Economic & Market Outlook – Q1: 2011

Provided by Mark Holloway

The United States capital markets continued to provide investors with positive returns in the first quarter.  The Standard & Poor’s 500 Index was up 5.92% for the first ninety days with most small and mid cap indices exceeding that return.  Even the bond market as measured by the Barclays Intermediate Government/Credit index had a positive return of .34% for the period in spite of the increasing budget deficit and the increased outlook for inflation.

The most talked about recent development was the issuance of a negative outlook on the U.S. AAA credit rating by the Standard & Poor’s rating agency.  A negative outlook signals at least a one in three chance of a downgrade of United States sovereign debt within two years.  The negative warning was the result of perceived political and economic risks.  The political risk was created by our inability to control deficit spending and the resulting growth of debt to unacceptable levels in real terms and as a percentage of the economy.  The economic risk is related to the increased chance of a slow down in economic growth triggered by increasing energy prices.  A slowing of economic growth would make the debt and deficit problems worse by reducing tax receipts.  The possibility of a downgrade in the rating of our government debt would have been unthinkable in the past and had a sobering impact on investors everywhere.

In recent meetings, clients have consistently asked about the impact on existing bond portfolios of a possible downgrade when coupled with the perceived rising level of inflation.  Many remember the hyper inflation of the early 1980′s and the resulting negative impact on the prices of individual bonds and bond mutual funds during that period.  The fear of negative returns from bonds and the loss in purchasing power that would result from inflation and or the decline in the value of the dollar as a result of a downgrade or default on our government debt has investors searching for alternatives to traditional fixed income investments.

What are we doing to offset the risk of rising interest rates in bond portfolios?  First, most fixed income portfolios at Stock Yards are short to intermediate in maturity.  Shorter maturity bonds have less volatility than longer term bonds.  We have also made extra efforts to make sure portfolio maturities are laddered to alleviate the negative effect of rising rates.  Portfolios have also been structured with a number of different types of fixed income securities to insure adequate diversification.  The importance of diversification is magnified during periods of rising interest rates.  We have also used Treasury Inflation Protection Securities (TIPS) extensively in portfolios.  These securities will actually appreciate in value during periods of rising inflation as measured by the Consumer Price Index.

We are also in the process of investigating some income producing options that would be partially immune to rising interest rates and inflation.  These include floating rate debt, step up yield securities, and the sovereign debt of foreign countries.  Several qualifications must be met before the government debt of a foreign country would be considered.  We must be able to own the security in our nominee name and a viable secondary market must be available to facilitate trading and liquidity.  The country must be a developed nation with the equivalent of our Securities and Exchange Commission.  The country must also be fiscally responsible with the ability to support its population without the excessive importation of energy or food stocks through an abundance of domestic natural resources.

Finally, we are considering common stocks with above average dividend yield as a substitute for bonds.  Many high quality large cap companies are paying dividends that are more than competitive with the rates that are currently available on fixed income investments.  Some of these companies have long records of increasing dividends and also have the financial flexibility to continue to do so regardless of the economic circumstances.  History has shown that common stocks are the one financial asset that has proven to provide returns above the rate of inflation thus preserving the purchasing power of the client’s dollars.

Which? Asset Allocation or Mutual Fund?

Provided by Anita Clemons

Asset Allocation – we have heard for the last decade that it’s all about your asset allocation. Statistics tell us that investment returns depend on the right mix of stocks and bonds as determined by your individual goals, time horizon, and risk tolerance. Why? Because markets are efficient and your investments in stock should achieve “stock-like” returns and bonds should achieve “bond-like” returns. In addition, you can adjust as you go to ensure your portfolio is not out of balance or over exposed to any asset class. This is much like a corporate “mission statement” – it provides focus as a declaration of objectives. However, asset allocation alone will not determine success!

Mutual Fund Selection – With the right asset allocation an investor can “outsource” the investment process to mutual fund companies who will make security selections to achieve a particular investment goal.  The task of mutual fund selection is a difficult and time consuming process.  There are thousands of mutual funds in the Morningstar universe of mutual funds.  The key to success is matching the right mutual fund to the right client.  That is what Stock Yards does best.

To answer the proposed question, which is most important, asset allocation or mutual fund selection, the answer is that one is no more important than the other.  You may have the proper asset allocation for your investment objectives, but if you have the wrong mutual fund then you will not achieve your goals.

That is why Stock Yards Bank works first to determine the proper asset allocation for each client.  This is derived from developing an Investment Policy Statement with each of our clients, or their “mission statement.”  From there the Investment Advisor constructs a portfolio of no-load, non-proprietary mutual funds that have passed our due diligence screens.  Stock Yards Bank’s due diligence screens include performance vs. benchmarks and peers, risk, expense ratio comparisons, fund size and inception date, manager tenure, performance in up and down markets, and more.  From here, the portfolio must be monitored and rebalanced as market conditions warrant.  Stock Yards communicates the performance of managed portfolios to clients on a regular basis to determine if their “mission” is being accomplished.

If you have questions about how your mission statement can be achieved, please contact Anita Clemons at 502/625-2551 or Todd Barron at 502/625-9120 with Stock Yards Bank Wealth Management.

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Planning for Retirement Planning?

Provided by Tracy Cooper

On January 1, 2011 the first members of the baby boom generation, those born in 1946, reach the magic age of 65 years.  As a society we have been trained by the Social Security Administration, our employers, and the media that age 65 is when we should retire.  Our parents, the “Greatest Generation,” for the most part followed this timeline and enjoy benefits from Social Security and government pensions, employer pensions and/or union pensions.  The retirement scenario, however, is greatly different for their children and grandchildren.

In 1980, Congress created the 401k plan and Individual Retirement Accounts.  After 30 years, these plans, intended to supplement company pensions, now have largely replaced employer-provided pensions.  Also, union and state and local government employees have seen benefits cut, due to reduced corporate revenues and government deficits.  Even the Federal government began informing us, on our annual Social Security statements, that “Without changes, in 2037 the Social Security Trust Fund will be able to pay only about 78 cents for each dollar of scheduled benefits.”  Essentially, the responsibility of accumulating retirement assets is now squarely on the shoulders of each individual person.

Financial services companies have bombarded us with information and advertisements urging us to follow the green path, or asking us about our “number.”  The message is quite clear that the quality of our retirement years is solely on us to determine.  But how does one start the process of planning for retirement?  A recent USA Today survey stated that the average American spends 1,277 hours per year watching television, 124 hours per year deciding what clothes to wear, and only 2 hours per year actually planning their retirement.  Most retirement surveys discover that respondents are simply overwhelmed by the volume of information available to assist them in planning retirement.  The result is that most do not know how to initiate the financial planning process, and thus do nothing.

At Stock Yards Bank & Trust, we have the training, knowledge, and experience to help you successfully navigate the waters of the retirement planning process.  We can help you;

 

» Discuss and determine your retirement goals

» Assess the assets needed to sustain your lifestyle

» Develop a customized plan for retirement independence

» Identify assets appropriate to your tolerance for risk

» Adjusting your plan to ensure that you stay on target

Set your mind at ease by contacting Brian Cohoon or Tracy Cooper to schedule an appointment for discussing our retirement and financial planning services. 
Call us today -  Brian Cohoon, CFP, (502) 625-0875 or Tracy Cooper, (502) 625-0874.