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Telemus Capital's Summer Insights Q2 2013
Telemus Capital's Summer Insights Q2 2013
Telemus Capital's Summer Insights Q2 2013
Telemus Capital's Summer Insights Q2 2013
Telemus Capital's Summer Insights Q2 2013
Telemus Capital's Summer Insights Q2 2013
Telemus Capital's Summer Insights Q2 2013
Telemus Capital's Summer Insights Q2 2013
Telemus Capital's Summer Insights Q2 2013
Telemus Capital's Summer Insights Q2 2013
Telemus Capital's Summer Insights Q2 2013
Telemus Capital's Summer Insights Q2 2013
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Telemus Capital's Summer Insights Q2 2013

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For more information, go to www.telemuscapital.com

For more information, go to www.telemuscapital.com

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  • 1. SUMMER 2013 Message from the Managing Partner Telemus Mid-Year 2013 Global Outlook Equities Fixed Income Fund Spotlight: Akahi Capital Management Telemus Wealth Advisors INSIGHTS Welcome to the next edition of our new quarterly newsletter Insights. As we noted in our first issue in these informative pieces you’ll hear from us, and others, regarding the current market environment as well as a variety of investment and financial topics. In this Summer issue you’ll hear from Jim Robinson, CIO and CEO of Robinson Capital Management, on his current views of the global economy and markets. Our U.S. equity market commentary is once again from Evercore Wealth Management, the sub-advisor of our core equity strategy. Tom Uber, the portfolio manager of our Beacon tax-exempt bond strategy, will explain how we use tax-exempt bonds in our portfolios and his current views of the muni market. Our Chief Wealth Officer, Andy Bass, will discuss the complex issues around inheriting an IRA. Finally Scott Takemoto of Akahi Capital Management LLC, writes about the firm’s investment strategy and the 1st half performance of the Akahi Fund L.P., a long/short market neutral hedge fund we’re investors in for certain clients. Recently the financial markets have reminded investors of their unpredictable nature. Statements made by Fed Chairman Bernanke after the release of the FOMC minutes caused quite a stir when he hinted that the current round of bond buying by the Fed may be tapered if economic data warranted it. He went on to say further that doesn’t mean the Fed intends to raise interest rates any time
  • 2. 2 | Telemus Capital | Summer 2013 soon, it meant that the extraordinary measures in place today may be eventually ended. The markets listened closely to what he first said, but for some reason ignored what he said after that. The result was a dramatic sell-off in the bond market, and to a lesser extent the stock market. For a couple of days there it felt like 2008 all over again as even relatively safe investments were subject to panic selling. Sure enough after the markets unexpected response to Bernanke’s comments a number of Fed Governors vocalized quite publicly that the markets had misinterpreted what the Chairman had said and that interest rates were expected to remain low. As a result the stock market rallied back to just about where it was before Bernanke’s comments. The bond market hasn’t really recovered, the 10 year Treasury as of today yields 2.50%, well above the recent low yield of 1.60% reached early in May. Given the general positive trend in the U.S. economic recovery yields in the bond market are unlikely to retreat much and we can expect even higher rates if the economic recovery strengthens. During times like these it’s our jobs as financial advisors to keep our clients informed, and more importantly, to remain calm and rational. In my over 30 years of experience it’s never been a good idea to counter the markets irrational behavior with irrational behavior of our own, and at Telemus Capital we make sure that’s the case for all our clients. We hope that you enjoy this second issue of Insights. If you have any questions regarding anything contained herein please contact us. A Message From The Managing Partner Gary Ran Chairman and Partner
  • 3. Telemus Capital | Summer 2013 | 3 U.S. Overview Economy As we mentioned in our beginning of the year Global Outlook, the delay in resolution to the Fiscal Cliff had an adverse effect on the economy in the fourth quarter—GDP came in at a near stall speed of 0.4%; and, the automatic sequester cuts didn’t help the recovery from that slow growth— Q1 2013 GDP came in at 1.8%. We believe the economy is showing gradual, incremental signs of improvement but we are not nearly as optimistic as the Federal Reserve appears to be. Economic growth for the full year will struggle to get much above 2%; and, the unemployment rate will likely remain at the 7-7.5% level. The story really hasn’t changed over the past four years: fiscal policy is non-existent due to Washington’s political gridlock and