weekly market review - CLS Investments

WEEKLY MARKET REVIEW SEPTEMBER 07, 2016

Market Performance

In This Edition • Momentum: Fact or Fantasy?

Stock Market

LAST WEEK

QTD

YTD ‘16

+0.69%

+4.79%

+8.59%

Domestic Large-Cap Equity2

+0.56%

+4.27%

+8.27%

Domestic Small-Cap Equity3

+1.15%

+8.89%

+11.30%

+0.32%

+7.01%

+5.92%

Developed International Equity

+0.48%

+6.68%

+1.96%

Emerging Market Equity

-0.11%

+8.43%

+15.38%

LAST WEEK

QTD

YTD ‘16

+0.17%

+0.37%

+5.70%

+0.01%

+0.05%

+0.16%

Total U.S. Market1

• Best Time to Invest • End of Summer ETF Update

International Equity4 5

6

Fixed Income U.S. Bonds

7

Cash Equivalent

8

Russell 3000 Index 2S&P 500 Index 3Russell 2000 Index 4MSCI ACWI ex-U.S. Index 5MSCI EAFE Index 6MSCI Emerging Markets Index 7Barclays Capital U.S. Aggregate Bond Index 8Barclays Capital 1-3 Month U.S. Treasury Bill Index 1

Week in Review Global stocks rose on low volume and low volatility during the (unofficial) last week of summer. Domestic smallcap companies led gains, while overseas, developed nations outperformed developing ones on the back of strong gains in Europe. The U.S. dollar strengthened leading up to Friday’s August jobs report. Speculators anticipated a moderate-to-strong report would usher in interest rate hikes sooner rather than later from the Federal Reserve (Fed). The report showed 151,000 jobs were created in August, below expectations but still indicating a healthy labor market. The stronger dollar contributed to declines in the price of oil and the broader commodity market. Overall, fairly positive global economic data – from U.S. nonfarm payrolls to global manufacturing purchasing manager indices (PMIs) – wasn’t enough to damage the broad bond market as the Barclay’s Aggregate finished slightly higher despite the yield on the 10-year Treasury rising to nearly 1.60%.

Momentum: Fact or Fantasy? At CLS, one of our Investment Themes for 2016 is X-factor. X-factor embodies all things smart beta and factor related, and applies to how we allocate portfolios, as well as the vehicles we use. One factor that CLS embraces is momentum. Momentum can be a friend and sometimes a foe, but it has been proven to be a robust factor across asset classes and market segments in much the way value has been proven effective by academics. Turns out, through some advanced “research” by CLS, momentum extends beyond investing and into the realm of fantasy football! We have discovered that if an NFL player scores in the top 50 of fantasy rankings one year, he has about a 50/50 chance of scoring in the top 50 again next year (not quite as likely as I thought). That same player would then have approximately a one-in-four chance of scoring more points than he did in the previous year. We can improve on this using a simple momentum study. If an asset class outperforms the

MSCI ACWI Index over any rolling 12-month period, there is a little more than 60% chance it will continue to outperform in the year ahead. There is about a one-in-three chance that the outperformance will be larger. Fun and games (literally) aside, momentum is just one of the factors we utilize to build portfolios. Pairing momentum with value can be a particularly powerful combination when they intersect. It’s also important to remember that momentum

is different from performance chasing. Momentum is carefully measured over specific time frames consistent with performance persistence and trend. Currently, emerging markets show strong positive momentum and also happen to be one of the cheapest asset classes available. When drafting up a portfolio, it would be wise to make sure emerging markets are in your starting lineup.

Source: CLS Investments, Morningstar, Fantasydata.com

Grant Engelbart, CFA Portfolio Manager Grant Engelbart joined CLS in 2009, and after several roles in operations and investment research, accepted the role of Portfolio Manager in 2013. Mr. Engelbart currently serves as a manager on CLS’s aggressive mutual funds, in addition to several ETF and mutual fund separate account strategies. Prior to joining CLS, Mr. Engelbart held positions at TD Ameritrade and State Street Corporation. Mr. Engelbart received his Bachelor’s degree in Finance from the University of Nebraska at Lincoln. He holds the Chartered Financial Analyst® (CFA) designation, is a member of the CFA Institute, and holds the FINRA Series 65 license.

