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Navigating the Investment Landscape
Portfolio Strategies: Bonds for the Long Run? ..................................... p6 Classic Cars: Your Portfolio’s Midlife Crisis ....................................... p16 David Gergen on the U.S. Political Landscape ............................... p22 Emerging Markets: The New Dividend Play ................................... p26
Private Banking Americas Investment Strategy and Advisory Group:
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As I reflect on 2012 thus far, I am struck by how much has transpired over such a short period of time. The Eurozone drama has commanded the global stage, Chinese monetary policy is a discussion point at nearly every client engagement, and the U.S. economy continues to move in fits and starts. Markets have been volatile and unpredictable, and investor sentiment remains depressed. During these times, we are reminded daily of how important it is to have a global view of the world, as markets and economies are so interconnected. In this edition of Compass, we focus on yield-based investments and their impact on portfolios. Barbara Reinhard, our Chief Investment Strategist, pens a relevant thought leadership piece entitled “Bonds for the Long Run?” She explores fixed income investing in a broad historical context and advises on how investors should position their fixed income allocations in the current interest rate environment. Our colleagues from Private Banking Research in Zurich discuss how emerging market equities are assuming a leadership role with respect to dividend yields. We also feature an interview with former presidential advisor and political analyst David Gergen, who was a featured guest speaker at the Credit Suisse Private Banking Miami Wealth Management Conference. Finally, it’s not often that cars and investing can be analyzed in the same context. In this edition of Compass, I am pleased to say, we make this connection. We discuss how within the last decade, classic car collecting has shifted gears from being a weekend hobby and passion to being a source of real returns. Credit Suisse prides itself on being a global leader in Private Banking and we value the partnerships we create with each of our clients. We are honored that you have chosen Credit Suisse to help you navigate these challenging markets. We hope you will enjoy this edition of Compass, and as always, look forward to your feedback. With warmest regards,
Anthony DeChellis CEO, Private Banking Americas
investors in emerging markets no longer have to forgo income as a component of returns.David Gergen 4 . but the prospects for our putting such a plan in motion at the end of the year don’t look as rosy as they should. it is a passion. we’ll need a balanced plan to bring the deficit down slowly without choking off the recovery – it shouldn’t be hard to do.Inside this issue: Page 16 For many. . Page 26 With dividend yields in excess of developed markets in many cases. Finding the right car and restoring its vintage beauty are leisure pursuits and pastimes that have the potential to reap outsized returns. purchasing vintage automobiles is not simply an investment. Page 22 eventually.
Contents: Portfolio strategies Bonds for the Long Run? 6 8 Where We See Opportunities in Fixed Income key Forecasts 11 12 strategic asset allocation Panorama Shifting Dynamics on the World Stage 14 16 classic cars Your Portfolio’s Midlife Crisis conversations with thought Leaders: David Gergen 22 26 emerging markets: The New Dividend Play A Sample of High Yielding Emerging Market Companies 30 31 Wealth Planning Estate Planning with Depressed Assets Compass 5 .
That. or next year.5% 29. is a mistake. Bonds serve as a diversifier to equities and may help smooth a portfolio’s overall volatility of returns. and commodities will perform over the near term – next week. we are often asked by clients to forecast how asset classes such as equities. as it is the grande dame that most other fixed income instruments are priced against.8% 11. table 1 Fixed income returns Annualized Barclays U. As private investors. Treasury Inflation Protected Securities (TIPS) Index Barclays U.4% today has been an especially meaningful move. fixed income has remarkably outperformed equities. Government Intermediate-Term Bond Index Ibbotson U. currencies.S.1% 5. Low Yields – they can stay Lower for Longer Even though most private investors do not invest directly in U. we see opportunity for additional yield within the riskier part of the fixed income market such as high yield.5% 5.6% 8.0% 8. 5-.2% 10. next month. It feels like a brave new world for many investors to have bond yields at such extraordinarily low levels. with bond yields currently at extremely low absolute levels. Treasury yield is near its all-time low of 1.3% As of 06/29/2012 Source: Bloomberg. the 10-year U. fixed income returns going forward are likely to be considerably constrained. the luxury of taking a long-term view. CFA. we do not have investment committees to answer to.S.4% (see Figure 1). AND SAMUEL BAUMANN.9% 23. Government Long-Term Bond Index Ibbotson U. Credit Suisse Investment Strategy & Advisory Group 6 Portfolio Strategies .S.5% 0.9% 5. it is clear to see portfolio? Not so fast. PRIVATE BANkING AMERICAS INVESTMENT STRATEGY AND ADVISORY GROUP speed read: n Over the last ten years.7% 7. In considering some of the big asset allocation decisions that will affect investment portfolios in the future. Ibbotson. With current bond yields at extremely low levels.S.2% 10-Year 5. remarkably.2% 5.5% in February 2011 to 1.3% 7.S. Treasuries – preferring the favorable tax treatment of municipal bonds or the more attractive yields available in credit-related fixed income – we pay close attention to the underpinnings of the Treasury market. fixed income. and 10-year periods have been well beyond their historical averages and.S. Municipal Bond Index Barclays U.4% 6.Portfolio Strategies BOnDs FOr tHe LOng rUn? WRITTEN BY BARBARA REINHARD. Currently. n Along with high quality fixed income exposure to investment grade credit and municipal bonds. High Grade Long-Term Corporate Bond Index S&P 500 Total Return Index 1-Year 9.9% 11. we can’t help but think very carefully about the fixed income market. in our opinion.5% 5. While U. Treasury yields have been falling steadily since 1981. nor do we have to be slaves to a market benchmark that has little relevance to our personal investment goals. in taking a look at financial market history. the relative collapse of yields from 3. it is hard for us not to view fixed income as an asset class that is going to perform very differently going forward than it has over the past decade. Aggregate Bond Index Ibbotson U. The one tool private investors have is time.S. and emerging market local currency debt.9% 7. The returns for fixed income over the rolling 1-. senior bank loans. n Throw fixed income out of a diversified As investment strategists.S. However. Rarely are we asked to opine on what is going to be the best or worst asset class over the long term.4% 5-Year 6.S. However.4% 8. most bond indexes have beaten the S&P 500 Index (see Table 1).
both sources of returns are constrained. To consider how this low interest rate environment will play out. very little of the return came from coupon and reinvestment of coupon income.S. Ibbotson. Credit Suisse Investment Strategy & Advisory Group table 2 ibbotson U. realistic expectations for Bond returns Although we don’t expect short.0 14. and income return. we looked at some historical examples.5 2. Second. bonds are a consistent diversifier of returns to higher risk assets such as equities.S.4% 4.4% 7. as coupon payments are received and reinvested. the authorities are keeping interest rates artificially repressed – this time. the road ahead for fixed income returns looks to be narrowing.S.S. it raises the question. Treasury Index.0 16. this period of low rates is likely to last far longer than market participants expect. the opportunities to reinvest the coupon payments are curtailed by prevailing interest rates. The last time nominal yields were in this neighborhood. in the 1940s and the 1950s.0 2.0 8.9% Price return 2. As in the 1940s. over the last ten years.0 6. the total return of the Ibbotson U. Government Intermediate-Term Bond Index has an average maturity of five years. Over the last twelve months ended June 2012. Government Intermediate-Term Bond Index was 5.0 3. We think a similar return scenario is likely going forward.9% coupon and reinvestment of coupon income 3. As of 06/29/2012 Source: Bloomberg. Don’t throw the Fixed income Baby Out with the Bath Water If we think high quality fixed income is going to deliver returns well below their long-term average.we have been in a similar low yield environment previously (see Figure 2).S.0% 2. our expectations are for high quality fixed income returns to be well below their historical averages. Government used policies to artificially cap short. Fixed income investors earn returns in two ways: price return.2% 5. bond yields have limited the price appreciation from current levels. Equity returns are largely driven by the Figure 1 U.2% 0. the Federal Reserve and the U. When yields are low. First. why do we include them in the Credit Suisse Asset Allocation Framework? The answer is two-fold. In comparison. with bond yields extremely low.0 4. most of the return was price appreciation due to a decline of yields. The Federal Reserve has said it plans to keep interest rates anchored at close to zero until 2014. This view is incorporated into the Credit Suisse Capital Market Assumptions – five year average annual return projections that are critical inputs into our asset allocation analysis (see Table 4). Government Intermediate-Term (5-year maturity) and Long-Term (20-year maturity) Bond Indexes returned between 1-3% (see Table 3). As seen in Table 2. as consumers continue to deleverage. Pulling it all together. the average annual contribution of interest income accounted for over half of the total return. as yields fall.s. government intermediate-term return composition Annualized total return 10-Year 5-Year 1-Year 5. As of 06/29/2012 Source: Ibbotson Compass 7 .9% 5.5 1.0 12.5 3. the Ibbotson U. First.0 10.0 2. and the turmoil in Europe – but. we see similarities.0% Note: Totals may not add up due to rounding. to service the heavy debt load that has been built up over the last decade. 10-Year treasury Yield Declined significantly since 2011 % 4.S.s.0 0.0 1. Not only were rates low during the 1940s. quiescent inflation. they remained low well into the 1950s – far longer than almost anyone expected.or long-term interest rates in the U. Today.and long-term interest rates to help service the debt incurred during World War II.9%. growth. to rise abruptly – due to continued sluggish U. The Ibbotson U.S.0 Jan-26 Jan-42 Jan-58 Jan-74 Jan-90 Jan-06 1932-1949 1981-2012 Ibbotson U.0 Dec-10 Mar-11 As of 07/23/2012 Source: Bloomberg Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Figure 2 Bond Yields in a Historical context % 18. For different reasons. In the mid-1940s. but out of a similar desire. Government Intermediate-Term Bond Yield Bond Bull Market Note: Ibbotson data has been used for this analysis due to data limitations on the 10-Year U.S.
