Tag Archives: health

This Is One Heck Of A Great Bond ETF

Summary The Vanguard Long-Term Bond ETF does everything right. If investors could only hold one bond ETF, this one would be a very strong contender for that spot. The fund offers solid income, a low expense ratio, and negative correlation to most major equity classes. If you don’t like this ETF, tell me why, because I do not see a single weakness here. This is a great ETF. There are only a few ETFs that really catch my eye as I’m researching them. This is one that immediately stands out for being absolutely exceptional. It has pretty much everything an investor could want for a bond ETF. I’ve shown a strong preference for funds that I can trade without commissions from my Schwab account because it makes frequent rebalancing more appealing. I would love to see this fund show up on there, but I don’t expect Vanguard funds to show up on the Schwab list at any point. For investors that have access to free trading on Vanguard ETFs, look into using the Vanguard Long-Term Bond ETF (NYSEARCA: BLV ). This ETF comes with everything I want (except free trading) and nothing I don’t want. Let’s go through the fund. Expense Ratio The expense ratio is only .10%. That is beautiful. Just try to find a way to complain about a long term bond fund with over 2000 different holdings and an expense ratio of .10%. This is ideal. Characteristics The fund is offering a fairly respectable yield to maturity of 4.2%. In the last decade investors may have scoffed at the idea of 4.2%, but in the new normal this is great. Some investors may expect yields to increase, but I doubt the Federal Reserve can pull that rabbit out of the hat when other countries have lower rates. An increase in domestic rates would result in a surge of cash inflows to the U.S. as foreign investors would seek dollars to buy up the higher yielding treasury securities. The resulting appreciation of the dollar would slam domestic employment and contradict one of the two dual mandates of the Federal Reserve. Until we see some major changes in the world economy, 4.2% is a fairly reasonable yield. Types of Bonds The Vanguard Long-Term Bond ETF is structured precisely how I would want it to be structured. The holdings include some foreign exposure without a very large allocation and a mix between industrial bonds and treasury bonds. Despite a strong allocation to treasury securities, there are no Agency MBS or Commercial MBS. Investors wanting access to those securities can acquire them on leveraged basis at a substantial discount to book value by buying mREITs. I see no reason to pay book value, but I would like a long term bond ETF with a heavy emphasis on high quality debts. Credit Quality The holdings are all solid. This is investment grade debt with a significant portion being treasury debt. This is a very solid ETF to have in your portfolio if the market starts tanking. I put together a demonstration of the role BLV plays in a sample portfolio. Building the Portfolio The sample portfolio I ran for this assessment is one that came out feeling a bit awkward. I’ve had some requests to include biotechnology ETFs and I decided it would be wise to also include a the related field of health care for a comparison. Since I wanted to create quite a bit of diversification, I put in 9 ETFs plus the S&P 500. The resulting portfolio is one that I think turned out to be too risky for most investors and certainly too risky for older investors. Despite that weakness, I opted to go with highlighting these ETFs in this manner because I think it is useful to show investors what it looks like when the allocations result in a suboptimal allocation. The weightings for each ETF in the portfolio are a simple 10% which results in 20% of the portfolio going to the combined Health Care and Biotechnology sectors. Outside of that we have one spot each for REITs, high yield bonds, TIPS, emerging market consumer staples, domestic consumer staples, foreign large capitalization firms, and long term bonds. The first thing I want to point out about these allocations are that for any older investor, running only 30% in bonds with 10% of that being high yield bonds is putting yourself in a fairly dangerous position. I will be highlighting the individual ETFs, but I would not endorse this portfolio as a whole. The portfolio assumes frequent rebalancing which would be a problem for short term trading outside of tax advantaged accounts unless the investor was going to rebalance by adding to their positions on a regular basis and allocating the majority of the capital towards whichever portions of the portfolio had been underperforming recently. Because a substantial portion of the yield from this portfolio comes from REITs and interest, I would favor this portfolio as a tax exempt strategy even if the investor was frequently rebalancing by adding new capital. The portfolio allocations can be seen below along with the dividend yields from each investment. Name Ticker Portfolio Weight Yield SPDR S&P 500 Trust ETF SPY 10.00% 2.11% Health Care Select Sect SPDR ETF XLV 10.00% 1.40% SPDR Biotech ETF XBI 10.00% 1.54% iShares U.S. Real Estate ETF IYR 10.00% 3.83% PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB 10.00% 4.51% FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT 10.00% 0.16% EGShares Emerging Markets Consumer ETF ECON 10.00% 1.34% Fidelity MSCI Consumer Staples Index ETF FSTA 10.00% 2.99% iShares MSCI EAFE