Quarter-In-Review, What's an Investor to Do?

1,864 views

Published on

Elevation Wealth Management's quarterly review of the investment, financial, and economic landscape as of September 30, 2013. Key take-aways and useful insights for average and sophisticated investors alike.

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,864
On SlideShare
0
From Embeds
0
Number of Embeds
4
Actions
Shares
0
Downloads
4
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Quarter-In-Review, What's an Investor to Do?

  1. 1. Barry Mendelson, CFP® President & Financial Advisor 1399 Y Ygnacio V ll Rd S it 24 i Valley Rd, Suite Walnut Creek, CA 94598 www.elevationwm.com barry@elevationwm.com b @ l ti 925-348-5852 Quarter In Review Third Quarter 2013
  2. 2. Disclosures Opinions expressed are those of Barry Mendelson, CFP® and Elevation Wealth Management. This presentation should not be construed as investment advice. The information contained in this presentation is compiled from sources p p believed to be reliable. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. The markets can remain irrational longer than you can remain solvent. 2
  3. 3. Timeline f Events: Q t in Review Ti li of E t Quarter i R i Selected headlines from Q3 2013 12% US Federal Reserve refrains from tapering and continues its pace of monthly bond buying purchases. S&P 500 Index hits all-time high of 1,729.86. US Congress fails to agree on spending bill, resulting in partial government shutdown. 10% 8% US Federal Reserve announces it will carry on with current pace of stimulus. GDP in euro zone climbs 0.3% in second quarter following six consecutive negative quarters. Indian rupee falls to a record low of 68.85 against US dollar. 6% 4% 2% 0% 6/28 Dow Jones Industrial Average replaces Alcoa, HP, and BofA with Nike, Visa, and Goldman Sachs. Egyptian President Mohammed Morsi ousted and Egypt’s constitution suspended. US and Russia agree on framework to destroy Syria’s chemical weapons. Prime Minister Shinzo Abe and Liberal Democratic Party win majority of seats in Japan’s upper house. 7/28 7/31 8/28 8/31 Returns in US dollars. Graph Source: MSCI ACWI Index. MSCI data copyright MSCI 2013, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results. 9/28 9/30 3
  4. 4. Market Returns U.S. and International Market Indexes July 1, 2013 through September 30, 2013 U.S. Large Cap Stocks U.S. Value Stocks +5.2% +3.9% U.S. U.S. REIT Small Cap Stocks Stocks +10.2% -3.2% U.S. STOCKS Int’l Value Int’l Small Stocks Stocks 12.5% 15.0% Emerging Markets Stocks 5.8% INTERNATIONAL STOCKS U.S. Gov/ Global 1-5 Year Credit 1-3 Bonds Year Bonds 0.5% 0.4% BONDS ONE Year 19.3% 19 3% 22.3% 22 3% 30.1% 30 1% 4.7% 4 7% 22.6% 22 6% 24.8% 24 8% 1.0% 1 0% 0.8% 0 8% 0.7% 0 7% FIVE Years 10.0% 8.9% 11.2% 5.3% 6.0% 11.1% 7.2% 2.5% 2.5% TEN Years 7.6% 7 6% 8.0% 8 0% 9.6% 9 6% 9.3% 9 3% 8.3% 8 3% 10.1% 10 1% 12.8% 12 8% 3.2% 3 2% 2.9% 2 9% Annualized for 5 and 10 Year Periods Source: Morningstar Direct 2013. Market segment (Index representation) as follows: U.S. Large Cap (S&P 500 Index), U.S. Value Stocks (Russell 1000 Value Index), U.S. Small Company Stocks (Russell 2000 Index), U.S. Real Estate Market (Dow Jones U.S. Select REIT Index), International Developed (MSCI World Ex USA Value Index (net div.)), Internationall S ll (MSCI W ld E USA S ll ( t di )) E I t ti Small World Ex Small (net div.)), Emerging M k t (MSCI E i Markets Emerging M k t I d ( t di )) Gl b l B d (Citi WGBI 1 5 Y Hd USD) US B d i Markets Index (net div)), Global Bonds 1-5 Yr Hdg USD), Bonds (BofA ML Corp & Govt 1-3 Yr TR). Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting.