monetary policy can only spur so much growth. Inflation Some Federal Reserve Governors have recently expressed concern about the trajectory and absolute level of inflation. The Personal Consumption Expenditures Index, the Fed’s preferred measure of inflation, has been declining consistently over the past year and presently stands just above the 1% level (below 1% is considered to be dangerously deflationary)— the slowest rise in prices over the past 50 years. Chairman Bernanke and the Federal Open Market Committee have outlined a data- dependent timeline for withdrawing quantitative easing. Should the Fed’s optimistic projections pan out, the Fed would begin cutting back on its bond purchases toward the end of this year and stop them altogether by the middle of next year. Unfortunately, the Fed has consistently been overly optimistic in its economic projections over the past four years. We don’t believe quantitative easing will end until the Fed is certain deflationary pressures are off the table—which would equate to a Personal Consumption Expenditures Index closer to 2% than the current 1%. Interest Rates Short-term interest rates will remain low for some time. Longer-term US Treasury yields, which have risen significantly over the past two months thanks to the Fed’s discussion about removing quantitative easing, are comprised of two component parts: a real interest rate plus an inflation expectation. The 1% rise in the 10- year US Treasury yield since the end of April was comprised of a 1.25% rise in real yields and a 0.25% decline in inflation expectations. We would expect the real interest rate component to rise another 0.5% when the Fed does finally cease its quantitative easing—we don’t expect that to happen until inflation expectations increase. As noted above, we have more deflationary than inflationary pressures at present. As a result, we expect longer-term interest rates to stabilize and likely decline a bit from these levels over the balance of this year. Longer term we expect the Fed will eventually succeed in engineering higher inflation rates and therefore higher long- term interest rates as both real interest rates and inflation expectations rise. Domestic Equity Markets Stock prices follow corporate earnings and we believe the corporate earnings environment remains positive even as the overall economic Telemus Mid-Year 2013 Global Outlook Provided By Jim Robinson, Robinson Capital Management
  • 4. 4 | Telemus Capital | Summer 2013 environment remains sluggish. We also believe stocks will continue to benefit from an overall reallocation from bonds to stocks by investors. Individual investors have been woefully underweighted in stocks since the financial crisis, and institutional pension plans will have a difficult time achieving 8% actuarial rates of return with any investments in investment grade bonds yielding 2.5%. The stock market still offers comparable yields, far more upside, and only slightly more downside than the investment grade taxable bond market. We remain bullish on the stock market over the balance of this year. Domestic Bond Market The domestic bond market experienced a major re-pricing over the past two months. Investment grade bond indices were down 4% as bond yields rose nearly 1%--the biggest two month decline in bond indices and rise in rates since the height of the financial crisis in late 2008. We think investors misinterpreted and overreacted to the Fed’s message, and we would expect bond yields to stabilize and likely decline modestly over the balance of this year. Longer term we believe bonds are a poor investment as they still offer historically low yields, little upside and lots of downside risk as investors experienced these past two months. Non-traditional fixed income securities such as senior bank loans, convertible bonds and preferred stocks continue to provide the most attractive risk/reward characteristics. International Overview Economy Europe is in a recession and many of the emerging market economies, particularly China, have definitely slowed down. Central banks across the globe, with the exception of Japan, are looking for ways, like our own Federal Reserve Bank, to ease their respective economies off of the monetary stimulus drip they’ve been on for the past several years. The monetary stimulus policies recently adopted in Japan are having an impact—the Japanese economy finally appears to be emerging from two decades of deflation. Inflation Slowing growth in the emerging markets coupled with most major central banks contemplating exit strategies for monetary stimulus should keep inflation in check. We still believe that deflation may still be a greater risk than inflation to the overall global economy. Interest Rates As with the domestic market, we expect global short-term interest rates to remain low. Longer- term interest rates in most major markets are still near historic low levels. Any improvement in economic