ETF EFA 10.00% 2.89% Vanguard Long-Term Bond ETF BLV 10.00% 4.02% Portfolio 100.00% 2.48% The next chart shows the annualized volatility and beta of the portfolio since October of 2013. (click to enlarge) Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. You can see immediately since this is a simple “equal weight” portfolio that XBI is by far the most risky ETF from the perspective of what it does to the portfolio’s volatility. You can also see that BLV has a negative total risk impact on the portfolio. When you see negative risk contributions in this kind of assessment it generally means that there will be significantly negative correlations with other asset classes in the portfolio. The position in TDTT is also unique for having a risk contribution of almost nothing. Unfortunately, it also provides a weak yield and weak return with little opportunity for that to change unless yields on TIPS improve substantially. If that happened, it would create a significant loss before the position would start generating meaningful levels of income. A quick rundown of the portfolio I put together the following chart that really simplifies the role of each investment: Name Ticker Role in Portfolio SPDR S&P 500 Trust ETF SPY Core of Portfolio Health Care Select Sect SPDR ETF XLV Hedge Risk of Higher Costs SPDR Biotech ETF XBI Increase Expected Return iShares U.S. Real Estate ETF IYR Diversify Domestic Risk PowerShares Fundamental High Yield Corporate Bond Portfolio ETF PHB Strong Yields on Bond Investments FlexShares iBoxx 3-Year Target Duration TIPS Index ETF TDTT Very Low Volatility EGShares Emerging Markets Consumer ETF ECON Enhance Foreign Exposure Fidelity MSCI Consumer Staples Index ETF FSTA Reduce Portfolio Risk iShares MSCI EAFE ETF EFA Enhance Foreign Exposure Vanguard Long-Term Bond ETF BLV Negative Correlation, Strong Yield Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio. Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. (click to enlarge) Conclusion BLV offers a clear negative correlation with each asset except for short term TIPS (no surprise, high credit quality) and equity REITs. The equity REITs in IYR have a slight positive correlation with BLV which is caused at least in part by the fact that BLV is holding some high credit quality non-Agency debt. Since a substantial portion of the debt is still corporate in origin, it has a higher correlation with equity REITs than it would if it were pure treasuries. Despite that, the ETF still has a very clear negative correlation with other equity assets classes. Normally that kind of negative correlation requires midterm or longer treasury securities, but most of those funds have very limited yields. That isn’t any surprise either since the demand for extremely high quality debt (treasury securities) has pushed the yields to extremely low levels. By incorporating investment grade corporate debt the total portfolio for BLV is able to offer a respectable return so that the fund offers investors a material amount of income along with a negative correlation that results in total portfolio risk being materially reduced. This is what a bond fund should look like. Vanguard is known for high quality and low cost funds, but this fund is downright exceptional.

All About Nothing: Stock ETFs Celebrate Zero Percent Rate Policy

If someone had told me in the 80s that 3-month T-bills would someday yield 0%, I might have doubled over in hysterics. Nevertheless, this is the world that has been created by a Federal Reserve that has waffled on leaving the zero-bound on its overnight lending rate, even after seven years. While one may be tempted to say that financial markets are losing respect for the Federal Reserve, it seems more likely that the financial markets are gaining confidence that interest rates could be kept near 0% for longer. About a year ago, I was meeting a client at a restaurant in Marina Del Rey, California. The traffic had been mild by Los Angeles County standards, so I arrived in the area early. I stopped in a local coffee shop and sat down in a booth. Lo and behold, in the booth next to me, Jerry Seinfeld had been interviewing Jim Carrey for a “webisode” of the popular online show, Comedians In Cars Getting Coffee. The reason that I bring this up? I began my financial services pursuits in the the second half of the 1980s, when songs and shows about “nothing” seemed to have their biggest impact. For instance, in November of 1987, British rock artist Billy Idol scored a top Billboard hit with a live remake of “Mony Mony.” The original writer of the song acknowledged that he got the title from Mutual Life Insurance of New York’s acronym (MONY), though the acronym in the song lacked any actual meaning. Similarly, Larry David and Jerry Seinfeld set out in the late 80s to create a show about nothing. “Seinfeld” later became one of the most iconic sitcoms in television history. Interestingly enough, investors on Monday (10/5) bought $21 billion in three-month Treasury bills at a yield of 0%, the lowest yield at a three-month Treasury auction ever recorded. The lowest yield ever! And there was healthy demand for the 0% return because the bid-to-cover ratio was the highest since late June. Strong demand for “nothing.” If someone had told me in the 80s that 3-month T-bills would someday yield 0%, I might have doubled over in hysterics. I was used to seeing anywhere between 5% and 7%. Who would be interested in 0%? Nevertheless, this