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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.