Market Update Through 06/30/2016

as of June 30, 2016
Total Return
Index 12 months YTD QTD June
Stocks
Russell 3000 2.14% 3.62% 2.63% 0.21%
S&P 500 3.99% 3.84% 2.46% 0.26%
DJ Industrial Average 4.50% 4.31% 2.07% 0.95%
Nasdaq Composite -1.68% -2.66% -0.23% -2.06%
Russell 2000 -6.73% 2.22% 3.79% -0.06%
MSCI EAFE Index -10.16% -4.42% -1.46% -3.36%
MSCI Emerging Markets -12.05% 6.41% 0.66% 4.00%
Bonds
Barclays US Aggregate 6.00% 5.31% 2.21% 1.80%
Barclays Intermediate US Gov/Credit 4.33% 4.07% 1.59% 1.43%
Barclays Municipal 7.65% 4.33% 2.61% 1.59%
Current Prior QTR
Commodity/Currency Level Level
Crude Oil $48.33 $38.34
Natural Gas $2.92 $1.96
Gold $1,320.60 $1,235.60
Euro $1.1110 $1.1396

10 ways to celebrate Independence Day:

Visit a historical site:

Western North Carolina is rich in history. One of my family’s favorite locations is Cherokee. In particular, we like to visit the Oconaluftee Indian Village. We always enjoy walking the trials and making new friends. Staff members are eager to share stories and have live demonstrations on how the early Cherokee people made jewelry, clothes, weapons, shelters, and canoes. We always seem to learn something on our trip back through time.

Read the Declaration of Independence

While many of us can recant passages of the document such as, “We hold these truths to be self evident,” how many of us have read or can recall the 27 grievances in the original writing leading to the declaration?

Get active – go for a hike, fishing, or camping:

Did you know that WNC has some of the arguably best trout fishing in the state? We have well over 3,000 miles of trout streams and each year the Wildlife Commission closes 1,000 miles for restocking and delayed harvesting. Currently, fishing season is wide open with a 7 daily keeper limit.

Make it memorable:

Consider investing in a decent photo or video camera. We took the plunge a few years ago and bought both types of cameras. We have a lot of fun capturing memories. Occasionally, we will look back on these priceless photos and videos to relive the moment and found this to be a great pass time. One of the things I like to do is compile short video clips and then set them to music; this makes a great way of preserving memories in a fun and engaging way.

Pack a picnic and watch the fireworks:

Admit it, many reading this cannot recall the last time they sat on a blanket and enjoyed a picnic dinner. How about trying a new recipe or pick up a box of fried chicken while picking out the perfect viewing area? Don’t forget to pack a frisbee to toss around. Looking for fireworks? Find them here!

Treat a veteran to lunch or dinner:

What better way to honor our nation’s heroes by treating them to a lunch? We see active duty servicemen and women at restaurants near the Asheville airport. Something we like to do is anonymously pay for their meal.

Make a difference:

Everyone has something they are passionate about. Why not take this passion and introduce it to someone new? For instance, an outgoing person might go to a nursing home and visit a resident. Someone who enjoys soccer could visit a local park and start a pick-up game.

Throw an Independence Day themed BBQ:

On a recent visit, the client arranged for a catered Low Country Boil as incentive for his staff to stay after hours for my education presentation and one-on-one meetings. This was my first boil and I was impressed at the simplicity of the food and great conversations. So much so, this inspired my family to invite a few good friends over for our first boil this summer! (If any have advice about how to make this go off without a hitch, please email me with your thoughts and suggestions.)

Watch the local 4th of July parade:

Remember when you were a kid and watched the parade? The nostalgia of candied apples, popcorn, marching bands, and waving the American flag just oozes fun and happy memories! It just doesn’t get much better.

Declare your independence, financially that is:

The Declaration of Independence is roughly 1,400 words. Financial independence does not require a formal “declaration” per se, but it does require a well thought out plan.   Just as our forefathers were resolute in their desire for independence, our decision to save and invest for our future should be a high priority. Things that should be considered are having adequate cash reserves, health, life and disability insurance, long-term savings and investments, and estate planning documents to name a few. The internet has a wide variety of tools and resources that may be helpful. However, the advisors at Parsec take a unique and tailored approach for client recommendations and advice. More importantly, our advice is consistent whereas information on the internet will vary. Our belief is that with proper savings, planning, and investment oversight most people can achieve financial independence. If you have questions or concerns that you would like us to address, please call or write.

I hope everyone has a happy and safe 4th of July!