is the world that has been created by a Federal Reserve that has waffled on leaving the zero-bound on its overnight lending rate, even after seven years. What’s more, the voracious appetite for nothing beyond the preservation of capital suggests that few believe the Fed will raise rates at all in 2015. Some contend the longer that chairperson Yellen and her Fed colleagues abstain from hiking borrowing costs, the less that financial markets will show confidence in the institution. That may not be accurate… at least not yet. For example, Friday’s jobs report (10/2) served up an abysmal 142,000 jobs, flat hourly earnings, downward revisions to the job numbers for prior months, and a monstrous drop in labor force participation. Every expectation was a “miss.” Stocks initially sold off, but they quickly surged higher by more than one percent on the anticipation that the data virtually assures ongoing Fed inaction. What about Monday (10/5)? The one saving grace of the U.S. economy has been the “well-being” of the services sector. Yet both data points on the services sector dropped more than expected from the previous month. The Institute of Supply Management’s (ISM) non-manufacturing index for September registered 56.9, down from 59. Markit Economics’ services purchasing managers’ index report fell to 55.1 from 55.6. Equally troubling? Business activity and incoming new work rose at significantly slower rates. Still, stocks in the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) catapulted higher, rejoicing at yet another disappointing batch of data. The exchange-traded fund closed above a short-term, 50-day moving average. It has also bounced off of support at 160 and is testing resistance five percentage points higher around 168. So while one may be tempted to say that financial markets are losing respect for the Federal Reserve, it seems more likely that the financial markets are gaining confidence that interest rates could be kept near 0% for longer. After all, the Federal Reserve’s song, dance and pony show is all about the continuation of zero-percent rate policy. (Some even think that we may even see negative rates before we see a hike.) Indeed, as long as global and domestic economic concerns persist, and the Fed maintains its squeamishness about leaving the zero-bound, financial markets have the potential to rejoice. Which sectors jumped the highest off of the intra-day bottom from Friday (10/3)? Here is a quick rundown: The Big Bounce Off Of Friday’s Intra-Day Lows 2-Day Turnaround SPDR Select Sector Energy (NYSEARCA: XLE ) 8.7% SPDR Select Sector Basic Materials (NYSEARCA: XLB ) 6.8% iShares Telecom ETF (NYSEARCA: IYZ ) 6.1% SPDR Select Sector Industrials (NYSEARCA: XLI ) 5.8% SPDR Select Sector Financials (NYSEARCA: XLF ) 5.4% SPDR Select Sector Technology (NYSEARCA: XLK ) 5.0% SPDR Select Sector Consumer Discretionary (NYSEARCA: XLY ) 4.7% SPDR Select Sector Consumer Staples (NYSEARCA: XLP ) 4.3% SPDR Select Sector Health Care (NYSEARCA: XLV ) 4.2% SPDR Select Sector Utilities (NYSEARCA: XLU ) 2.8% ETFs that have been beaten down the most from the global economic slowdown – XLE, XLB, XLI – rocketed the most. Since neither the global economy nor the domestic economy has demonstrated an enhanced potential to expand, it stands to reason that the super-sized price gains reflect the anticipation of more stimulus. (Or for fans of Saturday Night Live and Christopher Walken, “We need more cowbell.”) If the Fed is going to stand pat at the zero-bound, they’ll need to tell the investment community that they’re planning to remain there until the end of Q2, 2016. If they’re going to raise borrowing costs, they’ll need to describe the precise nature of the hiking campaign. Will it be one-eighth of a point every meeting until the end of the second quarter next year? Will it be one-quarter of a point every other meeting until the end of Q2? An inability by the Fed to make up its collective mind alongside murky claims of data dependency would continue to embolden short-sellers and safety-seekers. Conversely, if Janet Yellen and other voting members of the Fed’s Open Market Committee (FOMC) determine that the data call for additional stimulus in the form of “QE4,” only an “open-ended” stimulus will pack the kind of wallop to send risk assets into the stratosphere. It was the open-ended nature of QE3 that pushed stocks to all-time records; QE1 and QE2 lost firepower with the investment community’s knowledge that the stimulus had a definitive end date. At this stage of the correction, traders will likely sell the S&P 500 near the 2000 level and buy it near the 1900 level, at least until the Federal Reserve delineates an unambiguous course. The S&P 500 VIX Volatility (VIX) may have fallen below 20, though I presume that volatile price movement for stocks will remain the norm. For Gary’s latest podcast, click here . Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

10 Best Mutual Funds For The Next Decade From 10 Investment Strategists

