Portfolio Manager Report Archive

A visitor to Wall Street, noting that the S&P 500 index was essentially unchanged since January 1, might be forgiven for thinking 2011 has been a pretty quiet year.

You and I know better. It's been a roller coaster.

Consider just the closing weeks of November. After its worst Thanksgiving week (historically one of the stronger weeks of the year) since 1932, the stock market surged in the month's closing days, even posting its best single-day rise of the year on November 30th.

A combination of factors propelled the late-month gains. Central banks, led by the Federal Reserve, announced a coordinated action to provide greater liquidity in Europe. China also dropped its short-term interest rates for the first time in three years, acknowledging that policies designed to slow growth may have been excessive. U.S. holiday shopping reportedly got off to a strong start. And recent economic data concerning employment, manufacturing, housing and consumer confidence far exceeded expectations.

Despite the year's market volatility, including the crazy price swings in November, little has changed concerning our outlook for the coming months. We continue to believe that our "slow-growth, not no-growth economy" will produce profits for savvy investors. The reasons are manifold:

• Stock prices are currently stuck in a trading range—and have been for nearly four months. We believe that geopolitical concerns both at home and abroad will drive day-to-day price movements. Yet this short-term "noise" has little impact on a well-diversified portfolio built for longer-term investment objectives, and is a perfect reason to spend less time watching financial news shows and checking account balances!
• Economic growth, and how much we have to pay for it, will continue to determine long-term returns. Currently, while the economy and corporate earnings have reached all-time highs, we expect that both will continue to extend those highs in the quarters ahead. Stock-market valuations remain at reasonable levels, suggesting at least average returns in the years ahead (though with interest rates so low and overall liquidity so high, it's more likely that above-average returns await). This is why we maintain significant stock-market exposure.
• That being said, some stocks are more attractive than others. Large companies, growth companies, high-quality companies (companies with more stable profitability), companies with growing dividends and sectors like health care and technology remain attractive. Each of these market segments is emphasized in client portfolios.
• Given the high levels of debt among developed economies though, we believe growth will remain slow (and in Europe, a recession is increasingly likely). Deleveraging, austerity and political uncertainty are all part of the developed world's future. Still, we expect slow growth, but not no growth.
• Inflation remains a risk down the road. Austerity measures alone may not be enough to repair sovereign balance sheets. Currency devaluations and higher inflation could well be part of the ultimate solution. This concern keeps us on the defensive regarding longer maturity fixed-income investments (as higher inflation usually means higher interest rates). Thus, we are maintaining larger than usual allocations to shorter-term bonds and cash. We also favor corporate bonds, which would do well in a slow-growth environment with a touch of inflation.

Upcoming Trading Activity

Though our outlook remains the same, we expect to make some changes in many client accounts in the weeks ahead.

Some of these trades will be undertaken to rebalance your allocations to various market sectors. In essence, we may be selling some assets that have done well, and recycling that money back into assets that have lagged. In a year like 2011, this could mean selling portions of some bond funds and purchasing stock funds. Rebalancing has the dual benefit of reducing risk and enhancing returns. However, because it can create a "taxable event," we may delay some of these moves until January, pushing any realized gains into the new tax year. Besides rebalancing, we will also be looking to harvest tax credits on any positions with sizable, unrealized losses in taxable accounts.

Finally, with mutual fund distribution season in full swing, we are always working to minimize exposure to significant distributions when possible. That said, there are fewer distributions than we expected only a couple of months ago, as fund managers have successfully minimized their expected payouts.

Don't be surprised if you see some new names in your portfolios in the months ahead. One benefit, among many, of being part of Adviser Investments is our improved access to Vanguard-run funds. Our information flows from Vanguard have improved, and we are now able to avoid transaction fees that we once paid. As I'm sure you know, Vanguard's funds have some of the lowest costs in the industry, and every penny saved counts.

We will, of course, continue to selectively use Fidelity funds when appropriate. Fidelity also runs its funds at lower cost, and is consistently one of the top investment firms compared to its peers, as is Vanguard.

If you have any questions regarding our outlook, trading activity or wish to discuss anything else regarding your investment accounts, please don't hesitate to call our offices at 800-492-6868. We pride ourselves on being an investment adviser you can talk to.

Happy Holidays!

This article is distributed for informational purposes only. It contains current opinions of Kobren Insight Management and the author. The investment ideas and expressions of opinion may contain certain forward looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities.

The Author's and Kobren Insight Management's statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm's Form ADV Part II, which describes, among other things, affiliations, services offered and fees charged. Past performance is not an indication of future returns.

A balanced portfolio is one that balances the mix of different asset classes, such as stocks or bonds, to achieve an appropriate allocation and risk level depending on an investor's unique personal objectives, risk tolerances, and time horizons.
Diversification strategies do not ensure a profit and cannot protect against losses in a declining market. All investments involve risk including the loss of the principal amount invested.

Stock and bond values fluctuate in response to the activities of individual companies and general market conditions, domestically and abroad.

Data and statistics contained in this report are obtained from what KIM considers to be reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.