Financial Professionals


Striking a Balance


In the wake of yesterday’s FOMC meeting, the S&P 500® Index (SPX) (Figure 1) has appreciated to another fresh all-time high of 1959.79. The SPX volatility index (VIX) (Figure 2) has fallen to its lowest level since late 2006 to below 10.50 now.

Figure 1: S&P 500 Index (SPX), Prior 365 Days

Source: Bloomberg

Figure 2: SPX Volatility Index (VIX), Prior 365 Days

Source: Bloomberg

A rather favorable backdrop exists for investors as they currently meet with advisors to determine what portfolio changes they might initiate for the second half of 2014. By “favorable backdrop,” I mean to emphasize that condition exists across the multi-asset space. The argument can be made for ownership of basically all major asset classes. Give me 30 minutes and I can present compelling reasons for considering ownership of emerging market debt or equities, municipal bonds, high yield bonds, small caps, utilities, hedge funds, and commodities, to name a few.

As 2014 has evolved, this multi-asset concept has become clearer to me. Spending time in May at the SALT conference really highlighted the point, especially in talking with many multi-billion dollar portfolio and hedge fund managers. For the very first time since the 2008 credit crisis, the most important action investors might embark upon comes out of behavioral finance best practices. Current proper portfolio behavior suggests that “striking a balance” should be the ultimate goal. It is time to do away with “risk on/risk off” binary thinking. A particular asset class should not be categorized as “loved” or “hated” any longer. Think back to the end of 2013 when the conversation was all about making a choice – bonds or equities – and picking one, only one.

Even global monetary policy is striking a balance. FOMC Chair Janet Yellen doesn’t see inflation, or deflation. Select central banks, such as the ECB, are adopting easier monetary policy while a major central bank in its own geographic region, the Bank of England, cautions for tighter monetary policy. With this balance also comes a distancing from an investment world that for years was incredibly macro-oriented. Heading into this year, the collective investment community made four forecasts that were all macro-oriented and all incorrect thus far year to date.

Four Incorrect Macro Forecasts for 2014

  • Early 2014 advance above 3% for the U.S. 10-year Treasury
  • Early 2014 U.S. GDP surge above 3%
  • Early 2014 SPX correction greater than 10%
  • Early 2014 SPX top-line revenue surge

In 2014, the investment world has shifted toward balance, toward the micro, not the macro. Use, for example, the staggering year-to-date +16% sector leading performance for utilities (as measured by the XLU) being categorized as a lower yield play. It is not. On February 3, 2014, the yield on the U.S. 10-year Treasury was 2.57%, the same 2.57% yield it is this morning. The XLU traded at $38.75 on February 3, 2014, and this morning it is trading at $44. That is 13.5% appreciation while the U.S 10-year T-note yield remains unchanged. Rather, this performance highlights the micro influence of 19.09% earnings sales growth for SPX utilities companies during the prior quarter. It also highlights increased mergers and acquisitions desires, and new regulations that provide utilities with sustainable pricing power.

For the second half of 2014, the investor focus should be on the micro, and first and foremost, be certain that your portfolio strikes a balance!

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.