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THE ADVISOR A QUARTERLY PUBLICATION . SEPTEMBER 2013 4045 Edison Lakes Parkway Suite 100 Mishawaka, IN 46545 Phone: 574 271-0374 Fax: 574 271-0378 M A N A G I N G W E A LT H . 315 West Adams Street Muncie, IN 47305 Phone: 765 254-3500 Fax: 765 254-3510 Please join us for the next Quarterly Investment Briefing Wednesday, November 6, 2013 8:00 a.m. to 9:00 a.m. Windsor Park Conference Center 4020 Edison Lakes Parkway Mishawaka, IN 46545 307 South Main Street Suite 311 Elkhart, IN 46516 Phone: 574 294-3500 Fax: 574 294-3506 MARK THE DATE. Annual Client reception will be held at The Morris Inn at Notre Dame on Tuesday, October 15, 2013. WWW.INDTRUST.COM (continued from page 3) U.S. Monetary Policy Forefront in Investor Outlook Interest rate volatility does have an impact on the valuation of many assets, with the primary impact on bonds but with similar impact on other income generating assets such as preferred stocks, dividend paying stocks, and REITs. However, interest rates remain very low, and as mentioned above, the Fed has no current plan to increase interest rates. It may be that the market overreacted to the latest comments from the Fed, which affected bonds and these other income-producing assets. It is far from inevitable that interest rates move substantially higher from here in the near term – even if the Fed were to taper its bond purchases in 2013. “Go Paperless” with Indiana Trust Company’s Electronic Statements For a safe, secure way to view your client statements online, sign up for electronic statements through trustReporter, Indiana Trust Company’s online account access system. In addition to being able to use all of the features of trustReporter, you will gain these added benefits of going paperless: • Access to your statements anytime, from anywhere • Faster delivery to your inbox versus postal delivery to your mailbox • Print your statements only when you need paper copies • Optional annual printed statement To sign up to “Go Paperless” with Indiana Trust Company, or minimize the number of printed statements that you currently receive, simply contact your account administrator. When we opened our doors in 1988, our mission was to increase the financial security of our clients by providing excellent, ethical, and unbiased financial advice. They say that change is inevitable, but as we celebrate 25 years, one thing is certain: you can still count on Indiana Trust for our unwavering allegiance to our mission. As we anticipate the next 25 years, we look forward to helping you fulfill your mission as well. MANAGING WEALTH. SECURING LEGACIES. RETURNS AS OF 06/30/2013 ASSET CLASS E Q U ITI E S Large Cap US Equities (S&P 500) Mid/Small Cap US Equities (Russell 2000) International Developed Market Equities (MSCI EAFE) Emerging Market Equities (MSCI Emerging Markets) F IXE D I N C O M E Barclays Capital US Aggregate Bond Index BofA Merrill Lynch Municipals, 3-7 year A LT E R NAT I V E S Real Estate (FTSE NAREIT Equity REITS) SECURING LEGACIES. Spring 2013 Market Volatility Appears to be Short-Lived After a strong start to 2013, Seemingly “old news” from the Fed volatility returned to stock and bond is sometimes treated like a “surprise” markets in May and June. Some by markets and can generate market of the volatility was undoubtedly volatility over short time frames. The generated by comments from Fed markets’ reactions to the Fed in late Chairman Ben Bernanke related May and in June, along with sour to the potential tapering of the economic news from emerging markets, Fed’s monetary stimulus program. drove most major asset classes into Markets tend to pore over every the red for the second quarter. The word from the Fed, as exception was At times, the changes to U.S. monetary the U.S. equity Fed’s efforts at policy can impact market, which transparency on global capital markets. ended the quarter its decision At times, the Fed’s in positive territory. making process efforts at transparency U.S. large cap stocks can lead to on its decision making misinterpretation ended the second process can lead to quarter up 13.8% misinterpretation and and overreaction for the six month overreaction by investors. by investors. period while small cap stocks were up 15.9%. These returns represent YEAR-TO-DATE 2Q 2013 ENDING 06/30 the best first half start for U.S. equities since 1998. Continued 2.9% 13.8% slow-but-steady U.S. economic 3.1% 15.9% progress helped buttress U.S. stocks -1.0% 4.1% -8.1% -9.6% in the second quarter, particularly relative to international markets. Reported corporate earnings have -2.3% -2.4% -1.7% -1.0% been average so far for the second quarter, with sales a bit lackluster. -1.6% 6.5% (continued on page 2) The ITC Advisor is published four times a year. All articles contained herein are solely for general information purposes, and are not to be construed as legal, accounting, or other professional advice. The authors and publisher, accordingly, assume no liability whatsoever in connection with the use of this material. Every effort has been made to ensure this material is correct at the time of publication. 