Download 7-22-11-vandenberg-presentation-2

Seeking Growth and Income in an
Uncertain World
Third Quarter 2011
Richard O. Vandenberg, Jr.
[email protected]
Disclaimer
3Q11
Atlantic Trust Private Wealth Management includes Atlantic Trust Company, a division of Invesco National Trust Company (a limited-purpose national trust
company), and Stein Roe Investment Counsel, Inc. (a registered investment adviser), both of which are wholly-owned subsidiaries of Atlantic Trust Group, Inc.
This document is intended for educational purposes only and the material presented should not be construed as an offer or recommendation to buy or sell any
security. Concepts expressed are current as of the date of this newsletter only and may change without notice. Such concepts are the opinions of our investment
professionals, many of whom are Chartered Financial Analysts® (CFA®). The Chartered Financial Analysts® (CFA®) designation is globally recognized and
attests to a charterholder’s success in a rigorous and comprehensive study program in the field of investment management and research analysis. Certified
Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S.
There is no guarantee that these views will come to pass. Past performance does not guarantee future comparable results. To ensure compliance with
requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or
written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending
to another party any transaction or matter addressed herein. Atlantic Trust does not provide legal advice, and the information contained herein should only be
used in consultation with your legal, accounting and tax advisers. To the extent that information contained herein is derived from third-party sources, although we
believe the sources to be reliable, we cannot guarantee their accuracy.
Investment Products Offered are Not FDIC-Insured, May Lose Value and are Not Bank Guaranteed.
2 For Public Use
Economy
3Q11
Slow Growth gets Even Slower
Consumers Struggling
Real Disposable Personal Income (YoY % Change)
Real Consumer Spending (YoY % Change)
10
8
6
4
2
0
-2
-4
Source: Bloomberg, LP, 5/31/11
3 For Public Use
Inflation Pickup Mostly Due to Higher Energy Prices
CPI Index (YoY % Change)
CPI Ex Food and Energy (YoY %
Change)
6
4
2
0
-2
-4
Source: Bloomberg, LP, 5/31/11
Politics and Policy
3Q11
Government Debt Remains a Big Problem
Presidential Re-election and Unemployment
Federal Debt Held by Public as % of GDP
195
Margin of Re-election Victory
With Expected Policy
Changes Enacted
145
WWII
95
45
-5
1790
Great Depression
Civil War
1820
1850
WWI
1880
1910
1940
1970
2000
2030
25%
'72
20%
'84
‘54
15%
‘96
10%
Not Re-elected
‘04
5%
0%
-5%
‘80
‘92
-10%
-15%
-3
-2
-1
0
1
Change in Election Year Unemployment Rate
Source: Congressional Budget Office’s Long-Term Budget Outlook, data after
6/30/11 is projected.
4 For Public Use
Source: Strategas, 6/30/11
2
Bonds
3Q11
QE2 Postmortem
QE2 Focus: Unemployment and Deflation
Non-financial Debt
Total Debt
November 2010
May 2011
12
10
9.80%
9.20%
8
6
4
2
0.65%
1.51%
0
Unemployment
Source: Bureau of Labor Statistics, 6/30/11
5 For Public Use
Debt to GDP Ratio, Private and Public Sectors
400%
350%
300%
250%
200%
150%
100%
50%
0%
Core CPI
(YoY Change)
Source: Bureau of Labor Statistics, 6/30/11
Bonds
3Q11
Mini Flight to Quality
Investor Preference for Money in the Bank
$ Billions
Savings and Small-time Deposits
Money Fund Assets
7000
6000
5000
4000
3000
2000
1000
0
Source: Bloomberg, LP, 6/30/11
6 For Public Use
Corporate Bond Yield
High-yield Bonds (%)
Investment-grade Bonds (%)
10
9
8
7
6
5
4
3
2
1
0
Source: Bloomberg, LP, 6/30/11
Stock Market
3Q11
Despite Mini Correction, Equities Still in Positive Territory
Index: 12/31/10 = 100
Global Equity Returns
Equities Relatively Inexpensive
S&P 500 Total Return
MSCI Emerging Markets Total Return
MSCI EAFE Total Return
Long-term Historical Average (18.4)
S&P 500 Historical Forward
30P/E
115
25
110
20
105
15
100
10
95
5
90
0
Source: Bloomberg, LP, 6/30/11
7 For Public Use
Source: Thomson Financial, 6/30/11, Average from 6/30/96 to 6/30/11
Stock Market
3Q11
Large-Cap Equities Remain Attractive
Corporate Profits Recovery Is Complete
Long-term Historical Average ($65.20)
S&P Earnings Estimates
$120
$100
U.S. Companies: Rising Reliance on Overseas Revenues
S&P 500 Foreign Sales % Total
49%
47%
$80
$60
$40
$20
45%
43%
41%
2003
Source: Thomson Financial, 6/30/11. Historical estimates are the historical
expected (consensus) earnings, It consists of a rolling four-quarter sum
expressed as a monthly series.
8 For Public Use
2004
Source: Strategas, 12/31/09
2005
2006
2007
2008
2009
Non-U.S. Equities
3Q11
The Situation in Europe…Disparity Between Core and Periphery
Default Risk Rising in Some Countries
December 2010
July 11, 2011
2500
10-year Bond Yield Spread: Greece Versus Germany
16
(5-year Credit Default Swap Spreads)
14
2292
%
Basis Points
12
2000
1500
1010
1000
608
8
1113
1001
10
6
501
500
350 338
240 295
Spain
Italy
4
0
Greece
Ireland
Source: Bloomberg, LP, 7/11/11
9 For Public Use
Portugal
Source: Bloomberg, LP, 6/30/11
The Economic Challenge of Our Time
DEBT
10 For Public Use
3Q11
An Economy on Borrowed Time…
3Q11
Credit Ratio: Debt vs. GDP
Total Credit Market Debt (All Sectors) as a % of the Economy (GDP)
Credit Market Debt as % of GDP
Average (2005)
400
350
300
250
200
150
100
50
Source: Ned Davis Research, Inc., as of December 2010
11 For Public Use
Dec-10
Dec-06
Dec-02
Dec-98
Dec-94
Dec-90
Dec-86
Dec-82
Dec-78
Dec-74
Dec-70
Dec-66
Dec-62
Dec-58
Dec-54
Dec-50
0
Debt Relocation Rather Than Debt Reduction
Change
in Debt: June 2007 – December 2010
Source: Federal Reserve as of December 2010
12 For Public Use
3Q11
The Cost of Waiting: The Fiscal Gap
3Q11
Unfunded Promises
125
99.4
100
$ Trillion
76.4
75
62.9
50
25
0
2009
Source: Government Accountability Office, as of March 2011
13 For Public Use
2010
2011
Cost of the Debt Binge: No Easy Way Out
Massive Debt and the Cost of Fixing the Problem have Long-Term
Implications for the U.S. Economy

