Sentinel Benefits by alicejenny

VIEWS: 4 PAGES: 4

									                          Quarterly Market review
                                                                                                                        First Quarter 2010
                                                 mArket review
                                                    U.S. equity markets ral-      that threaten the stability of the euro currency.
                                                    lied in March to deliver      This turmoil has caused investors to flock to
                                                    positive gains across the     dollar denominated investments and brought
                                                    board in Q1. Despite a        renewed interest back to U.S. assets.
                                                    brief sell off in February,
                                                    the resilience of the past
QuarterlY Market review



                                                    year’s rally was once
                           Matthew H. McPhail, CFA
                           Chief Investment Officer again on display as buyers
                                                    stepped in to bid prices
                          higher. The lack of a traditional 10% pullback
                          in equity prices since the market rally began one
                          year ago continues to surprise many. As we’ll
                          discuss below, the current challenges facing
                          investors are numerous, but for now the market
                          is giving the benefit of the doubt to the optimists
                          and thwarting those who believe prices have
                          risen far in advance of economic fundamentals.          A Greek DrAmA
                          Those in the bullish camp point to the incredible       By now you’ve undoubtedly heard reference to
                          earnings results over the past few quarters and         the economic crises in Greece and the potential
                          the stabilization of most key economic indica-          impact on Europe and the world. Why is this
                          tors. Those in the bear camp feel the current           such an important story and how does it impact
                          pace of corporate earnings growth isn’t sustain-        us? To state it as simply as possible, Greece is
                          able (as much has been due to cost cutting and          operating under a tremendous debt burden (a
                          not true growth in sales) while making the case         situation shared by many countries these days).
                          that much of the improvement in the overall             They’ve overleveraged themselves with debt
                          economy is the result of government interven-           and capital is now fleeing the country as it has
                          tion and stimulus.                                      become crystal clear that Greece is no longer in
                                                                                  a position to pay back its creditors unless dras-
                          For the quarter, the Dow Jones Industrial               tic changes are made. A key for the proper func-
                          Average gained 4.1% to finish at 10856.63.              tioning of any market is confidence from the
                          This was the best Q1 for the Dow since 1999             public. At this point, all confidence in Greece
                          and marks the fourth straight quarter of gains          has been lost. In all probability, there are two
                          for the popular benchmark. The S&P 500                  potential outcomes. Greece will either have to
                          climbed 4.9% to 1169.43 and the small-cap
                          Russell 2000 was the leader among the popular             this Quarter...
                          benchmarks with a gain of 8.5% for the quarter.           Market review                                 pg. 1
                                                                                    a Greek DraMa                                 pg. 1
                          In a reversal of recent trends, overseas markets          what CoulD Go wronG?                          pg. 2
                                                                                    FunD expenses on the rise                     pg. 3
                          failed to keep pace in Q1 as several European             You MaY Be a FiDuCiarY iF...                  pg. 3
                          countries, most notably Greece (more on this              our portFolio strateGY & alloCation outlook   pg. 4
                                                                                    Market sCoreBoarD                             pg. 4
                          situation below), are struggling with debt issues


                             55 walkers Brook Drive, suite 100 reading, Ma 01867      1-888-880-1330      www.sentinelgroup.com
restructure its debt (popularly known as a bailout; to    to feel the impact. This is an important story. Stay
be done through the kindness of other European            tuned.
nations) or be forced out of the euro currency system.
In the former scenario, Greece would have to endure       whAt CoulD Go wronG?
massive cuts in spending and services to meet the         The strong March rally resulted in a positive Q1 and
new terms of any debt restructuring. This would           a tremendous trailing 12-month returns for the major
essentially guarantee that Greece enters into a severe    equity market averages. While jubilant may be too
economic depression. The latter option means that         strong of a term to describe the market mood, our
Greece reverts back to its own currency; massive          sense is that investors are becoming a little too
inflation develops as the currency would rapidly          complacent and not fully cognizant of the risks and
devalue and a similar economic depression would           challenges that lie ahead. Here is a list of factors that
ensue. This is the classic between a rock and a hard      could upset the current good cheer and bring on
place scenario.                                           correction that many equity investors have been on
                                                          guard for:
One of the key questions now being debated in the
market is whether Greece is an isolated event, or is      1. Bullish sentiment readings. Based on several readings of
                                                          investor sentiment, the mood right now is overwhelmingly pos-
their situation a precursor to other dominoes falling
                                                          itive or bullish. When the consensus is betting heavily on a cer-
in Europe. Unbelievably, we see some market com-          tain outcome, something else is likely to happen.
mentators confidently stating that the Greek situation    2. Tougher profit comparisons in the coming quarters.
will be “contained” and collateral damage will be         Remember, companies are now announcing earnings results
minimal or non-existent. If you can remember back         compared to the same time 12 months ago, at the depths of the
                                                          recession. As we move forward, it will be more difficult to
to 2007, the phrase “contained” was also used to          show results that indicate strong year-over-year growth without
describe the impact of sub-prime mortgages on the         continuous improvement in the economy.
credit markets and the economy in general. As we          3. The fading of fiscal and monetary stimulus. Even the gov-
know now, the sub-prime debacle wasn’t contained          ernment has limits as to how much support it can lend to the
                                                          economy in the form of easy credit and schemes like “cash for
to just the mortgage market, but rather to planet
                                                          clunkers”.
earth. Those who understood the impact of sub-            4. Uncertainty surrounding financial reform. Could the
prime back then new the influence would be wide-          recent criminal charges at Goldman Sachs be only the tip of the
spread. The real question then regarding the ongoing      iceberg in terms of new laws and regulations?
                                                          5. Higher tax rates to pay for the massive $1.4
crises in Greece is not whether there will be a market
                                                          trillion federal budget deficit.           Starting in 2011,
impact, but a question of magnitude across the globe.     marginal tax rates and taxes on dividends will jump higher.
Looking across Europe, several other countries (with      6. Sovereign debt problems. Greece is getting all the head-
much larger economies than Greece) carry similar          lines today, but is it just a sign of things to come for other
debt burdens; specifically Spain, Portugal and            nations like Portugal and Spain? Most worrisome is the com-
                                                          ment from some that the problems in Greece will be “con-
Ireland. So if Greece is bailed out and a precedent is    tained”. The last problem that was thought to be “contained” at
set, then do these much larger countries get a bailout    the beginning was sub-prime mortgages and we know how that
too? What impact does this have on markets? When          played out.
does the culture of bailouts end? Only time will tell,    7. Ongoing problems with commercial real estate. While
                                                          under reported in the press, this has largely contributed to the
but as we write the conditions in Europe seem to be
                                                          failure of 55 banks this year alone.
deteriorating by the day and U.S. markets are starting    8. Underfunded state pension plans and the dire fiscal