2% 3.2% -0. Corporates Medium-Term expected return asset class 2.0 Jan-83 Average 0.47 -0.1% 28. Bloomberg .5% 7.4% 17.6% 8. High Yield U.7% ibbotson U. correlations of returns wander through time.25 0.1% 9.9% 6.6 -0.4% 3. government Long-term Bond index 1926-29 1930-39 1940-49 1950-59 1960-69 1970-79 1980-89 1990-99 2000-09 2010 2011 average 5.S. As of 06/29/2012 Source: Ibbotson. Long-Term U. the Mexican Tequila Crisis in 1994. fixed income investments blunt the volatility of riskier types of assets classes such as equities.67 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11 S&P 500 Index/Barclays Municipal Bond Index S&P 500 Index/Ibbotson U.1% As of 07/05/2012 Source: Credit Suisse Global Research Capital Market Assumptions (CMAs) . These differences in drivers of returns are illustrated by the correlations of returns between these asset classes. the Ibbotson U. An entire academic field of study called behavioral finance has developed out of analyzing investors’ emotional behavior. government intermediate-term Bond index 4.6% 0. Tax-Exempt. In an asset allocation context.8% 7.2% 4. Government Intermediate-Term Bond Index.1% 0.7% 10. 3) Ibbotson data has been used for this analysis as it is has a more comprehensive data history than a constant maturity U.3% 6.0% 8.1% Notes: 1) The Compounded Annual Growth Rate measures the rate of return over a defined period taking into account annual compounding. Loss aversion refers to an investor’s tendency to prefer avoiding losses over acquiring gains.1% 2. so bonds act negatively to a fast growth environment.S.2% 6.s. High yield and senior bank loans are among the segments within fixed income that we consider attractive. after market shocks. Obviously. and the Financial Crisis of 2008.000.9% 7.6% 7. Medium-Term U.S.0% 1.2% 7.8% 1. A correlation of -1 indicates the returns of the assets move in the opposite direction.3% 6. Corporates Long-Term U.26 Jan-91 Maximum 0.5% 12.S.0% 11. Medium-Term U.9% 2. respectively.s.25 (see Figure 3). and 20 years. annualized.68 0. Fixed Income Developed Emerging Markets Local Fixed Income expected return 3.000 than they would be satisfied to win USD 1. the average correlation since January 1983 is 0. Bonds are the antithesis: their returns are driven by the fixed coupon payment stream and its purchasing power. Inflation-Linked Non-U.6% 12.6 0.8 -1.S.7% 6.70 0. 2) Average: 1/31/1926 through 6/30/2012. Looking at the 36-month rolling correlations of returns of municipal bonds and the S&P 500 Index. In table 4 credit suisse capital market assumptions Projected Five-Year Average Annual Return asset class U. we also see opportunities for additional yield within the riskier parts of the fixed income market (see Figure 4).0 0.5% 5.5% U. Emerging market debt also looks appealing.S. and the Ibbotson U.S.4 0.2% 13. Treasuries.2 0. which puts them in an especially good position to service their debt and interest expenses.S. The Ibbotson U.62 -0.4 -0. Where We see Opportunities in Fixed income Although we maintain our high-credit quality fixed income exposure in our Credit Suisse Asset Allocation Framework through municipal and investment grade corporate bonds.2 -0.0 -0. they were able to re-establish their long-term relationship.9% 3. It is the smoothing of returns that fixed income provides to a portfolio of riskier assets that we find appealing to help investors cope with the emotional side of investing. Long-Term U. Treasury Index.s.09 0. As a practical example.0% 1.S. loss aversion explains how people would be more disappointed to lose USD 1. Second.5% 1.2% 5. in our view.S.4% ibbotson U. High Grade LongTerm Corporate Bond Index have maturities of 20 years.4% 7.S.S. Government Long-Term Bond Index.S. A correlation of +1 indicates the two returns of the assets move in tandem. As of 06/29/2012 Source: Ibbotson growth of corporate profits. such as the Crash of 1987. Corporations have record amounts of cash on their balance sheets. 5 years. Treasuries.1% 1.5% 5. High Grade Long-Term Corporate Bond Index Note: The correlation measures the degree and relationship between returns of two assets on a scale of +1 to -1. Government Intermediate-Term Bond Index S&P 500 Index/Ibbotson U.27 Jan-87 Minimum -0. bonds are a means of addressing loss aversion.7% 1. High grade Long-term corporate Bond index 5.S. Tax-Exempt.table 3 Bond index compounded annual growth rates ibbotson U.4% -1.1% 4. but noticeably.July 2012 Update Figure 3 Bonds exhibit Low correlation with equities 36-Month Rolling Correlation 1.S.8 0. even though correlations rose.
10-Year Municipal Treasury Note 10-Year G.O. the U.…with bond yields currently at extremely low absolute levels.8% 5. issues of today While we favor taking a long-term view to find investment opportunities. as neither party wants to be blamed for an avoidable economic calamity. That demand won’t be satiated in the near term.8% 4. and establishing that ESM bonds are no longer senior to government bonds. The real issue becomes how much the uncertainty about the fiscal cliff weakens the broader economy. However.1% 7. authorization of the European Stability Mechanism (ESM) to inject funds directly into the banks. We are encouraged by the almost 10% decline in the euro since the end of February as a cheaper currency will help make the value of their exports relatively less expensive. but growth and a mutualization of the debt will be critical for a final resolution for Europe.2% 2. The current muddling through approach adopted by policy makers makes the recurrence of these mini-crises quite likely. Business confidence surveys and capital expenditures are key indicators we are closely monitoring. Compass 9 Figure 4 credit Offers Higher Yields Fixed Income Yields across Asset Classes 5. At the end of 2012. rather than recapitalizing efforts flowing through the sovereign governments. While investor expectations for the path forward for Europe are still quite negative. many emerging market countries. but a few years of 1-3% returns may prove to be a likely outcome that investors should be prepared for in our view.S. as with so many of the other summits. we cannot ignore some of the pressing current issues.5% 1. we think politicians are aware that the cost of a Eurozone break-up would be far greater than the cost of a bail-out. Turning to Europe: the European Union Summit at the end of June produced some promising initiatives: the formation of a single banking supervisor for the EU. fiscal cliff comes to mind. AAA Bond1 1 Moody’s Baa Corporate Bond Emerging Credit Suisse Credit Suisse Markets Leveraged High Yield Bond Loan Index Bond Index Tax equivalent yield As of 07/23/2012 Source: Bloomberg. it is hard for us not to view fixed income as an asset class that is going to perform very differently going forward than it has over the past decade. Specifically. Thomson Reuters Municipal Market Monitor.4% U. a fiscal contraction of that magnitude would cause a recession. With an economy growing at a 2% rate. We view all three of these segments of the fixed income markets as complements to our core high-credit quality holdings for investors willing to take additional risk.S. We continue to think the expiration of all of the measures at the start of 2013 is a highly unlikely outcome. An agreement of some sort is likely after the November election in the lame duck session of Congress. These uncertainties add up to continued robust demand for high quality fixed income assets. GDP.S. implementation and execution are still risks. Credit Suisse Fixed Income Research . the expiration of the Bush tax cuts and automatic sequestration of spending cuts simultaneously will amount to about 4% of U. currencies are now quite inexpensive and inflationary pressures have been alleviated by monetary tightening measures and the recent decline in commodity prices.
Africa ▼ ▼ Fixed income ▼ U.USD vs. or ▼ Indicates a modest investment conviction in over/underweight position. Treasury Inflation Protected U.S. CAD USD vs. USD NZD vs. Securitized U. JPY USD vs.S. Uk Asia Pacific ex-Japan Canada U. Treasury equities: U. MXN EUR vs.S.S. price change with USD as base currency Source: Private Banking Americas Investment Strategy and Advisory Group Energy or ▼ ▼ Indicates a strong investment conviction in over/underweight position.S. USD Europe. Indicates a neutral investment conviction. Bloomberg. CHF (As of July 31. Japan Europe ex-Uk emerging markets Asia Latin America USD vs. Municipal U. High Yield U. USD USD vs. sector Consumer Staples Utilities Telecomm Services Information Technology Energy Industrials ▼ ▼ ▼ ▼ ▼ Consumer Discretionary ▼▼ Financials Materials ▼▼ ▼▼ key ▼ Positive Neutral Negative ▼ commodities ▼ Precious Metals Industrial Metals Livestock Agriculture Source: Private Banking Global Research.S. USD ▼ ▼ ▼ AUD vs. Thomson Reuters DataStream *3-month or 12-month forecasts as indicated **Level with USD as counter currency. BRL GBP vs. 2012) Arrows represent the current Private Banking Americas Investment Strategy and Advisory Group absolute market view for 6-12+ months. Investment Grade Corporate Emerging Markets U. Mid East. ▼ ▼ 10 Portfolio Strategies ▼ ▼ ▼ ▼ ▼ ▼ ▼ ▼ ▼▼ ▼▼ Health Care ▼ ▼ ▼ ▼ ▼ ▼ ▼ ▼ ▼▼ ▼ ▼ ▼ ▼ ▼ ▼ Outlook Summary equities: regional Developed markets currency ▼ ▼ .s.S.
00 1.99 1415.10 -0.03 1.30 1.76 12. USD/pound) Aluminum Copper Agriculture (USD/bushel) Wheat Corn currencies (UsD vs.1.00 3m 1.57 0.6 .20 0.343 2.00 1.000 2013e 3.06 12m 1.80 0.326 5.1 .20 12m 2.40 1.04 inflation 12e 3.20 2.81 8.7% 1.1% 12m 100.global equity indices U.29% 1.00 1.00 1500.03 0.47% 0.00 7/31/12 1.12 1.00 3.00 28.75 9.74 13.20 6.3% 0.8 .379 2.98 0.0% 2. 2012) Source: Private Banking Global Research. USD/ounce) Gold Silver Platinum Base Metals (Spot.05 0.56 1.21 1614.00 2.80 3.20 6.86 3.90 6.00 28. Bloomberg.8 .S.571 6.07 7/31/12 1.30 2.54 9.00 1650.00 0.20 2.90 key Forecasts* (As of July 31.06 3.43 8.031 9.097 40. price change with USD as base currency Compass 11 .70 3m 1.47% 1.33 2.1.10 2.40 3.00 1650.50 12m 1.81 13.5 .00 3.800 1. Thomson Reuters DataStream *3-month or 12-month forecasts as indicated **Level with USD as counter currency.50 1650.18 80.) Euro** Japanese Yen British Pound** Swiss Franc Canadian Dollar Australian Dollar** New Zealand Dollar** Mexican Peso Brazilian Real 7/31/12 1.2.S.50 7.91 3.1.704 2012e 3.0% 3m 95.9 .8% 0.50 1.S. Euro Area Japan Non-Japan Asia Latin America interest rates (10-Year government) U.86 3.88 8.00 0.2.00 0.6% 1.2 .635 8.1.21 79.1. Natural Gas (USD/mmbtu) Precious Metals (Spot.000 45.4 .98 1.40 3.23 78.00 1. Euro Area Uk Japan commodities Energy WTI Crude Oil (USD/barrel) U.4% 1.30 27.96 0.75 0.S.54 1. (S&P 500) Euro Area (Euro Stoxx 50) Uk (FTSE 100) Japan (Nikkei 225) Asia Ex-Japan (MSCI Asia AC ex-Japan) Brazil (Bovespa) Mexico (IPC) real gDP (in %) Global U.2.79% 7/31/12 88.695 952 56.077 71.