Neal Nolan, CFP®, AIF®
Senior Financial Advisor
Director of ERISA Services

Neal

Implications for “Brexit”

Investors received surprising news this morning, as the United Kingdom (U.K.) voted to leave the European Union (EU).  While markets will no doubt experience increased volatility in the coming weeks, longer-term, we believe the negative impact of “Brexit” will be largely contained to Great Britain and Europe.

Trade accounts for about 40% of the U.K.’s gross domestic product (GDP), with most of those exports and imports tied to EU partners.  As a result of the recent vote, Britain is likely to see higher trade tariffs from the EU and more trade staying within continental Europe’s borders.  Both of these shifts could weigh significantly on Britain’s economic growth in the mid-term and would likely weigh on EU growth as well.  One positive is that the U.K. never adopted the Euro, choosing instead to maintain the British Pound as its currency.  This is should make an exit from the EU smoother and slightly less costly than if they had converted to the Euro, and suggests it could be less detrimental than if Greece had left.

While the U.K. is likely to experience the largest negative impact by leaving the EU, continental Europe is also at risk given its relatively fragile economic expansion following the Financial Crisis of 2008-2009.  From 2010 through 2015, EU GDP has grown at an average rate of just 1.2% compared to U.K. GDP growth of 2.0%.  Thus any major shock, such as one of its strongest members leaving the Block, could derail those modest growth levels.

Turning to the U.S., Europe is one of our larger trade partners with about 16% of total U.S. exports going to the Block last year.  This is not an insignificant number, and will likely weigh on U.S. GDP growth in the near-term.  However, the U.S. consumer remains the largest driver of our economy, accounting for about two-thirds of GDP growth.  Following the Financial Crisis of 2008-2009, the U.S. consumer has gotten healthier, supported by an expanding housing market, strong jobs growth, and deleveraging.  A resilient consumer and relatively better economic growth compared to the rest of the world should position us to better weather the recent developments in Europe.

To be sure, today’s news surprised investors and markets alike.  Although the near-term economic impact will likely be limited to the U.K. and Europe, the vote has broader implications for the future of the European Union.  While we can’t predict the longer-term repercussions of today’s historical vote, we can assure you of the benefits of staying invested in a diversified portfolio over the long-term.  Markets will experience sharp corrections, as well as strong rallies, yet clients who remain invested across asset classes throughout the market cycle have a better chance of reaching their financial goals.  With this perspective in mind, market declines like the one we’re seeing today simply represent an excellent opportunity to rebalance your portfolio at more attractive valuations levels.

 

Thank you,

The Parsec Team

Things are not as bad as the media would have you believe

Queen Elizabeth II turned ninety years old on April 21st.  While I don’t follow the Royal Family all that closely, I do love Princess Kate’s fashion sense and have a thing for sparkly tiara’s (the real ones).  So naturally when I saw an article about the Queen’s birthday I had to check it out.  In addition to some great shots of the Crown Jewels, I found one of the Queen’s comments particularly uplifting.  When asked about the state of the world, Elizabeth unequivocally said that things are much better today than when she was a child.  Although recent headlines – from terrorist attacks to slowing global growth – would have us believe otherwise, I’d like to provide some much-needed evidence that we’re living in pretty good times.

First, Americans are living longer and are healthier than ever before in history.  In 1800 the U.S. life expectancy was 39 years at birth, then 49 years in 1900, 68 years in 1950, and an incredible 79 years today!  In addition to a longer life expectancy, we can take advantage of our twilight years with something called retirement.  The concept didn’t exist in the U.S. prior to the late 1880’s, when workers pretty much labored until they died.  That started to change in 1875 when American Express offered America’s first employer-provided retirement plan.  The Federal Government followed suite in 1935 with the creation of Social Security; and medical health benefits for those over 65 years, also known as Medicare, started in 1965.

According to the Federal Reserve, the number of years spent in leisure – measured as retirement plus time off during your working years – rose from 11 years in 1870 to 35 years by 1990.  While we’re not all experiencing a Downton Abbey lifestyle, things could be worse.

Concerning crime and violence: while the tragic terrorist attacks in recent years are difficult to reconcile, overall murder rates in the U.S. have dropped dramatically since the 1990’s.  America averaged 20,919 murders during that decade but the average number of murders in the 2000’s dropped to 16,211.  On a global level, a report from the Human Security Report Project suggests the world is getting safer, as it relates to people killing other people.  Deaths from war has been in decline since the end of World War II and high-intensity conflicts have declined by more than half since the end of the Cold War.  The report goes on to say that terrorism, genocide, and homicide numbers are also down.

