March 2007
Monthly Investment Commentary | March 2007
We do not anticipate a cyclical bear market to develop in 2007. We expect economic growth to continue at a slow to reasonable pace. Housing is expected to continue to slow the economy as the inventory of vacant homes for sale is at a recent historical high. Core inflation measured by the consumer price index is only around 2%. Worker productivity output is favorable enhanced by technological enhancements in the workplace. The Federal Reserve is scheduled to meet later this month. The federal funds rate is at 5.25% since last June. Based on favorable worker productivity and low core inflation it is anticipated that a change in the federal funds rate will not occur at this meeting. Changes We Are Making to Our Model Portfolios (and Our Reasoning)We will consider implementation of changes to our model portfolios this month. These changes are reviewed and possibly implemented into our client portfolios. Factors we review are possible redemption fees, taxation of unrealized gains in taxable accounts, and overall asset allocation percentages. We are increasing the tactical overweighting to large-caps by reducing our small-cap position in our Equity and Equity-Tilted Balanced model portfolios. We are also adjusting our large-cap tactical position in all four models to use the S&P 100 ETF instead of the S&P 500, to help compensate for a downward cap bias that exists in the universe of active managers (including ours). Specific changes are described below, along with additional context in the form of a brief Q&A. Why are we increasing the weighting to large-caps in the Equity and Equity-Tilted Balanced models (i.e, swinging harder at this fat pitch)? There are several reasons. First, we recently did a study to look at the magnitude of outperformance during market-cap cycles. The conclusion was that the asset class favored by the cycle outperformed the other asset class by a sizeable amount, and we wanted to capitalize on this. Because large-caps are a less risky asset class than small caps, we can actually reduce risk by making this move, while still increasing our return potential. Also, in the case of Equity model investors, because there is no fixed-income exposure, our tactical opportunities are limited to equities. As such, when we have a compelling opportunity we want to take full advantage of it. Why are we using the S&P 100 ETF? The S&P 100 is even larger-cap than the S&P 500 (the average market cap is more than double). We studied the sector and performance differences between the 100 and 500, and believe that we are taking a very nominal amount of tracking error risk, and picking up some added performance by making this move (mega-caps, such as the S&P 100 have beaten the S&P 500 during past large-cap cycles). An additional consideration was that because many of our larger-cap managers have mid-cap exposure, the overall portfolio market cap in our active models is a bit lower than our benchmarks. Using the S&P 100 instead of the S&P 500 helps offset this to a certain extent. Implementation We will be reviewing client portfolios to effect the above model portfolio changes. Changes may not be implemented where the tax consequences outweigh the potential benefits or the overall portfolio effect for the client is nominal. —Stapp Financial Planning, PLLC (March 2007) — Stapp Financial Planning, PLLC This information is also available at www.stappfinancial.com, or you can download a PDF version. If you do not want to receive future e-mail newsletters from Stapp Financial, link to our subscription form, or send an e-mail to bstapp@stappfinancial.com. Before acting on any advice it is recommended to seek appropriate counsel applicable to your individual circumstances. |
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omestic equities lost ground in February with larger-caps down about 2% and smaller-caps down almost 1%. International equities were flat, but domestic investment-grade bonds and emerging markets local-currency short-term bonds performed better, gaining 1.5% and 1%, respectively. Commodity futures held up the best of all the asset classes we own, returning more than 3%. Our model portfolios were a few basis points behind their benchmarks for the month. We also want to mention that as long-term investors, the market decline that occurred towards the end of February does not concern us. Current valuations are attractive, which should limit further downside; if stocks materially decline from this point, we would likely see it as a buying opportunity.