5% 2.0% 11.5% 3.5% 1.0% 0.0% 5.0% 6.0% saa +/3.0% 5.0% 38. Emerging Markets Fixed Income USD.5% 3.0% 0.5% 3.0% 80. 12 Portfolio Strategies .0% 54 55 Baa 5.0% 0.0% 0.0% 20.0% Dev.0% -2. It is comprised of a long-term Benchmark Asset Allocation (BAA) and a shorter-term Strategic Asset Allocation (SAA).0% 5.0% -1.0% 4. Taxable Non-USD.0% 5.5% 2.0% 0.0% 2.0% Source: Private Banking Americas Investment Strategy and Advisory Group important information: The proposed Benchmark and Strategic Asset Allocations for each of the risk budgets referenced above are created by the Private Banking Americas Investment Strategy and Advisory group.and underweights relative to the BAA.0% 16. Ultra High Net Worth Individuals (As of July 31. It is developed from the ideas and forecasts of the most accomplished senior strategists at Credit Suisse and incorporates all of the fundamental concepts of asset allocation. The Benchmark Asset Allocation (BAA).0% 15.0% 5.0% 5. for a 3-7 year time horizon.0% 1. Emerging Markets Fixed Income USD.0% 1.0% -1.0% 0.0% 3. is the neutral position reflecting the predefined risk budgets and meets investment objectives over a full market cycle.0% 2.S.0% 24.Strategic Asset Allocation For U.5% 16.0% 6.0% 10. the Benchmark asset allocation (Baa) is based on the Credit Suisse Capital Market Assumptions and is expected to remain relatively static for a full market cycle.5% 5.5% 38. It utilizes a 6-12 month time horizon.0% 0.0% 55.0% 0.5% -2.0% 22. 2012) Overview The Credit Suisse Global Asset Allocation Framework (GAAF) is a dynamic process that sets recommended benchmark weightings for each of the asset classes we believe should be incorporated in a balanced asset allocation.0% 0.0% 0.0% -2.0% -1. Taxable Non-USD.S. Tax-Exempt USD.0% 0.0% 2.S.0% saa +/Cash USD Equities United States 4.0% 54.0% 0.0% 5. the strategic asset allocation (saa) Based on market behavior and recommendations from Credit Suisse’s global strategists.0% 0.0% -0.5% 5.0% 3.5% 5. Equities ex-U. Taxable Alternative Investments Commodities Gold Hedge Funds Private Equity Real Estate (Property) 80. the SAA seeks to establish strategic over.0% 0.0% 2.0% 5.0% 4.0% 1.0% 21.0% 1. Taxable Alternative Investments Commodities Gold Hedge Funds Private Equity Real Estate (Property) 5.0% 2.0% 22.0% 0.0% -2.5% 14. keY Recommended (SAA) Neutral (BAA) risk Budget 1: Low 5 4 16 15 risk Budget 2: Low-medium 5 20 21 3 22 20 80 80 Baa Cash USD Equities United States Dev.0% 56.0% 0. Tax-Exempt USD.0% 56.5% 5.0% 20. Equities ex-U.0% 5. The primary goal of the SAA is to generate excess return and/or reduce risk relative to the BAA.0% 1.
0% 0.0% 0.0% 7.0% 10.5% 30.0% 13.0% 1.0% 20.0% 27.0% 10.0% 1.S.0% 2.0% 29.0% 9.0% 0.0% 0.0% 2.0% -1.0% 0.0% 11.0% 10.0% 6.0% 10.0% 2. for a 6-12+ month time horizon. Equities ex-U.0% 21.0% 0.0% -1. Taxable Non-USD.0% 1.0% 0.0% 26.0% 3.0% 5.0% saa +/Cash USD Equities United States Emerging Markets Fixed Income USD. Taxable Non-USD.0% -3. Taxable Non-USD.5% 3. expresses views resulting in temporary deviations from the BAA to generate expected excess returns or reduce risk.5% 28.5% 3.0% -3.0% 3.0% 30.5% 10.5% 16.0% 15.0% 58.0% 43.0% 5.5% 5. Taxable Alternative Investments Commodities Gold Hedge Funds Private Equity Real Estate (Property) 5.0% 2.0% 0. Compass 13 .0% 5.5% 0.5% 2.5% 1.0% 31.0% 3.S. Tax-Exempt USD.5% United States Emerging Markets Fixed Income USD.5% 55.0% 8.0% -0.0% 3.0% 30.0% 67.0% 20.0% 1.0% -3.0% 2.0% Dev.0% 32.0% -3.5% 5.S.0% 10.0% 1. 16.0% 31.0% -1. Taxable Alternative Investments Commodities Gold Hedge Funds Private Equity Real Estate (Property) Baa 5.0% 2.0% 10.0% 15.5% 25.0% -3.0% 5. Taxable Alternative Investments Commodities Gold Hedge Funds Private Equity Real Estate (Property) Dev.5% Dev.0% 0.0% 8.0% 2.0% 10.0% 5.0% 5.5% 18.0% 0.0% 0.0% saa +/Cash USD Equities 9 Baa 5.0% 3.0% 0.0% 3.0% 3.5% 13.0% 0.0% 1.5% -0.0% 0.5% 9.0% -3.5% 1.0% 2.0% 22.5% 3. Alternative investments are typically high-risk investment vehicles which are available only to qualified individuals or entities that are willing to assume above average risk and sustain limited liquidity with a portion of their net worth.5% 65.0% -1. Please refer to the attached “Important Legal Information” for important disclosures relating to alternative investments.0% 0.0% 5.5% -1.0% -1.0% 0.risk Budget 3: medium 5 25 26 2 43 40 risk Budget 4: medium-High 5 30 31 2 58 55 risk Budget 5: High 5 2 30 31 67 65 10 29 30 Baa Cash USD Equities United States Emerging Markets Fixed Income USD.5% 2. Tax-Exempt USD. Equities ex-U.0% 0. Tax-Exempt USD. Equities ex-U.0% 2.5% 2.0% The Strategic Asset Allocation (SAA).0% 40.0% 16.0% 1.0% 9.5% 2. 19.0% saa +/- 2.0% 10.5% 1.0% -1.0% 0. 12.5% 33.0% 2.0% 11.
the French government announced plans to raise taxes by over USD 9 billion this year. Credit Suisse (07.27. Bloomberg (06.2012 GDP growth in the Uk is expected to get a boost from this summer’s Olympic games in London.2012) The Daily Telegraph (07. as independent events collectively shift our global perspective.2012.06.06. Pew Research (02.23. each event contributes in some way to the accelerating pace of global change. As a result of the slowdown in economic growth momentum.2012).S. as the worst U.11.23. Sources: Associated Press (07. from 10% in 1987 to 18%. The average partisan gap has nearly doubled over the past 25 years. 07.2012.2012 The Brazilian real fell over 31% against the U.11.04.2012). The Wall Street Journal (07.17.22.S. the government forecast that it would have to spend EUR 52 billion to service its debt in 2013. the largest decrease among major emerging market currencies. It now expects that cost to total only EUR 20 billion next year. The Straits Times (04. 07.Panorama is a 10.22. and supplies are declining. 07. 07. In an attempt to contain the current budget deficit. drought since 1988 has impacted the world’s largest harvest. 07.02. Three years ago. 07.08. largely derived from construction contracts with local businesses.2012). Small and medium-size companies are expected to help deliver more than half of the total GDP contribution.2012.2012) .2012 According to Pew Research.5 billion.04.2012).2012). 02.2012 06. Central Bank of Brazil has reduced interest rates by 450 basis points over the past twelve months.27. 06.02.2012 Corn prices have surged more than 50% from mid-June through mid-July. Germany has financed billions of euros in debt at record low interest rates. The GDP impact is expected to reach nearly GBP 16.000-foot view of notable events and milestones reported around the world. voters will head to the polls in November more polarized along partisan lines than at any point in recent history. dollar over the past twelve months.2012 As continental Europe’s largest economy. targeting wealthy individuals and companies.
908 units sold in all of 2011.17. a resource valued at twice kenya’s annual economic output at today’s oil prices. The World Bank expects the share of middle class in China to grow from just above 10% in 2009 to above 70% in 2030. In the first six months alone. units versus the 15.v5. 06.2012 As the global real estate market slowly recovers from the depths of the 2008 lows. Singapore is expecting home sales in 2012 to reach all-time highs. The drilling is targeting as much as 700 million barrels.11. The market for mobile applications is expected to be worth an upwards of USD 17 billion globally by the end of the year. 04.2 billion currently own cellphones.2012 More than half of India’s population of 1. 07.2012 kenya will undergo drilling on its first deepwater oil well.11.08.2012 07.098.2012 Chinese luxury brand consumption is projected to grow by 18% annually and to account for 20% of the global luxury demand by 2015 – it currently accounts for 10% – primarily driven by China’s fast-growing wealthy middle class. sales reached 12. Panorama shifting Dynamics on the World stage Compass 15 . with over 100 million apps downloaded every month.