Best Time to Invest Record stock market highs, record low interest rates, geopolitical fears - and the list of excuses and reasons not to invest continues. Despite the fact that we have tackled all of these concerns and then some (market highs here, here, and here; record low interest rates; geopolitical fears), there are other, less apparent, reasons that make today the best time to be an investor. Two years ago we mentioned several reasons, but there are many more: • Technology. Literally everything is at your fingertips nowadays. Investors can check their account balances minute-by-minute (not recommended) and make contributions to their investment portfolios on the fly (highly recommended). Mobile apps allow for detailed analysis of performance and asset allocation with incredible ease. For instance, I can check my 401(k) by just using my fingerprint. Did I mention CLS has a mobile app designed for advisors

and their clients? Download it here if you haven’t already. • Judicial Landscape. Lawmaking is never without flaws, and recent U.S. Department of Labor (DOL) rulings are no exception. But certain attributes of the changing investment vehicle landscape are very positive for investors. The days of hidden 5%-10% upfront loads for mom and pop investors are ending. Waves of lawsuits from qualified plan investors are leading to even lower fees for retirees and squeezing revenue sharing. Future decisions and rulings will hopefully continue down the path of favoring investors. • Manager Access. The bestof-the-best managers are becoming available through active ETFs. CLS utilizes fixed income ETFs that are actively managed by teams at DoubleLine Capital, PIMCO, and Fidelity for a fraction of the cost of mutual funds. Before long, actively managed

ETFs by the world’s best equity managers will become available in the lower-cost ETF wrapper as well. Despite recent disrupters to the industry (DOL ruling, “robo advisors,” fee compression) it is not a bad time to be a financial advisor either. Those embracing technology can reach out to clients in new and exciting ways. CLS’s own online account opening system, Autopilot, enables advisors to open accounts with their clients without even being present to do so. We’ve recently made the CLS AdvisorOne Funds portfolios available through the Autopilot system as well. The AdvisorOne Funds are mutual funds containing ETFs that provide any investor – with either $1* or $1 million – access to globally diversified, risk-managed ETF portfolios from our Portfolio Management Team. *The CLS AdvisorOne Strategy has no minimum investment when accessed through CLS directly.

End of Summer ETF Update As summer unofficially winds down, let’s take a look at the continually evolving ETF landscape. ETFs have continued their dramatic growth in 2016, with over 150 new funds launched so far this year. Interestingly, 2016 is on pace to see the highest number of ETFs shut down in the short history of ETF existence. Of course, considering the number of ETFs available is higher now than ever before, the closure rate really isn’t all that high (see chart). There’s also reason to believe ETF closures are actually a good thing, and not a bad omen for the industry.

First, ETFs that close are typically not all that large and lack onscreen liquidity. This generally favors investors, as those unaware of the nuances of trading ETFs could face difficulties with these products. Some are levered or inverse, further adding to the potential for misuse. Second, we’ve seen a number of closures in the exchange traded note (ETN) space. ETNs require a bank to put up capital to support the product, since they are technically debt instruments (learn more in our ETF Education Center).

New innovations in the structure of ETFs have allowed more

Source: Morningstar

products that would historically be in ETN form to be launched in ETF form. And finally, a large percentage of the closures we’ve seen recently are in “repeat products.” For instance, a Latin America ETF was closed recently by one ETF sponsor, yet there still exists a very similar product in the marketplace by another ETF sponsor. This again is favorable for investors as it reduces the number of options within esoteric asset classes and likely increases the assets of the remaining ETF that represents that category.

The Russell 3000 Index is an unmanaged index considered representative of the U.S. stock market. The index is composed of the 3,000 largest U.S. stocks. The S&P 500 Index is an unmanaged composite of 500-large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. The Russell 2000 Index is an index comprised of the 2,000 smallest companies on the Russell 3000. It serves as a benchmark for small-cap stocks in the U.S. The MSCI All-Countries World Index, excluding U.S. (MSCI ACWI ex US) is an index considered representative of stock markets of developed and emerging markets, excluding those of the U.S. The MSCI EAFE Index is a composite index which tracks performance of international equity securities in 21 developed countries in Europe, Australia, Asia, and the Far East. The MSCI Emerging Markets (or EM) Index is a composite index which tracks performance of large and mid-cap firms across 21 countries classified as emerging market countries. The Barclay’s Capital U.S. Aggregate Bond Index measures the performance of the total United States investment-grade bond market. The Barclay’s Capital 1-3 Month U.S. Treasury Bill Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general. You cannot invest directly in an index. The views expressed herein are exclusively those of CLS Investments, LLC (CLS), and are not meant as investment advice and are subject to change. CLS is not affiliated with any companies listed above. No part of this report may be reproduced in any manner without the express written permission of CLS. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. CLS is not making any comment as to the suitability of any funds mentioned, or any investment product for use in any portfolio. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Individual client accounts may vary. Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies. The graphs and charts contained in this work are for informational purposes only. No graph or chart should be regarded as a guide to investing. At certain places we offer direct access or “links” to other websites. These sites contain information that has been created, published or otherwise posted by organizations independent of CLS. CLS does not endorse, approve, certify or control these websites and does not assume responsibility for the accuracy, completeness, or timeliness of information located there.

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