activity will drive those rates higher— we don’t expect that to happen over the balance of this year. Currencies The dollar has had quite a run ever since the Fed started talking about curbing its bond buying activities. Just as we expect interest rates to stabilize at these levels, we would expect the dollar to do the same versus most major currencies with the exception of the Japanese yen—we expect the yen to continue weakening. Natural Resources The slowing of emerging market economies, particularly China, and the strength in the US dollar, has had a direct negative impact on commodity prices. We don’t see that changing over the balance of this year, but longer-term we believe the emerging and frontier markets will resume their growth trajectories and natural resources will follow. Global Equity Markets While emerging market economies continue to show signs of slowing, we believe some of those markets’ stock valuations are becoming attractive. At present we still have a bias toward domestic versus international stocks; frontier markets over emerging markets, and small cap stocks over large cap stocks in both domestic and developed international markets. Global Bond Markets Most of the weaker countries in the Eurozone (Greece, Italy, Spain) have seen their bond yields come down dramatically in recent months. While we haven’t read or heard much about the European sovereign debt crisis lately, it doesn’t mean it’s been resolved. We believe the risk is still there but the potential reward has been greatly reduced. We would favor higher rated developed European countries at these levels. We remain underweight emerging market debt as we don’t believe investors are being compensated for the reduced liquidity and lower credit quality in those markets.
  • 5. Telemus Capital | Summer 2013 | 5 Equities For the first quarter of 2013 the Partner’s Account was up 10.8%, slightly ahead of the S&P 500 return of 10.6%. Through May 31st, the Partner’s Account was up 18.4%. For the same period, the S&P was up 15.4%. While it has been a strong start absolutely and relative to the market, the last several summers have been very volatile. It appears that this summer may well follow the same pattern. That said, we believe that the account is well positioned and we have both harvested some recent gains and initiated new positions that we hope will perform well for the balance of the year and beyond. For the year-to-date through May 31st , Rock- Tenn, Western Digital and Blackstone were three of our most significant contributors. Each of these companies’ stock prices reacted well to very strong first quarter earnings. Rock-Tenn continues to execute on its operational targets post its acquisition of Smurfit. Western Digital is also executing very well in a difficult environment and is showing excellent capital discipline; a key ingredient to our thesis for the company. Blackstone is benefitting from the ability to refinance many of its portfolio companies debt and extract dividends. They have also been able bring several companies public. Additionally, they are beginning to unlock value in their real estate funds which ultimately should flow to the LP holders. On the negative side, Apple was our largest detractor. There continues to be tremendous skepticism about Apple’s ability to continue to innovate. At current prices, we believe that the stock is very inexpensive for a non-distressed company and that cash flow will be very significant over the next few years. American Tower, while up modestly has been a laggard for the year. The company continues to have solid growth in the US and very good opportunities internationally and the stock should perform better prospectively. We have sold several positions including Actavis and Oil States. Actavis is involved in merger discussions and the stock appreciated very quickly. While we like the longer term prospects we decided to take profits but may revisit when the dust settles. Oil States also jumped in price when an activist investor announced a large position and desire for the company to split into several parts. While there may be further value, we sold on the jump in price. We added new positions in Qualcomm (QCOM) a leader in the design and manufacture of wireless communication technology and Polaris (PII) the designer manufacturer of on and off-road vehicles and motorcycles. We have seen a number of our company managements at recent conferences and, overall, business appears to be reasonably good. The proof will obviously be in the numbers and we look forward to seeing second quarter earnings in the coming weeks. Provided By Timothy Evnin, Portfolio Manager, Evercore Equities