                                                    -2-
condition of state finances in general. Will certain states    inflows. As we’ve highlighted in previous updates,
require a bailout from the federal government?                 investors have shown a much greater preference for
                                                               bond funds since the turmoil of 2008. Even in Q1,
FunD expenses     on the   rise
                                                               after a tremendous year in 2009 for stocks, bond
According to a recent study from Morningstar,                  funds continue to garner the majority of new assets.
there’s both good and bad news for investors in rela-
tion to the expense ratios they’re being charged by            You mAY Be      A   FiDuCiArY iF...
the mutual fund industry. First the bad news.                  A very large part of our advisory practice at Sentinel
Overall, the average actively managed fund expense             involves consulting with and acting as an advisor to
ratio rose from 0.874% to 0.887% in 2009 vs. 2008.             those people in charge of running retirement plans at
This might seem like a trivial increase, but not so            their respective companies. These people are other-
when evaluated against the trillions of dollars invest-        wise known as the plan fiduciaries. What is a fiduci-
ed across the mutual fund world. Also, this reverses           ary? A fiduciary is someone who has undertaken to
a recent trend of gradually declining expenses and             act for and on behalf of another in a particular
represents the largest jump in fees since 2000. The            matter in circumstances which give rise to a rela-
downdraft in the market during 2008 is primarily               tionship of trust and confidence. A fiduciary duty is
responsible. Expense ratios for 2009 are measured              the highest standard of care at either equity or law. A
from November 2008 thru October 2009. Since most               fiduciary is expected to be extremely loyal to the per-
funds carry break points to trigger fee declines as            son to whom he or she owes the duty (the "princi-
assets rise, its little surprise that fees actually rose as    pal"): he or she must not put their personal interests
fund assets declined.                                          before the duty, and must not profit from the position
                                                               as a fiduciary, unless the principal consents. The
Now for the good news. The incredible move high-               word itself comes originally from the Latin fides,
er off the lows of March 2009 should result in a               meaning faith, and fiducia, trust. Those people
reversal of expense ratios on the whole as asset lev-          responsible for running retirement plans can usually
els have risen dramatically. While it’s too early to           be separated into three groups; those who are fiduci-
say, expenses near 2008 levels for 2010 wouldn’t be            aries and know it, people who aren’t fiduciaries and
unreasonable to expect. Breaking down the numbers              know it, and people who are fiduciaries, but don’t
further, there were major differences depending on             know it. Here are some things you should know
the asset class being examined. Balanced funds saw             about being a fiduciary:
an increase of 7 basis points to 0.88%, and alterna-
tive funds (such as long-short and commodities                 1. If you have decision making authority for a plan, you’re
funds) also rose 7 basis points to 1.48%.                      a fiduciary. If you have discretion in terms of administering
                                                               and managing a plan, controlling plan assets (picking the plan
International equity funds' expense ratios rose 6 basis        investments) or choosing a plan advisor, then you’re a
points to 1.10%. Municipal bond funds' expense                 fiduciary.
ratios rose 4 basis points to 0.76%. U.S. equity funds'        2. You cannot eliminate your fiduciary responsibilities. The
expense ratios rose 2 basis points to 0.90%. Only              good news is that there are ways for a fiduciary to lessen, but
                                                               not eliminate, their fiduciary liability. One example is for the
taxable bond funds saw a cut in expenses. There, the
                                                               plan fiduciary to work with an investment advisor who will
average investor's bill shrank 2 basis points to 0.72%         agree in writing to become a plan fiduciary and share in the
thanks to much smaller losses in 2008 and strong               responsibility for choosing and monitoring plan investments.



