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Identifying Ideas For A Low-Growth, Low-Rate Environment

Summary Our strategy looks across asset classes, currencies, geographies and sectors to identify good long-term ideas wherever they may be. This piece highlights five themes that we believe will likely prevail over the next two to three years. In the shorter-term, we believe that 2016 could potentially bring with it some significant changes across financial markets. 2016 investment outlook: Multi-asset strategies By David Millar, Head of Multi Asset, Invesco Perpetual Divergence in economic growth and monetary policy around the world has led to an increasingly volatile market environment in 2015. Specifically, while the United States (U.S.) and the United Kingdom (U.K.) have been preparing to raise interest rates from rock-bottom levels, Europe and Japan have continued to employ quantitative easing measures. China also stepped up monetary easing policies during the year through several interest rate cuts and a surprise devaluation of its currency. What is important to know about our team’s investment process is that we take a two- to three-year view of the world, which helps us avoid some of the short-term noise in the markets, looking across asset classes, currencies, geographies and sectors to identify good long-term ideas 1 wherever they may be. Going forward, we believe the following themes will likely prevail over the next two to three years: Low, but positive, global economic growth We believe that structural economic growth will remain subdued on a global basis. However, regional differences could continue, with inventory and capital expenditure concerns acting as a potential drag on consumption-led U.S. growth, and the economic slowdown in China posing a potential risk to Europe’s cyclical recovery. Interest rates to remain low At the beginning of 2015, we acknowledged that interest rates could start to rise in the U.S. and the U.K., and that impacted our appetite for having duration in the portfolio. Given the modest economic outlook, we expect interest rates to remain low over the next few years even if rates do tentatively start to rise in the US and U.K. We believe the outstanding question is whether the monetary policies that are driving these changes will be effective in sustaining a healthy economic recovery. Low inflation to continue globally We expect low inflation to continue globally, exacerbated by ongoing competitive currency devaluation. We believe underlying inflation will remain low in the face of structural factors, such as debt overhang, and that implied inflation priced into forward interest rates will remain high. Select opportunities in risk assets We believe that select opportunities exist in risk assets, but current equity valuations must be navigated with care as earnings trends show differences between regions. Within fixed income, the search for yield appears to be distorting valuations, although U.S. corporate bonds look, in our view, more fairly priced. Higher levels of market volatility to persist Volatility has risen in 2015, but we believe that divergent economic policy globally, as well as non-market forces such as political interference, could underpin persistently higher levels of absolute volatility over the coming years. Given this two- to three-year outlook of the market, in the shorter-term we believe that 2016 could potentially bring with it some significant changes across financial markets. The beginning of a rate-tightening cycle could lead to a very different landscape for investing, as compared to the past few years which were defined by very loose monetary policy. This is important for a multi-asset portfolio like ours. For example, if interest rates rise, bonds may not provide the diversification 2 investors need. Another general theme, which extends through 2016 and beyond, is the use of different policy tools around the world. Ongoing competitive currency devaluation is a theme that may dominate across Asia in particular as economies fight for their share of global trade. In this environment, taking views on individual countries rather than broad-based regions makes sense as individual countries are responding to global economic pressures in very different ways, in our view. As policy and economic factors diverge across regions, this typically underpins higher asset class volatility than we have experienced over the past few years. Learn more about Invesco Global Targeted Returns Fund (MUTF: GLTAX ). Important information The opinions of the ideas expressed are those of Invesco Multi-Asset Team and are based on current market conditions which are subject to change without notice. These opinions may differ from those of other investment professionals. Diversification does not guarantee a profit or eliminate the risk of loss. Volatility measures the amount of fluctuation in the price of a security or portfolio. About risk There is a risk that the Federal Reserve Board (NYSE: FRB ) and central banks may raise the federal funds and equivalent foreign rates. This risk is heightened due to the potential “tapering” of the FRB’s quantitative easing program and other similar foreign central bank actions, which may expose fixed income investments to heightened volatility and reduced liquidity, particularly those with longer maturities. As a result, the value of the Fund’s investments and share price may decline. Changes in central bank policies could also increase shareholder redemptions, which may increase portfolio turnover and fund transaction costs. Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested. These risks are greater for the Fund than most other funds because its investment strategy is implemented primarily through derivatives rather than direct investments in more traditional securities. The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues. The Fund is subject to the risks of the underlying funds. Market fluctuations may change the target weightings in the underlying funds and certain factors may cause the Fund to withdraw its investments therein at a disadvantageous time. Leverage created from borrowing or certain types of transactions or instruments may impair liquidity, cause positions to be liquidated at an unfavorable time, lose more than the amount invested, or increase volatility. The Fund is non-diversified and may experience greater volatility than a more diversified investment. Short sales may cause an investor to repurchase a security at a higher price, causing a loss. As there is no limit on how much the price of the security can increase, exposure to potential loss is unlimited. The Fund may invest in derivatives either directly or, in certain instances, indirectly through Invesco Cayman Commodity Fund VII Ltd., a wholly owned subsidiary of the Fund organized under the laws of the Cayman Islands (Subsidiary). Because the Subsidiary is not registered under the Investment Company Act of 1940, as amended (1940 Act), the Fund, as the sole investor in the Subsidiary, will not have the protections offered to investors in U.S. registered investment companies. Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments. Debt securities are affected by changing interest rates and changes in their effective maturities and credit quality. Underlying investments may appreciate or decrease significantly in value over short periods of time and cause share values to experience significant volatility over short periods of time. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund. Before investing, carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the products, visit invesco.com/fundprospectus for a prospectus/summary prospectus. The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE All data provided by Invesco unless otherwise noted. Invesco Distributors, Inc. is the U.S. distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd. ©2015 Invesco Ltd. All rights reserved. Identifying ideas for a low-growth, low-rate environment by Invesco Blog