  • 6. 6 | Telemus Capital | Summer 2013 Successful investment portfolios resemble successful business and sports teams, each comprising a diverse group of specialists with unique skills and attributes, working together to achieve excellence, the ultimate goal of all teams. Because their returns are tax-exempt, municipals bonds are an essential component of taxable fixed income allocations within high net worth portfolios. Generally speaking, municipal bonds are less volatile than US Treasuries and have historically outperformed them in rising rate environments. Municipal investors typically “buy and hold” their bonds, making them less actively traded. They are purchased for their tax free income, not as trading vehicles as many investors view Treasuries. Municipal bonds play a defensive role in most portfolios, providing tax free income, safety of principal and liquidity as well as higher tax equivalent yields than taxable securities with comparable quality. Credit markets have been unusually active since the Spring edition of Insights, and municipal yields have risen dramatically. Compare the following changes in the Municipal Yield Curves over the last month and AAA, AA and A rated Municipal Bonds compared to US Treasuries: Fixed Income By Thomas Uber, Senior Portfolio Manager
  • 7. Telemus Capital | Summer 2013 | 7 June was an uncharacteristically volatile month as Fed Chairman Bernanke’s June 19 comments about reducing asset purchases sent global bond prices lower across all sectors. The Fed indicated that “downside risks” have diminished, that inflation expectations are “stable”, and that they were lowering their outlook on inflation and unemployment. With slight upticks in economic forecasts, the Fed committed to reduce asset purchases and end Quantitative Easing by next summer, triggering a sell-off which moved yields to higher ranges. While municipals typically lag moves in the US Treasury market, yields rose sharply in the face of a heavy new issue market and rising global bond yields. Additional market setbacks could be touched off by new comments from the Fed, negative news affecting the municipal market, such as recent bankruptcy announcementsinDetroit,StocktonandJefferson County, Alabama, and Administration challenges to the tax exempt status of municipal bonds. Look for volatility to continue as adjustments to expectations will create ebbs and flows into the bond market, remembering though, the Fed reserves the right to change its mind as rising interest rates will likely slow the economy. We maintain a defensive posture within the municipal portion of the portfolio by selecting highly rated, AA or better, general obligation, essential service revenue and pre-refunded bonds with short durations, to reduce credit and market risk. We avoid troubled states, counties and cities. We will extend duration when we feel reward outweighs risk. When the market experiences dramatic setbacks, as we have this month, we will add bonds with durations longer than the portfolio average to take advantage of higher yields without sacrificing credit quality. When the opportunity doesn’t exist, we patiently wait. MMD Current 7/5/2013 Week Ago 6/28/2013 Month Ago 6/5/2013 UST Gross 7/5/2013 Muni/UST 7/5/2013 AAA 5 Year 1.47 1.40 .98 1.59 92.5% 10 Year 2.66 2.56 2.12 2.71 98.29% 15 Year 3.68 3.58 2.96 3.43 107.3% 20 Year 3.95 3.83 3.29 3.68 107.3% AA 5 Year 1.66 1.59 1.15 1.59 104.4% 10 Year 2.93 2.81 2.39 2.71 108.1% 15 Year 3.97 3.86 3.24 3.43 115.7% 20 Year 4.23 4.11 3.57 3.68 114.9% A 5 Year 1.91 1.84 1.41 1.59 120.1% 10 Year 3.41 3.31 2.83 2.71 125.8% 15 Year 4.47 4.41 3.74 3.43 130.3% 20 Year 4.70 4.58 4.06 3.68 127.7%
  • 8. This piece should only be distributed to clients who are verified to be accredited investors. This not a recommendation, advertisement or offer to sell any investment products. Please consult with your Telemus Wealth Advisor with any questions or for advice. Fund Spotlight: Akahi Capital Management Akahi Capital Management, LLC’s investment objective is absolute returns. Our goal is to earn positive returns regardless of the direction of the stock market with less volatility over the long term. To neutralize our exposure to the market’s movement up and down, we buy stocks long in half the portfolio (to profit in up markets) and we sell stocks short in the other half (to profit in down markets). To earn positive returns, we must select stocks to buy that will go up more than the market and select stocks to short that will go down more than the market. The universe of stocks that we invest in is defined as U.S. small- cap growth. The firm manages this strategy identically in two separate funds, Akahi Fund, L.P. and Akahi Fund II, L.P. Through June 2013, Akahi Fund, L.P. is up 1.57% net of fees and expenses, Akahi Fund II, L.P. is up 1.48% net of fees and expenses and our benchmark, the Russell 2000 Growth Index, is up 17.44%. We are not surprised by the performance of the funds or the performance of the market in 2013. The strategy is not designed to participate in large market swings, up or down. For instance, in 2008, the Russell 2000 Growth Index was down 38.54% and Akahi Fund, L.P. was up 6.71% net of fees and expenses (Akahi