Pictured above is the 2011 Best of Show winner.Classic Cars: Y Portfolio’s Midlife Crisis our WRITTEN BY SCOTT ROSENBLATT. 2012 will mark the third year that Credit Suisse has officially sponsored the Concours. one of the premier classic car shows. 200 of the most prized collector cars in the world roll onto one of the best finishing holes in golf – the eighteenth fairway at Pebble Beach. The occasion is the prestigious Pebble Beach Concours d’Elegance. PRIVATE BANkING AMERICAS INVESTMENT STRATEGY & ADVISORY GROUP In August each year. a 1934 Voisin C-25 Aerodyne. .
has driven record auction sales and provided a dependable diversifier and source of returns for savvy collectors.3% through June and 18. com- bined with a limited supply in the market.769 $7. table 1 ten most expensive cars sold at Public auction* Year 1 2 3 4 5 6 7 8 9 10 1957 1957 1961 1931 1931 1937 1962 1937 1937 1965 car make Ferrari Ferrari Ferrari Duesenberg Bugatti Mercedes-Benz Ferrari Mercedes-Benz Bugatti Shelby car model 250 Testa Rossa 250 Testa Rossa 250 GT Spyder California SWB Model J Murphy-Bodied Coupe Type 41 kellner Coupe 540k Special Roadster 330 TRI/LM Testa Rossa 540k Special Roadster Type 57 Atlantic Coupe Daytona Cobra Coupe Purchase Price1 $16.000 $12.000 $7. are enough to bridge the widest gaps. and hedge fund magnate Ray Dalio have in common? They all collect classic cars. In Compass.390. outperforming more traditional asset classes such as equities and commodities. and in the midst of the current difficulties in Europe.000 $9.236 $10. rarely do we have the opportunity to literally ‘navigate’ via a tangible investment vehicle like a classic car.592 $10. speed read: n The classic car market has returned 10.090. n Compared to similar collectible invest- ments such as wine or art.000 Date Aug-11 May-09 May-08 Aug-11 Nov-87 Aug-11 May-07 Oct-07 Aug-08 Aug-09 auction event Gooding & Company RM Auctions Italy RM Auctions Italy Gooding & Company Christie’s Auction House Gooding & Company RM Auctions Italy RM Auctions Gooding & Company Mecum Auctions *Commission included 1 Nominal value As of 07/28/2012 Source: Classic Car Auction Yearbook (data by Historica Selecta) Compass 17 .265. during points of market stress.910.2% year-over-year.685. There are few passions in this world that can bring successful business leaders together from such disparate industries. activity and prices at current classic car auctions have reached new heights (see Table 1). classic cars have kept pace and offered less volatile returns in recent years. and the sheer joy of owning what many have dreamed of since childhood. bringing a diverse and affluent field of investors together behind the wheel.What do fashion designer Ralph Lauren.000 $9.193.000 $9. buoyed by newly interested investors and a generation of established collectors.920. the intrinsic value and limited supply in the classic car market have drawn in new collectors and investors alike. fixed income. n The intrinsic value of classic cars. and commodities.438 $8.340. market Overview Through the turmoil of the 2008 credit crisis. classic car collecting has proven to be a tangible investment that is largely uncorrelated to the ebb and flow of mainstream asset classes (see Table 2).680. In fact. we often navigate the investment landscape on behalf of our clients’ traditional assets such as equities.800. Interestingly. comedian Jay Leno. four of the ten most expensive cars have been sold at auction since the Great Recession. The resilience of the classic car market over the years. As investors and financial professionals grapple with the ongoing volatility in risk assets.
For many participating in today’s record-breaking auctions. Currently. classic cars have kept pace and offered less volatile returns in recent years (see Figure 2). Warren Buffet was offered the collection of over 1. Buffet passed on what would have added to his impeccable investment portfolio. At a recent auction in Monaco. The star of that show was the 1973 Porsche 917/30 Can-Am Spyder.4 million. Ferraris generated over USD 41 million in total sales. The most expensive and lucrative collectible cars remain those with a finite supply and timeless design. it is clear that those who collect – out of pure passion and interest – have benefited over the past decade. when the ballyhooed Harrah’s collection was made available for sale. with European sports cars leading the charge. Auction house Gooding & Co. with more than USD 36 million in sales. As of 06/29/2012 Source: Historic Automobile Group International (HAGI).10 -0. you will often find multiple generations of a family collecting and restoring together. Figure 2 cars Have Been Less volatile than Other collectibles 180 160 140 120 100 80 Dec-08 May-09 Oct-09 May-10 Aug-10 Jan-11 Jun-11 Nov-11 Apr-12 ArtPrice Global Index (USD)1 HAGI Top Index Liv-ex Fine Wine 100 Index2 1 The ArtPrice Global Index is a price index based on the repeated sales. The above analysis uses historical monthly returns from 12/31/2008-6/29/2012. Bloomberg Figure 1 classic cars Have Outperformed equities and commodities 600 500 400 300 200 100 0 2000 2002 2004 2006 2008 2010 2012 CRB Commodity Index HAGI Top Index1 MSCI All Country World Index 1 The HAGI Top Index is designed to measure the rare collector’s automobile market. Compared to similar collectible investments such as wine or art. mostly devoted to Porsches and Ferraris. back test. the three most expensive cars sold at public auction date from the 50s and 60s.5 million. cars from the early part of the 20th century are beginning to take a back seat to those from the 50s and 60s. Since December 2008.37 As measured by the Historic Automobile Group International’s (HAGI) Top Index. the Spider alone sold for nearly USD 6.000 repeated sales gathered from more than 4. ArtPrice. which are experiencing a swift upswing in interest and price. 2000-2008: Annual returns. As of 06/29/2012 Source: Historic Automobile Group International (HAGI). outperforming more traditional asset classes such as equities and commodities (see Figure 1). At today’s top auctions and classic car shows. with a sample of more than 400. Collectors often share this passion with younger generations.s. Note: The correlation measures the degree and relationship between returns of two assets on a scale of +1 to -1.08 -0. Finding the right car and restoring its vintage beauty are leisure pursuits and pastimes that have the potential to reap outsized returns. auction prices rose by 20% in 2011. it is a passion. purchasing vintage automobiles is not simply an investment. equal weighted. While we do not make room for classic cars in our Strategic Asset Allocation Framework (see page 12).table 2 classic car correlation of returns with select asset classes (2009-2012) crB s&P msci all commodity 500 country index index World index HAGI Top Index 0. A correlation of +1 indicates the two returns of the assets move in tandem.’s Amelia Island sale this past spring reinforced this trend. Liv-ex 18 Classic Cars .000 vintage cars for just under USD 1 million. With fewer living aficionados. ranging from pre-war to the new millennium and is currently comprised of 50 car models drawn from 19 different marques. For avid collectors.2% year-over-year. the classic car index has cumulatively returned 53%. each setting new records in just the last four years.02 -0.07 spot gold Barclays U. According to HAGI.3% through June and 18. One need only look back to 1980. a diverse collection of cars at the high end of the market has proven especially resilient in the face of market shocks and unease. the classic car market has returned 10. Weighing the opportunity. Over the subsequent decade. A correlation of -1 indicates the returns of the assets move in the opposite direction. Ultimately. The index is calculated monthly. Cars with these attributes have appreciated in value consistently through the decades.com. parts of the collection would go on to generate nearly USD 80 million in various private sales. One component of the collection. Among the 22 Ferraris auctioned. Price treasury index index 0. Bloomberg Buying nostalgia For many. a market index for exceptional historic automobiles.500 auction houses worldwide. Value in the market tends to shift in unison with the age of the average classic car collector. their interest lies in the cars they remember fondly from their youth. 2 The Liv-ex Fine Wine 100 Index represents the price movement of 100 of the most sought-after fine wines for which there is a strong secondary market. 2009-present: market cap weighted As of 06/29/2012 Source: Historic Automobile Group International (HAGI). led by the rare 625 TRC Spider. an auction record for Porsche. the power of nostalgia tends to take a back seat to the sheer value associated with rarity of the car. The index is calculated monthly. which sold for USD 4.
S. expenses typically include upkeep. author of the Classic Car Auction Yearbook and Chief Class Judge of the FIVA Award for “the best preserved car” at the Pebble Beach Concours d’Elegance.5 million. Experienced owners spend a great deal of time and money restoring models to their vintage conditions and insuring their prized investments. most experts advise prospective collectors to look for the best example within their Compass 19 . there can be solid potential for price appreciation. he was likely focused on completing Berkshire Hathaway’s USD 47 million initial investment in Geico Corp. classic cars are no different. which is feverishly active.) According to Adolfo Orsi. storage. as with many collectibles.) classic Does not always equal value Not all collectible cars are equally classic. almost double the market value of a perfectly restored example of the exact same model. Adolfo notes that these instances are quite rare and apply to a very limited number of cars and fortunate collectors. The 1962 Ferrari 250 GTO. the higher the price. Based on these criteria. which reinforced the steep value associated with vehicles that have a notable lineage and an exciting backstory. Among the almost three million classic cars located in the U. even as different types and models go in and out of fashion. For this reason. are generally considered “classics”. (On average. classic cars are a highly segmented market. shows first-hand the enormous difference between the cars as they were when originally manufactured and how they are once restored. dazzling paintwork and new interiors. pristine examples. It has changed hands several times since 1996.500 to 40 million.Ferrari 250 testa rossa (Pebble Beach 2011 auction) Photo by Pawel Litwinski ©2011 courtesy of gooding & company the 1931 Bugatti Royale Coupe (one of only six built). However. when a preserved 1966 Ferrari 275 GTB sold for USD 1. at about 10 million units globally. the extent to which a car has been preserved over the decades is an important factor.” investment Drivers of classic cars n expenses Every investment has its requisite expense and inherent risk. the pool of collectible cars is quite large. a car can Only Be Original Once Beyond the very best. originally made for former Formula One racer Stirling Moss. For collectors. leather seats marked by use on the green next to their restored counterparts adorned with gleaming chrome. when it was originally purchased for a tenth of the price. If one buys the best example of whatever model fits his or her budget and maintains it in good order. “Showing these cars with their cracked paintwork. would have returned Buffet’s investment several times in the coming decades. Collectors have only recently begun to place value in cars that have remained mostly untouched for the better part of the past century.. they net 25% to 50% more than a comparable restored car. “Restorers still have a long working life ahead of them. prices range from USD 3.” Last year’s Pebble Beach auction offered a prime example of this trend in action. and insurance. the trend is worth noting. a car is recognized as a “collectible” when a vintage model exceeds its costs as a new model. vehicles holding or appreciating in value that were produced in 1972 or earlier. an independent art appraisal and advisory firm with expertise in classic cars and motorcycles. According to Winston Art Group. con- tributing to the robust auction results in recent years. (It’s worth noting that in the same year Buffet turned down this offer. Generally speaking. The winning bid at an auction does not reflect the total cost of this investment vehicle over the long run. The preserved car is therefore the benchmark for all cars undergoing restoration. The rarer the car. the best investment potential continues to lie in the upper range of the market. was sold in February for USD 35 million. More specifically.