4 Founded in 1988, Indiana Trust and Investment Management Company is an independent trust company chartered under the Indiana banking statutes. It is a single purpose financial institution dedicated exclusively to providing investment management and trust services to individuals, trusts, employee benefi t plans, corporations, and not-forprofi t organizations. Trusts I Investments I Retirement Planning One of Indiana’s oldest and largest independent trust companies Spring 2013 Market Volatility Appears to be Short-Lived While investors want to see sales growth play a more prominent role in boosting earnings, they appear to be settling for cost containment and share buy-backs as catalysts for recent advancement. Still, valuation metrics on U.S. equities continue to indicate stocks are in a fairly-valued range. Building on the first half of the year, July was a tremendous month in U.S. equity markets as large cap stocks were up 6%. International developed markets were likewise up 5.3%. The first half of 2013 was very similar to the first half of 2012 when international and emerging market stocks trailed U.S. markets by a wide margin. (The second half of 2012 saw a dramatic reversal of leadership, with international leading the U.S.) Continued muted economic growth in Europe has been a wet blanket over U.S. Monetary Policy Forefront in Investor Outlook (continued from page 1) markets there, although some markets such as Germany and Ireland have held up well. Foreign currency weakness translated into lower U.S. dollar returns as well. Currency depreciation was particularly acute in emerging markets. The Indian rupee, for example, reached all-time lows versus the U.S. dollar in the second quarter. Also weighing heavily on emerging market returns were revised-lower (but still robust) economic growth figures in China, as well as falling commodity prices. Bond markets performed poorly across the board in the second quarter. This was in large part due to an interpretation of Ben Bernanke’s comments to mean that the Fed may wind down its monetary stimulus a bit sooner than expected (also known as the “taper” in the media). The 10 year U.S. Treasury Note, an indicator of broad market interest rates, increased from 1.7% in early April to 2.6% in late June as investors reacted to this news. As bond prices move inversely with interest rates, bond market prices – particularly investment grade intermediate and longer term bonds – were pushed lower. The U.S. Aggregate Bond Index ended down (-2.3%) for the quarter. Other sectors of the bond market, such as high yield bonds (-1.4%), held up marginally better, underlining the benefit of a multisector approach to fixed income portfolios. Since late last year, the Fed has been actively buying intermediate term bonds in the open market in an effort to increase the supply of money – a program known as Quantitative Easing, or “QE.” The Fed buys bonds from U.S. banks, which are given money in return. This money, referred to as “bank reserves,” may then be lent by banks to their clients. Portfolio Comments Indiana Trust takes into consideration the potential for volatile interest rates when constructing fixed income portfolios. Generally, target portfolio duration is in the intermediate term range and is slightly shorter in average maturity than the broad U.S. investment grade bond market. Our recent strategic allocations to high yield bonds (both taxable and tax-exempt) in many fixed income portfolios as a complement to core investment grade bond allocations is one way to help manage interest rate risk and provide overall diversification. Also, we have adjusted bond portfolios to have a greater weight on investment grade corporate bonds compared to the market benchmark, and we continue to establish positions in investment grade international bonds. These bonds further diversify sources of bond return. As we rebalance portfolios, given recent fixed income performance, we will be harvesting equity gains and adding to fixed income positions to bring