Slower economic growth

Higher inflation and interest rates

A weak and declining U.S. dollar
14
For Public Use
U.S. Dollar: Reserve Currency in Reverse
Real Broad Dollar Index
Real Broad Weight Traded Dollar
Average (96.8)
140
130
120
110
100
90
80
70
'73
Source: Strategas, May 2011
15
For Public Use
'77
'81
'85
'89
'93
'97
'01
'05
'09
U.S. Equity Market: What, Me Worry?
S&P 500 Index
1,600
August 2010
Bernanke hints at QE2
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
Source: Bloomberg, LP as of April 2011
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For Public Use
Apr-11
Feb-11
Dec-10
Oct-10
Aug-10
Jun-10
Apr-10
Feb-10
Dec-09
Oct-09
Aug-09
Jun-09
Apr-09
Feb-09
Dec-08
Oct-08
Aug-08
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
Dec-06
600
A Profit-Led Recovery
Profit Margins Close to a Peak: Now What?
10
8
6
4
2
0
'94
'96
Source: Strategas, as of December 31, 2011
17
For Public Use
'98
'00
'02
'04
'06
'08
'10
Investment Strategy in a Time of Unique Challenges
“In a volatile world, opportunities will appear and
disappear in short order. Flexibility has to be the
watch word.”
-Peter L. Bernstein
18
For Public Use
New Challenges, New Opportunities
Successful Asset Allocation Will Require:

Casting a wider net

Being nimble and opportunistic

Embracing growth, avoiding debt
19
For Public Use
Where’s the Growth?
IMF Data Mapper: Real GDP Growth 2011
Annual percent change
10% or more
6% - 10%
Source: Wolfe Trahan, as of April 2010
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For Public Use
3% - 6%
0% - 3%
Less than 0%
No data
Equity Growth Will Mirror GDP Growth
Emerging Markets Equities May Represent 55% of Global Market Cap by 2030
Emerging Markets’ Share of the World
GDP
Market Cap
MSCI World Weight
70%
60%
50%
40%
30%
20%
10%
0%
2010
Source: MSCI, Goldman Sachs Global ECS Research estimates as of December 2010
21
For Public Use
2020
2030
The Global Balance Sheet Favors Emerging Markets
Public Debt as % of GDP: Developed vs. Developing Economies
Developing Economies
Developed Economies
120%
100%
80%
60%
40%
20%
0%
'90
'92
'94
Source: Strategas, IMF Estimates Begin After 2008
22
For Public Use
'96
'98
'00
'02
'04
'06
'08
'10
'12
'14
'16
Participating in the Emerging Markets…
Direct Exposure
EM Equities
Leading Economic & Earnings Growth
EM Debt
Improving Fiscal Trends,
Rising Foreign Exchange Reserves
Indirect Exposure
23
Commodities
Strong Demand & Infrastructure
Spending
U.S. Large Caps
Rising Sales Exposure to EM Markets
For Public Use
Expected Returns Favor U.S. Quality &
Emerging Markets
GMO 7-Year Asset Class Return Forecasts
Stocks
Annual Real Return Over 7 Years
6%
4%
2%
0%
-2%
-4%
U.S.
U.S.
Equities
Equities
(Large Cap) (Small Cap)
+- 6.5
+- 7.0
U.S. High
Quality
+- 6.0
Int’l
Equities
(Large Cap)
Int’l
Equities
(Small Cap)
Equities
(Emerging)
+- 6.5
+- 7.0
+- 10.5
Estimated Range of 7-Year Annualized Returns
Source: GMO, December 31,2010. *The chart represents real return forecasts 1 for several asset classes. These forecasts are forward-looking statements based upon the reasonable
belief’s of GMO and are not a guarantee of future performance. Actual results may differ from the forecasts above.
1 Long-term inflation assumption: 2.5% per year.
24
For Public Use
Government Bonds: High Uncertainty, Low Yields
Used with permission from Clay Bennett
25
For Public Use
Ultra-Low Bond Yields
Stock Yields Exceed Bond Yields – not Since the 1950s
Yield Comparison: Stocks vs. Bonds
Yield Comparison: Bonds vs. Stocks
US 10YR Yield
DJIA Income Yield
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Source: Bloomberg, Estimates Begin After September 2010
26
For Public Use
Risks of Kicking the Can
Alternative Scenario Assumption