Fund II, L.P. had not yet been created). The market has been up strongly thus far, and while this move might extend through year-end, we do not anticipate this continuing without increased volatility. Being that the funds are hedged, the market’s direction largely did not impact performance. However, it seemed to us that all boats rose with the tide and investors did not closely differentiate between more attractive and less attractive investments. Our internal analysis ranks stocks by risk (downside potential if the company fails) and reward (upside potential if the company succeeds). Our take-away from the first half of the year is that stocks with poor risk/reward participated in the market up swings as much or more than companies with great risk/ reward. For instance, in our March newsletter, we wrote about a company that we believe has poor risk/ reward, Select Comfort Corp. (SCSS). Since March, SCSS is up from $19.77 to $25.06. To summarize our letter, the risk to the company comes from competition and sales volumes in the high-end bed market (not intended to suggest that the SCSS is not a good company, or that it is poorly run). The company confirmed our assessment of its operating risk in April, when it reported revenue and earnings estimates below street expectations and lowered future guidance. Despite this, the stock has risen 26.76%. We remain focused on generating positive, absolute returns through our research of individual stocks. Regardless of market volatility and direction, we believe investors will ultimately care about what they put in their portfolios. Provided By Scott Takemoto, Chief Operating Officer, Chief Financial Officer, Akahi Capital Management 8 | Telemus Capital | Summer 2013
  • 9. Telemus Capital | Summer 2013 | 9 Telemus Wealth Advisors We are nearing the peak of the baby boom inheritance cycle where one of the most common assets being left is IRAs or other retirement accounts. Due to the advantageous tax deferral nature of such accounts, these investments were usually the last ones utilized to support the older generation. Due to the deferred income obligation associated with these accounts, thorough and well advised planning is critical due to varied potential income tax outcomes based on to whom and how such accounts are transferred. The named beneficiary designation on the account is what controls the disposition of these assets, versus what one’s will or trust documents say. Thus it is critical that beneficiary designations are reviewed regularly to insure they are consistent with one’s wishes and the overall estate and income tax plan of the owner. Inherited IRA rules vary based on who is the named beneficiary and the age of the account owner at death, however there are three basic options and each has special rules and timing requirements. 1. Assets can be transferred to an “Inherited IRA” where depending on the facts the assets can be drawn down immediately without a penalty; deferred and withdrawn systematically over a specified time period; or possibly required to be withdrawn in total by the end of the fifth year. 2. If you are the spouse of the plan owner you can roll the assets into your own IRA and have them treated as if they are your own IRA assets subject to the same rules and restrictions as other assets in your own IRA or leave the assets in an inherited IRA.3. 3. One can take a lump sum distribution and pay taxes on the full value based on your personal tax rates. The first thing that must be done is determining the type of plan being inherited; • An IRA (including traditional or employee sponsored) and Roth IRA or By Andrew Bass, CWM, CPA Chief Wealth Officer and Senior Advisor
  • 10. 10 | Telemus Capital | Summer 2013 • A qualified retirement plan such as a profit sharing or 401(K) or a similar plan. Then one determines who the named beneficiary is; spouse, non-spouse; trust, or estate executor • If you are the spouse and are the named beneficiary of a traditional, SEP, or Simple IRA your options are: o Take a lump sum and pay tax in full (no penalty and full access to the after tax proceeds) o Transfer assets to your own IRA: assets are transferred to your own IRA and you have full discretion to choose beneficiaries. The assets are treated as yours and subject to the same distribution rules as your other assets. If you are young and do not need immediate access to the funds, this could be the most advantageous option as the deferral continues in full until you reach the required beginning date for your minimum distributions. o Open an inherited IRA: Assets in the account continue to grow tax free and you are not subject to the early withdrawal penalty (Note: if the account is left to multiple beneficiaries you must establish separate beneficiary accounts by December 31 of the year after death in order for each beneficiary to use their own single life expectancy otherwise the oldest beneficiary’s life will control). • If