  5. 5. World Asset Classes Third Quarter 2013 Index Returns International developed markets led equity returns d i th quarter. M j i di I t ti ld l d k t l d it t during the t Major indices posted positive returns, with th exception of the t d iti t ith the ti f th US real estate market. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market M k t segment (index representation) as follows: US Large Cap (S&P 500 I d ) US S ll C (R t (i d t ti ) f ll L C Index); Small Cap (Russell 2000 I d ) US V l (R ll Index); Value (Russell 1000 Value Index); US Reall Estate (Dow Jones US Select REIT Index); Globall R l ll V l I d ) R E t t (D J S l t I d ) Gl b Real Estate (S&P Global ex US REIT Index); International Developed Large, Small, and Value (MSCI World ex USA, ex USA Small, and ex USA Value Indexes [net div.]); Emerging Markets Large, Small, and Value (MSCI Emerging Markets, Emerging Markets Small, and Emerging Markets Value Indexes); US Bond Market (Barclays US Aggregate Bond Index); and Treasury (One-Month US Treasury Bills). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2013, all rights reserved. MSCI data copyright MSCI 2013, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). 5
  6. 6. Diversified Portfolios Review Growth of Wealth Asset Class Qtr 1 Year 5 Year 10 Year 10 Year Volatility 100% Stocks 8.6% 21.2% 8.4% 8.0% 16.4% 75-25 6.7% 16.0% 7.6% 7.3% 11.9% 50-50 4.7% 10.8% 6.2% 6.2% 7.7% 25-75 2.6% 5.7% 4.4% 4.7% 3.8% 100% Bonds Oct 2003 – Sep 2013 0.4% 0.6% 2.2% 2.9% 1.3% Source: Morningstar Direct 2013. 5 and 10 year periods are annualized. Asset allocations and index portfolio returns are for illustrative purposes only and do not represent actual performance. Stocks represented by MSCI World IMI Index (net div.) and Bonds represented by 50% Citi World Government Bond Index 1-5 Yr Hedged and 50% Bank of America Merrill Lynch US Treasury/Agency 1-3 Yr. Globally diversified portfolios rebalanced annually. Hypothetical value of $1 and kept invested through June 31, 2013 from th respective d t A f the ti dates. Assumes reinvestment of iincome and no t i t t f d transaction costs or t ti t taxes. Thi iis f ill t ti purposes only and not iindicative of any iinvestment. This for illustrative l d t di ti f t t Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Stock investing involves risks, including volatility (up and down movement in the value of your assets) and loss of principal.
  7. 7. 7 Source: Morningstar Direct 2013. Market segment (Index representation) as follows: U.S. Large Cap (S&P 500 Index), Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. The time period for the performance shown was chosen to correlate with the market crisis in 2008. Therefore, performance is only shown up to January 31, 2009 and is not current to the most recent data available. More recent performance may alter these assessments or outcomes.
  8. 8. Greatest Lessons from the Great Recession 1. Don t 1 Don’t let emotions drive investment decisions 2. Don’t try to time the markets 3. Active managers do not consistently outperform in bear markets k t 4. Diversification still works 5. Don’t take unnecessary risks with bonds 6. Rebalance your portfolio regularly 7. There may be no better alternative to buy-and-hold investing
  9. 9. Don’t Let Emotions Drive Investment Decisions It s It’s easy to let emotions influence your confidence
  10. 10. Source: Wikipedia
  11. 11. “Default would produce global economic and financial crisis of major proportions” “Pressure grew on Republicans to accept an increase in the nations debt ceiling y g yesterday y when a major Wall Street rating firm threatened to downgrade US government securities” S&P 500 Performance During Gov Shutdown 0.37% 0 37% “The Treasury Department said it was its 12‘duty and intention to take all18.72% Months Following legal steps necessary t assure that the nation’s to th t th ti ’ financial obligations — obligations already approved by Congress — are honored” Source: Morningstar Direct 2013. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio Past performance is not a guarantee of future portfolio. results. All investments involve risk, including loss of principal. 11 Source: Wikipedia — http://www.fool.com/investing/general/2013/09/30/the-most-important-thinginvestors-should-remember.aspx Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal.
