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.
Closing the Book on a Strong Year in Domestic Markets
SAM Results Buoyed by Strong Fundamentals and Active Portfolio Management
As we reflect back on 2013 and look forward to next year, economic and market fundamentals have continued to improve. Although slower than many had predicted, housing and employment have been moving in a positive direction and the Federal Reserve (the Fed) has hinted at the possibility of a tapering off of their current efforts to hold interest rates down at historically low levels.
Domestic equity markets continued to lead the way throughout 2013, with companies adding to already record profit levels. As a result, most U.S. equity market indices finally eclipsed their previous highs, with the S&P up over 25% as of November 30. Within fixed income, these improving economic conditions and the potential change in Fed policy have pushed interest rates higher throughout 2013. This has caused more interest rate-sensitive investment categories, like U.S. Treasuries, to underperform. Conversely, fixed-income classes that are more sensitive to underlying economic and credit conditions, like higher yielding corporate bonds, provided strong relative results throughout the year.
Looking to 2014, we remain cautiously optimistic that the recovery will slowly continue and maintain our bias toward U.S. equities given strong market fundamentals and the outlook for earnings. There are potential headwinds on the horizon, however, with the current political stalemate in Washington making any type of legislation difficult.
Additionally, while current valuation levels remain attractive, we are watching for any change in overall market valuations that could extend risk levels if the rapid equity advance continues. While we do not expect a significant increase in interest rates in 2014, we do favor less interest rate-sensitive classes, as rates could be flat to higher over the foreseeable future. Overseas markets have also improved, yet emerging market economies lagged in 2013. We continue to feel that these markets are poised for strength, as countries like Brazil and China stabilize and return to growth.
Improving Economic Conditions in 2013 Support a Positive Outlook
SAM Portfolios Benefit from Strategic and Tactical Active Management
Given our early year forecast for improving market fundamentals, we added to positions in U.S. equities throughout 2013, a move that rewarded SAM shareholders with the significant outperformance of domestic stock markets. Within equities, while our growth positions have performed very well, we have been looking for opportunities to add to more value-based equity sectors such as financials, energy, and consumer stocks. Other moves that have added to relative results include our favoring of higher yielding corporates over Treasuries and investment-grade corporate issues, as the high yield category provided significant strong results compared to the rest of the fixed-income markets.
We continue to look for ways to cushion the impact of potentially rising interest rates on fixed-income positions, seeking to widen diversification levels across alternative income sources and asset classes to help manage risk. While international positions, especially emerging markets, trailed behind domestic markets, we feel these positions add to overall diversification and could be poised for improvement over the long term.
Current SAM positioning is as follows:
- Continue overweighting U.S. equities given record earnings, record profits, and improving economic conditions; and now favor more value-based equities.
- Reduce positions in U.S. government bonds and investment-grade corporate bonds in favor of fixed-income positions that are less sensitive to the possibility of rising interest rates.
- Maintain positions in asset classes such as real estate, small-cap equities, and emerging markets to help widen diversification levels.
For additional information including allocation changes and performance, select the appropriate Portfolio in the Performance menu above.
1 Federal Reserve; increase in 10-Year Treasury YTD as of December 10, 2013.
2 National Association of Realtors; average increase in existing home prices October 2013 vs. October 2012.
3 Standard & Poor's; S&P 500 12-month estimated average operating earnings per share YTD for December 31, 2013.
4 Bureau of Labor Statistics; Based on average monthly new jobs increase during trailing 12 months through November 30, 2013.