the owner was under 70 ½ at date of death; required distributions are required to start by the later of these two dates;(1) the December 31 following the year in which the owner died or (2) December 31 of the year in which the account owner would have reached age 70 ½. • If the account owner was over 70 ½; you must start taking the required minimum distribution over your life expectancy beginning no later than the December 31 following the year of death. (Note: if the original account owner did not take an RMD in the year of death it must be taken by the end of that year) • If the named beneficiary is a non-spouse individual, you have the following two options: o Open an inherited IRA where the assets continue to grow. There is no early withdrawal penalties and you can chose your beneficiaries. • Assets are transferred into an inherited IRA in the name of the original account owner. If the account is left to multiple beneficiaries, you must establish separate beneficiary accounts by December 31 of the year after death so that each beneficiary can use their own single life expectancy. Otherwise the oldest’ s life will control. • You can access funds whenever you like and are taxed on each distribution however: • If account holder was under age 70½ at death: o If you intend to take an annual Required Minimum Distribution (RMD), you must begin no later than December 31 following the
  • 11. Telemus Capital | Summer 2013 | 11 year of the original account holder’s death. o You may delay distributions until the end of the fifth year after the year in which the original account holder died, at which time all assets need to be fully distributed. • If account holder was over age 70½: o Your annual distributions are spread over your expected lifetime. o If you intend to take an annual Required Minimum Distribution (RMD), you must begin no later than December 31 following the year of the original account holder’s death. o If the original account holder did not take an RMD in the year he or she died, you must take the distribution by the end of that year. o Take a lump sum distribution and the assets are fully taxed at date of distribution • If the named beneficiary is a trust: o Determine if the trust is a qualified trust or a non-qualified trust (consult legal counsel) as the rules are complex and the ultimate method of distribution will vary. o If it is a qualified trust, the distribution period for the assets can generally be spread over the life expectancy of the named beneficiary. • Open an inherited IRA in the name of the original account owner for the benefit of the trust (individuals of the trust generally cannot establish their own inherited IRAs unless the IRA was actually distributed out by the trust within the designated post death time period.) • There are two ways that the trust may take distributions: • Based on the single life expectancy of the beneficiary, if he or she is the sole beneficiary of the trust. • Based on the single life expectancy of the oldest beneficiary if there are multiple beneficiaries. • If account holder was under age 70½: • If you intend to take an annual Required Minimum Distribution (RMD), you must begin no later than December 31 following the year of the original account holder’s death. You may delay distributions until the end of the fifth year after the year in which the original account holder died, at which time all assets need to be fully distributed. • If account holder was over age 70½: • If you intend to take an annual Required Minimum Distribution (RMD), you must begin no later than December 31 following the year of the original account holder’s death. • If the original account holder did not take an RMD in the year he or she died, you must take the distribution by the end of that year. o If the trust is a nonqualified trust meaning that one cannot use the “look through rules” then it will be subject to the no designated beneficiary rule and required distributions will be calculated under the account owner’s life expectancy or the five year rule depending on the age when the account owner died. As can be seen, the rules on inheriting an IRA are very complicated and need to be understood before naming beneficiaries. Furthermore, after death, the executor and all stakeholders must be sure that all deadlines are met regarding determining optimum ownership and if necessary distributing and designating who the ultimate owners will be. There are different rules for other non IRA retirement accounts which need coordination with the plan administrator and estate tax counsel to insure they are properly designated and timely handled as well.
  • 12. southfield, michigan two towne square, suite 800 southfield, Michigan 48076 248.827.1800 fax 248.827.1808 ann arbor, michigan 110 Miller avenue, suite 300 ann arbor, Michigan 48104 734.662.1200 fax 734.662.0416 800.827.3519 telemuscapital.com

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