options, the index shows the market’s expectation of 30-day volatility www.Leefin.com
  9. 9. 2013 Outlook www.Leefin.com
  10. 10. Returns in Different Inflation Environments – 40 Years Sources: BLS, Barclays Capital, Robert Shiller, Federal Reserve, Strategas/Ibbotson, Standard and Poor’s, FactSet, J.P. Morgan Asset Management. Data are as of 09/30/12 www.Leefin.com
  11. 11. LFC Goes Beyond Traditional Diversification Traditional Diversification Relies On Traditional Equity Traditional Fixed Income • Large cap • Treasuries • Mid Cap • Corporates • Value • High-Yield • Growth • ABS/MBS • Global • Global • Emerging Markets Enhanced Diversification Alternative Equity Alternative Fixed Income Alternative Assets • Long/Short • Duration Management • Infrastructure • Market Neutral • Yield Management • Real Assets • Private Equity • Long/Short • Real Estate • Long Bias • Opportunistic • Currency • Arbitrage • Distressed Debt • Commodities • Credit Arbitrage • Precious Metals www.Leefin.com
  12. 12. Traditional Portfolio Including Alternatives • Large Cap • Emerging Markets • Growth • Value • Treasuries • High-Yield • Corporates • ABS/MBS Equity Alternative Assets • Infrastructure • Real Assets • Real Estate www.Leefin.com Fixed Income Alternative Strategies • Long/Short • Distressed Debt • Arbitrage • Market Neutral
  13. 13. Portfolio Positioning, Diversification & Outlook Cash and Other Investments • View cash and cash-like investments as an asset class to help to dampen volatility Tax-Exempt Bonds • Implemented in client accounts primarily through our core separate account manager relationship • We believe municipal bonds have reestablished their longer term position as a “port in the storm” amid heightened market volatility. • Budgets continue to get balanced even in the face of lost Federal stimulus • State and local revenues are growing • Default rates have declined substantially • Long term pension and liability issues are being addressed www.Leefin.com
  14. 14. Tax-Exempt Municipal Bonds www.Leefin.com
  15. 15. Portfolio Positioning, Diversification & Outlook Taxable Bonds • Implemented in client accounts primarily through our short and intermediate, multi-strategy, high-yield and global bond mutual fund manager relationships • We remain reluctant to take significant duration risk and focus on short and intermediate duration US government, agency, and mortgage backed securities • We continue to like the fundamentals associated with high-yield corporate debt • Actual default rates remain in the range of 2%, but high-yield credits are priced to reflect a doubling or tripling of that default rate in the next few years • The bulk of US corporations are at least as good a credit as sovereigns • Businesses have cleaned up their balance sheets and hold significant cash • Low interest rates make debt servicing that much easier • Global allocations utilized to protect investor purchasing power • Core manager focused primarily on sovereign credits and currencies in Europe (non-EMU), Asia (ex-Japan), and Latin America • Opportunistically shorts Euro and Yen www.Leefin.com
  16. 16. Taxable Bond Returns Sources: BLS, Barclays Capital, Robert Shiller, Federal Reserve, Strategas/Ibbotson, Standard and Poor’s, FactSet, J.P. Morgan Asset Management. Data are as of 12/31/11 www.Leefin.com
  17. 17. Portfolio Positioning, Diversification & Outlook Absolute Return • Implemented in client accounts primarily through our multistrategy, hedge, fund of fund and mutual fund manager relationships • Lee Financial serves as the general partner for our internal limited partnerships • LFC 1990 Hedge: Core managers are long-biased with proven stock picking abilities that utilize a variety of hedging strategies to deliver attractive risk adjusted returns • LFC Alpha & Omni • Certain managers in LFC Alpha seek to take advantage of distressed and other special situations to buy the assets of a company at a substantial discount to their intrinsic value • Other managers will look for investment opportunities with asymmetric return profiles to generate returns with lower correlations to major market benchmarks www.Leefin.com
  18. 18. Positive Hedge Fund Returns by Strategy 1997-2011 www.Leefin.com
  19. 19. Portfolio Positioning, Diversification & Outlook Equity • Implemented in client accounts primarily through our mutual fund manager relationships and individual stock holdings • Believe the best value can be found in well-managed, global large cap companies with strong brands • Companies favorably positioned in emerging markets are set to benefit over the long term from higher secular growth rates. • Core position in the S&P Midcap 400 Index • The Index has vastly outperformed the S&P 500 Index over time given its greater diversification and lower reliance on companyspecific returns • Sectors: Tend to favor technology, multinational consumer products, exploration and production, and utility companies • Also emphasize positions in higher-yielding equities such as mortgage REITs, strong Asian dividend-paying and domestic business development companies www.Leefin.com