  12. 12. Don’t Try to Time the Markets Best and Worst Days in the U.S. Stock Market S&P 500 Index, Jan. 1, 1970 through Dec. 30, 2012 Worst Ten Days Source: Yahoo! Finance. Market segment (Index representation) as follows: U.S. Large Cap (S&P 500 Index), Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal. Best Ten Days
  13. 13. Active Managers Do Not Consistently Outperform g y p The S&P 500 began 2008 at 1468.. Noted Market Strategists’ Predictions for the S&P 500 Index at the End of 2008 – Abhijit Chakrabortti (Morgan Stanley) 1520 – Richard Bernstein (Merrill Lynch) 1525 – Stuart Freeman (A.G. Edwards) 1575 – Rod Smyth (Wachovia Securities) 1590 – Thomas Lee (JP Morgan Chase) 1590 – Tom McManus (Bank of America Securities) 1625 – Abby Joseph Cohen (Goldman Sachs) 1675 – Tobias Levkovich (Citigroup) ( g p) 1675 – Jason Trennert (Strategas Research Partners) 1680 …and ended at 903 and 13 Source: USA Today. 2008 predictions for the S&P 500. January 2, 2008.
  14. 14. Active Managers Have Not Outperformed in Bear Markets Active Managers Do Not Consistently Outperform 2008 Active Managers underperformed S&P 500 by 1.67% 14 • Standard and Poor’s study of 2008 bear market concluded: “the belief that bear markets favor active management is a myth.” • Study found similar results in 2003 for the 2000 - 2002 bear market. Source: Standard and Poor’s Investment Service, 2009. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. The data assumes reinvestment of income and does not account for taxes or transaction costs. Past performance is not a guarantee of future results.
  15. 15. Active Managers Do Not Consistently Outperform Percentage of Active Managers Failing to Beat Index August 2008 through July 2013 Source: Standard & Poor’s Indices Versus Active (SPIVA) Aug 2008 – Jul 2013. Index used for comparison: US Large Cap — S&P 500 Index; US Mid Cap — S&P MidCap 400 Poor s (SPIVA), 2013 Index; US Small Cap — S&P SmallCap 600 Index; Global— S&P Global 1200 Index; International — S&P 700 Index; Emerging Markets — S&P/IFCI Composite; Short-Term Inv. Grade Fixed Income — Barclays 1-3 Year Government/Credit Index. Outperformance is based upon equal weight fund counts. For illustrative purposes only. Index returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. Past performance is not an indication of future results.
  16. 16. Diversification Still Works 20% 300% 10% 250% 0% 200% Cumulative Return Mar 2009 – Sep 2013 -10% 150% -20% 100% -30% Cumulative Return Jan 2008 – Feb 2009 50% -40% 0% -50% -50% -60% 16 Emerging Marke ets Emerging Marke ets International Sma all International Sma all International Valu ue International Valu ue REIT Ts REIT Ts US Sma all US Sma all US Valu ue US Valu ue US Larg ge US Larg ge Global Bond ds Global Bond ds US Bond ds US Bond ds -100% -70% Source: Morningstar Direct 2013. Market segment (Index representation) as follows: U.S. Large Cap (S&P 500 Index), U.S. Value Stocks (Russell 1000 Value Index), U.S. Small Company Stocks (Russell 2000 Index), U.S. Real Estate Market (Dow Jones U.S. Select REIT Index), International Developed (MSCI World Ex USA Value Index (net div.)), International Small (MSCI World Ex USA Small (net div.)), Emerging Markets (MSCI Emerging Markets Index (net div)), Global Bonds (Citi WGBI 1-5 Yr Hdg USD), US Bonds (BofA ML Corp & Govt 1-3 Yr TR). Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. The risks associated with investing in stocks and overweighting small company and value stocks potentially include increased volatility (up and down movement in the value of your assets) and loss of principal. Emerging markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. Bonds are subject to market and interest rate risk. Bond values will decline as interest rates rise, issuer's creditworthiness declines, and are subject to availability and changes in price. Real estate securities funds are subject to changes in economic conditions, credit risk and interest rate fluctuations.
  17. 17. Diversification Still Works Ranking of Markets Around the World — Ten-Year Performance in US Dollars Annualized Returns Year Ending September 30, 2013 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 17 Colombia Philippines Brazil Egypt Indonesia Peru Thailand Mexico Turkey China Norway y Czech Republic South Africa Sweden Denmark 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. Malaysia Singapore Korea Chile India Australia Hong Kong Poland Germany Switzerland Canada New Zealand Morocco Netherlands Russia 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. UK Spain France USA Austria Belgium Israel Hungary Taiwan Japan Finland Portugal Italy Ireland Greece Source: Morningstar Direct 2013 Countries represented by their respective MSCI IMI(net div ) Indexes are unmanaged baskets of securities in which investors cannot 2013. div.). directly invest; they do not reflect the payment of advisory fees or other expenses associated with specific investments or the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Diversification neither assures a profit nor guarantees against loss in a declining market.
