Principal Strategic Asset Management (SAM) Portfolios

Focused on Managing Overall Risk Levels

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.

SAM News

The following is an economic and market outlook and overview of the strategies implemented this quarter.

A Strong Year for Both Fixed-Income and Equity Investments

Equity indices advance to record levels and interest rates fall to boost bond investments

Building on some positive economic surprises at the end of the third quarter, equity markets have rallied recently, reaching several new all-time highs thus far in the fourth quarter. While the strong start to the fourth quarter is positive, the SAM portfolio management team expects just modest growth through year-end and into 2015. Other economic indicators generally remain positive, with consumer sentiment rising and the U.S. unemployment rate dipping below 6 percent for the first time in more than six years, dropping to 5.8 percent in October. However, these positive signals were tempered by a drop in U.S. home sales and by the slow recovery in Europe. Despite the positive economic news, interest rates continued to fall, as the 10–year Treasury dropped under 2.2 percent at the end of November. Because interest rates move in the opposite direction of bond prices, falling rates continued to boost the performance of fixed-income assets in 2014. In addition, commodity prices have been generally weak as inflation has yet to surface. Yet, portfolio management still sees the potential for an uptick in both rates and inflation as this recovery continues to slowly unfold.

A Supportive Environment for Stocks and Bonds

Sources: Federal Reserve (Fed) Bank of St. Louis (research.stlouisfed.org); S&P Dow Jones Indices (spindices.com) U.S. Stocks are represented by the S&P 500, a market capitalization weighted index of 500 widely held stocks often used as a proxy for the stock market.

Core Asset Classes Continue to Gain

Traditional equity and fixed-income classes drive results in 2014

Within equities, large-cap stocks have led the way, recording strong gains and significantly outpacing smaller–sized companies. In addition, domestic equities have outpaced international positions during 2014, and the portfolios’ strategic and tactical underweight in international developed market equities aided performance. Emerging markets continued to underperform as positions detracted from overall relative results, yet longer–term forecasts continue to point to the overall diversification value of these allocations. Within fixed income, longer duration (a measure of a bond’s price sensitivity to changes in interest rates) led the way when interest rates dropped, but more credit–sensitive issues in the corporate and high yield segments have also delivered strong results, and credit conditions have been positive.

Current Strategic Asset Management Positioning

Portfolio management continues to prefer equities over fixed income, but has reduced the magnitude of the equity overweight that has added to relative results throughout the year. We continue to have a positive outlook for equities as we move into 2015, but are closely managing overall risk levels. In addition, we believe the anticipated rise in interest rates will be quite gradual, which tempers our concerns about fixed-income markets. Overseas, China’s soft landing seems to be on track, but Europe’s growth remains slow, adding to our preference to favor domestic positions.

Within both equities and fixed income, managers have made slight adjustments to risk preferences. Among equities, we’ve adjusted our outlook to favor larger-cap stocks over small caps, though we remain positive on the mid-cap range. On the fixed-income side, we continue to prefer corporate issues over government bonds, but we’re tempering our expectations for high-yield bonds. Most pundits expected 2014 to be a year of rising interest rates, returning to a more normal environment after a long, recession–induced stretch of exceptionally low rates. Instead, we’ve seen the 10–year Treasury yield trend downward, dropping from its peak of 3.03 percent on December 31, 2013 to 2.18 percent on November 30.

An overview of the positioning of the SAM Portfolios is as follows:

  • We believe the Portfolios are positioned for a continued slow but positive growth environment as U.S. equity markets reached several all-time highs during the fourth quarter.
  • The Portfolios have benefited from positive performance by large-;cap growth holdings during the year, favoring large cap over small cap moving forward.
  • Modest U.S. bias over international equities based on earnings and the strength of the U.S. dollar.
  • Overweight corporate bonds and tactical underweight to government bonds given their interest rate sensitivity and the gradual removal of the Federal Reserve’s quantitative easing program.
  • Tempering overweight in higher yield bonds as they have delivered strong results for several periods.

For additional information, including allocation changes and performance, click on your Portfolio to the right.

SAM Tools

5 of 7

project

(login required)

6 of 7

project

(login required)

Hear from Portfolio Manager Todd Jablonski.