allocations in both stocks and bonds back to target weights. Similarly, as international stocks have been outperformed in recent years by U.S. stocks, we have been rebalancing allocations to international stocks back towards their target weights in client portfolios. The rebalancing discipline across asset classes allows portfolios to capture relative value through time – put another way, it provides a “buy low, sell high” portfolio management discipline. Many investors ascribe QE’s main goal to be lower interest rates available to consumers and companies, which, in theory, should boost borrowing and spending. Lower interest rates are a benefit but it is not the whole story – if that were the sole aim of QE, it would be known as “Interest Rate Easing” rather than “Quantitative Easing.” The main problem QE is attempting to address is the lackluster money supply growth (or, the quantity of money) in the economy, which is surprising considering that the Fed has created $2.7 trillion via QE programs since 2009. The reason for the low growth in money supply is that banks – who received bank reserves from the Fed in return for their bonds – are not lending those larger reserves to the broader economy. The borrowing and lending process is impaired. This helps explain tepid U.S. economic growth and is a reflection of many nuanced problems in the demand for loans (i.e., households deleveraging) and the supply (i.e., banks not lending because of stricter regulations). Ultimately, the creation of all of those dollars has not led to inflation. Through this lens, the rise of interest rates in June based on comments made by the Fed related to its potential tapering of QE is a bit of a head-scratcher. The Fed did not say it was raising interest rates. The Fed has no intention of raising interest rates in the near future – some estimate not until 2015 or beyond, thanks to the Fed’s dual mandate of stable inflation and full employment. As bond investors normally look to be compensated for expected inflation, an end to QE – an end to the program whose goal is to create money supply – may cause inflation expectations to fall. That may actually lead to interest rates falling, which is a positive development for bond prices and is in fact what happened when the Fed ended previous QE programs. (continued on page 4) 2 3 Trusts I Investments I Retirement Planning One of Indiana’s oldest and largest independent trust companies Spring 2013 Market Volatility Appears to be Short-Lived While investors want to see sales growth play a more prominent role in boosting earnings, they appear to be settling for cost containment and share buy-backs as catalysts for recent advancement. Still, valuation metrics on U.S. equities continue to indicate stocks are in a fairly-valued range. Building on the first half of the year, July was a tremendous month in U.S. equity markets as large cap stocks were up 6%. International developed markets were likewise up 5.3%. The first half of 2013 was very similar to the first half of 2012 when international and emerging market stocks trailed U.S. markets by a wide margin. (The second half of 2012 saw a dramatic reversal of leadership, with international leading the U.S.) Continued muted economic growth in Europe has been a wet blanket over U.S. Monetary Policy Forefront in Investor Outlook (continued from page 1) markets there, although some markets such as Germany and Ireland have held up well. Foreign currency weakness translated into lower U.S. dollar returns as well. Currency depreciation was particularly acute in emerging markets. The Indian rupee, for example, reached all-time lows versus the U.S. dollar in the second quarter. Also weighing heavily on emerging market returns were revised-lower (but still robust) economic growth figures in China, as well as falling commodity prices. Bond markets performed poorly across the board in the second quarter. This was in large part due to an interpretation of Ben Bernanke’s comments to mean that the Fed may wind down its monetary stimulus a bit sooner than expected (also known as the “taper” in the media). The 10 year U.S. Treasury Note, an indicator of broad market interest rates, increased from 1.7% in early April to 2.6% in late June as investors reacted to this news. As bond prices move inversely with interest rates, bond market prices – particularly investment grade intermediate and longer term bonds – were pushed lower. The U.S. Aggregate Bond Index ended down (-2.3%) for the quarter. Other sectors of the bond market, such as high yield bonds (-1.4%), held up marginally better, underlining