s. are items of inherent worth. often. due to the growing demand for their own brands. like Porsche. can you discuss the general health of the classic car marketplace today? The classic car market is currently very healthy. and still survive here – and because of the dollar’s comparative weakness against other currencies – we have seen a large number of these cars repatriated at very strong prices. While the market may fluctuate. and sells perfect examples of its own classic vehicles.S. which purchases. maintains.ask an expert Answers from Mckeel Hagerty. they also have seen a boost in brand value when one of their vintage models makes history at auction. CEO of Hagerty Hagerty is one of the largest specialty classic car insurance providers. handle restorations of their decade-old models directly in-house for the most discerning collectors. as money saved purchasing a vintage vehicle in subpar condition tends to be spent many times over on restoration. Aside from the lofty price tag associated with the best “examples”. especially when compared to the volatile investment environment discussed in the news on a daily basis. Much of this risk can be mitigated through proper collectible advising services. budgets. there is no Enron (or Greek default) scenario built into classic car ownership…a Mercedes 300SL Gullwing won’t declare bankruptcy on a Monday and be worthless. Which segments of the market have fared the best in recent years? The cars that have performed the best in recent years are those that have international appeal. Because of the fact that so many foreign classics were imported to the U. companies such as Ferrari actually provide authentication and certification services. the deduction amount also will depend on whether the charity’s use of the property relates to its mission. interest in classics follows. Aside from the increased visibility. Certain cars will likely never go out of style. Have you noticed any correlation to events in europe? Those who look at classic cars as investments rather than just objects of enjoyment focus on the safety of investing in tangibles in times of economic uncertainty. prepurchase inspections. n 20 Classic Cars . Classic cars. which are currently 15% for personal or investment assets held for over a year and up to 35%. n Brand Several of the large public automobile companies have also been very active in the classic car market over the last decade. Accordingly. unlike other forms of investments. In general. and by buying cars with no significant restorative needs. Collectors should be aware of the tax consequences upon the sale of their collectibles. We know there is a robust market for classic cars in the U. high net worth collectors (as opposed to speculators) who feel the clock ticking in terms of their ability to acquire their most aspirational classic cars. The highest end of the market is populated by extremely discerning. American muscle cars have had a tougher time over the last few years because of the fact that so much of the money that flowed into that market was related in some way to money made from (or borrowed against) real estate. and europe. How do investors manage the changing tastes in the markets. Manufactures have not only benefited from providing spare parts. This rate differs from the general federal capital gains tax rates. as different types of vehicles go in and out of favor? The savviest investors tend to focus on cars that have timeless appeal. if held for one year or less. accessibility Managing the risks and expenses associated with this asset class can make investing in classic cars inaccessible and cumbersome for anyone lacking a 10-car garage and acumen for the classic automobile scene. One of the manufacturers most directly linked to the classics market is Mercedes-Benz. That said. but what about emerging markets? Some fine vintage car shows have been held in India and the Middle East in recent years. gains from the sale of a collectible held for more than one year remain subject to a 28% federal capital gains tax rate. and. As for donating collectibles. car collecting carries the responsibility of storing the physical asset. insuring approximately 700.000 vehicles worldwide. Each successive auction cycle since 2010 has seen records continually broken in terms of total dollar volume and individual records. China is becoming a large market for late-model exotic cars. a Jaguar E-type or a Ferrari California Spider or a split-window Corvette are examples of icons that are unlikely to fall out of favor. and. but we have yet to see a high profile Asian show or auction (outside of Japan) that has made a major impact. collectors should carefully plan any donations of their collectibles with their tax advisor to maximize the tax benefits of their contributions.
classic cars remain a niche investment. For those with the means and the passion.000).130. make it the type of investment owners want to display. but remain so in the upper echelons of the market. As a rule of thumb.000 . there has been a nascent movement toward broadening access to the classic car market. driving auction sales higher (See figure 3). has created a virtuous cycle that has helped maintain a level of safety and liquidity at the high end of the market. are driving up demand for the most sought-after vintage autos and enticing new entrants. the more liquid it tends to be. The solid performance and wealth preservation characteristics are clearly evident. conclusion Classic cars are an aspirational investment with social motivations. offers several examples of reliable entry points for aspiring collectors: “We believe in very good examples. who lack the time or the means to properly maintain it. coupled by the relative strength and resilience of this Figure 3 total auction sales USD million 520 480 440 400 360 320 280 240 200 160 120 80 40 0 1995 1997 1999 2001 2003 2005 2007 2009 2011 As of 12/31/2011 Source: Classic Car Auction Yearbook (data Historica Selecta) Compass 21 . Still. such as Jaguar Xk120s (USD 90. president and founder of auction house Gooding & Company.000 . how can those interested in this investment. n investment class.000 . gain exposure to classic automobiles in a more diverse and cost efficient way? In recent years. a classic car is not a very liquid investment.110. say. The finite supply and costly barriers to entry. David cautions that the rarest variants or show-quality examples of each of these will often run more in value. “Classic car funds” aim to provide interested investors with diversified exposure to the classic car market by purchasing a basket of classic cars with notable lineages. courtesy of autoweek 1973 Porsche 917/30 can-am spyder. This dynamic. courtesy of Winston art group One can go out and invest in most other alternative asset classes without concerning one’s self with the storage of.1936 mercedes-Benz 540k special roadster.” However. classic car collecting marries treasure with pleasure in the form of a tangible portfolio diversifier. courtesy of Dayerses 1931 Duesenberg model J “Whitell coupe”. combined with the craftsmanship and design. the better the car. gold bullion or a barrel of oil.90. either via public auction or private sale. and Porsche 911s (USD 50. David Gooding. of post-war sports cars.000). Mercedes-Benz 280s (USD 50. Liquidity While the best models typically can find buyers. Owners usually need time to adequately market and sell their investment. So. Today’s avid collectors. continuously seeking rarer models to enhance their collections.000). courtesy of gooding & company 1957 Ferrari 250 testa rossa. open to those with spirited interest in autos and collectibles.
s. I think it’s likely we’ll find a way to postpone “Taxmageddon” and. seniOr POLiticaL anaLYst FOr cnn anD FOrmer PresiDentiaL aDvisOr INTERVIEW BY JIMMY JAMES. The employment picture is a different story: jobs. He got Osama bin Laden when no one else could. Obama continued some of the initiatives that began with the Bush-Paulson team. was on the verge of another depression. kick the can further down the road. was able to avoid that outcome. and keynote speaker at the Credit Suisse Wealth Management Conference in Miami. when you ask high-placed individuals in both parties “What’s plan B?” you get a blank stare.S.conversations with Thought Leaders WitH DaviD gergen. irresponsibly. His advisors told him when he took office that there was a one-in-three chance we would have a Great Depression. president. Employment is approximately five million below the pre-crisis peak.S.S. real GDP has retraced and is above its pre-crisis level. we’ll need a balanced plan to bring the deficit down slowly without choking off the recovery – it shouldn’t be hard to do. You say that Obama stopped the U. PRIVATE BANkING AMERICAS INVESTMENT STRATEGY AND ADVISORY GROUP President Obama inherited an economy nearly four years ago that was faced with numerous headwinds. How do you think it will be resolved? DG: The fiscal cliff is a serious danger for our country and our economy. He does deserve some credit on that point. Moving the needle in employment will be the priority initiative for the next U. He managed to navigate the Libyan crisis in a way that ultimately brought down the regime without putting troops on the ground. I think some credit also belongs to the preceding administration. it had some investors thinking the U. far slower than the typical recovery. the tenor of both sides has appeared to reflect a belief that voters will speak with a clear voice and the party voted into power will have a mandate to implement its own version of a resolution. but it did not escape a collapse in employment. Increasingly.s. 22 Conversations with Thought Leaders . Eventually. his chief accomplishment is that he stopped the country from sliding into the abyss. while growing. With the 2008-2009 Credit Crisis now firmly in our rearview mirror. U.s. troublingly. Obama has proven to be a more effective and more popular president in foreign affairs than in domestic affairs. We have called on a renowned thought leader to bring some clarity to the political situation. You served as an advisor to four U. one of the foremost political commentators. gDP. Fortunately. and we avoided that outcome. give us your view of Obama’s first term. The ensuing contraction in GDP was so severe. presidents. but the prospects for our putting such a plan in motion at the end of the year don’t look as rosy as they should. How to do so is a matter for debate. the U. and we are pleased to share the insights of David Gergen. from sliding into the abyss – we are now facing a fiscal cliff which could shave close to 4% off U.S. are doing so at an anemic pace. and how effective do you think he has been in righting the ship with regard to the economy? David Gergen: Ironically. But on the domestic side. He extricated troops out of Iraq and Afghanistan as he promised. That seems highly unlikely to me and. This is something we’ve been getting quite good at in recent years – but not before the ratings agencies and some of the global markets start to take notice.
So we’re going through a rough patch. including Teach for America. I’ve seen estimates of up to three and a half million jobs that are going unfilled in the U. The second part of the answer is longer term. that’s the distressing issue. took a year off to investigate the job situation and then wrote a book about what’s going on in America. a general agreement that we would be far better off to have an infrastructure bank of some sort funded by Washington. but run by an independent figure so it doesn’t become a piggy bank for politicians. but there are still over five million people who lost jobs and haven’t gotten them back. There is. We’re growing. companies will naturally grow in this country. where his father taught mathematics at Duke University. Gergen went on to work in the administration of Gerald Ford and as an adviser to the 1980 George H. not just going to college. News & World Report. some jobs will return naturally.S.the U. posted to a ship in Japan.s. Gergen lives in Cambridge. Gergen works as a political journalist and analyst. particularly given that the economy is now as large as it was before the recession. They have two children. where he also served as editor-at-large. DG: Right. Eyewitness to Power: The Essence of Leadership. when he joined the MacNeil/Lehrer NewsHour for widely praised Friday night discussions of politics. If we can make high-end goods. Ed Luce. because we don’t have David gergen David Gergen is a senior political analyst for CNN and has served as an adviser to four U. then you could see jobs start to flourish again. but for millions of Americans.W. we can create jobs. it sure seems like it. If we can get back to a three or three and a half percent growth rate. Infrastructure is actually something we need to do anyway. The construction industry would thrive in that scenario. That would be one way to help. This means that a lot of employers have scaled back and are trying to make it with fewer numbers.S. In 2000. Compass 23 . He is a member of the Washington D. he appears frequently on CNN as senior political analyst and contributes a monthly column to Parade magazine. One is that if we get the economy back on track. Bill Clinton has argued we could create far more jobs if we went green and retrofitted a lot of buildings. He came to see me after he had spent six months on it and said he’d been all over the country asking experts how to fix the job problem.S. that has many skilled people. Democrats. Gergen joined the Nixon White House in 1971. The truth is that the answer to the job problem is going to be twofold. Ben Stein and Bill Safire. Bush presidential campaign. economy has added more than two million jobs since the great recession ended. in policy circles. Germany is a clear example of what a well-educated work force. North Carolina. where he taught from 1995-1999. how do you prepare your work force for the jobs of the 21st century? We need to put far more emphasis on high school graduates getting skill training after high school. Gergen was born in Durham. MA with his wife Anne. a group of heavyweights that included Pat Buchanan. disagree and want to use government as an instrument of growth. I’m not sure whether we will look back and call this a lost decade or not. That. In his private life. and the deleveraging process currently underway is going to clearly take another several years to play out.S. He graduated with honors from both Yale College (1963) and Harvard Law School (1967) and served as an officer in the U. That’s why Republicans argue if you reset the table of taxes and regulations. We are now faced with a suboptimal growth pattern. Nixon to Clinton. He served as Director of Communications for Ronald Reagan and as adviser to Bill Clinton and Secretary of State Warren Christopher on domestic and foreign affairs. No one had an easy answer. From 1985-1986 he worked as an editor at U. That’s because they have highly trained workers who can make high-end products that have a market in a place like China. Gergen joined the Harvard faculty in 1999. and jobs will follow. Christopher and katherine and four grandchildren. Germany has an export surplus with China. as a staff assistant on the speech writing team. the Aspen Institute and Duke University. but at a rate that is so far below what we’ve normally experienced after previous recessions. can do in this international economy. of course. Navy for nearly three and a half years. Gergen’s career in television began in 1985. Bar and the Council on Foreign Relations and holds 19 honorary degrees. He is a professor of public service at the Harvard kennedy School and the director of its Center for Public Leadership. Today. and it is. He is active as a speaker on leadership and sits on many boards.C. a family therapist. so how do we move the needle in employment and create jobs? DG: I don’t think anybody has a quick fix to the unemployment problem. presidents. But that would be a temporary solution. he published the best-selling book. who is the Washington columnist and commentator for the Financial Times.