  18. 18. Don’t Take Unnecessary Risks with Bonds Fixed Income Maturity Risk 1970 – 2012 Source: Morningstar, January, 2013. Short-term government bonds are represented by the one-year U.S. government bond for 1970–2012. Intermediate-term government bonds are represented by the five year U S government bond and long term government bonds by the 20 year U S government bond An investment cannot be made directly in an index five-year U.S. long-term 20-year U.S. bond. index. The data assumes reinvestment of all income and does not account for taxes or transaction costs. For the annual periods 1970 through 2012, each year was categorized as a year when yields rose or a year when yields fell. The price changes during all years when yields rose were then averaged. The same was done for years in which yields declined. The price change was isolated, as opposed to the total return, so that the effect would be more pronounced. Bonds are subject to market and interest rate risk. Bond values will decline as interest rates rise, issuer's creditworthiness declines, and are subject to availability and changes in price.
  19. 19. Don’t Take Unnecessary Risks with Bonds 10 Year Treasury Yield Jan. 1, Jan 1 Sep 30, 2013 Apr 1 – 1983 30Sep 30 2013 – 30, Source: US Department of the Treasury. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal.
  20. 20. Rebalance Your Portfolio Regularly Keys to Rebalancing • Automatic - Set it and forget it • Disciplined - Remove emotion from decision • Frequency - Monthly, Quarterly, Annual make little difference • Risk Management - Vital to maintaining a desired portfolio exposure The buying and selling of securities for the purpose of rebalancing may have adverse tax consequences.
  21. 21. Rebalance Your Portfolio Regularly Importance of Rebalancing 1992 – 2012 Source: Morningstar Large stocks are represented by the Standard & Poor’s 500® index which is an unmanaged group of securities and considered to be representative of the Morningstar. index, U.S. stock market in general. Bonds are represented by the five-year U.S. government bond. An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for taxes or transaction costs. ©2013 Morningstar, Inc. All rights reserved. Stock investing involves risks, including increased volatility (up and down movement in the value of your assets) and loss of principal. Bonds are subject to market and interest rate risk. Bond values will decline as interest rates rise, issuer's creditworthiness declines, and are subject to availability and changes in price.
  22. 22. Pioneer of Modern Finance 2013 Nobel Prize in Economics S Science University of Chicago Professor Eugene Fama, Sr. For his groundbreaking work on Efficient Market Hypothesis
  23. 23. Greatest Lessons from the Great Recession 1. Don t 1 Don’t let emotions drive investment decisions 2. Don’t try to time the markets 3. Active managers do not consistently outperform in bear markets 4. 4 Diversification still works 5. Don’t take unnecessary risks with bonds 6. Rebalance your portfolio regularly 7. 7 There may be no better alternative to buy and hold investing buy-and-hold
  24. 24. Given Time Markets Recover Time, Source: Morningstar Direct 2013. Market segment (Index representation) as follows: U.S. Large Cap (S&P 500 Index), Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal.
