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.
U.S. Equity Markets Eclipse New Highs in Second Quarter
Markets advance amidst a slow economic growth environment
Slow growth continues to be the dominant economic story and we have generally avoided major shocks in the markets. Economic reports have been generally positive, but we expect continued muted responses by the market as lower volatility relative to recent years settles into market reactions. Employment results continued to be positive, adding more private sector jobs in both April and May, though the results were slightly below expectations. The SAM Portfolio management team expects continued yet modest improvement throughout the second half of 2014.
While equity market performance has been more subdued in 2014, with earnings continuing to grow, markets eclipsed all-time highs as we approached the end of quarter. Low interest rates have prevailed year-to-date, with Treasury yields falling to period lows in May as some economic data was slightly below what many analysts had predicted. As a result, fixed-income investments have provided strong results thus far, as their prices move in the opposite direction of market interest rates. Given the historical low yields, it is important to watch interest rate moves as they relate to investment performance and the low cost of capital that companies are able to experience. It is interesting to note that, after falling for much of 2014, rates moved slightly higher in the second quarter while equity markets were still making all-time highs.
Equity Markets Advance as Interest Rates Remain Low
Source: U.S. Treasury 10-Year Yields and the S&P 500 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. The S&P 500 is a market-capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. The 10-Year Treasury Note is a debt obligation issued by the United States government that matures in ten years.
Current Strategic Asset Management Positioning
Overall, we are confident in the slow recovery and retain a bias of equities over fixed income. The continued fundamental economic strength supports stocks, while the potential for rising interest rates at some point in the future does raise concerns about longer-term risks in the bond market. The overweight in stocks has added to relative performance in recent years and we continue to diversify both equity and fixed-income assets across a wide range of classes. Within equities, we have moved closer to target allocations in international positions, reducing some emerging market positions as economic and geopolitical concerns exist overseas. We also moved to neutral within equity styles and company sizes, reducing positions in small cap after a very strong 2013.
Within fixed-income allocations, we continue to have a strategic overweight to corporate bonds and are underweight government bonds and other more interest rate-sensitive areas of the market. We favor corporate issues, especially lower-rated high yield issues, over investment-grade bonds. With a slowly growing economy, strong corporate balance sheets, and the prospect of eventual interest rate increases, we think the extra yield can benefit investors.
An overview of the positioning of the SAM Portfolios is as follows:
- Portfolios are positioned for a continued slow growth environment as U.S. equity markets reached all-time highs during the quarter.
- Fixed-income performance has been good, but we are looking for ways to diversify interest rate risk as rates will eventually move higher.
- The Portfolios have moved to a neutral position in both style and company size after the run-up in small-cap stocks.
- The management team has been reducing positions in more interest rate-sensitive fixed-income investments in favor of credit-based issues.
For additional information including allocation changes and performance, click on your Portfolio to the right.