start-ups. In fact. There will be a lot of businesses.S. that are going to be in places like Miami. so many of the Latin American countries have moved toward embracing market reform. Since 2004.8 12. can turn out to be a real asset for us in building up trade with our southern neighbors. but I think we can innovate our way out. We could become less oil dependent.Figure 1 gDP Has recovered. but how important is Latin america. what should be the focus of our new or incumbent president in his first 100 days in office? DG: Get our financial house in order. followed by Houston. latest data available Source: Bloomberg people with technical skills to fill them. how many of the students there graduate with engineering degrees nowadays? DG: Very few. Brazil is now a world class emerging country. treasurys? DG: Yes. which focused on our Latin american clients.4 Q2-06 Million 140 138 136 134 132 130 128 Q2-12 DG: No. five are in Texas. we need to get more people educated with these skilled jobs.S. and jobs can become plentiful. we’re going to see more and more trade between the U. That is partly because so Q2-07 Q2-08 Q2-09 Q2-10 Q2-11 Real GDP Payrolls (r. You know.0 12. but being a welder or being able to handle a computer is very important. Just ten years ago. But that means in the near term we might have to get worse before we get better. That should teach us something about how to create an accommodative regulatory and tax environment.S. Innovation. You can’t pull the plug on spending or support for the economy. Even though the next administration may have a Democratic president and a Republican Congress. Not everybody has to go to college. It’s Austin on top. It should not be impossible. But what we’ve gone through in the last year and a half suggests it’s going to be darn hard. College is great for many people.h. Over time. and we sure can’t spend our way out of it either. There are so many jobs in this country where you cannot succeed unless you have some technical training. You are a professor at Harvard.6 12. much of the financial media attention concentrates on china.S.4 13. I believe strongly that the Hispanic community in the U. We removed many burdensome trade barriers through NAFTA. It should not be beyond the capacity of the president in the next four years to do exactly that. or elsewhere that will be thriving Latino-run businesses.s. They argued the deterioration of our public schools has become a distinct threat to our national security. we see that in California versus Texas.s. But china is obviously still an important partner for the U. we are moving in a direction that Reagan envisioned a long time ago. we had four straight years of balanced budgets. when the Bureau of Labor Statistics released its job growth figures. I don’t think anybody envisioned that Brazil would be in as strong a position as it is today. and Dallas.s. If you look beyond what’s going on with the gun trade and the drug trade. some sort of economic partnership that stretches from Canada down through the tip of Chile.S. When Bill Clinton was president and Newt Gingrich was the Speaker. Especially now with natural gas and the potential to capitalize on shale. and Latin America. San Antonio. Besides the labor market.? DG: Latin America has become an incredibly important partner to the U. both as an economic and political partner to the U. I was in Austin earlier this year.2 13. It makes a big difference.) As of 06/29/2012. and unleashing the entrepreneurial spirit of the country are important. You hold people back through cumbersome regulations and onerous taxes. it’s the sixth largest economy in the world. but you certainly should be able to reach an agreement to put us on a steady glide path to reducing our debt. we can’t tax our way of this. it’s 33 percent. How do you propose we get our house in order and close the deficit? Do we grow our way of it? Do we tax our way out of it? 24 Conversations with Thought Leaders . we should be growing on the energy front. there’s a lot of promising growth and development in Mexico. They pointed out that six percent of our graduates go into engineering. North Dakota has almost zero unemployment because the energy sector has taken off there. it does not mean we can’t get progress. Fort Worth. The Obama administration is pivoting from an emphasis on the Middle East to a focus on Asia. of the top six cities for job growth.s. You delivered the keynote speech at the credit suisse Wealth management conference in miami. The Council on Foreign Relations recently had an education task force led by Condoleezza Rice and Joel klein to report on the state of public education in the country. Over time. Energy has become a very bright spot for the U. more competitive economically.6 13. In China. But very importantly. and create jobs. Do you worry about the power they wield by being the largest holder of U. New technologies represent a game changer. Real GDP and Nonfarm Payrolls USD Trillion 13. Jobs Haven’t U. Texas is doing much better than California economically. I do think tax structure and regulatory structure make a difference as well. more environmentally safe. south Texas.
Though the Supreme Court upheld Obama’s Affordable Care Act. It did help Barack Obama mobilize the young vote four years ago. It’s definitely changed the discourse. but he never really coasted to victory in the primaries. If given the opportunity. you said that one of the biggest issues facing mitt romney is that the gOP is no longer his father’s party. the greatest danger of conflict is probably in the South China Sea. Social media is allowing people to find each other. the greatest danger for conflict is with Iran. if i type your name into Youtube. and could remain weak into the election. is becoming more nationalistic. can romney beat Obama by being the “least bad” candidate.W. Maybe they can find each other on a social media venue. You mentioned the internet bringing people together. as it grows. H. social entrepreneurs. poisonous way. that our relationship with China may deteriorate.com article. But there are some rising fears in Asia and within parts of the U. but in the long term. maybe even ronald reagan may not have been nominated by today’s republicans. There are many different ways that the president can get hurt here in the months ahead. You have 6. That’s my sense of it. Romney has his work cut out for him. That is. nixon. There are some talented people developing. What happened in Tahrir Square would not have occurred were it not for social media. People who once felt comfortable as moderates in the Republican Party are going to look for a new home. in a cnn. there are nearly 1. But if the two main parties continue to become more and more purist. It’s building a blue water navy. I think if politics continues in this paralyzed. Romney is clearly the best candidate to take on Obama within the original Republican field.000 videos and results. There are a lot of social pioneers. Can he win? Yes. Compass 25 . But it’s also coarsened the conversation so that people say some pretty mean things on the Internet. we’re going to get a new generation of leaders who could save the country. That would hurt him. What’s important for the world is that China become a constructive major figure in the world economy and be a source of stability. DG: Surely people have better ways to spend their time! Social media had an enormous impact on the Arab Spring. and young veterans coming back who are just first class.000 times. Obama started off as an underdog and is now the favorite according to most major polls. we’re not going to see a third party this time around. I think we’re all trying to figure out how to capture this great tool and mobilize people for good causes. In this country. Bush. say. some of which have been viewed almost 700.. circling back to the U. With republicans rigidly defining themselves. their decision gives Romney a new way to mobilize his base. one to the left and one to the right. And it still remains to be seen whether the steady stream of attacks on Romney’s time at Bain and his reluctance to release full information on his finances will move the poll numbers as Obama has hoped. we will see the makings of a third party. or does he have to find a way to truly inspire passion or announce game-changing initiatives? DG: Well. I’m not sure it’s going to sway the election very much.000 “likes” on Facebook. in a more constructive way. romney is the republican nominee. The system is stacked against third parties. and it’s starting to flex its muscles militarily. You said that eisenhower. It’s got some of its own internal problems. The Internet does provide ways to bring people together that you couldn’t use in the past. The Eurozone could unravel. Job growth has already cooled off. moderate conservatives face purity tests forcing them to move further to the right. But there are some fears that China. one of the great hopes for this country is the younger generation that’s emerging. I think it’s contributed more than I would have thought to polarization. is there room for a viable third party? DG: Clearly. In the short term.s.S. That would hurt him. but I don’t think it will sway this election. People who once felt comfortable as moderate conservatives in the Democratic Party are going to look for a new home. that’s going to leave a great number of Americans stranded who feel they don’t have a close allegiance to either. of a third party over time. I’ll tell you this. and maybe there will be mobilization. I think he can win.much of our economic growth comes from Asia.
While we may be waiting for these markets to fully “emerge”. Hong kong . they have clearly taken a leadership role in returning capital to investors.
the price momentum has been a saw-tooth pattern of ups and downs. DataStream. investors are finding much needed investment income from non-traditional sources. though. What’s more. thereby eliminating a larger systemic threat (see Figure 2). while we may be waiting for these markets to fully “emerge”. PASCAL ROHNER. though. the absolute average inflation level is lower. the possibilities are somewhat limited to a further expansion of central banks’ balance sheets via quantitative easing programs (QE). for example. emerging market economic growth. and most central banks are currently on hold. The Brazilian central bank.Emerging Markets As the global search for yield intensifies. is that we expect this trend to continue. In some of the smaller economies. inflation dynamics are less favorable. this should help to prevent an economic hard landing in 2012. Over the next decade. YVES LIECHTI. The changing demographics of emerging markets should continue to shift to a greater domestic consumerdriven consumption model. is expected to be a multiple of developed markets (see Figure 1). Emerging markets. Apart from the Eastern European countries. Credit Suisse Global Research Figure 2 exports as a % of gDP from emerging markets to the eurozone Hungary Czech Republic Poland Russia Egypt Turkey Malaysia Thailand South Africa Chile South Korea Peru China India Colombia Indonesia Brazil Mexico 0 10 20 30 40 50 60 70 80 As of 06/29/2012 Source: IMF. on par with. In our view. is likely to continue to cut its target interest rate and we are likely to see further reductions in the Reserve Requirement Ratios for Chinese banks. Further coordinated global stimulus and policy easing to jump start the sputtering developed world economic recovery should bolster corporate profits and benefit emerging markets dividend capabilities considerably. as measured by GDP. as interest rates are almost near zero and budget targets curtail fiscal flexibility. DataStream. YoY 10 8 6 4 2 0 -2 -4 -6 Jan-90 Jan-94 Jan-98 Jan-02 G7 (Developed Markets) GDP Jan-06 Jan-10 Jan-14 Emerging Markets GDP As of 06/29/2012 Source: IMF. many emerging market countries do not have direct trade or economic dependencies with the Eurozone. Thus. or in certain instances. One of these relatively new sources is emerging market equities. emerging market equities should outperform developed market equities the new Dividend Play WRITTEN BY DOMINIk GARCIA. emerging market equities have begun to assert themselves as a meaningful source of income through the dividend yield. longer term. It appears that the market needs further policy stimulus to reestablish greater confidence in risky assets. in excess of developed market equities. room for Further Fiscal and monetary stimulus Since equity markets troughed from their spring sell-off in early June. have more scope to maneuver. PRIVATE BANkING GLOBAL RESEARCH Figure 1 current and expected gDP of Developed and emerging markets %. Generally known for their contribution to the growth portion of a portfolio. especially with regard to monetary policy. Credit Suisse Global Research Compass 27 . In developed markets. they have clearly taken a leadership role in returning capital to shareholders. Long-term advantages remain intact Although risks prevail in the short term.