Americans often worry that slowing U.S. growth and rising debt levels will result in a downward economic spiral.  They often point to Japan as a worst-case-scenario.  While the island nation has its challenges, consider that Japanese unemployment has remained below 5.7% for the last 25 years, income per capita adjusted for purchasing power continues to grow at a healthy rate, and life expectancy is on the rise.  Plus I hear they have amazing sushi.  I can think of worse outcomes.

Another common concern I read about is stagnant wage growth.  While I believe this is an important issue, consider that the median annual household income adjusted for inflation was about $25,000 in the 1950’s.  Today it’s almost double that!

A few other things that are better: U.S. death rate from strokes has declined by 75% since the 1960s; deaths from heart attacks have also dropped dramatically; more Americans attend college today than at any other time in our history; smoking is down sharply; poverty is on the decline in the U.S.; and fewer people around the world die from famine each year.

Happily, I could go on, but I won’t.  Suffice it to say that Queen Elizabeth II, in her 90 years of experience and wisdom, may be right.  And even if she’s not, we’re all better off believing she is.

Carrie A. Tallman, CFA
Director of Research

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What is Smart Beta?

You’ve undoubtedly heard this term, used to describe a certain type of investment that is becoming increasingly popular. What does it mean? And if these investments are “smart,” does that mean that the others are “dumb?”

So-called “smart beta” investing is a bit of an active/passive hybrid methodology. Traditional passive investments are typically replicas of well-known market capitalization-weighted indices, like the S&P 500. A market cap-weighted ETF holds each company in the index according to its size in the index, which can be calculated by multiplying a company’s outstanding shares by the current market price of one share. While this provides broad market diversification at a very low cost, one drawback of this approach is that the companies whose stock prices are rising become relatively larger while companies whose stock prices are falling become relatively smaller. If markets are less than perfectly efficient and stock prices are anything other than fairly valued, cap-weighted indices will tend to favor overvalued companies.

“Smart beta” strategies use different weighting schemes to construct a portfolio, involving metrics such as dividends or low volatility, or even equal-weighting, all of which sever the link between price and weight and tend to provide a value tilt to the portfolio. The reason for this is that, when rebalancing the portfolio, these strategies result in buying low and selling high. Portfolios based on market cap-weighted indices will often do the opposite when rebalancing, buying more shares of the companies whose stock prices are going up, and vice-versa. According to Research Affiliates, LLC, “smart beta” strategies must also encompass the best attributes of passive investing, such as transparency, rules-based methodology, low costs, liquidity, and diversification.

Does this mean that “smart beta” is a panacea that will bridge the gap between active and passive investing? Many of these strategies have back-tested well and have become increasingly popular, resulting in large inflows of capital. Rob Arnott, one of the pioneers of smart beta at Research Affiliates, has written about rising valuations in smart beta investments as a result of their soaring popularity (“How Can “Smart Beta” Go Horribly Wrong?”). He cautions against “being duped by historical returns” and advises investors to adjust their expectations for future returns to account for mean reversion. He and his co-authors think there is a possibility of a smart beta bubble in the works, due to the rising popularity of such strategies.

And what about traditional passive investments? Is there still room for these vehicles in an investor’s portfolio? Absolutely, particularly in the more efficient sectors of the broad market.  Even Arnott believes “there is nothing “dumb” about cap-weighted indexing.” At Parsec, we stay abreast of current investment trends, but use a measured approach to portfolio construction that is research-based and backed by sound financial theory. We don’t believe any one investment is particularly “smart” or “dumb,” but rather that there is room for different types of investments within the context of a well-diversified, well-constructed portfolio.

Sarah DerGarabedian, CFA
Director of Portfolio Management

Brexit: What is it and what are the investment implications?

There have been many headlines recently about the so-called “Brexit”, or the possibility of the United Kingdom leaving the European Union. There is a referendum on the subject coming up on June 23 in the UK, with current polls showing 47% in favor of staying and 40% in favor of leaving. This is not to be confused with the “Grexit” fears from a few years ago about the possibility of Greece leaving the European Union as well as the Euro currency. The UK is different in that it is a member of the EU, but continues to use the Pound as its currency rather than the Euro. Therefore, the UK maintains its own central bank and monetary policy. The main effect of such an exit has to do with trade agreements within the EU.

