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Driving In Neutral

By Neuberger Berman Asset Allocation Committee So far, 2016 has been characterized by stomach churning swerves in market direction with little actual change in levels. When the Asset Allocation Committee recently met to update our views for the coming 12 months, most participants felt that a variety of factors was in effect, setting a speed limit on big directional market moves. The most obvious of those factors is the Federal Reserve (Fed), which now looks set to deliver only two rate hikes this year, when as recently as December the market expected as many as four. FOMC policy makers seem willing to let the dollar act as a substitute for further tightening while they await stronger economic data and evidence of core inflation growth that’s closer to their 2 percent target. The coupling of oil and equity prices is acting as another governor on higher valuations, making it hard for risk assets to sustain advances. Elsewhere, other major central banks are seemingly stuck in neutral against an uninspiring economic backdrop. European Central Bank (ECB) chief Mario Draghi received a chilly response in suggesting no further rate cuts would be coming after unveiling a new easing package in early March. In Japan, there is a genuine crisis of confidence in quantitative easing efforts now that negative rates have only produced similarly negative feedback. Meanwhile, China is caught between the need for additional stimulus and adherence to its reform agenda, increasing the risk of a significant devaluation of the yuan. In light of these constraints, the Committee believes that the recent rebound in equity prices, while welcome, needs evidence of rising earnings and improving economic fundamentals to continue. At the same time, we observe that the market has been experiencing rapid rotations among sectors and across asset classes, creating significant divergences that may yield opportunities to add value within and across individual categories. As such, with little visibility over the coming three to six months, we favor an approach of continued selectivity in pursuing risk asset opportunities through trades within asset classes rather than large directional bets, and to wait for pullbacks to consider adding to positions. Outside of non-U.S. developed market equities, the Committee maintained its neutral stance on U.S. and emerging market equity and adjusted its outlook for master limited partnerships (MLPs) to a neutral position. We are maintaining an underweight view of most developed market government securities because of our view that low yields do not compensate for the risk of higher rates, and remained cautious on emerging market debt with a bias toward hard currency sovereigns. Global Equities Among Few “Slightly Overweight” Calls History has shown that U.S. equities (as measured by the S&P 500) have often benefited when the Fed is in the midst of a tightening cycle. The main reason is that corporate earnings tend to rise as the economy strengthens, offsetting the impact of higher borrowing costs. But if you look at what’s happening during this cycle, average price-to-earnings ratios have declined by a full percentage point in the face of tepid to flat earnings growth. This fact was not lost on the Committee, which voted to maintain its neutral stance on U.S. equities even as most members expressed their belief that the country will avoid another recession for the time being. On the other hand, the Committee believes that global equities–and particularly those in developed markets outside the U.S.–may provide more opportunities over the coming 12 months. Despite the latest ECB posturing on rates, evidence is growing that past stimulus is providing a tailwind for growth. Business confidence continues to be decent, credit demand is rising, and corporate profits have yet to recover to post-crisis levels as they have done in the U.S. Among fixed-income assets, the Committee continues to favor high yield given current prevailing yields and the outlook for credit quality. But given the likelihood for ongoing fallout from weakness in the energy sector, we continue to prefer short-duration issues and higher-rated credits, at least for the near term. We feel clients looking for additional fixed-income exposure may want to consider shifting their exposures in assets such as core European bonds, burdened by negative yields, to high yield and select portions of the emerging market debt universe. Move to “Neutral” on MLPs The move to neutral from slightly overweight on MLPs was a difficult one given our prevailing belief that investors had unfairly punished the asset class amid ongoing weakness in energy markets. Many market participants have been caught off-guard by