Summary Aging demographics, rising demand for less invasive ways to stay active or better address illnesses, emerging market growth of healthcare demands and real products are bullish for Fidelity Select Biotechnology. Parnassus Endeavor has outperformed the S&P 500 by 4.8% annually over the past 10 years. In addition to removing alcohol, tobacco, gambling, firearms and nuclear power from the portfolio. China’s P/E ratio is 8.7 times the next 12 month’s forecast earnings by analysts, which is below the past five years’ average, and a little more than half the U.S. Investors are understandably worried about their portfolios in light of the stock market selloff in August and September. But in the long run, a 10% or even 20% correction will be merely a blip on the screen. To help you focus on the long term, I asked a panel of investing strategists to share their mutual fund investing idea that they have conviction in for the next decade. 1. Fidelity Select Biotechnology Portfolio (MUTF: FBIOX ) By Jim Lowell Aging demographics, rising demand for less invasive ways to stay active or better address illnesses, emerging market growth of healthcare demands, real products, real earnings, and time-tested management are all part of my positive diagnosis for investing in biotechnology and healthcare stocks. For the aggressive growth investor, I recommend Fidelity Select Biotechnology. Priced to perfection and prone to price-related swoons, this sector remains one of my absolute long-term buy recommendations. After the recent price gouging biotech brouhaha, many blue-chip biotechs were being sold down as if they were in the same boat as the upstart Turing Pharmaceuticals, whose capitalist instincts ran away with its better nature, raising the price of a niche but necessary drug from $13.50 to $750 a dose. The CEO finally buckled to public relations pressure and announced that the company would lower the price of the drug in response to the outcry. Of course, Biogen-Idec (NASDAQ: BIIB ), Gilead (NASDAQ: GILD ) and others have diversified portfolios of efficacious biotech drugs and are a far cry from the Turing’s one-trick pony. There will be other blowups under the biotech tent, making it a natural place for proven active management to take center stage. As an individual investor, I’d be nervous about trying to time into this sector as well as pick a broad array of biotech stocks that could reduce near-term risks and enhance long-term return. By investing in FBIOX, I don’t have to worry about either, since manager Rajiv Kaul does that job for me. Currently, his top holdings are Gilead Sciences, Biogen, Alexion (NASDAQ: ALXN ), Celgene (NASDAQ: CELG ), Regeneron (NASDAQ: REGN ), Vertex Pharmaceuticals (NASDAQ: VRTX ), BioMarin Pharmaceutical (NASDAQ: BMRN ), Medivation (NASDAQ: MDVN ), and Incyte (NASDAQ: INCY ). FBIOX is up 13.8% year-to-date through September 23. For the defensive growth investor, I recommend the Fidelity Select Health Care Portfolio (MUTF: FSPHX ). Top-ranked manager Eddie Yoon invests in companies involved in the design, production, or sale of health care products and services, including, but not limited to: pharmaceutical, diagnostic, administrative, medical supply, and biotechnology companies. This sector represents 17% of U.S. GDP and covers thousands of stocks and experimental drugs. You can’t bring the acumen, informed insight and trade execution capacity and quality to this field, but Yoon can and does. He invests with an eye on the necessary demographic trends and stories of aging boomers needing a youth-inducing crutch as well as on the emerging market theme of new consumers demanding better healthcare. His current top holdings include Boston Scientific (NYSE: BSX ), Teva (NYSE: TEVA ), Abbvie (NYSE: ABBV ), McKesson (NYSE: MCK ), Vertex, UnitedHealth (NYSE: UNH ), Shire (NASDAQ: SHPG ), and Bristol-Myers Squibb (NYSE: BMY ). While sub-sectors like biotechnology have been blazing higher, there are other defensive sectors when higher alpha plays are being sold off. One stealth benefit: This is a globally diversified sector with this fund’s foreign investments typically making up one-third of its assets. Jim Lowell is editor of FidelityInvestor.com and chief investment officer at Adviser Investments with $3 billion under management in Newton, Mass. He owns both funds mentioned here. 2. Deutsche Bank Global Infrastructure Fund ( TOLSX ) By Jeremy S. Office, Ph.D., CFP, CIMA, ChFC, CRPC, MBA We believe one of the best opportunities for investors with more than a seven-year time horizon is global infrastructure. According to the World Economic Forum, global infrastructure demand is approximately $4 trillion annually with only $2.7 trillion invested each year. Global infrastructure remains underdeveloped, and existing structures are in their later stages of life. As government balance sheets near their tipping point, we believe this gap will open the doors for private investment opportunities that will further attract investors into the asset class. Also, the potential to hedge inflation by investing in companies with the ability to raise prices (high pricing power) may also be attractive if inflation begins to increase. At Maclendon, we use the Deutsche Bank’s Global Infrastructure Fund as a diversified way of investing in this vertical. Although the world may be slowing down economically, population growth and the need for updated infrastructure remain high. With the essential need of infrastructure within a society, the resiliency of cash flows, and the potential hedge against inflation, we believe this to be a compelling investment in a portfolio over the next 10 years. The current zero interest rate policy has diminishing value to stimulate the economy and eventually leads to asset bubbles that could jeopardize the entire experiment in the first place. Cutting interest rates and embarking on quantitative easing to stimulate