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Wisco 2Q2013 Newsletter

Wisco 2Q2013 Newsletter

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Published by Greg Schroeder
Market Review and Commentary for the Second Quarter of 2013.
Market Review and Commentary for the Second Quarter of 2013.

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Published by: Greg Schroeder on Jul 10, 2013
Copyright:Attribution Non-commercial


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Investment Management
Second Quarter 2013
Dear Clients & Friends;
Both stocks and bonds started the quarter on an upbeat note, posting positive returns in April. However, this didn’t lastlong as the direction reversed in May when U.S. interest rates began to rise and economic concerns in China and otherinternational markets began to percolate. As a result, the markets produced weak results across the board in the backhalf of the quarter.In summary, U.S. stocks were the bright spot, rising 3% in the second quarter, while both international equities andxed income markets declined 3%. Agricultural commodities declined 4%, while gold, although not in the Wisco modelportfolios this period, plummeted over 20% in 2Q13.As a reminder, our policy is to rebalance our model portfolios on a semi-annual basis. We do this in order to realign ourmodel portfolios with our current market expectations. To that end, we recently completed our semi-annual model port-folio adjustments and are planning to rebalance client portfolios in mid-July. As always, feel free to contact us to discussthe rebalancing of your portfolio, your targeted risk level, portfolio performance or any other life changes that may berelevant to how your portfolio is invested.On the marketing front, we were excited to launch our new website this quarter. Check it out at www.wiscoinvest.com.We now have a presence on several social media sites, including Facebook, LinkedIn and Twitter. If you are a socialmedia user, please follow us on these sites to receive our current thoughts on the nancial markets. In addition, we willbe hosting two investment seminars at Blackhawk Country Club this quarter, on Wednesday July 31st and Friday August9th. We will be discussing our investment approach as well as our capital market expectations for the remainder of theyear. Please let us know if you would like to attend. Guests are welcome and referrals are always appreciated. We alsohave some tee times reserved on our seminar dates if you would like to get out and play a round of golf with us.We continue to believe that well-diversied, low-costinvestment strategies will produce favorable resultsover time. If you have questions about your investmentportfolios or would like to schedule a meeting pleasecontact us anytime. We appreciate your businessand thank you for your referrals!Sincerely,
The Wisco Team
402 Gammon Place, Suite 380Madison, WI 53719Ofce: 608.442.5507Fax: 608.237.2206
Stephen Share
Chas Janisch
Greg Schroeder
second Quarter 2013 Market Review 
Domestic Equity
The S&P 500 hit a record high of 1669 on May 21stbefore retreating nearly 4% by the end of June.Nevertheless, the domestic stock market stillmanaged to increase a solid 3% in 2Q13 adding toa very strong 1Q13 result. Investor enthusiasm wastempered in June by concern that the Federal Reservewould taper its bond purchasing program. This led tohigher interest rates and lower stock prices. Going forward, we feel investors will be focused on thetrade-off between better economic conditions versusless Fed stimulus. S&P 500 rst quarter operating earnings increased 3% y/y and 1Q13 GDP grew 1.8%,suggesting we continue to be in a slow growth environ-ment. Despite some handwringing about higher rates,we think the Fed will continue to be accommodative inthis slow growth environment, which should continueto drive corporate earnings higher.At Wisco, we continue to have a positive view on U.S.equities. The market still appears reasonably pricedwith the S&P 500 trading at a P/E of 15x 2013consensus earnings. We think short-term traders mayrotate out of bonds and into stocks as the domesticeconomy continues to gain momentum.
 Wisco Investment Management
The Wisco model portfolios are constructed using six different asset classes; Domestic Equity, International Equity,Domestic Fixed Income, Commodities, Domestic Real Estate and Money Market. Our current model portfolio assetclass allocations are as follows:
Wisco Model Portfolios
Conservative Balanced Balanced Growth Growth Aggressive
Domestic Equity 36% 46% 50% 58% 63%International Equity 0% 5% 10% 15% 25%Domestic Fixed Income 44% 32% 23% 12% 0%Commodities 5% 5% 5% 5% 5%Domestic Real Estate 5% 5% 5% 5% 5%Money Market 10% 7% 7% 5% 2%Total 100% 100% 100% 100% 100%Target Volatility
6% 8% 10% 12% 15%
*Target Volatility is our estimate for the annual standard deviation of portfolio returns.Source: Wisco Investment Management LLC 
Source: Dow Jones U.S. Broad Stock Market Index and Wisco.
  Q  3   Q  3   Q  3   Q   Q   Q   Q  3   Q   Q   Q   Q  0  3   Q  0   Q  0   Q  0 
Domestic Equity Returns
International Equity
The international equity markets turned negative in2Q13. Japan’s Nikkei 225 turned down in dramaticfashion this quarter. After reaching 15,627 on May22nd, a 50% year-to-date increase, the index declined13% through June 28th to close at 13,667. In Europe,the STOXX 50 was more or less at in the quarteras pockets of strong corporate performance wereoffset by sluggish economic growth on the continent.Emerging markets declined 9% in the quarter asweakness in China and Brazil drove down results.
Brazil’s IBOVESPA declined 15% in the quarter as higher
 ination and poor economic growth hurt results. InChina, the Shanghai Composite Index declined 12% in
the quarter as its tighter monetary policy has constricted
credit markets creating a drag on economic growth.Wisco continues to believe international equitiesare an important part of a well diversied portfolio.However, we are concerned that emerging marketsmay prove to be the weak link in the global economyand are reducing our holdings in less developedmarkets in favor of a more balanced internationalportfolio. In addition, we are completely exiting international equities in our most conservativemodel to reduce volatility for our risk-averse clients.
Domestic Fixed Income
The Barclays Capital U.S. Aggregate Bond Indexposted its worse quarterly return since 1Q94,declining 2.8%. This decline in value was the result of a dramatic increase in interest rates in May and June.The 10-year treasury yield went from 1.63% on May2nd to 2.48% on June 28th. This increase was at leastpartially caused by concerns the Federal Reserve’spolicies have kept interest rates at unsustainablylow levels and any “tapering” of these policies mightforce interest rates higher. Barclays U.S. TreasuryInation Protected Securities Index (TIPS) declined 7%in the quarter as ination still has not accelerated asmany investors expected.Wisco is reducing our Fixed Income exposure in allour model portfolios as we expect low returns fromthis asset class for at least the next six months. Inaddition, after exiting the TIPS market in most of ourportfolios in January, we now plan to take advantageof the current TIPS price weakness and buy thesesecurities in our more conservative portfolios. Currentination expectations are just 1.55% annually over thenext 10-years per the Cleveland Fed and we feel thismay prove conservative should the economicrecovery strengthen.
Source: MSCI ACWI ex USA and Wisco.
International Equity Returns
  Q  3   Q  3   Q  3   Q   Q   Q   Q  3   Q   Q   Q   Q  0  3   Q  0   Q  0   Q  0 
Source: Barclays Capital U.S. Aggregate Bond Index and Wisco.
Domestic Fixed Income Returns
  Q  3   Q  3   Q  3   Q   Q   Q   Q  3   Q   Q   Q   Q  0  3   Q  0   Q  0   Q  0 

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