                                                              -3-
                                        Disclosure: This information is intended solely to report on investment results, strategies and opportunities identified by Sentinel Pension
                                        Advisors, Inc. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of finan-
                                        cial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation for the purchase
                                        or sale of any financial instrument. References to specific securities are for illustrative purposes only and are not intended, and should not
                                        be, interpreted as recommendations to purchase or sell such securities. Past performance is not indicative of future results. Index informa-
                                        tion has been obtained from sources that we believe to be reliable; however, we do not guarantee the accuracy of such information.




3. If you’re able to hire a fiduciary, you’re likely a fiduciary.                    readings of market sentiment, the overall mood of
The ability (remember the discretion mentioned above) to put                         investors is now at bullish levels last seen in 2007
others in a position of influence regarding plan assets is as
important as the decisions which impact those investments
                                                                                     before the market meltdown. Such high levels of
directly.                                                                            market optimism are typically greeted by the market
4. Hiring another fiduciary doesn’t keep you from being a                            with pullbacks to remind investors that stocks can
fiduciary. Remember, all fiduciaries have potential liability                        move in both directions.
for the actions of their co-fiduciaries. So monitoring the
actions and activities of a fiduciary you hire is a key part of
your responsibility.                                                                 For our retirement investors we continue to lean in a
5. You have personal liability as a plan fiduciary. The legal                        conservative direction with our allocations. While
liability for breaches of fiduciary duty is personal. You may be                     we view this as the proper long-term course of
required to restore any losses to the plan or to restore any prof-
                                                                                     action, it has certainly held us back somewhat com-
its gained through improper use of plan assets.
6. Once a fiduciary, you can’t just quit and walk away. The                          pared to other portfolios that are willing to take on
Dept. of Labor cautions that “fiduciaries who no longer want to                      significantly more risk. Our diversification strategy
serve in that role cannot simply walk away from their respon-                        is designed to create portfolios that can both survive
sibilities, even if the plan has other fiduciaries. The need to fol-                 the downturns and provide solid results during up
low plan procedures and make sure that another fiduciary is
carrying out the responsibilities left behind.”
                                                                                     markets. We see no reason to venture away from this
7. You’re expected to be an expert – or hire someone that is.                        philosophy now, especially after the massive run-up
Per the Dept. of Labor, “Lacking that expertise, a fiduciary will                    in prices we’ve seen over the past year. Staying dis-
want to hire someone with that professional knowledge to carry                       ciplined and searching for ways to take risk off the
out the investment and other functions.” This may be specific
                                                                                     table is our current goal. In our opinion, now is not
to plan investments or the management of the whole retirement
plan.                                                                                the time for investors to take steps that would dra-
                                                                                     matically increase portfolio volatility. Please let us
our portFolio strAteGY & AlloCAtion outlook                                          know if you’d like to discuss your personal investing
There are no changes to report within our individual                                 goals.
client portfolios as we enter Q2. As always, we                                                                 Matthew H. McPhail, CFA
rebalanced our portfolios back to target allocations                                                              Chief Investment Officer
as the quarter began. Despite strong recent perform-
ance in the equity markets, we’re still playing it cau-                              mArket sCoreBoArD
tious as we expect the investing environment to                                         index total returns                                        Q1 2010
become more volatile as we continue through the                                                                                 Q1 2010       YtD      1 Year 3 Year 5 Year
year. We’ve listed some of our primary concerns                                        S&P 500                                     5.39       5.39      49.77      -4.17      1.92
earlier in the update. Any one of them could mani-
                                                                                       DJIA                                        4.82       4.82      46.93      -1.48      3.34
fest into something bigger that gives equity investors
pause. Remember, normal market advances out of                                         NASDAQ                                      5.68       5.68      56.87      -0.33      3.70

recessions are typically characterized by starts and                                   Russell 2000                                8.85       8.85      62.77      -3.99      3.36
stops. In other words, advances and perfectly nor-
                                                                                       MSCI EAFE Int’l Index                       0.22       0.22      49.99      -9.64      1.05
mal pullbacks. The last twelve months have not fea-
tured any pullbacks of significance and this is a con-                                  Barclays Aggregate Bond                    1.78       1.78      7.69       6.14       5.44

cern. We would view some sort of retracement in                                         DJ-UBS Commodity                           -5.03     -5.03      20.53      -6.88     -1.36
prices as healthy for the market. Based on current
                                                                                       Total Returns excluding Dividends               Source: Morningstar



           55 walkers Brook Drive, suite 100 reading, Ma 01867                               1-888-880-1330                www.sentinelgroup.com

								
To top