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2015 ended the year much like 2014 in the equity markets in many ways.  While the returns of major market indices were very different from 2014, the results of a globally diversified investor felt similar. Disappointing returns of globally diversified investors relative to the S&P 500 Index feel all too common place in these markets.  However, we believe that now is not the time to abandon diversification and that the last few years have been anomalies rather than a new normal.


The chart above focuses in on the last three years where the S&P 500 has outperformed almost all other asset classes.  However, when we look back at longer periods of time we see that this is not normally the case.  There have been many opportunities over the past 15 years to add value to investor returns through global and multi asset class allocation mandates.  While it is difficult to accurately predict that this trend will not continue into 2016 given the last few years, we do have a few points to make against it.

Following the 2008 financial crisis the US began multiple iterations of quantitative easing programs in which the Federal Reserve promoted expansionary monetary policy through the use of zero interest rate policy and government bond purchase programs.  The rest of the world did not follow suit until more recently with the Bank of Japan and European Central Bank (ECB) developing their own in early 2015. The US Federal Reserve actions prompted a currency shift that has led to a flow of assets into the US and dollar-denominated assets.  This flow propped up the higher quality and more liquid US assets (Treasuries, Large Cap US Stocks, and Real Estate).

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Liquid Alternatives: A passing grade in their first real test

While many of the first established hedge funds date back to the 1970s, liquid alternatives are a fairly new asset class. Many of these strategies seek to provide hedge fund like returns in a mutual fund format. These funds have recently been put to the test during the recent market correction. A recent article from Investment News magazine entitled “Liquid Alts funds pass first real test with flying colors”  highlights the relative out-performance of this asset class versus traditional markets in the recent market sell off. Highlighted in their analysis is the AQR Managed Futures fund which is one of four managers we have allocated in to this space. The fund gained 4.15% on Monday (8/24/15) when the equity markets (as measured by the S&P 500 index) dropped 3.94%. Even the worst liquid alternative category, Equity Long-Short (as tracked by Morningstar Inc.), only dropped 1.86% on average during trading on Monday. 


 “Winning by losing less is a theme that the liquid alts space has long embraced, but over the past six years, most of the strategies haven’t been able to prove the point. Until now”   -Investment News


We have been investing in liquid alternatives for the past few years in our portfolios. We have seen many new products brought to the investment marketplace. We believe that a few of these products make for attractive components to our client portfolios, but there are also many products that we do not feel are appropriate in that format. Certain hedge fund strategies (managed futures and hedged equity) are liquid and transparent enough for a mutual fund investment, while other strategies (private equity, private real estate, and venture capital) are not. We continue to focus our efforts on managers that can manage volatility and provide relatively attractive returns that are less correlated to traditional markets. We believe that more and more products will be introduced to the marketplace and we are excited for the opportunities that this may provide for our client portfolios.

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Rising Interest Rates - What are the Impacts for Fixed Income Investors

The United States appears to be at the tail end of a multi decade long period of falling interest rates that dates back to 1982.  These falling interest rates have helped fixed income investors by providing attractive returns with low volatility.  Hence, this has been a great vehicle for meeting investor income needs.

However, over the past several years interest rates have fallen to such low levels that these same investors have been forced into riskier areas of the financial markets to help meet their income needs.  Those who have remained in fixed income, and have resisted the urge to add risk for more income, might now find themselves in a situation where they begin to lose principal.  Investors who cannot wait for their bonds to mature (especially long term bond holders) might find themselves in a situation of having to sell their bonds at much lower prices.

We continue to feel that interest rates will rise over the next few years. We believe the best approach in this new environment may be a higher allocation to non-traditional fixed income that has a more flexible mandate.  That being said, looking forward we do think that returns in the fixed income space will be low and potentially even negative should we see interest rates rise faster than the market anticipates.

Scott Drown is a Portfolio Manager at Heller Wealth Advisors.  If you would like to discuss the fixed income markets, please contact Scott at This email address is being protected from spambots. You need JavaScript enabled to view it.

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International Markets - Is the sleeping Giant finally awakening?

The international markets have under performed the US markets heavily over the past five years as the US markets have rebounded from our “Great Recession”, and US Monetary policy has pumped liquidity into the markets through three quantitative easing programs. Additionally, Europe struggled with a debt crisis in 2011 that largely held their markets back from their recovery. However, we do believe that we are seeing signs that European Markets are starting to bounce back. 


Monetary Policy

Central banks in Europe, Japan, and China have started to copy the US playbook regarding monetary policy and are implementing their own versions of Quantitative Easing. Japan started late last year, China earlier this year, and the European Central Bank announced a program that started this week. While the magnitude of these programs is open for debate, these programs are all designed to stimulate each of their economies.


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Portfolio Rebalancing

One of our investment management philosophies has always been to rebalance portfolios when tactical opportunities present themselves. We monitor our investment portfolios relative to their intended asset class targets and believe the optimal rebalancing strategy is to trim positions that have done well and add to those which have lagged, bringing asset classes back to their intended targets. This vigilance forces us to sell when positions are high and buy when positions are low, which is part of a sound, long-term investment strategy.

As we approach year-end, we see some significant market dislocations which we believe create an opportunity to rebalance our portfolios. Additionally, we are navigating year-end mutual fund capital gains distributions and tactically harvesting losses in order to potentially reduce tax liabilities for our clients.

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