the long-term earnings trend still appears superior compared to developed markets.3x.1%.2%. emerging markets are asserting themselves in an area that was once thought reserved for developed markets: dividend yield. valuation Has Become more attractive relative to Developed markets After the recent spring correction in equities. The gap between bond yields and dividend yields is at record lows. return expectations remain high for emerging market equities. we believe emerging market equities no longer deserve a valuation discount compared to developed market peers. Profitability. and index returns converge and eventually be more in line with the developed markets. Importantly. as measured by the MSCI Emerging Markets Index. Emerging markets dividend yield. the dividend return component of returns is becoming increasingly important. high-yielding emerging market stocks have had slightly lower drawdowns during correction phases. (see Figure 4) Dividends are Becoming a Larger Portion of total return Today. ongoing urbanization in Asia. emerging markets dividend-yielding stocks appear attractive. and an emerging middle class leading to greater consumer spending. With the gradual development of many emerging market countries. Finally. As a result of this collapse in fixed income yields. high dividend-yielding emerging market equities have meaningfully outperformed the MSCI Emerging Markets Index by an average of 5% per year. Noticeably. high dividend-yielding stocks in the emerging markets presents an opportunity for investors to collect income while at the same time being exposed to regions that are poised to grow at a faster clip than the developed markets. One way investors have sought to make up the difference is by investing in companies that are paying high and sustainable dividends. While consensus earnings per share forecasts for 2012 have been revised lower within the last six months. remains well above the level of developed markets. The availability of quality. valuations have compressed and are at attractive levels. Additionally. Even though there will likely be fits and starts. it may come as a surprise that the MSCI Emerging Markets Index has a current yield of 3. it would not be unlikely to see growth rates decelerate. Despite the current economic challenges in the developed world. is currently at 3.based on better demographics. As a result. several emerging market countries have changed their dividend policies to accommodate the increased focus on dividend payments to investors. a 13% discount to its ten-year historical average and a 17% discount to the MSCI World Index (see Figure 3). Dividend-focused investment strategies have been working and since the beginning of 1999. Compared to other developed market dividend yields. From 1995 to present.5%. stocks or Bonds? With a 30-year bull market in bonds globally. 28 Emerging Markets . the MSCI Emerging Markets High Dividend Yield Index has shown superior performance compared to the more broad MSCI Emerging Markets Equity Index. Emerging markets are no different. investors are finding it challenging to generate sufficient returns from yield-based investments. To many who consider emerging market investments high-volatility growth engines within a portfolio. the obsession with yield has taken many forms. especially due to their above-average growth potential. above its 10-year average of 2. they have recently stabilized. The MSCI Emerging Markets Index is currently trading at a 12-month forward Price-toEarnings (P/E) of 9. As a result. interest rates are currently at very low levels. the dividend return contributed 36% to the As yield has become more important over the last few years. the IMF still expects emerging economies to outgrow the G7 by some 4% in terms of GDP growth over the next three years (See Figure 1). such as the S&P 500 Index at 2. a favorable debt and fiscal situation. The most recent example is Russia.1%. as measured by Return on Equity.
istanbul. In this example. Going forward. To further attract capital. key changes include the shift in the basis on which dividends are calculated. Brazil’s legal framework forces companies to pay out more than 20% of net earnings in dividends. Indices rebased to 100 as of 12/31/1998 Source: MSCI. several emerging market countries have changed their dividend policies to accommodate the increased focus on dividend payments to investors. dividend payments until recently were based on the unconsolidated Russian Accounting Standard (RAS) earnings. In addition to the change in dividend policies. Figure 3 12-month Forward P/e of Developed and emerging markets 12M Forward P/E 19 17 15 13 11 9 7 5 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 MSCI Emerging Markets Index 12-Month Forward P/E MSCI World Index 12-Month Forward P/E MSCI Emerging Markets Index Average MSCI World Index Average Figure 4 msci emerging markets High Dividend Yield index and msci emerging markets index Performance 1000 900 800 700 600 500 400 300 200 100 0 Jun-00 Jun-03 Jun-06 Jun-09 MSCI Emerging Markets Index MSCI Emerging Markets High Dividend Yield Index Jun-12 As of 06/29/2012 Source: DataStream. growing earnings. Asian companies have raised their dividend payout ratio. companies Have realized that Paying sustainable Dividends attracts investors As yield has become more important over the last few years. The most recent example is Russia. turkey annual total performance of the MSCI Emerging Markets Index. With progressing maturity. Credit Suisse Investment Strategy and Advisory Group Compass 29 . the calculation is proposed to be based on the consolidated RAS or IFRS earnings – the global accounting standards used in most developed countries. which is now in the range of 30% to 40%. we expect this share in total return to further increase and continue to draw investors’ attention to the emerging markets. Credit Suisse Global Research As of 06/29/2012. and improving governance may lead to a more sustainable dividend policy through time. emerging market companies’ fundamentals remain highly attractive with generally low corporate debt levels.
9 0.0% 3.4 1.9% 3.500 2. investors in emerging markets no longer have to forgo income as a component of returns.674 3. We applied a filter to this index to screen for the stocks that had a beta less than one relative to the MSCI Allname Turpas-Turkiye Petrol Rafine Telefonica Brasil EDP. if a stock has a beta of 0. country Turkey Brazil Brazil Taiwan South Africa Taiwan South korea China Turkey Thailand Taiwan Indonesia Turkey Taiwan Indonesia Thailand Thailand Taiwan Philippines market cap UsD m 5.5% 5.932 6.5 0.9% 4.950 3.8% 4.065 227.9 0. and an absolute dividend yield exceeding 3%.259 5.5% 5. emerging market investments present more attractive opportunities than those available in the developed markets.789 12.9 0.0 0.7 0. With dividend yields in excess of developed markets in many cases. Our screen returned 20 companies that had. Gas & Consumable Fuels Diversified Telecommunication Electric Utilities Computers & Peripherals Oil.8 0. Gas & Consumable Fuels Construction Materials Oil.141 Dividend Yield 9.4% 3.4 0. a beta versus the global equity market of 0.548 3. This material should not be regarded as an offer or solicitation of an offer to invest in any security. which is comprised of 236 companies.1% 6. For example. The reference to specific securities is for illustrative purposes only.0% 4.784 7.910 67.2% 8.622 6. Bloomberg.6 Wireless Telecommunication Services Hong kong Note: Certain stocks mentioned above may not be covered by Credit Suisse Research. Beta is the expected percent change in the price of the stock price given a 1% change in the price of the index.7 0.520 5.7% 5.8% for every 1% change in the index.8 and a dividend yield of 5%. one would expect the stock to move 0. n/a= not available As of 07/12/2012 Source: HOLT.8% 4.1% 5.128 17. The dividend yield was calculated as of 7/12/2012.conclusion On many levels. Credit Suisse Investment Strategy and Advisory Group . 1 Beta: The measurement of stock price volatility relative to index volatility.6% 4.030 8.442 4.9% 3. on average.0 0.9 1.9 0.9 0.2% 4.462 3. DataStream.5 0.8 relative to the index.9 0. They are demographically and structurally sound. table 1 a sample of High Yielding emerging market companies Table 1 provides a sample of 20 companies from the MSCI Emerging Market High Dividend Yield Index.2% 5. and poised for further growth that is frequently a multiple of developed market growth.Energias do Brasil SA Asustek Computer Inc Exxaro Resources Ltd Taiwan Cement S-Oil Corporation China Construction Bank Arcelik AS krung Thai Bank Pub Co Ltd Siliconware Precision Inds Telekomunikasi Indonesia Eregli Demir Ve Celik Fabrik United Microelectronics Corp Astra Agro Lestari Siam Cement Charoen Pokphand Foods Taiwan Semiconductor Manufacturing Aboitiz Power Corp China Mobile Ltd aDr ticker TUPRF VIV n/a ASUUY EXXAY n/a SOOCY CICHY ACkAY kGTFF SPIL TLk ERELY UMC PTABF SCVUF CPOkY TSM ABZPF CHL industry Oil. Gas & Consumable Fuels Commercial Banks Household Durables Commercial Banks Semiconductors Diversified Telecommunication Metals & Mining Semiconductors Food Products Construction Materials Food Products Semiconductors Independent Power Producers Country World Index (see beta1 explanation below).401 18.553 9.9 0.250 158.7 0.2% Beta1 0.8% 3.3% 5.7 0.
has a current share price of approximately USD 18/share.000. The combination of the declined asset value and the increased Federal lifetime gift tax exemption created an opportunity for this individual to transfer assets that he otherwise would not have been able to without incurring a Federal gift tax.800. transaction or tax calculation.320.120. individuals may gift more of their assets while maximizing the use of their Federal lifetime gift tax exemption. an individual owns 100. gifting assets with Depressed value For those who have seen the value of their investments decline in recent years due to the market downturn.000). or USD 10.000) without paying any Federal gift tax because the current value of the assets is below this year’s Federal lifetime gift tax exemption amount (USD 5.000 per married couple. the individual still has USD 3. which was valued at approximately USD 38/share in August 2010. or USD 2.. Because the Federal lifetime gift tax exemption amount in 2007 was only USD 1. as the Federal lifetime gift tax exemption amount was only USD 1. since 2010. Please consult your accounting. an individual wishes to retire and transfer his company interests to his children who are also involved with the business.240.000 per married couple. For example. the stock has declined approximately 47% in value and.000). While market values are relatively low compared to a few years ago. Without further Congressional action. In addition. In addition. this exemption will decrease to USD 1.000. This is because the use of the Federal lifetime gift tax exemption is based on the fair market value of the asset transferred at the time of gift.000 per person. For example. tax and legal advisors to understand the applicability of the tax analyses described herein to your specific situation. this year presents significant opportunities for estate planning.000 per individual.800. Coupled with the current low interest rate environment. A previous valuation estimated the company interests at USD 6. the amount that can be transferred free of gift tax) is at an all-time high of USD 5. he would have incurred a Federal gift tax. If this individual had made a gift of these shares to his children in 2010 (a total gift value of USD 3. starting in 2013.000. Credit Suisse does not provide tax or legal advice.000.000.000 in 2007.000. PRIVATE BANkING AMERICAS WEALTH PLANNING The current tax and market environment provides unique opportunities for estate planning. The same applies to other types of assets such as interests in a company or real estate. there may be a silver lining. the Federal lifetime gift tax exemption amount (i. the individual would have only been able to transfer one-sixth worth or USD Important Information: The tax calculation examples provided above are for illustrative purposes only and do not represent any actual client account. The individual can now transfer his entire HP position to his children (a total gift value of USD 1.Wealth Planning estate Planning with Depressed assets WRITTEN BY ALVINA LO.000 per individual. as many asset prices are still well below their peak levels of 2007.e. However. For the remainder of this year. these relatively depressed assets are especially attractive for gifting.000 shares of stock in Hewlett-Packard (“HP”).000 of his Federal lifetime gift tax exemption available for use for the remainder of the year. as of this writing. Compass 31 .120.