both the depth and persistence of that weakness, and the Committee feels that further declines in commodity prices in recent months have increased the potential for additional restructuring in the energy sector and added to the downside risks faced by midstream operators in particular. Broader Array of Risks The Committee agreed that a step-devaluation of the Chinese yuan remains the centerpiece risk in the investment outlook over the coming 12 months, but other downside scenarios featured more prominently. Chief among these was the risk that the Fed proceeds with tightening too quickly and undermines confidence in market liquidity, and that emerging markets such as Brazil create a contagion effect for developed market risk assets. Political risks are also rising, including the possibility of “Brexit” as the UK holds a June referendum on membership in the EU, and uncertainty around the U.S. presidential election. Driving in neutral can still get you down the road, but not without shifting into “drive” from time to time. In the months ahead, we believe it will be important to be vigilant for opportunities to add during market pullbacks and pursue trades within broad asset categories when the associated risks are acceptable. We believe the value of active management may be more evident during periods when asset allocators have little cause for conviction, and we anticipate that a firm hand on the wheel over the coming months will be key in helping navigate this uneven terrain. This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results. The views expressed herein are generally those of Neuberger Berman’s Asset Allocation Committee which comprises professionals across multiple disciplines, including equity and fixed income strategists and portfolio managers. The Asset Allocation Committee reviews and sets long-term asset allocation models, establishes preferred near-term tactical asset class allocations and, upon request, reviews asset allocations for large diversified mandates and makes client-specific asset allocation recommendations. The views and recommendations of the Asset Allocation Committee may not reflect the views of the firm as a whole and Neuberger Berman advisors and portfolio managers may recommend or take contrary positions to the views and recommendation of the Asset Allocation Committee. The Asset Allocation Committee views do not constitute a prediction or projection of future events or future market behavior. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. A bond’s value may fluctuate based on interest rates, market conditions, credit quality and other factors. You may have a gain or a loss if you sell your bonds prior to maturity. Of course, bonds are subject to the credit risk of the issuer. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (NYSE: AMT ) and/or state and local taxes, based on the investor’s state of residence. High-yield bonds, also known as “junk bonds,” are considered speculative and carry a greater risk of default than investment-grade bonds. Their market value tends to be more volatile than investment-grade bonds and may fluctuate based on interest rates, market conditions, credit quality, political events, currency devaluation and other factors. High Yield Bonds are not suitable for all investors and the risks of these bonds should be weighed against the potential rewards. Neither Neuberger Berman nor its employees provide tax or legal advice. You should contact a tax advisor regarding the suitability of tax-exempt investments in your portfolio. Government Bonds and Treasury Bills are backed by the full faith and credit of the United States Government as to the timely payment of principal and interest. Investing in the stocks of even the largest companies involves all the risks of stock market investing, including the risk that they may lose value due to overall market or economic conditions. Small- and mid-capitalization stocks are more vulnerable to financial risks and other risks than stocks of larger companies. They also trade less frequently and in lower volume than larger company stocks, so their market prices tend to be more volatile. Investing in foreign securities involves greater risks than investing in securities of U.S. issuers, including currency fluctuations, interest rates, potential political instability, restrictions on foreign investors, less regulation and less market liquidity. The sale or purchase of commodities is usually carried out through futures contracts or options on futures, which involve significant risks, such as volatility in price, high leverage and illiquidity. This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions. © 2009-2016 Neuberger Berman LLC. | All rights reserved

Why Brazil ETFs Are Gaining Despite Economic And Political Risks?