the economy was necessary during the financial crisis, but we have made considerable progress since and believe a Fed rate hike in September was warranted. We understand the global implications of higher rates and how the Fed is attempting to accomplish a “Goldilocks” raise, not too much and not too soon, but believe at this point we need to move off zero at least for the reason of having the ability to lower them again if markets do show further signs of weakness. Right now the Fed has used all of their tools in its toolbox. If the economy cannot withstand a 0.25% hike in rates, we are in worse shape than previously thought. There is a misconception with retail investors that higher interest rates are bad for the economy, but when you are coming off zero that doesn’t hold true. Higher rates could stimulate the economy as banks are more inclined to lend, retirees are earning more on their fixed income, and would be homebuyers get off the sidelines to avoid higher mortgage rates. Jeremy S. Office, Ph.D., CFP, CIMA, ChFC, CRPC, MBA, is founder and principal of Maclendon Wealth Management in Delray Beach, Fla. with $140 million under management. 3. DFA Global Allocation 60/40 Portfolio (MUTF: DGSIX ) By Michael S. Brown CFA, CPA, CFP® Over the last six weeks, U.S. large-cap stocks have declined by 10%, erasing year-to-date gains. Times like these are healthy because they remind investors that the stock market’s attractive historical returns do not come without risk. Successful long-term investors understand that strong equity markets are inevitably followed by downturns, the timing and magnitude of which are impossible to predict. They specifically demonstrate discipline by avoiding the herd mentality and taking advantage of occasions when stocks are priced most competitively. Dowling & Yahnke aims to build highly diversified portfolios that align with client risk tolerance and long-term investment objectives. Combining this philosophy with a mandate to minimize costs, manage taxes and rebalance in a disciplined manner limits the scope of funds with which we place client assets. When recommending a solution for an investor with a moderate risk tolerance and long-term investment horizon, DFA’s Global Allocation 60/40 Portfolio is a great choice. While many all-in-one fund options exist, DGSIX delivers DFA’s unique investment approach in an efficient, low-cost package. The portfolio, which features a globally diversified fund-of-funds structure with built-in rebalancing, is designed to seek total returns consisting of capital appreciation and current income by investing 60% of assets in equity funds and 40% in fixed income funds. The funds included in the Global Allocation 60/40 Portfolio provide broad exposure to global markets, including more than 10,000 securities in more than 40 countries at a low net expense ratio of 0.29%. In addition to providing an allocation to inflation-protected securities, the equity components of DGSIX employ Dimensional’s applied core equity approach, emphasizing smaller cap, relatively low price, and higher profitability stocks to enhance expected returns. The fixed-income components complement the equity allocation, helping to optimize the tradeoff between dampening risk and maximizing expected return. Michael S. Brown CFA, CPA, CFP® is a partner at Dowling & Yahnke, LLC in San Diego, Calif. with $3 billion under management. 4. Parnassus Endeavor Fund (MUTF: PARWX ) By Michael Kramer Parnassus Endeavor is a $1.3 billion large-cap core mutual fund with a five-year annual return of 14.8% and a 10-year annual return of 11.2% through September 30, 2015. This fund has outperformed the S&P 500 by 4.8% annually over the past 10 years. In addition to removing alcohol, tobacco, gambling, firearms and nuclear power from the portfolio, it also seeks out sector leaders in areas such as community relations, labor standards, human rights, environmentally-friendly practices, and employee health, safety, diversity, and rights. Research has long indicated that ESG integration has a neutral-to-positive correlation to long-term financial performance. In volatile and uncertain markets, investors that view ESG factors as material to bottom-line performance understand that true long-term profitability is directly connected to adherence to best corporate practices around risk mitigation. This low-turnover fund overweights technology and financial services while emphasizing dividend-yielding positions and, at 39%, has twice the benchmark and category averages of mid-cap stocks. Top holdings include Altera (NASDAQ: ALTR ), Intel (NASDAQ: INTC ), Whole Foods Market (NASDAQ: WFM ), American Express (NYSE: AXP ), Applied Materials (NASDAQ: AMAT ), and IBM (NYSE: IBM ), representing 35% of the portfolio weight. This fund has been resilient in down-markets and strong in growth periods. During the 2008 downturn, for example, the fund was down 30%, while the S&P 500 lost 38% of its value, and in 2009 the fund was up 62%, while the S&P was up only 26%. Manager Jerome Dodson, who founded Parnassus Investments in 1984 and has managed this fund for 11 years, maintains a consistent and disciplined approach, which has helped this sustainable and responsible fund to earn 5 stars from Morningstar and place in the top 1% of all mutual funds for 10-year tax-adjusted return in its category. Michael Kramer is managing partner and director of social research at Natural Investments and co-author of The Resilient Investor: A Plan for Your Life, Not Just Your Money. 