Let's look ahead to 2016 and talk about what advisor trends to expect, and also look back at the best news from 2015.
Content provided by Rusty Vanneman, CFA, CLS Chief Investment Officer
The current stock market environment feels a heckuva lot like the late 1990s. Large-cap growth stocks, particularly some high-profile Internet companies, are leading the way now, just as they did then. Value-oriented investors, including some of the most well-known portfolio managers, are getting shellacked. The international markets are also trailing the U.S. market by large margins. Overall, the current environment is very similar to what we witnessed more than 15 years ago when globally diversified portfolios trailed the S&P 500. Let’s look at what happened then – and what we should be prepared for now?
First, the numbers, as of November 16, 2015 (all numbers from Morningstar):
At CLS, we have been overweighting large-cap growth stocks for some time now, particularly through our high-quality investment theme. This positioning has helped us considerably.
So, if this is like the late 1990s, what can we expect moving forward?
Next, let’s look at the outperformance of domestic stocks versus international.
At CLS, we have also been overweighting international stocks for some time. This positioning has not helped us – yet.
So, what can we expect moving forward?
Note: Jackson Lee, CLS Investment Research Analyst, did some serious number-crunching on this article.
Watch today's Orion Weekly for news about 2016 Orion Tech Labs, our new Business Intelligence Apps, and Advizr Express.
The post Planning for 2016, Trends and Insights, and Advizr Express appeared first on Orion Advisor Services.
Content provided by Kostya Etus, CLS Associate Portfolio Manager
2015 is coming to a close which means it’s time to reflect on the year that was. But, more importantly, it’s time to plan for the year that will be. Planning for the future (for anyone and anything) has to start with the three basic questions:
Answering these questions may seem tough, but unfortunately that is the easy part. The tough part is committing to your plan and seeing it through to the end. I recently read an article [LINK: http://www.iris.xyz/development/5-factors-financial-advisors-should-consider-growth-2016-and-beyond] by Andrea Schlapia listing five things advisors should be thinking about for 2016, and I was very happy to note that CLS has them all checked.
1) Appoint and Support a Chief Compliance Officer
The regulatory world is not getting any simpler. Recent developments include newly proposed laws on fund liquidity constraints, Social Security benefits, U.S. Department of Labor fiduciary duties, and restrictions on stop-loss orders. Furthermore, enforcement agencies are cracking down on financial institutions. Outside of the dramatic headlines surrounding Curian Capital and F-Squared Investments, it seems there is a new horror story of wrongdoing every week. Compliance has become a critical function and needs to be embraced by the entire industry to stop the black eyes. Luckily at CLS we can rest easy knowing our stellar compliance team is on the job.
2) Utilize Technology
This is not only necessary to pursue younger clients; People of all ages are using technology more and more every day. Everyone wants things done fast and done right, and technology gets us there. For example, many people favor digital access to their accounts and paperless statements these days. But why stop there? How about video statements, robo-advisor functionality, and a simply beautiful website? I would say CLS is ahead of the curve on this one.
3) Differentiate Your Firm
If all advisors say the same thing and make the same promises, how do you choose? The answer is through trust and customer service. As Schlapia writes, customers need to know you are thinking about them first and foremost. If you have this down, it will serve you far more than differentiating based on fees or products. At CLS, we have always put our clients first by prioritizing the client experience every step of the way.
4) Create Strategic Alliances
Having dependable partners is an invaluable resource. Whether in sales, trading, portfolio management, or anything else, partnering with other firms to achieve common goals is a favorable endeavor. Primarily, it allows you to share costs and skills to provide clients with the best service possible. CLS has many dependable partners in the industry that we are proud to work with.
5) Build a Team Infrastructure
“Team[work] is no longer an option, it is a necessity,” Schlapia writes. Having a team approach is the most successful strategy from an operational standpoint as it allows for the combination of skills, time, and expertise. Beyond operations, it creates a cohesive atmosphere (culture) and leads to a collaborative environment (which breeds innovation). For CLS, although I can certainly mention how important teamwork is internally, in this context I will focus on our teamwork with advisors. Advisors, especially those with rapidly growing businesses, need to focus on what they are good at. “Advisors typically find themselves working in the business rather than on the business,” Schlapia writes. But by delegating portfolio management to CLS, advisors can form a cohesive team and build the infrastructure they need for further growth.
Watch today's Orion Weekly to get up to speed on our all new data analytics platform, Orion Business Intelligence.
The post An All-New Data Analytics Platform for Orion Advisors appeared first on Orion Advisor Services.
Content provided by Josh Jenkins, CFA, CLS Portfolio Manager
Recent guidance from the Federal Reserve (Fed) suggests it may finally be ready to lift interest rates at its next meeting on December 16, and the market has taken note.
According to Bloomberg, as of December 10 the probability of a hike was 80%. Bloomberg has a cool function that calculates the probability of a rate hike at any given Federal Open Market Committee (FOMC) meeting based on the pricing of certain derivative contracts. This function is illustrated below and has frequently been quoted in the financial media.
In addition to determining the probability of a rate move at any given meeting, the function also determines the probability of interest rates falling within a particular range. The table below illustrates this probability distribution for interest rates in December 2016. This distribution implies that the benchmark rate will be at 0.86% in 12 months. Given the benchmark rate is currently between 0.00% and 0.25% (we can assume the middle point of 0.125% for simplicity), pricing in these derivative contracts implies three rate hikes over the next 12 months.
Here’s the formula:
(Interest rate in 12 months – current interest rate) / size of each rate hike
(0.86-0.125)/0.25 = 3
Three rate hikes in the next 12 months!? We should sell all our bonds right!? Wrong. Three rate increases in 12 months can be considered a slow and steady pace, and there are several reasons to believe this slow pace will not cause interest rates to rise on the long end of the curve:
So what could bond portfolio returns look like in this scenario (rates increase on the short end but not the long end)? Below is a simplified analysis to illustrate:
The table above breaks down the components of total return for the Aggregate Bond Index (a proxy for the domestic bond market). The return components include price return and yield. From this we can see the rise in interest rates reduces the value of the bonds (price return), but the coupon payments (yield) are more than able to cover the loss. To emphasize: in this scenario there will likely be some initial volatility, but the return on fixed income can still be positive, even with a rate hike.
This simplified analysis ignores the effects of a potential increase in default rates (this would lower expected bond returns), the effects of the roll yield (this would increase expected bond returns), and convexity.
Check out today's Weekly to see why we now have Orion Advisor Success Advocates, and see details on how to make your Orion Connect your own.
The post Advisor Success Advocates and a New Orion Connect User Experience appeared first on Orion Advisor Services.