Potential negatives of an exit include a possible slowdown in the UK economy, short-term local stock market volatility and\or depreciation in the Pound. The EU represents about 50% of UK exports but only about 10% of imports, so if trade agreements are less favorable as a result of the exit then the UK stands to lose.

There are also positive factors to consider with regard to the UK. According to Goldman Sachs, the economy (as measured by Gross Domestic Product) in the UK is projected to grow faster than that of the US or the other Euro area countries in both 2016 and 2017. The Pound has already fallen 9% against the dollar over the past year, and the UK stock market has underperformed both the S&P 500 and the MSCI EAFE index over the same period. A vote to remain in the EU would remove the current uncertainty, and could be a catalyst for UK stocks to reverse their recent underperformance. If the vote is to leave the EU, many trade agreements will need to be renegotiated. This process will likely take years to complete, while UK stock market volatility should be short-lived.

To quantify our clients’ potential exposure to the UK, in a typical portfolio our target weighting for international stocks is about 26% of the overall allocation to equities. Of this amount, approximately 1/3 is emerging markets and about 2/3 developed markets. The UK is considered a developed market, and makes up about 20% of the MSCI EAFE index, which is the primary benchmark for most actively managed developed international mutual funds. This would imply that roughly 3-4% of our typical stock portfolio has exposure to UK equities through mutual funds, plus any additional exposure through individual stocks we might buy that are headquartered in the UK.

Since the outcome of the Brexit vote is impossible to predict with certainty, portfolio exposure to UK stocks is low and the effect of the vote on stock prices is indeterminate, we are maintaining our current target weights in international stocks.

From a diversification standpoint, investing in international stocks reduces overall portfolio risk since foreign stocks do not move exactly in tandem with US stocks. Sometimes international investing improves portfolio returns and sometimes it does not. In recent years international stocks have underperformed relative to the US, but historically there have also been periods of significant outperformance. While there will be more hype and headlines as the June 23 vote approaches, we remain committed to long-term investing in a globally diversified portfolio.

William S. Hansen, CFA
President
Chief Investment Officer

Bill

IRA Beneficiaries: Per Stirpes vs. Per Capita

Did you know that your IRA beneficiary supersedes your will? No matter how carefully you’ve crafted your last intentions in your will, an outdated IRA beneficiary that was never updated after your divorce can unwittingly bestow your former spouse with all of your IRA inheritance, while also disinheriting your new spouse and children. That’s why it’s important to update your beneficiaries after major life changes such as marriage, divorce, births, illness, domestic issues and deaths.

While you’re at it, make sure to check how the beneficiary form reads too.  Most will default to either a “per stirpes” designation or a “per capita” designation. Knowing the difference in these two designations is important, as is making sure you understand what the form you’re signing defaults to, so you can override it if necessary.

Both of these designations refer to what happens if one of your beneficiaries is no longer living.  A per stirpes designation means that if one of your IRA beneficiaries is deceased, the deceased person’s children will receive his or her share.  Imagine you have two children – a son and a daughter – to whom you’ve split your IRA beneficiaries 50/50.  Your daughter has two daughters and your son has two sons.  At your death, if your son has not survived you, your two grandsons would receive his share of the IRA.  Your daughter would receive 50% of the IRA and your grandsons would each receive 25%. Keep in mind that if your son had no heirs, the entire balance would go to your daughter.

A per capita designation does not look along the lineal lines. Instead, if one of your beneficiaries is deceased, the proceeds are distributed to the other beneficiaries as if the deceased beneficiary was not to inherit any, regardless of whether or not he/she had children. Imagine you have three children, and each is to receive a third of your IRA.  If one child predeceases you, the IRA would go equally to the living two children.

What if none of your primary beneficiaries survive you (and either you selected per stirpes but your beneficiaries have no children, or you selected per capita)?  That’s when the contingent beneficiaries become important.  Your IRA money will go to your contingent beneficiaries only if no primary beneficiaries survive you. If you want to ensure that one of your heirs receives a portion of the IRA, you must name him/her as a primary beneficiary.

Why can’t you just avoid this whole beneficiary form and let the will name your beneficiaries?  You can, but your estate is not considered a person under the law, and therefore beneficiaries will have limitations to how long they can stretch out distributions from the IRA.  They will not be allowed to stretch the distributions out over their lifetimes, which will result in losing valuable tax-deferred growth. Review your beneficiaries with your financial advisor to ensure the are aligned with your intentions.

Harli Palme, CFA, CFP®
Chief Operating Officer
Chief Compliance Officer

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