  20. 20. Annual Returns and Intra-year Declines www.Leefin.com
  21. 21. Returns by Market Cap 5-Year Returns S&P 600 - Small Cap www.Leefin.com 1-Year Returns S&P 500 – Large Cap S&P 400 – Mid Cap
  22. 22. Portfolio Positioning, Diversification & Outlook Real Assets • Implemented in client accounts primarily through our multi-strategy, hedge, private and mutual fund manager relationships and individual stock positions • Established relationships with some of the best energy-oriented private equity managers in the business • Infrastructure-related investment opportunities such as pipelines remain a core focus – implemented through a variety of strategies including direct positions in master limited partnerships (MLPs) • Focus on income producing energy and real estate-related investments Real Estate and Private Equity • Historically implemented in client accounts primarily through our private equity manager relationships and direct equity ownership of real estate and private companies • Continue to work out and manage legacy real estate and private equity investments www.Leefin.com
  23. 23. Real Assets Increasing Source: USDA, BP Statistical Review of World Energy, J.P. Morgan Asset Management Data are as of 12/31/11 www.Leefin.com
  24. 24. Yield Discussion Understanding the concept of yield and its relationship to total return, cash flow, and withdrawal rates is critical to investment selection  Cash and Cash Equivalents: yield is meant to equal total return and often does  Yield can be utilized as a very accurate forward estimate of total return  Yield is typically not the most important investment criterion and is often trumped by liquidity, preservation of capital, etc.  Biggest risk to the investment is inflation  Core Bonds (investment grade taxable and tax-exempt): yield drives total return over the long term, but not always in the short term  Yield can be utilized as an unbiased estimate of long term total return  Income is typically the most important investment criterion, although liquidity and preservation of capital as also important investment objectives  High-Yield Investments (high-yield stocks and bonds, levered funds, REITs, MLPs, etc): yield is not the key driver of total return even in the long term  Yield is intended to contribute significantly to total return, but the two often do not converge  Investors should expect price volatility, although yield should act to dampen the total return impact of a price correction  Yield will be an irrelevant component of total return in the short term www.Leefin.com
  25. 25. Impact of Rising Rates on Bonds The general rule of thumb states that if bond yields rise then prices must fall. While higher yields tend to shelter fixed income investors from big corrections in bond prices, the current low yield environment means fixed income investors should be prepared for a greater correction in a risky rate environment. Bond Sector Sensitivity Credit Interest Rates Currency US High Yield High Low None Int'l Dev Mkts Bonds Low Medium High LT US Treas Bonds None High None Emg Mkts Dobt High Low High US MBS Low High None US Inv Grd Bonds Low High None Source: Natixis Global Associates Sources: Barclays Capital, J.P. Morgan Asset Management www.Leefin.com
  26. 26. Bond Income and its Relationship to Returns  During the past 20 years, income played a dominant role in the median total return for a number of asset classes www.Leefin.com
  27. 27. Bond Sectors & Rising Rates Source: Natixis Global Associates The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance. The MSCI World Index consisted of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. www.Leefin.com 27
  28. 28. DJIA Historical Dow Jones Industrial Average Range Bound for 12 Years www.Leefin.com 28
  29. 29. Equity Returns Are Not Normal or Random Magnified at right The red line suggests that the likelihood you will see an S&P 500 daily return below -5% is close to zero (the height of the red line is close to zero). But, as you can see in F.2 the S&P 500 has had several returns less than -5%, and in some cases, less than -9%. If returns were random the odds of a -5% fall in the DJIA are less than 2 in 1 million! 7 standard deviation events 10 million times more frequently than random! Sources: Bloomberg, Nuveen Asset Management, LLC www.Leefin.com
  30. 30. Bond Returns in Rising & Falling Interest Rate Markets www.Leefin.com

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