  25. 25. Commodities Third Quarter 2013 Index Returns Individual Commodity (% Returns) Commodities reversed some of th i YTD decline, C diti d f their d li as the DJ-UBS Commodity Index finished up 2.1% during the quarter. Silver 11.21 Copper With the US Federal Reserve hinting in mid-September that it will keep rates low for the foreseeable future future, precious metals, which have borne the brunt of the commodity market decline so far this year, finished the quarter with a gain of 8-11%. The inflationary impact of the Fed’s decision was positive news for precious metal investors precious-metal investors. 8.44 Gold 8.25 Brent Oil 8.05 8 05 WTI Crude Oil 7.91 Lean Hogs 4.42 Sugar 4.13 Cotton 3.81 Heating Oil Soft commodities, with the exception of coffee, corn, and soybean oil, reversed the declines from the previous quarter, finishing with gains of 1-4%. The energy complex, with the exception of natural gas, had a good quarter; oil led the way, finishing up approximately 8%. 3.39 Unleaded Gas 3.07 Soybean 2.46 Asset Class Commodities * Annualized YTD Q3 1 Year 3 Years** -8.56 2.13 -14.35 -3.16 5 Years** 10 Years** -5.29 2.14 1.59 u u Aluminum 1.32 Nickel 1.23 Zinc Period Returns (%) Live Cattle 1.22 Wheat 1.05 Natural Gas Coffee C ff Soybean Oil -4.41 -7.57 -8.91 Corn -17.48 Past performance is not a guarantee of future results. Index is not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. All index returns are net of withholding tax on dividends. Dow Jones-UBS Commodity Index Total Return data provided by Dow Jones ©. 25
  26. 26. Standardized Performance Data and Disclosures Average Annual Total Returns (%) 3 Mo 1 Yr 5 Yr 10 Yr Since Inception S&P 500 TR 5.24 19.34 10.02 7.56 10.43 Jan-26 Russell 1000 Value TR USD 3.94 22.30 8.87 7.99 12.28 Dec-78 Russell 2000 TR USD 10.21 30.06 11.16 9.64 11.90 Dec-78 DJ US Select REIT TR USD -3.15 4.70 5.31 9.29 8.99 Dec-86 MSCI World Ex USA Value NR USD 12.52 22.56 5.99 8.26 11.90 Dec-74 MSCI World Ex USA Small Cap NR USD 14.97 24.75 11.06 10.15 9.19 Dec-00 MSCI EM NR USD 5.77 0.98 7.22 12.80 10.97 Dec-98 Citi WGBI 1-5 Yr Hdg USD 0.48 0.80 2.53 3.18 5.98 Jan-85 BofAML US Corp&Govt 1-3 Yr TR USD 0.43 0.72 2.51 2.91 5.43 Jun-86 Data as of 9/30/13 Source: Morningstar Direct 2013. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect p g portfolio. Past p performance is not a g guarantee of future results. All investments involve risk, including loss of g the expenses associated with the management of an actual p principal. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting.
  27. 27. Appendix and additional data points on the following slides… g
  28. 28. US Stocks Third Quarter 2013 Index Returns During the third D i th thi d quarter, major US asset classes t j t l continued to post positive performances. Asset class returns ranged from 12.80% in small growth to 3.94% in large value. Ranked Returns f th Quarter (%) R k dR t for the Q t Small Cap Growth 12.80 Small Cap Small caps outperformed large caps Growth caps. indices outperformed value indices among both small caps and large caps. 10.21 Large C G L Cap Growth th 8.11 8 11 Small Cap Value 7.59 Marketwide 6.35 Large Cap 5.24 Large Cap Value 3.94 Period Returns (%) P i dR t World Market Capitalization—US W ld M k t C it li ti US *A Annualized li d Asset Class 3 Years** 5 Years** 21.30 21.60 16.76 10.58 Large Cap 19.79 19.34 16.27 10.02 7.57 Large Cap Value 20.47 22.30 16.25 8.86 7.98 Large Cap Growth 20.87 19.27 16.94 12.07 7.83 Small Cap 27.69 30.06 18.29 11.15 9.64 Small Cap Value 23.07 27.04 16.57 9.13 9.29 Small Cap Growth US Market $18.9 trillion 1 Year Marketwide 49% YTD 32.47 33.07 19.96 13.17 9.86 Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (S&P 500 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap: Russell 3000 Index is used as the proxy for the US market. Russell data copyright © Russell Investment Group 1995–2013, all rights reserved. The S&P data are provided by Standard & Poor's Index Services Group. 10 Years** 8.11 28
  29. 29. International Developed Stocks Third Quarter 2013 Index Returns During the third D i th thi d quarter, d t developed markets outside l d k t t id the US posted strong performances. The size premium rebounded after reversing its negative trend in the second quarter. The US dollar depreciated relative to the currencies of most major foreign developed countries, in particular the euro and the British pound, further adding to US dollar returns. Ranked Returns f th Quarter (%) R k dR t for the Q t Local Currency 14.97 Small Cap 11.09 12.52 12 52 Value 8.54 11.31 Large Cap Across the size spectrum, value outperformed g p p growth. World Market Capitalization—International Developed W ld M k t C it li ti I t ti