"We’ll start the war from right here!"
General Theodore Roosevelt, Jr.
June 6, 1944 (D-Day) after learning that the Utah Beach invasion forces landed
more than a mile from their original objective
Our environment is constantly changing - not just from a financial perspective but an economic, family and circumstantial one as well. Just as Roosevelt adapted to changing circumstances and an outcome that was not planned, we must adapt to unexpected changes in our environment as well.
Most recently our thinking has continued to evolve surrounding charitable giving between now and the end of 2012. Based on currently legislated income tax law, in 2013 there are phase out rules that will be re-implemented in relation to personal exemptions and itemized deductions. Commonly referred to as PEP and Pease, these limitations serve to reduce the financial benefit afforded higher income-earners from the basic tax exemptions each individual receives. Additionally and perhaps more importantly, these limits also affect the benefits received from activity such as gifting to charity. In addition, President Obama has affirmed his support for certain additional limits for the tax value of charitable deductions.
Whether these will come to pass or not is subject to interpretation of our country’s political and financial future. Having said this, any possibility is enough to motivate thoughtful planning in this regard. These fact sets are increasingly convincing us that larger charitable giving in a deliberate, highly structured way makes sense this year and next, particularly for those with high income and/or net worth.
We’ve seen a slight pullback in equity markets around the world during the month of May due to concerns about our economy hitting a soft spot and also renewed concerns about European debt levels. On the other hand, many bond indices were positive for May as investors reduced their appetite for risk and sought the safety of bonds. Provided below is a chart with the recent performance from a variety of equity and bond indices.
Financial Market Indices
Year to Date
Last 12 Months
S & P 500 (US Stocks)
MSCI Developed EAFE (foreign stocks)
MSCI Emerging Mkt Equities (emerging country stocks)
Barclays Capital Aggregate Bond – Intermediate Term
Barclays Capital Municipal Bond Index
The markets are constantly changing with the ever-evolving global economy, so just like Roosevelt we too must periodically adjust our battle plan. In this regard, we have made a few tactical changes to our client portfolios over the past month and a half. We’ve used the recent rally in bonds to capture gains, reduce risk, shorten the average maturities on our bond holdings and increase our portfolio diversification. In case you missed our prior correspondence, we have summarized these recent changes below.
First, we reduced our exposure to emerging country bonds and moved more dollars into currencies and commodities through the Rydex Managed Futures Fund (an alternative investment strategy that is uncorrelated with the equity and bond markets). We believe it was prudent to slightly reduce our exposure to emerging market bonds due to the strong returns generated by this investment category over the past couple of years. One of the primary valuation indicators we follow is the spread or difference in interest rates between emerging market debt and U.S. dollar denominated debt. The spread in interest rates had fallen to a level that was well-below the long-term historical average. This was a signal to us that emerging market bonds were getting somewhat expensive. Also, emerging market bonds tend to be a more volatile asset class; therefore, reducing some risk seemed prudent.
Second, we are eliminating positions in Treasury inflation-protected bonds (TIPS). Today, real interest rates are extremely low on TIPS (i.e. the 10-year TIPs yield is about 0.67%). This suggests to us that TIPS may not be the best investment at this point in time, especially for those in search of income on their fixed income holdings, or for those concerned about a future increase in Treasury interest rates. Any future decline in credit worthiness of the US Government could result in higher interest rates and lower prices on US Treasuries, including TIPS. By eliminating TIPS we reduced the average maturity and duration of our fixed income holdings, thus providing better principal protection in a rising interest rate environment.
Perry Moore, our Director of Wealth Planning, recently obtained his Master’s in Business Administration from USI in May after working toward the degree for 2 years. Particular areas of concentration included strategic management, business tax, and quantitative analysis and decision making. This education will allow Perry to better lead our wealth planning function and advance the expertise, organization and structural methods behind the delivery of this critical service to our clients.