Picking Stocks For The Long Term Is Harder Than You Think – So Don’t

Summary It is important to distinguish between stock picking and index investing, because they require different approaches. A common assumption with index investing is that, over the long term, indexes will rise. Often, investors make the same assumption when picking individual stocks, but they shouldn’t. It is extraordinarily difficult to find individual stocks that offer value, long-term predictability, and index out-performance. That doesn’t mean that we should abandon stock-picking. It just means that it is very important to take into account the medium-term prospects of a stock. Alpha is more likely to be achieved if one develops a medium-term investment thesis and then sticks to it. I generally try to avoid referencing super-investors for a variety of reasons, but this article will be an exception. There have been many, many articles and comments on Seeking Alpha that reference Warren Buffett’s investing advice. What is often not taken into account, however, is that Buffett’s advice is directed at two distinct categories of investors: active, knowledgeable investors; and passive, less knowledgeable investors. For passive investors, Buffett’s basic advice is to invest the majority of one’s capital into a low-cost S&P 500 index fund, and perhaps hold some capital in cash in case there is a downturn in which one needs money and does not wish to sell their stocks while the stocks are undervalued. The reasoning behind this is that over the long-term, a large basket of US stocks are likely to outperform other asset classes, and you can purchase a large basket of US stocks rather cheaply. As for investors who are active, intelligent, and knowledgeable, they should look for some combination of value and long-term predictability, and also have a high portfolio concentration, low turn-over, and if possible, aim to seek out companies with small capitalization. (This is summarizing a lot of what Buffett has said, done, and written over the years into one sentence. I would be happy discuss any reasonable objections of the summary in the comments section.) It is important to note that these two investing approaches are often mutually exclusive. You cannot have a high concentration and index at the same time. You also cannot assume that an individual stock that has a low correlation with its respective index will rise over long periods of time like you can with an index. In fact, I think that the relationships may be opposite one another. (Meaning the longer you commit to holding an individual stock, the more likely it is the stock will decline in value, while the longer you commit to holding a US focused index fund, the more likely it is that it will rise in value.) Not everything is mutually exclusive between the two approaches. You can buy a small-cap value fund that charges only small fees (but you can also expect more volatility if you do so). You can limit turnover when purchasing individual stocks, just as many indexes do. You can also try to find long-term individual stocks to purchase, but consider this: If Warren Buffett and Charlie Munger–two of the best investors in the world–can only find one or two worthy long-term picks in any given year, what makes you think that you can find more than that? So, while there is some potential overlap between the approaches, the areas that are mutually exclusive are often forgotten by investors, and the ones that aren’t mutually exclusive either have high volatility or are difficult to find. The mistake I see is that often times investors want to combine an indexing approach–and the assumptions that come with it–with a stock picking approach. Specifically, investors want to (1) be diversified beyond 3-10 holdings even though long-term value stocks are hard to find, (2) assume the historical bias toward long-term index gains applies to individual stocks, (3) assume that picking individual blue-chip stocks that have a high correlation with indexes will outperform indexes, and (4) assume that their goals are unrelated to the performance a benchmark. I will set assumptions 1, 3, and 4 to the side for this article, #1 would make this article too long, #3 is obviously a poor assumption, and #4 