the benefit of a multisector approach to fixed income portfolios. Since late last year, the Fed has been actively buying intermediate term bonds in the open market in an effort to increase the supply of money – a program known as Quantitative Easing, or “QE.” The Fed buys bonds from U.S. banks, which are given money in return. This money, referred to as “bank reserves,” may then be lent by banks to their clients. Portfolio Comments Indiana Trust takes into consideration the potential for volatile interest rates when constructing fixed income portfolios. Generally, target portfolio duration is in the intermediate term range and is slightly shorter in average maturity than the broad U.S. investment grade bond market. Our recent strategic allocations to high yield bonds (both taxable and tax-exempt) in many fixed income portfolios as a complement to core investment grade bond allocations is one way to help manage interest rate risk and provide overall diversification. Also, we have adjusted bond portfolios to have a greater weight on investment grade corporate bonds compared to the market benchmark, and we continue to establish positions in investment grade international bonds. These bonds further diversify sources of bond return. As we rebalance portfolios, given recent fixed income performance, we will be harvesting equity gains and adding to fixed income positions to bring allocations in both stocks and bonds back to target weights. Similarly, as international stocks have been outperformed in recent years by U.S. stocks, we have been rebalancing allocations to international stocks back towards their target weights in client portfolios. The rebalancing discipline across asset classes allows portfolios to capture relative value through time – put another way, it provides a “buy low, sell high” portfolio management discipline. Many investors ascribe QE’s main goal to be lower interest rates available to consumers and companies, which, in theory, should boost borrowing and spending. Lower interest rates are a benefit but it is not the whole story – if that were the sole aim of QE, it would be known as “Interest Rate Easing” rather than “Quantitative Easing.” The main problem QE is attempting to address is the lackluster money supply growth (or, the quantity of money) in the economy, which is surprising considering that the Fed has created $2.7 trillion via QE programs since 2009. The reason for the low growth in money supply is that banks – who received bank reserves from the Fed in return for their bonds – are not lending those larger reserves to the broader economy. The borrowing and lending process is impaired. This helps explain tepid U.S. economic growth and is a reflection of many nuanced problems in the demand for loans (i.e., households deleveraging) and the supply (i.e., banks not lending because of stricter regulations). Ultimately, the creation of all of those dollars has not led to inflation. Through this lens, the rise of interest rates in June based on comments made by the Fed related to its potential tapering of QE is a bit of a head-scratcher. The Fed did not say it was raising interest rates. The Fed has no intention of raising interest rates in the near future – some estimate not until 2015 or beyond, thanks to the Fed’s dual mandate of stable inflation and full employment. As bond investors normally look to be compensated for expected inflation, an end to QE – an end to the program whose goal is to create money supply – may cause inflation expectations to fall. That may actually lead to interest rates falling, which is a positive development for bond prices and is in fact what happened when the Fed ended previous QE programs. (continued on page 4) 2 3 THE ADVISOR A QUARTERLY PUBLICATION . SEPTEMBER 2013 4045 Edison Lakes Parkway Suite 100 Mishawaka, IN 46545 Phone: 574 271-0374 Fax: 574 271-0378 M A N A G I N G W E A LT H . 315 West Adams Street Muncie, IN 47305 Phone: 765 254-3500 Fax: 765 254-3510 Please join us for the next Quarterly Investment Briefing Wednesday, November 6, 2013 8:00 a.m. to 9:00 a.m. Windsor Park Conference Center 4020 Edison Lakes Parkway Mishawaka, IN 46545 307 South Main Street Suite 311 Elkhart, IN 46516 Phone: 574 294-3500 Fax: 574 294-3506 MARK THE DATE. Annual Client reception will be held at The Morris Inn at Notre Dame on Tuesday, October 15, 2013. WWW.INDTRUST.COM (continued from page 3) U.S. Monetary Policy Forefront in Investor Outlook Interest rate volatility does have an impact on the valuation of many assets, with the primary impact on bonds but with similar impact on