A series of five actively managed asset allocation funds, the SAM Portfolios provide investors with a highly diversified investment solution that is simple to understand.
Each Portfolio is managed with a rigorous investment discipline that examines dozens of domestic and global economic forces to develop risk-adjusted investment strategies. With this in mind, the Portfolios are continually reallocated to benefit from evolving investment conditions.
Additionally, the multi-manager SAM Portfolios provide financial professionals with a robust practice management solution to help strengthen client acquisition and retention efforts.
The following is an economic and market outlook and overview of the strategies implemented this quarter.
The Power of an Allocation Strategy in Today’s Environment
Thoughtful allocation is needed in the midst of a slowly recovering economy
Slow and steady advancement in both equities and fixed income has been the predominant trend so far this year, as some positive economic signals have been balanced with potential headwinds. Job growth and optimistic housing reports have had a positive impact on domestic equities, and earnings have continued to grow. Fixed-income performance has also been positive, as interest rates continue to be held back by accommodative global monetary policy, but we are closely watching for a change in the current environment, eventually leading to higher rates. The SAM Portfolio Management Team will continue strategic allocation with this slow and steady drawn-out recovery, looking for opportunities to make tactical moves within asset classes to add to relative results.
Mixed Messages Make for a Positive Backdrop in 2014
Equity markets reach record highs despite potential headwinds
Stock prices have continued to gradually climb throughout this year, with minor downturns being few and short-lived. Despite some headlines and headwinds, performance has been steady, with the Dow Jones Industrial Average reaching and surpassing the 17,000 point level in the third quarter. The housing sector continues to be vital to the recovery, as banks strengthen their positions and loosen their mortgage lending policies, making credit more attainable for consumers. Unemployment has trended downward for much of 2014, despite a slight uptick in July. The SAM Portfolio Management Team continues with a positive outlook on the recovery, looking for slow, tempered improvement as we move closer to 2015.
Interest rates have moved lower thus far in 2014, with Treasury yields falling to 2014 lows in August. As a result, the fixed-income market has been generating positive results. In the third quarter, the Federal Reserve (the Fed) released statements indicating that the door remains open for rate hikes, as the current historically low levels cannot be sustained forever.
Equity Markets Continue to Advance near Record Levels
Source: Dow Jones Industrial Average (DJIA) daily closing values.
Calculations are based on historical index performance and are shown for illustration purposes only. Past performance does not guarantee future results.
Does not reflect the performance of any Principal product. Investors cannot invest directly in an index.
Current Strategic Asset Management Positioning
So far, 2014 market performance has reinforced our belief in a slow recovery, and in the necessity of caution when analyzing the current interest rate environment. Equities have clearly benefited from the current transition into a steadier economic climate and we have overweighted positions in equities across the Portfolios. Our overweight in stocks has added to relative performance in recent periods and we continue to diversify both equity and fixed-income assets across a wide range of classes. Within equities, we remain positive in our outlook, but are carefully watching overall market risk levels. Recent performance was boosted by our positions in small-cap and emerging market stocks, and we currently favor allocations to growing, good-quality stocks with attractive yields.
With the possibility of an uptick in interest rates, we continue to manage risk within our bond allocation strategy. This translates to an overweight to corporate bonds and an underweight to government bonds and other more interest rate-sensitive areas of the market. Corporate-backed issues tend to be a bit more closely tied to the strength of the economy and company balance sheets, while Treasury bonds are more interest rate-sensitive. Our positioning is in anticipation of rising rates, as the Fed has hinted to the gradual removal of the extreme measures they have been using to hold down interest rates.
An overview of the positioning of the SAM Portfolios is as follows:
- Portfolios are positioned for a continued slow but positive growth environment as U.S. equity markets reached all-time highs during the quarter.
- Overweight corporate bonds and tactical underweight to government bonds given their interest rate sensitivity.
- Looking for ways to diversify interest rate risk as the Fed has made the possibility of rising rates more apparent this quarter.
- The Portfolios have benefited from positive performance by large-cap growth holdings during the quarter, with a more neutral outlook within company size moving forward.
For additional information, including allocation changes and performance, click on your Portfolio to the right.