5. Federated Global Allocation Fund (MUTF: FSTBX ) By Stephen F. Auth, CFA Federated Global Allocation Fund is a diversified global balanced fund that can go anywhere and has sufficient flexibility to preserve capital in market corrections, while also being able to participate significantly in the secular bull that we believe we are in. It goes without saying: It’s been a rather messy time for stocks. The China fears that sparked this summer’s sell-off have been succeeded by handwringing over what the Fed sees that’s keeping it from liftoff. Don’t expect clarity anytime soon. No major upside surprises appear to be lurking on the economic calendar, and we are entering what historically has been an unsettling seasonal period. We see recent market volatility continuing for the next several weeks, with a likely retest of August’s lows, i.e., an S&P 500 that trades 3% to 5% below present levels. Over the longer term, however, we remain “stubbornly constructive” on equities. Secular bull markets such as we are in occasionally experience corrections that wash out the weak hands and set the stage for the next advance. This is what we are currently experiencing. The list of positive drivers off current levels is long and more in place than ever: Negative sentiment regarding stocks. Highly accommodative global monetary policies. Low global inflation. Low global yields. An expanding global economy despite headwinds from China. Corporate balance sheets and cash flows that remain very healthy. Valuations that are attractive and not expensive, price-to-earnings multiples are below 15 times expected 2016 S&P earnings of $130 to $135. We think this market will find new legs later this year into next and have not changed our 2,500 S&P target for 2016, implying close to a 30% upside from the present. With the market currently selling almost indiscriminately, we favor oversold stocks in such areas as domestic cyclical, consumer discretionary, financials, healthcare/biotech, even rate-sensitive utilities, and staples. We still think it’s too early to buy into energy and industrial and commodity names with big overseas exposure. People ask me, “What will be the catalyst?” My answer: When you have corrections like this, with babies being thrown out with the bathwater and companies with fantastic multi-year fundamentals like many of the health-care stocks being sold hard and indiscriminately by the ETF providers, you don’t need any of the positive catalysts listed above to spark a sustained rally. You just need a few things to get less worse, in particular news out of China. Once the market sniffs out this “less-worse” scenario, perhaps late in the fourth quarter, look out above. Stephen F. Auth, CFA is chief investment officer of equities at Federated Investors, Inc. Pittsburgh, Penn. with $349.7 billion under management. 6. Cognios Market Neutral Large-Cap Fund (MUTF: COGMX ) By Jonathan Angrist Investors should consider alternative mutual fund strategies as a diversification tool for their portfolios with a particular focus on those strategies that hedge market exposure. Market neutral equity is one of the few strategies that actually moves independently of the stock and bond markets, offering true diversification. Why is additional diversification necessary? We see the gulf between attractively valued companies with good long-term growth prospects and over-valued companies with challenging growth opportunities to be very wide, diminishing the potential for returns from traditional equity markets. Further, the current interest rate environment creates additional hurdles for traditional asset allocation. Rates will rise, and when they do increased rates are likely to impact both the equity and fixed income markets. This is likely to challenge traditional long-only strategies, but creates an opportunity for market neutral strategies. Due to the cyclicality of earnings, the Shiller cyclically-adjusted price-to-earnings ratio (NYSEARCA: CAPE ) is often used as a more accurate indicator of long-term earnings power than unadjusted earnings per share. As of August 31, 2015, this ratio stood at 25.84 times. Historically, when this ratio rises above 25.0 times, our research shows that the annualized return for the Standard & Poor’s 500 Index (S&P 500) is near zero for the following five years. Even with the continued economic expansion, we expect corporate profits to decline given that corporate profits as a share of gross domestic product are near all-time highs. As a result of continuing quantitative easing in Europe, on-going quantitative easing in Japan and slowing economic growth in China, earnings from foreign countries are also likely to decline due to the strengthening U.S. dollar. Conditions in the fixed income market are difficult as well. Many members of the Federal Open Market Committee have indicated that they would like to raise the federal funds rate by 0.25 percent before 2015 year-end. Barring further intervention long-term rates are also likely to rise. Long-term Treasury rates will continue to rise as China and commodity-dependent nations liquidate foreign currency reserves to stabilize their own currencies and plug national deficits. The potential for disappointing future performance of traditional asset classes and the increased market volatility, economic uncertainty and geopolitical turbulence that continues to persist highlights the need for a market neutral allocation in a well-balanced and diversified portfolio. Market neutral strategies offer the opportunity for returns that are independent of broad market and macro events. Jonathan Angrist is president and chief investment officer of Cognios Capital in Leawood, Kan. with $329 million under management. 