other income generating assets such as preferred stocks, dividend paying stocks, and REITs. However, interest rates remain very low, and as mentioned above, the Fed has no current plan to increase interest rates. It may be that the market overreacted to the latest comments from the Fed, which affected bonds and these other income-producing assets. It is far from inevitable that interest rates move substantially higher from here in the near term – even if the Fed were to taper its bond purchases in 2013. “Go Paperless” with Indiana Trust Company’s Electronic Statements For a safe, secure way to view your client statements online, sign up for electronic statements through trustReporter, Indiana Trust Company’s online account access system. In addition to being able to use all of the features of trustReporter, you will gain these added benefits of going paperless: • Access to your statements anytime, from anywhere • Faster delivery to your inbox versus postal delivery to your mailbox • Print your statements only when you need paper copies • Optional annual printed statement To sign up to “Go Paperless” with Indiana Trust Company, or minimize the number of printed statements that you currently receive, simply contact your account administrator. When we opened our doors in 1988, our mission was to increase the financial security of our clients by providing excellent, ethical, and unbiased financial advice. They say that change is inevitable, but as we celebrate 25 years, one thing is certain: you can still count on Indiana Trust for our unwavering allegiance to our mission. As we anticipate the next 25 years, we look forward to helping you fulfill your mission as well. MANAGING WEALTH. SECURING LEGACIES. RETURNS AS OF 06/30/2013 ASSET CLASS E Q U ITI E S Large Cap US Equities (S&P 500) Mid/Small Cap US Equities (Russell 2000) International Developed Market Equities (MSCI EAFE) Emerging Market Equities (MSCI Emerging Markets) F IXE D I N C O M E Barclays Capital US Aggregate Bond Index BofA Merrill Lynch Municipals, 3-7 year A LT E R NAT I V E S Real Estate (FTSE NAREIT Equity REITS) SECURING LEGACIES. Spring 2013 Market Volatility Appears to be Short-Lived After a strong start to 2013, Seemingly “old news” from the Fed volatility returned to stock and bond is sometimes treated like a “surprise” markets in May and June. Some by markets and can generate market of the volatility was undoubtedly volatility over short time frames. The generated by comments from Fed markets’ reactions to the Fed in late Chairman Ben Bernanke related May and in June, along with sour to the potential tapering of the economic news from emerging markets, Fed’s monetary stimulus program. drove most major asset classes into Markets tend to pore over every the red for the second quarter. The word from the Fed, as exception was At times, the changes to U.S. monetary the U.S. equity Fed’s efforts at policy can impact market, which transparency on global capital markets. ended the quarter its decision At times, the Fed’s in positive territory. making process efforts at transparency U.S. large cap stocks can lead to on its decision making misinterpretation ended the second process can lead to quarter up 13.8% misinterpretation and and overreaction for the six month overreaction by investors. by investors. period while small cap stocks were up 15.9%. These returns represent YEAR-TO-DATE 2Q 2013 ENDING 06/30 the best first half start for U.S. equities since 1998. Continued 2.9% 13.8% slow-but-steady U.S. economic 3.1% 15.9% progress helped buttress U.S. stocks -1.0% 4.1% -8.1% -9.6% in the second quarter, particularly relative to international markets. Reported corporate earnings have -2.3% -2.4% -1.7% -1.0% been average so far for the second quarter, with sales a bit lackluster. -1.6% 6.5% (continued on page 2) The ITC Advisor is published four times a year. All articles contained herein are solely for general information purposes, and are not to be construed as legal, accounting, or other professional advice. The authors and publisher, accordingly, assume no liability whatsoever in connection with the use of this material. Every effort has been made to ensure this material is correct at the time of publication. 4 Founded in 1988, Indiana Trust and Investment Management Company is an independent trust company chartered under the Indiana banking statutes. It is a single purpose financial institution dedicated exclusively to providing investment management and trust services to individuals, trusts, employee benefi t plans, corporations, and not-forprofi t organizations.