lD l d US Currency 7.37 10.10 Growth G th 6.20 Period Returns (%) P i dR t *A Annualized li d Asset Class 1 Year 3 Years** Large Cap 14.66 21.45 7.89 6.12 8.18 Small Cap 18.99 24.75 9.92 11.06 10.15 Value 40% YTD 5 Years** 10 Years** 14.58 22.56 7.87 5.99 8.26 Growth 14.70 20.32 7.85 6.19 8.02 International Developed Market $15.7 trillion Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth). All index returns are net of withholding tax on dividends. World Market Cap: Non-US developed market proxies are the respective developed country portions of the MSCI All Country World IMI ex USA Index. Proxies for the UK, Canada, and Australia are the relevant subsets of the developed market proxy. MSCI data copyright MSCI 2013, all rights reserved. 29
  30. 30. Emerging Markets Stocks Third Quarter 2013 Index Returns Emerging markets rebounded i th l tt part of the E i k t b d d in the latter t f th third quarter. Value outperformed growth by 2.82%, and large caps outperformed small caps by 2.28% in US dollar terms. Ranked Returns f th Quarter (%) R k dR t for the Q t US Currency 7.19 Value The US dollar depreciated against most emerging markets currencies. 6.95 5.77 5 77 Large Cap 5.63 4.37 4.33 Growth 3.49 3 49 3.42 Small Cap World Market Capitalization—Emerging M k t W ld M k t C it li ti E i Markets Local Currency Period Returns (%) * Annualized Asset Class YTD 1 Year 3 Years** 5 Years** 10 Years** 11% Large Cap -4.35 0.98 -0.33 7.22 12.80 Small Cap -0.21 4.88 -1.41 12.36 13.77 Emerging Markets $4.2 trillion Value -5.65 -1.21 -1.15 7.08 14.07 Growth -3.18 3.03 0.42 7.30 11.50 Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap: Emerging markets proxies are the respective emerging country portions of the MSCI All Country World IMI ex USA Index. MSCI data copyright MSCI 2013, all rights reserved. 30
  31. 31. Select Country Performance Third Quarter 2013 Index Returns All developed countries posted positive returns for the quarter, while performance was mixed in emerging markets. Spain, Greece, Italy, and Egypt were among the best performers in USD terms, in contrast to their performance earlier this year. Indonesia, which reported a record terms year Indonesia high current account deficit, was the worst performing market as the rupiah declined sharply. The larger emerging markets countries of South Korea and Russia, however, performed well. Emerging Markets (% Returns) Developed Markets (% Returns) Greece Spain Finland Italy Austria Ireland France Sweden Denmark New Zealand Netherlands Belgium Germany UK Australia Portugal Switzerland Canada C d Hong Kong Norway Japan USA Singapore Israel 26.29 25.85 24.65 19.42 19.04 16.08 15.96 15.81 15.67 15.64 15.04 13.00 13 00 12.93 12.76 12.45 11.54 9.87 9.07 9 07 9.06 8.63 7.39 6.35 4.92 4.82 Egypt 17.96 Poland 17.71 Korea 14.47 Czech Republic 13.96 Russia 13.30 China 11.64 Colombia 9.28 South Africa 8.38 Brazil 7.94 Taiwan 4.28 Morocco Mexico 0.47 -1.69 Malaysia -2.91 Hungary -3.33 Peru -3.38 Thailand -5.11 India -5.69 Chile -5.82 Philippines -5.87 Turkey -6.65 Indonesia -24.56 I d i 24 56 Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), Russell 3000 Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data copyright MSCI 2013, all rights reserved. Russell data © Russell Investment Group 1995–2013, all rights reserved. Greece has recently been reclassified as an emerging markets country by MSCI, effective November 2013. 9
  32. 32. Fixed Income Third Quarter 2013 Index Returns Bond investors got a bit of good B di t t f d news this quarter as the US Federal Reserve continued the pace of bond buying in the latest quantitative easing program. This was a far cry from the news last quarter, when the quarter Fed announced it would begin to taper the purchase of government bonds with a view to end the most recent round of quantitative easing by mid 2014 The market reacted by mid-2014. taking 10-year bond yields from a two-year high of 3.00% to a close of 2.61%. Bond Yields B d Yi ld across Diff Different I t Issuers 4.53 9/30/13 6/30/13 3.48 9/30/12 2.61 10-Year US Treasury 2.53 2 53 State and Local Municipals AAA-AA Corporates Period Returns (%) The positive effects of continuing p g the latest round of quantitative easing, which could be inflationary, spilled over to the TIPS market. Real rates across most of the maturity spectrum declined quarter over quarter. Yield-seeking investors were rewarded as credit spreads narrowed. A-BBB Corporates * Annualized Asset Class YTD 1 Year BofA Merrill Lynch Three-Month US Treasury Bill Index 0.06 0.10 0.10 0.16 1.70 BofA Merrill Lynch 1-Year US Treasury Note Index 0.24 0.31 0.37 0.87 2.09 Citigroup WGBI 1-5 Years (hedged to USD) 0.40 0.80 1.43 2.53 3.18 Long-Term Government Bonds -8.86 -10.16 3.48 6.43 6.22 Barclays US A B l Aggregate B d I d t Bond Index -1.89 1 89 -1.68 1 68 2.86 2 86 5.41 5 41 4.59 4 59 Barclays US Corporate High Yield Index 3 Years** Years 5 Years** 10 Years** Years Years 3.73 7.14 9.19 13.53 8.86 Barclays Municipal Bond Index -2.87 -2.21 3.24 5.98 4.40 Barclays US TIPS Index -6.74 -6.10 4.02 5.31 5.24 Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citigroup bond indices copyright 2013 by Citigroup. The Merrill Lynch Indices are used with permission; copyright 2013 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. 32