7. AQR Risk Parity II MV Fund (MUTF: QRMIX ) By James F. Smigiel For many investors, a 10-year time horizon can be liberating in terms of the types of riskier investment opportunities that would not be viable over shorter time frames. There is a tendency among investors to view risk differently as holding periods lengthen. Specifically, the risk tolerance of the typical investor tends to increase as the period expands. Perhaps this stems from the fact that there are some statistical measures of risk that tend to decrease as the period increases. Whatever the reason, the investment community has not served these investors well, as there is still a surprising amount of controversy and confusion about the relationship between time and risk. SEI believes the facts are clear and investors should recognize that the range of potential outcomes, both positive and negative, will expand as time horizon increases. This is a natural result of returns compounding over time. In other words, the longer the time horizon, the greater amount of uncertainty. Given the above, SEI’s recommendation for the next 10 years would be a highly diversified investment that could be expected to perform relatively well in many potential economic and market scenarios. Specifically, we would suggest any of the so-called “Risk Parity” mutual funds including AQR Risk Parity II MV I or the SEI Multi-Asset Accumulation Fund (MUTF: SAAAX ). These funds and others like them provide investors with equal or near-equal exposures to multiple asset classes such as global equities, global bonds and global inflation-related assets (inflation-linked bonds, commodities). Unlike traditional balanced funds, however, these portfolios balance asset classes by risk contribution as opposed to a percentage of assets invested. Investing across asset classes via the amount of dollars invested can leave a portfolio highly concentrated in one exposure given the wide differences in asset class volatilities (i.e. equities can be more than twice as volatile as bonds). A portfolio that invests half of its dollars in stocks and half in bonds might appear diversified, but because stocks are so much riskier than bonds, nearly all of that portfolio’s risk would be contributed by stocks. Risk parity seeks to make all assets, even low-risk ones, “matter” at the overall portfolio level. An allocation approach that focuses on risk provides a truly diversified portfolio, which could be expected to perform well across a range of market and economic environments versus a more traditional, but concentrated, approach. Given the level of uncertainty that a ten-year horizon represents, we believe this choice provides the investor with the best chance of achieving a reasonable rate of return without accepting an undue amount of risk. James F. Smigiel is a managing director of Portfolio Strategies Group SEI Investment Management Unit at SEI at Oaks, Penn. with $262 billion under management. 8. Arrow Alternative Solutions Fund (MUTF: ASFNX ) By Joseph Barrato Over the next decade, we believe what is happening with the bond market may be just as relevant for investors as the direction of the stock market. Despite the Federal Reserve’s recent decision to keep interest rates unchanged, the world obviously anticipates rising rates in the future. This may mark the end to a declining rate environment that began in the 1980s. Although it’s true that we’ve experienced instances of rate hikes during the last few decades, we are now entering unchartered territory not seen by many of today’s investors. In the past when rates have increased, bond fund performance was cushioned by portfolio yields that were higher than prevailing market rates. We now have an environment where portfolio rates have slowly declined to the point where competitive yields are few and far between. Generating yield income is not the sole reason for holding bonds. Many portfolios are built to rely on fixed income as a core diversifier to offset the volatility of large equity exposure. As such, we expect to see a huge demand for non-traditional and alternative bond funds among investors who are looking either to replace or supplement their fixed income holdings with strategies that can deliver in rising and declining rate environments. The Arrow Alternative Solutions Fund is an example of a non-traditional bond fund that seeks capital appreciation with an emphasis on absolute returns and low volatility. Composed of three underlying fixed income strategies, the fund relies on quantitative analysis to optimize long/short/flat exposure to corporate high-yield bond markets, credit default markets, and long-term U.S. Treasury bond markets. As a result, the Arrow Alternative Solutions Fund has shown a low historical correlation to traditional equity and fixed income markets, and may also help to diversify an investment portfolio during various rate environments. As with any investment, investors should carefully consider risks with benefits. In this case, the Arrow Alternative Solutions Fund uses a combination of derivatives and fixed income securities to achieve its objective, which are subject to interest rate, credit, and inflation risks. Joseph Barrato, CEO and director of investment strategy at Arrow Funds in Laurel, Md. with $700 million under management. 