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Investment Outlook and Strategy:
Using the above as our backdrop, below are a few thoughts on different asset classes that affect our current allocation strategies. We continue to maintain a diversified investment strategy that attempts to protect portfolios against the known and unknown risks facing investors.
Bonds - The threat of a reduction in the Fed’s purchase of Treasuries sent yields higher this summer. Rates have lowered since then. We believe this is a short-term trend. Although the yield increase earlier this year may have been overdone, we believe that yields will trend higher over the longer-term. We continue to favor managers that have a multi-sector approach that allows for flexibility as volatility remains high.
Enhanced-Yield Strategies - Although traditional high-yield mutual funds can be another way to invest in U.S. companies, we continue to favor private debt transactions as bank lending is still very hard to find for small companies and investment groups. The U.S. government shutdown has only exasperated the problem. We continue to seek deals with low to mid-teen returns backed by strong collateral in real estate and private operating companies.
Stocks - The U.S. stock market has been the darling of the investment world for most of 2013. The “buy the dip” strategy has continued to work this year. However, if one of the political parties is really willing to risk a U.S. default, then all bets are off on how deep the next dip might be. The Fed’s promise of a highly accommodative policy continues to provide a backstop, but Bernanke probably could not print enough money to backstop a U.S. default. If D.C. can come to some sort of agreement though, as companies continue to have strong balance sheets, the economy should continue to move forward into 2014.
Real Estate - The multi-family housing sector continues to see investor money come in to acquire assets. This has placed Virtu, one of our managers, in a very good position as it acquired most of its properties at least two years ago. Virtu sold three properties this summer and has several properties on the market this fall. We still think certain real estate sectors present a good investment opportunity as well as diversification from the stock market. Specifically, we continue to favor commercial opportunities that generate ongoing cash flow. Landsmith had expected more bulk sales this quarter; however, activity has slowed down in the housing market leading to builders stalling on the acquisition of more lots.
Commodities/Managed Futures - Although a positive in these asset classes has been energy, consumers have had to get used to higher gas prices. Commodities and Managed Futures continue to be the biggest drag on clients’ portfolios. Another twist to this asset class is the increased stimulus plans from other countries and its effects on the U.S. dollar as mentioned in our outlook. This could be a continued headwind for U.S. dollar based commodities. However, we continue to use these asset classes to mitigate the risks of increased inflation expectations and a weakening dollar while the Federal Reserve continues printing money at historic rates while tapering has been delayed.
Disclosures: This commentary is submitted for the general information of Cornerstone Wealth Management, LLC clients and may not be distributed to other individuals. This commentary is not deemed to be investment advice and information contained herein may not be current. An investor should consider the investment objectives, risks, charges, and expenses of each investment carefully before investing. For more complete information, you may contact us at 858-676-1000. Past performance is no guarantee of future results. Individual performance may vary and investment performance numbers may not be audited.