Financial Pros Offer Insight on Investment Climate– June 05, 2014

Cohen & Company and Sequoia Financial Group (Sequoia) were honored to host their 2014 Insight conference. Cautious optimism was the theme that prevailed at the event, which featured an interactive panel comprised of some of the most prominent financial firms in the industry. The group assessed the trends, challenges and opportunities impacting the global investment climate. Speakers covered domestic and international equities, as well as taxable and municipal bonds to provide attendees with a global perspective on the market and how it will affect portfolios. A thought-provoking Q&A session wrapped up the event. Below is an overview of the presentations.

Domestic Equities

While not going quite as far to say he is “bullish” on domestic equities, Vanguard Investment Analyst Andrew Patterson, CFA, did express optimism. Taking a long-term perspective of 10-years or more into the future, Patterson said investors can expect six to nine percent in annualized returns, leaving room for inherent volatility. While returns will likely hover at the lower end of this estimate, he said returns above nine are not impossible with the right investment. He went on to explain the difficulty and risk in forecasting investment outcomes, but he said looking at the fundamentals such as the Gross Domestic Product (GDP), private-equity ratios and price-to-earnings ratios can help. These are less than perfect predictors but give the best case scenario when looking into the future. Patterson named unpredictable headwinds, such as general uncertainly caused by political events and debt crises in countries such has Greece, as areas we can’t predict but should certainly watch. As for the more positive “tailwinds”? Companies have a lot of cash to make purchases and capital investments right now, and that should remain a positive for the near-term future of domestic equities.

International Equities

Mike Quinn of Oppenheimer Funds opined that investors tend to be cautious of investments outside of the U.S. often because of news reports and forecasts. But he says that investing outside of the U.S. does diversify portfolio risk, at least statistically, and shouldn’t be overlooked. Expanding opportunities are everywhere, so as investors we must look beyond our domestic borders. In fact, he said that where a business is based has little relevance with how its economics is derived. Quinn suggests looking at who and where the customers are to determine if the investment makes sense in terms of portfolio diversification.

He reminded those in attendance that equities are often used to fund long-term expenses, such as wedding or educational expenses. So keep a long-term view, ignoring the inevitable “the world is coming to an end” mentality that rears its ugly head every four to six years in the news and other outlets. Quinn says, in general, to ignore it: a large part of investment success is sitting on your “you-know-what” and doing nothing. Keep a consistent market profile, be patient, and take a business perspective to investing, keeping an eye out for high-return structures, which are generally a function of quality and price.

Taxable Fixed Income

Fred Sweeney, CFA, of Loomis Sayles also provided a positive outlook on the global market moving forward, saying that the U.S. is well-placed as a global engine of growth because the major sector balance sheets appear healthy. U.S. consumers are resuming traditional borrowing and spending patterns, plus a rebound in housing and less fiscal drag should drive GDP growth close to 3.0% in 2014. He pointed out that global growth will likely also be stronger with better momentum compared to the last couple of years, including a stronger U.S., UK, Europe and select emerging market countries like Mexico. Inflation remains low in U.S., UK, Europe and Japan, so we do not expect a major rise in interest rates, but rates will most likely rise by late 2015. The Federal Reserve Bank will continue to “taper” its Quantitative Easing program and is expected to conclude by November of this year.

As for the credit situation, metrics were fine in 2013 but we still need to see better top-line growth in 2014 for the corporate sector to avoid a significant rise in leverage. Corporate fundamentals look reasonable to good, but we are still in the latter stage of the expansion of credit cycle, so it could be a few years yet before we see that come back to pre-recession levels.

For investors, Sweeney noted that multi-sector flexibility is key in a low-yielding environment like the one we are currently in. Use caution. Identify “winners” and “losers” by looking at the specifics of the investment, not just market trends.

Municipal Bonds

Municipal bonds are attractive on many levels and should be factored into any well-structured portfolio, Nancy Angell, CFA, of GW&K Investment Management told Insight attendees. Despite the volatile market, municipal bonds have been outperforming other fixed assets this year, after underperforming last year, and are currently experiencing moderately positive in-flows. They also are attractive on a taxable basis, and defaults on this type of fixed asset are virtually non-existent. (Angell noted that areas in financial turmoil, such as Detroit, have no bearing on the larger bond market, but rather, are case-specific and not indicative of a growing trend.) A specific opportunity to consider is seven to 15-year muni bonds, which may yield attractive returns without the associated volatility of the 30-year variety.

Overall bond outlook for 2014 is positive. Municipals could yield over 100 bps higher than the cyclical low, benefit from a steep yield curve and wide credit spreads, remain cheap to treasuries, defaults should remain isolated, fundamentals for states are in good shape, longer-term demographics are strong, with current high tax rates making municipals more attractive. The downsides include absolute yields that are at historic lows, “headline risk” of continued pressure on municipal credits, and supply normalization putting upward pressure on rates.

Managing Portfolios

Russell Moenich of Sequoia gave his take on the state of the markets and how the firm approaches managing portfolios, including analyzing global macroeconomic influences such as political happenings and business cycles, and collaborating closely with fund managers to strategically structure asset allocations.

Moenich says the goal is to balance portfolios with equities, which have higher returns but more volatility; fixed income assets, such as bonds to reduce volatility; and alternatives/real assets, which can offer inflationary protection. He and Sequoia work to balance the “three legs of the stool” over time for clients. Currently, the firm is looking at opportunities to add meaningful allocations in the area of real assets, such as real estate, as inflation increases. And the firm is looking to large cap versus small cap funds, value over growth funds, and emerging markets. Moenich concluded by remarking, “We’re investing during ‘interesting times,’ but our goal is to build ‘uninteresting portfolios’ for clients.”

We sincerely thank all of our speakers and attendees for bringing us these insights and many more at this conference. 

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Performance figures represent past performance and do not guarantee future results.

Though related entities, Sequoia Financial Group, LLC and its affiliates, and Cohen & Company, Ltd. are separate companies with common, but not identical ownership. Investment Advisory Services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Securities offered through ValMark Securities, Inc., Member FINRA, SIPC. 3500 Embassy Parkway, Akron, OH 44333, 330.375.9480. Certain insurance products offered through Sequoia Financial Insurance Agency, LLC. Sequoia Financial Group, LLC and related entities are separate entities from ValMark Securities, Inc., and ValMark Advisers, Inc. Panel members are not affiliated with ValMark Securities, Inc., ValMark Advisers, Inc., or Sequoia Financial Group, LLC or any of its affi¬liated entities. Opinions and advice offered are their own.