The Brazil stock market has been one of the best performers this month with the benchmark Ibovespa gaining 16% as of March 24, 2016. Several Brazilian ETFs – Shares MSCI Brazil Capped (NYSEARCA: EWZ ), Market Vectors Brazil Small-Cap ETF (NYSEARCA: BRF ), iShares MSCI Brazil Small-Cap (NYSEARCA: EWZS ) and Global X Brazil Mid Cap ETF (NYSEARCA: BRAZ ) – have jumped 28.3%, 20.3%, 24.7% and 19%, respectively, in the last 30 days (as of March 24) (read: Catch these Brazil ETFs on a Rebound ). The rally came on the back of speculations regarding a change in government. Brazil has been witnessing a highly charged political drama since the beginning of this month when speculations that President Dilma Rousseff will be impeached were afoot. Even her major coalition partner, the Party of the Brazilian Democratic Movement (PMDB), is working on policies including welfare cuts if the Rousseff government is toppled and it comes to power. Meanwhile, the Brazilian Bar Association has filed a new request for impeachment proceedings to Congress. Rousseff is under political pressure regarding one of the largest corruption controversies in Brazil. The bribery scandal surrounding Brazil’s national petroleum company Petrobras continues to involve several of the country’s politicians. Investors in favor of a change in government believe that new leadership could be in a better position to revive the battered economy. Apart from that, markets were also buoyed by potential rate cuts by Brazil’s central bank. Although in its meeting earlier in March, the central bank kept the benchmark rate at 14.25%, several analysts believe that it might consider lowering interest rates later in the year. A rate cut could help boost consumer and corporate spending. Once the star performer of BRIC and emerging markets, Brazil is currently in shambles thanks to the economic slowdown and an endless streak of corruption scandals. A new government could infuse a fresh lease of life into the ailing economy which otherwise is expected to contract for the second straight year in 2016. After shrinking 3.9% in 2015, the economy is expected to contract by 3.5% this year. Other worrying factors include an increasing unemployment rate, rising inflation and the currency losing its value. Although it is questionable how long the rally will continue, a new government might revive the moribund economy. So, investors looking to tap into this market could consider the following ETFs in the days to come. EWZ in Focus This product tracks the MSCI Brazil 25/50 Index and is the largest and most popular ETF in the space with AUM of over $2.6 billion and average daily volume of more than 20.6 million shares. It charges 64 bps in fees per year from investors. Holding 61 stocks in its basket, the fund is highly concentrated in its top two holdings with one-fifth of the portfolio invested in them. In terms of industrial exposure, financials dominates the fund’s return at 35.5%, followed by consumer staples (19.8%), energy (10.3%) and materials (9.6%) (read: Fragile Five ETFs Not At All Fragile This Year? ). BRF in Focus This fund provides exposure to the small cap equities of the Brazilian market and tracks the Market Vectors Brazil Small Cap Index. The fund holds a total of 57 small cap stocks and has a total asset base of $76.9 million. The fund trades an average daily volume of 58,000 shares. The fund is well diversified with no stock holding more than 5% of weight. Among the different sectors, consumer discretionary and consumer staples occupy the top two positions with 42% of investment made in these two categories. Market Vectors Brazil Small-Cap ETF charges a fee of 60 basis points for the investment. Investors, however, should invest in small cap companies with caution as these are more volatile than their large cap counterparts. EWZS in Focus Another fund tapping the small cap companies of the Brazilian market is EWZS. The fund seeks to track the MSCI Brazil Small Cap Index. The fund has a total asset base of $19.9 million and trades in average daily volume of almost 43,000 shares. The fund holds a total of 52 stocks with none holding more than 6.5% weight. Among sectors, the fund has almost 40% of assets invested in consumer discretionary followed by industrials (16%) and financials (13.4%). The fund charges an expense ratio of 64 basis points (read: Emerging Market Crisis: 5 ETFs Down Over 30% in 2015 ). BRAZ in Focus The Brazil Mid Cap ETF has been designed to tap the mid cap market of Brazil. The fund seeks to track the Solactive Brazil Mid Cap Index. The fund, through an asset base of $3.3 million, taps 41 stocks. The fund has an average daily volume of 1,400 shares. However, BRAZ appears to be highly concentrated in the top 10 holdings with 51% of the assets invested in those securities. Among sectors, the fund has 19% invested in utilities, thereby holding the top position in terms of sector exposure. The investors pay an expense ratio of 69 basis points for the investment made in the fund. Original Post

5 Ways To Spring Clean Your Portfolio