Extension of most 2001 and 2003 tax cuts until 2020
AMT relief extended
Growth in discretionary spending indexed to GDP
Debt Held by the Public
Baseline
Alternative
Ryan Proposal
150
% of GDP
130
110
90
70
50
30
10
-10
Source: Congressional Budget Office, 3/2011
27
For Public Use
2010
2022
2030
Inflation – No Price / Wage Spiral
Inflation and Wages


The “pass-through” from energy to income – 67% then, 27% now
Excess capacity in labor and manufacturing
Energy CPI
Personal Income
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Feb. 1979 - Dec. 1981
Source: Bureau of Labor Statistics, Bureau of Economic Analysis as of March 2011
28
For Public Use
Jun. 2007 - Feb. 2011
Yield Offers Little Cushion
Impact of Higher Rates on the 10 Year Treasury – Then and Now
February 1979
Current
Yield
9.0%
3.5%
Price Change Given
1% Yield Change
-6.5%
-8.4%
1 Year Holding Return
3.5%
-4.9%
Source: Bloomberg, Atlantic Trust, April 2011
29
For Public Use
Municipal Markets Focused on State Budgets
46 States Faced Budget Shortfalls in 2010
30
For Public Use
The Response
Budget Balancing Strategies Employed by Number of States

Fiscal 2010
Fiscal 2011
Revenue
Enhancements
22
24
Job/Salary Cuts
31
30
Cuts to Local Aid
20
19
Rainy Day Fund
23
13
Constitutional requirement for balanced budgets in 49 of 50 states
Source: National Conference of State Legislatures, November 2010
31
For Public Use
0%
32
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Pension Funding
Plan Assets as a Percent of Liabilities
120%
101%
100%
81%
80%
Source: Pew Center on the States, April 2011
For Public Use
51%
60%
40%
20%
Bankruptcy as an Option

Chapter 9 of the Bankruptcy Code
– Differences with Chapter 11

No states allowed
– Arkansas pre-dates current municipal bankruptcy law

Watch the locals
– Funding trickles down
– High reliance on property taxes
– Vallejo, CA
– Jefferson County, AL
– Harrisburg, PA
– Hamtramck, MI
– Central Falls, RI
– Chowchilla, CA
Source: Atlantic Trust, January 2011
33
For Public Use
Defaults: The Historical Record

The 5 year average cumulative default rate for rated municipal issuers from
1970 – 2009:
AAA
AAA
A
Baa
Speculative Grade

54 rated municipal issuers defaulted between 1970 and 2009. 42 were in
either the Housing or Health Care sectors.
Source: Moody’s, as of February 2010
34
0.00%
0.01%
0.04%
0.08%
3.43%
For Public Use
Municipal Market Summary

Significant Challenges and Real Risks
- Credit analysis is crucial

States have the wherewithal to meet near term imbalances
- Revenues coming in ahead of expectations
- Expense cuts, while difficult, are likely

Diversify income sources
- Safety is at a premium
- Income is available from a variety of sources with varying risks
35
For Public Use
Diversified Income
With Bond Market Uncertainty High, A Diversified Approach to
Income Generation is Advised…
36
Sector
Objective
High Quality Core Fixed Income
Protection in a deflationary environment,
liquidity
Senior Bank Loans
Income, floating rate coupons, credit
improvement
Emerging Market Debt
Income, currency diversification, credit
improvement
Higher Yielding Equity Strategies
Growth & Income Mix; Dividend Growth
For Public Use
Higher Yielding Sectors
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
US 3m T-Bill
AAA 5 Yr TaxEquiv Municipal
Source: Bloomberg L.P.; Lipper and Alerian Indexes, April 30, 2011
37
For Public Use
Equity Income
Funds
Senior Bank
Loans
MLP
Emerging Market
Debt