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Implications for a Low
Return Environment
Christopher M Ruth, CFA, CPA
Chief Market Strategist
What are the major implications and risks
for a low return environment?
Answer: Beyond the obvious for low returns
that disappoint, the longer term dangers lie
below the surface.
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A primary risk is the pressure to “stretch”
for returns.
Whether it is corporate cash and short-term fixed
income investment portfolios or pension plans, the
need to maximize investment returns can sometimes
lead to dangerous places.
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How quickly history can be forgotten!
Auction Rate Securities
AAA Rated Sub-prime Mortgage Pools
CMO Pools and Related Derivatives
Money Market Funds That “Break the Buck”
………To Name a Few……….
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For many investment professionals expected
to take reasonable and prudent investment
risks, the most appropriate investment game
plan is to:
Preserve Principal First, Grow Prudently Second.
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Insert Picture of U.S. Golf Open Leader Board
Source: usopen website
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Risk Management Is Key
While we can’t eliminate investment risk, in a low
return environment risk management becomes
especially critical due to a muted upside potential.
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Risk Management is Key
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Minimize Asymmetrical Risk
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Identify Investments with Symmetrical Risk Characteristics or a
Slight Positive Bias for Symmetrical Risk
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Normal Return Expectations
1926-2009
Current Implied
Equity Returns
Equity Risk Premium
Over LT Government
Bonds
6.0%
8.0%
Equity Risk Premium
Over T-Bills
8.1%
8.2%
Inflation Adjusted
Equity Returns
8.7%
11.6%
Source: Morningstar and Thomson Reuters
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Normal Return Expectations
(1958-2010)
Real GDP %
% Return
S&P 500
Median
3.28%
8.15%
Average
3.12%
7.27%
Standard Deviation
2.30%
13.45%
Source: St. Louis Federal Reserve
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Comparative Analysis
S&P 500 Performance During Periods of Real GDP
Growth Under 3%
(1958-2010)
20.00
15.00
10.00
5.00
0.00
-5.00
-10.00
-15.00
-20.00
-25.00
Source: St. Louis Federal Reserve
Real GDP
S&P 500
This material is for use in one-on-one presentations with eligible investors only.
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Comparative Analysis
S&P 500 Performance
During Periods of Real GDP Growth Under 3%
(1958-2010)
Real GDP
(Yr./Yr. % Change)
S&P 500 *
Total Return
Average
0.87%
-0.32%
Median
1.41%
4.06%
Standard Deviation
1.81%
13.83%
% of Time Period S&P
500 Return is above 4%
50.0%
*Calculations performed by Comerica Asset Management Group, based on data obtained from St. Louis Federal Reserve
This material is for use in one-on-one presentations with eligible investors only.
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Comparative Analysis
Global Economic Growth and Returns For MSCI ACWI
(1997-2011)
50
40
30
20
10
0
-10
-20
-30
-40
Source: International Monetary Fund and Thomson Reuters
Global GDP
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MSCI ACWI
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Comparative Analysis
Global Economic Growth and Returns For MSCI ACWI
(1997-2011)
Global Real GDP
(Yr./Yr. % Change)
MSCI ACWI
Total Return
Average
3.4%
8.9%
Median
3.9%
11.4%
Standard Deviation
1.9%
21.6%
*Calculations performed by Comerica Asset Management Group, based on data obtained from International Monetary Fund and Thomson Reuters
This material is for use in one-one presentations with eligible investors only.
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Comparative Analysis
Returns For the MSCI ACWI
When Global Economic Growth is Below 3%
(1997-2011)
MSCI ACWI
Total Return
Average
-2.9%
Median
-18.2%
Standard Deviation
33.1%
% of Time Returns for
the MSCI ACWI were
positive
40.0%
*Calculations performed by Comerica Asset Management Group, based on data obtained from International Monetary Fund and Thomson Reuters
This material is for use in one-one presentations with eligible investors only.
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U.S. Investment Grade (5 year) tightening to Treasuries pauses due
to heavy new issue supply. Domestic economy showing strength in
the first quarter of 2012 helps corporates outperform recently.
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Source: Bloomberg
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A-rated financial credits (top) perform well recently though still
spread over twice as much over Treasury yields (bottom) as
compared to AA-rated industrial credits (middle).
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Source: Bloomberg
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German 10-year bunds (bottom) outperform US
Treasury 10-year Notes (top) as Euro zone economy weakens.
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Source: Bloomberg
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Italian 10-year yields (middle) and Spanish 10-year yields (top) off
the highs of late 2011 though move higher recently as both
economies fall back into recession. Both near historically wide
spreads versus German 10-year yields (bottom).
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Source: Bloomberg
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10-year tax-exempt, AAA-rated yields as a percentage of 10-year
Treasury yields continue to show relative value of owning municipals.
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Source: Bloomberg
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With the Federal Reserve pledge to hold Fed Funds rate at near zero
through 2014, there is little value in the yield curve within two-year maturities.
Corporate securities add incremental yield and extending duration
instead of reducing quality is recommended.
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Source: Bloomberg
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Liability Driven Investments (LDI) Strategies Make
Sense Where Appropriate
If a significant duration mismatch exists between
investments and liabilities, LDI may make the most sense.
LDI is one of the very few scenarios where we see the
need to purchase long-duration bonds based on the
current low yield environment.
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Dividends Are Another Important Consideration
For accounts that can accept equity risk,
high-quality dividend paying stocks should be considered.
We believe we will continue to be in a more traditional period
where dividend income comprises a large portion
of total equity investment returns
(we think that a return to the 1990’s is unlikely).
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Alternative Investments May Also
Be Appropriate
For accounts that can utilize alternative investments,
we recommend them for both
absolute return and diversification benefits.
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Focus on Quality
It will provide better principal protection in volatile markets.
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Disclosure
This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein has
been obtained from sources we consider to be reliable but Comerica Wealth Management does not warrant, or guarantee, its completeness
or accuracy. Materials prepared by Comerica Wealth Management personnel are based on public information. Facts and views presented in
this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Wealth
Management, including investment banking personnel.
The views expressed are those of the author at the time of writing and are subject to change without notice. We do not assume any liability for
losses that may result from the reliance by any person upon any such information or opinions. This material has been distributed for general
educational/informational purposes only, and should not be considered as investment advice or a recommendation for any particular security,
strategy or investment product, or as personalized investment advice.
Past performance is not indicative of future results. The material is not intended as an offer or solicitation for the purchase or sale of any
financial instrument. The investments and strategies discussed herein may not be suitable for all clients. The material is not intended to
provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations.
Comerica’s Wealth Management team consists of various divisions of Comerica Bank, affiliates of Comerica Bank including Comerica Bank
& Trust, N.A., and subsidiaries of Comerica Bank including World Asset Management, Inc.; Wilson, Kemp & Associates, Inc.; Comerica
Securities, Inc.; and Comerica Insurance Services, Inc. and its affiliated insurance agencies. World Asset Management, Inc., Wilson, Kemp,
& Associates, Inc., and Comerica Securities, Inc. are federally Registered Investment Advisors. Registrations do not imply a certain level of
skill or training.
Securities and other non-deposit investment products offered through Comerica are not insured by the FDIC; are not deposits or other
obligations of, or guaranteed by, Comerica Bank or any of its affiliates; and are subject to investment risks, including possible loss of the
principal invested. Past performance is not indicative of future results. Information presented is for general information only and is subject to
change. Comerica Bank and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors regarding your
specific situation.
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