Click to enlarge If you have a ritual to turn your house upside down for a thorough spring cleaning, you may want to do the same for your portfolio. If a lot of dust has settled on your investments over the years, it may be time to size things up and evaluate your holdings. Below are five tactics to help you see – and optimize – your portfolio in the new light of spring. 1. Sweep your house into order When was the last time you assessed your portfolio allocations and rebalanced its exposures? Let’s start from the top and assess whether your asset allocation still makes sense. If you want to maintain your original allocation but it is drifting, you can rebalance it by redistributing the weightings among each asset class. While rebalancing does take work, the alternative is a portfolio with out-of-balance allocations that could very well change the portfolio’s overall risk level and performance. Rebalancing the motifs in your account takes only a few mouse clicks. For more, check out the importance of rebalancing a portfolio over time. 2. Is it time to dust off old strategies and look forward? Does your portfolio need a fresh start? While you’re sizing up your portfolio, it could also be a good time take stock of the macro environment and see whether your investment thesis still makes sense. In the current climate where a strong U.S. dollar is putting the brakes on inflation and consumers are pocketing greater purchasing power, you may want to consider plays that take advantage of the appreciating greenback and shed exposure to foreign currencies. After all, of the major central banks, only the Fed has signaled rate hikes this year. In Europe, central bankers are still keeping rates around zero while Bank of Japan has kept rates below zero. So, consider strategies like investing in shares of companies that rake in their earnings from the U.S. domestic market or trim your holdings in foreign bonds. To get some ideas going, check out the All-American motif. 3. Time to part with low performing funds and high cost? Spring cleaning is about letting go – like that old sweater you’ve clung to but have not gotten any wear out of it for a decade. Have your investment returns met your expectations? For instance, if your mutual funds have underperformed, you may want to consider replacing them with ETFs. ETFs track an index, specific asset or basket of assets and can cover sectors, commodities, currencies, bonds, and other asset classes. On the performance front, the latest research from S&P Dow Jones Indices, Does Past Performance Matter , shows that relatively few active managed funds can outperform year after year. Of the 678 U.S. equity funds that made the top quartile as of September 2013, only 4 percent managed to stay in the top quartile after two years. ETFs also tend to be more transparent. While mutual funds are only required to disclose their holdings every quarter, you can usually verify your ETF’s daily positions. On the cost front, ETFs tend to have lower cost because as passive investments that track indices, they do not require high-priced investment professionals to look after them; the passive nature of these vehicles also means fewer trades, which translates to lower commissions. For cost, performance and transparency reasons, it is no wonder that last year ETFs drew a record $2.2 trillion, according to data from Fund Distribution Intelligence and Investment Company Institute. If your mutual funds have underperformed and command high management fees, keep in mind that ETFs are a popular alternative. 4. Pruning your holdings Think about harvesting your gains and cutting your losses. Take a look at the winners and losers in your portfolio. If you have accumulated a few winners over the years and believe their themes have played out, or if the company is fully valued, consider cashing them in and realizing your long-term gains. After all, we have had a strong bull run of the last seven years and taking profits would be a wise move as the climate is now more uncertain. By selling your positions now, you get to reinvest your gains while delaying the payment of your taxes for 12 months. You are also taxed at the long-term capital gains of 15 percent, which is significantly lower than the rate at which short-term gains are taxed (this would be your normal income tax rate). If, on the other hand, you have accumulated some losers and no longer believe in them, ditching them now may be as good a time as any. Your losses can also reduce your capital gains and soften the tax blow. 5. De-cluttering and streamlining your portfolio Do you have multiple retirement accounts? Do you have duplicate holdings in your brokerage accounts? If you are someone who has hopped from one workplace to another, you may have built a nice collection of 401(k) and IRA accounts. If that is the case, you may want to consolidate them because you can probably better manage your retirement accounts and track your assets when your funds are not all spread out among different accounts. Having fewer accounts will help you better size up your net worth, assets and liabilities. So, there you have it. We encourage you to pick one of these spring cleaning tips and get to work. A word of warning: once you dig in, it may be hard to stop because the act of spring cleaning and getting into your portfolio’s nooks and crannies does something to induce satisfaction and put a spring in your step. Happy cleaning!