  33. 33. Riding the Emerging Markets Tiger Third Quarter 2013 Many investors fell for emerging markets in recent years when they delivered sizeable returns. More recently, the associated risk has reasserted itself and the infatuation has faded. What s the right approach? What's A major theme in media commentary since the turn of the century has been the prospect of a gradual passing of the baton in global economic leadership from the world’s most industrialized nations to the emerging economies. Anticipating this change, investors have sought greater exposure to these changing economic forces by including in their portfolios an allocation to some of the emerging powerhouses such as China, India, and Brazil. These markets historically have provided higher average returns than developed markets. But the flipside of these returns is that emerging markets also tend to be riskier and more volatile. This is reflected in their higher standard deviation of returns, which is one measure of risk. The i k Th risk associated with emerging markets h i t d ith i k t has reasserted itself in recent months. Expectations that the US Federal Reserve will “taper” its monetary stimulus have led to a retreat by many investors from these developing markets. In its latest economic assessment released in September, the Organization of Economic Cooperation and Development (OECD) noted that while advanced economies were growing again, some emerging economies were slowing.1 Naturally, many investors will be feeling anxious about these developments and wondering whether emerging markets still have a place in their portfolios. There are number of points to make in response to these concerns. First, this information is in the price. Markets reflect concerns about the impact of the Fed’s tapering on Fed s capital flows. Changing a portfolio allocation based on past events is tantamount to closing the stable door after the horse has bolted. Second, just as rich economies and markets like the US, Japan, Britain, and Australia tend to , p , , perform differently from one another, emerging economies and markets tend to perform differently from rich ones. This just Thi j t means that irrespective of short-term th t i ti f h tt performance, emerging markets offer the benefit of added diversification. And we know that historically, diversification across securities, sectors, industries, and countries has been a good source of risk management for a portfolio. Third, emerging markets perform differently from one another, and it is extremely difficult to predict with any consistency which countries will perform best and worst from year to year. That’s why concentrated bets are not advised. Fourth, in judging your exposure to emerging markets, it is important to distinguish between a country’s economic footprint and the size of its market. Combined, emerging markets make up only 11% of the total world market. This is not to downplay the importance of emerging markets. The global economy is changing, and the internationalization of emerging markets in recent decades has allowed investors to invest their capital more broadly. Emerging markets are part of that. We know that risk and return are related, so getting out of emerging markets or reducing one’s exposure to them after stock prices have dropped means p pp forgoing the increased expected return potential. A bumpy ride on this tiger is not unexpected. But for those adequately diversified with an asset allocation set for their needs and risk appetites, it is worth holding on. 1."Interim Economic Assessment," OECD, September 3, 2013 Adapted from “Riding the Emerging Markets Tiger” by Jim Parker, Outside the Flags column on Dimensional’s website, September 2013. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale. All expressions of opinion are subject to change. Diversification does not eliminate the risk of market loss. General investment risks include loss of principal and fluctuating value. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Dimensional Fund Advisors LP ("Dimensional") is an investment advisor registered with the Securities and Exchange Commission. 33

×