While market values are relatively low compared to a few years ago. could be removed from the individual’s taxable estate. the individual has another USD 1. In certain jurisdictions. utilizing depressed assets with these strategies could have significant transfer tax savings. Generally. Depressed assets are ideal for GRATs because all future growth in excess of the hurdle rate can be captured by the GRAT and pass transfer tax free to the children (or to a trust for their benefit). For example. then approximately USD 136.144 could be transferred to the children at the end of the 5-year term1. As a result. children) at the end of the trust term. individuals may gift more of their assets while maximizing the use of their Federal lifetime gift tax exemption. since 2007. In addition. This amount would be removed from the individual’s estate essentially free of transfer tax.000. the current interest rate environment makes GRATs especially attractive because the hurdle rate is at a historic low. In addition to a GRAT.000. there would be no further gift or estate tax on the asset (or on any future income and appreciation thereon). the underlying asset. and the asset steadily appreciated back to its original level of USD 1 million over the trust term. which consists of a portion of the original principal plus an interest based on a “hurdle rate” determined at the creation of the GRAT. Furthermore. An example of this would be the use of depressed assets in a Grantor Retained Annuity Trust (“GRAT”).. if the assets were gifted to a trust such that the asset could also be protected from generation-skipping tax. If the asset were to appreciate above its original level. the value of the annuity is usually set sufficiently high so that the value of the remainder interest (the value of the gift) is as close to zero as possible. which means that the basis of the property in the hands of the donee (the person receiving For those who have seen the value of their investments decline in recent years due to the market downturn. If the individual were to contribute this depressed asset to a 5-year GRAT. then any excess amount could pass to the children (or to a trust for their benefit) without additional gift or estate tax. the assets could remain in trust transfer tax free for the benefit of future generations. charitable lead trusts are also very appropriate in today’s environment. For individuals who are charitably inclined.000. assume that an individual has a USD 1. For maximum leverage. interests in the company have declined and are now valued at USD 4.000 asset that declined 25% in value over the last few years.000 of his interests in the company to his children without incurring a Federal gift tax. Once gifted. such that it has a current market value of USD 750. grantor retained annuity trust (“grat”) Certain estate planning strategies could be particularly attractive in this low interest rate environment.200. However.1. gifting depressed assets with these structures could generate significant tax savings. In all cases.000 worth of Federal gifting exemption available that he may use to make additional gifts.000. individuals with depressed assets may also wish to consider other strategies that are suitable in the current low interest rate environment.000. The donor is deemed to make a gift equal to the present value of the assets that will pass to the beneficiary (e. such as intra-family loans and sales to intentionally defective grantor trusts. Note that the donor must survive the trust term for all of the assets to be removed from the estate. there may be a silver lining.g. cost Basis of gift The cost basis of an asset is an important factor to consider when selecting the appropriate asset for gifting. as well as any associated future income and appreciation. If the trust assets appreciate above the interest or hurdle rate. A GRAT is an irrevocable trust to which a donor contributes assets while retaining the right to receive a fixed annuity each year for the term of the trust. In addition. these trusts can continue in perpetuity (the so-called “Dynasty Trust”). lifetime gifts receive carryover basis. 32 Wealth Planning . In addition. then the transfer tax savings is even more significant. With the increased Federal lifetime gift tax exemption this year. The GRAT must pay the required annuity back to the donor each year. as any appreciation could be removed from the donor’s estate and transferred to the next generation without any gift or estate tax. the individual may now gift his entire interest in the company without incurring a Federal gift tax.
Therefore. The current tax and market environment makes estate planning – and. and low interest rate environment makes this year an ideal time to consider making large gifts. in particular. which is the hurdle rate used for GRATs created in August 2012. then the donor would recognize a gain or a loss as if the donor had held the assets in his individual name. If the sale price falls between the donor’s basis and fair market value at the time of gift.the gift) is the same as that in the hands of the donor (the person giving the gift). and low interest rate environment makes this year an ideal time to consider making large gifts. Therefore. There are several exceptions to the above carryover basis rule.2 When considering gifts of significant size. as described below). Therefore. the basis of the property remains unchanged in the hands of the trust. Therefore. The combination of the increased Federal lifetime gift tax exemption. many choose to utilize a trust structure (as opposed to an outright gift) for maximum flexibility. relatively depressed value of many assets. gifting – particularly advantageous. the one that is most applicable to gifting depressed assets is as follows: for gifts of property that have significantly declined in value such that the fair market value is below basis. In contrast. an individual may wish to gift high basis assets and retain low basis assets so that there may be a step-up in basis at death. the donee’s basis is the adjusted basis in the hands of the donor. Wealthy individuals should take advantage of this opportunity and gift assets with depressed values to maximize the use of their increased Federal lifetime gift tax exemption. the donee’s basis depends on whether the asset will be sold for a gain or a loss. A trust is a separate legal entity and often a separate taxpayer. summary The current tax and market environment makes estate planning – and. The combination of the increased Federal lifetime gift tax exemption. gifting – particularly advantageous. then she would have a gain of USD 30 because she must use the donor’s adjusted basis (USD 100) as her basis to calculate the gain. If the grantor trust were to subsequently sell the assets. A grantor trust is disregarded for income tax purposes and the grantor continues to be responsible for the income tax associated with the trust assets. unless the circumstances are such that a court would find that the substance of the transaction warrants a disallowance of the loss. resulting in less capital gains tax when the beneficiaries ultimately sell the assets. for purposes of determining gain. For example. an individual purchased a share of stock for USD 100 which has since declined in value to USD 80. generally. she would have a loss of USD 10 because she must use the fair market value at the time of the gift (USD 80) as her basis to calculate the loss. Compass 33 . tax efficiency. in particular. if the donee were to sell the stock for USD 130. then there is no gain or loss realized. the donee’s basis is the fair market value of the property at the time of gift. 1 Assumes a hurdle rate of 1%. 2 The “wash sale” rule generally does not apply to gifts. In particular. it is generally recommended that the donor in this case sell the property to recognize the loss and then make a gift of the sale proceeds to the donee (unless the donee is a grantor trust. The individual now gifts the stock to her child. On the other hand. In contrast. A trust may also be structured as a so-called “grantor trust”. For purposes of determining loss. If the donee were to sell the stock for USD 70. This would allow the beneficiaries to receive assets with zero or minimal built-in gain. relatively depressed value of many assets. the same rules discussed above apply when determining the basis of the gifted property in the hands of the trust. and creditor protection. bequests at death generally receive a step-up in basis to the fair market value at the date of death (unless alternate valuation is elected).
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CSSU may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. illiquidity. state. CSSU does not provide legal or tax advice. CSSU makes no representation as to the suitability of any alternative investment product for any particular investor nor as to the future performance of any such products.important Legal information: The Private Banking USA business in Credit Suisse Securities (USA) LLC (“CSSU”) is a regulated broker dealer and investment advisor. an investor should determine if the product suits his or her particular circumstances and should independently assess (with his or her professional advisors) the specific risks and the legal. This report is not directed to.000. please refer to: https://www. volatility of performance. unitholders of an MLP are personally responsible for paying taxes on their individual portions of the MLP’s income.com/pbclientview. the observations and views of CSSU research department analysts. This material may be distributed in Mexico by Banco Credit Suisse (México).jsp Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations. credit. Consult your personal accounting. and tax advisor with respect to any legal or tax implications. commodities or real estate. Unless otherwise specified. in fact. It is not authorized to accept deposits or provide corporate trust services and it is not licensed or regulated by any state or federal banking authority. country or other jurisdiction where such distribution. which may be different from.credit-suisse. and no representation or warranty. advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used. CSSU does not provide tax or legal advice. any person or entity who is a citizen or resident of or located in any locality. gains. credit-suisse. this may not be construed as an offer or an invitation to enter into any transaction or purchase any security or investment product that may not be undertaken under Mexican applicable regulation. Each legal entity in Credit Suisse Group is subject to distinct regulatory requirements and certain products and services may not be available in all jurisdictions or to all client types. endowments. legal. or intended for distribution to or use by. a firm must earn 90% of its income through activities or interest and dividend payments relating to natural resources. The most recent CSSU research on any company mentioned is available to online subscribers at www. availability or use would be contrary to law or regulation or which would subject CSSU to any registration or licensing requirement within such jurisdiction. and this information is not intended to be a recommendation or opinion regarding the equity securities of the referenced companies. Tax-exempt institutional investment funds such as pensions. In order to qualify. and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. the term “Credit Suisse Private Banking” generally refers to the combined capabilities of Credit Suisse Group subsidiaries and affiliates that provide private banking services to high net worth clients worldwide. the terms and conditions of an investment in such product and tax information and risk disclosures that involve significant risks. The material does not constitute objective research under FSA rules. losses. ©2012 Credit Suisse Securities (USA) LLC. regulatory. An MLP has a partnership structure but issues investment units that trade on an exchange like common stock. provides only a limited view of a particular market.. and deductions. and other alternative investments are complex instruments that are not suitable for every investor.com/us/privatebanking/en/glossary_indices. hedge fund or other alternative investment product shall only be made pursuant to the offering material for each such product. MLPs are not subject to corporate income taxes. omissions or changes in market factors.
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