9. Index Funds S&P 500 Equal Weight Fund (MUTF: INDEX ) By Michael G. Willis Having trouble beating the S&P 500 Index? Join the club, and it’s a large club. According to the most recent SPIVA report released by Standard & Poor’s, over 86% of large-cap fund managers could not beat it last year, and those numbers approach nearly 90% if you look at the past 5-year period. In March of 2014, Warren Buffett announced that his advice to his heirs is to put 90% of his estate in “a very low-cost S&P 500 index fund.” That’s a strong endorsement coming from arguably one of the best stock traders on the planet. So, what could be better than owning the S&P 500 Index for the next 10 years? Well, since the index is already in a class by itself, try beating the S&P 500 Index with a simple & logical version of itself! We believe one of the best-kept secrets on Wall Street is the S&P 500 Equal Weight Index. This index holds the same 500 companies with a minor twist: each of the 500 companies is held equally over time. Simple, right? This is in stark contrast to the market-cap version that uses a complex formula that winds up allocating over 50% of the portfolio to only 50 companies. It could be argued that the equal-weight version of the S&P 500 Index is the “pure” version of the index because it invests in each of the 500 companies equally, without bias. By definition, this makes it a better-diversified version of the index as it does not over-weight a select few. Incredibly, since its inception in 2003, this simple & logical version of the index has outperformed its “big brother” nine out of 12 years. Although many investors prefer index funds because of the lower costs, a key benefit of index investing is the peace of mind factor. Since no one knows the future, why second guess it or attempt to time it? An index portfolio manager’s read on current market conditions doesn’t matter, as their job is to track the index and ignore everything else. Index investors can also follow their lead here and attempt to ignore the daily “noise” on Wall Street and focus on their individual long-term goals. For 20 years, we were in the club that tried to beat the S&P 500 Index. Now this simple equal weight strategy might just have the best ticker on Wall Street: INDEX. Michael G. Willis is lead portfolio manager of The Index Group, Inc. in Colorado Springs, Colo.with $3 million under management. 10. Fidelity China Region Fund (MUTF: FHKCX ) By Kheim Do Investors have been bombarded by speculation that the Chinese economy probably already is sliding into a recession, and that it could pull the rest of the industrialized world down as well, especially at an awkward time when the U.S. Federal Reserve Board is contemplating raising interest rates. The increasing chatter of the scenario of a global recession in 2016 is a frightening one, especially when the world economy has barely started recovering from the recent financial crisis. According to some well-followed surveys of investor sentiment by global investment banks including Citigroup and Credit Suisse, the current mood is nearly as depressing as that prevailing in the dark days in the aftermath of the 2008 global financial crisis. The pricing of assets which are dependent on China’s economic growth have fallen significantly. For instance, oil prices and global emerging equity markets have fallen by 60% and 28% respectively over the past 12 months. The book of investment history suggests however that a savvy investor should act in a contrarian manner, when we are at extreme sentiment levels. In other words, the current high level of fear offers excellent long-term buying opportunities. Our global strategic policy group has regularly been monitoring and analyzing massive amounts of data, covering all the major economies around the world, ranging from weekly to 100-year data points. At the beginning of each year, a dedicated specialist team performs a detailed projection of the coming 10-year growth rate of gross domestic product in real, nominal (including inflation) and per capita terms. This, combined with the starting valuation tools, including price/earnings ratio and dividend yield, associated with each major asset class, constitutes the foundation of our 10-year total return forecasts of major bond, equity and currency markets. We are proud to report that our 10-year predictions of equity markets’ total returns made in 2004 for the decade ending 2014 turned out to be “deadly” accurate. Barings’ 10-year forecasts made at the beginning of this year suggests that the best equity market in the coming decade is China. Surprised? I expect so. As a market, China is unloved and current valuations of listed companies suggest an unduly pessimistic scenario of very little growth in nominal economic and corporate profit growth in the coming five to 10 years, while the reverse is true for the U.S. stock market, where high valuations discount a very rosy outlook. China’s price-to-earnings ratio is 8.7 times the next 12 month’s forecast earnings by broking analysts, which is significantly below the past five years’ average, and a little more than half of that of the U.S. equity market. Khiem Do is investment director at Baring Asset Management in Hong Kong with $38.7 billion under management.