is simply a different topic altogether. So this article will focus on why investors have to be careful not to assume that the long-term historical upward bias of index funds also applies to individual stocks that are weakly correlated with the index. The Problem with Visibility: Visibility of the long-term future of individual stocks is more cloudy than people think. Quite often investors will assume that a company will perform well twenty years from now because it has performed well in the decades leading up to that point in time. If the investor purchases the stock and the stock price drops, quite often the investor will insist that the drop in price is okay because they are “holding for the long term”, and long term the company will be fine. It is absolutely critical the investors realize just how difficult it is to forecast out ten or twenty years on an individual stock. That is a key difference between an index and an individual stock. It might be okay to assume the S&P 500 index will be higher in twenty years than it is now. But if one were to pick an individual stock at random from the S&P 500, there is a greater than 50% chance that in twenty years the company will not even qualify as part of index. Half of the components of the S&P 500 in 1999 are not in the index today , only 16 years later. But, Cory, you say, I am not picking my stocks at random, I am picking only blue-chip stocks like Johnson & Johnson (NYSE: JNJ ), Coca-Cola (NYSE: KO ), Exxon Mobil (NYSE: XOM ), Procter & Gamble (NYSE: PG ), and Kinder Morgan (NYSE: KMI ) –I’m only partially kidding about Kinder Morgan. Your picks are probably not going to be perfect, right? My response is that if you only purchase huge, blue-chip, depression resistant companies, and you are going to diversify beyond ten of them just in case a couple of them turn out to be duds, then your performance will probably be similar to an S&P 500 index. You cannot assume that big, widely followed blue-chip companies will be available for purchase at value investor prices very often. And you cannot assume that value opportunities with small-cap companies will possess the same long-term visibility as big, blue-chips. It seems clear that those who purchase only the biggest and safest stocks are few and far between. Many stock-pickers might have a core portfolio of these companies, but they also branch out to other areas in search of alpha with regard to either yield or total return. In many cases what we have are stock-pickers who are moving beyond the confines of blue-chips in search of alpha who are carrying with them the assumptions that rightly apply only to indexes or the blue-chip stocks that are highly correlated with the indexes. Specifically, the assumption that if they just hold on to something long enough, it will rise or pay out steady dividends for the next ten or twenty years while also out-performing the market. This assumption can lead to under-performance or disaster. It is not an assumption that should be made. So, if one wants to seek alpha by picking individual stocks, what is it one could do to deal with the emotions and short term volatility in the stock market that compel investors to sell at the wrong time, without resorting to the fallback of aiming to hold for the long-term? I think the solution is to develop both a short and medium-term thesis while picking stocks, and only when a thesis comes to fruition should one consider holding a stock for the long-term. In my next article, I will explain the method I have been using recently with some success. Note: Please consider “following” me for real-time notification of my latest articles. My views are a constant work in progress and I am always interested in hearing other points of view, so if you have any thoughts, please feel free to share them in the comments section.

Proposed SEC Rules Could Shake Leveraged ETFs

Leveraged ETFs have been investors’ darlings this year thanks to stock market volatility. This is because these funds try to magnify returns of the underlying index with the leverage factor of 2x or 3x on a daily basis by employing various investment strategies such as swaps, futures contracts and other derivative instruments (read: 10 Most Heavily Traded Leveraged ETFs YTD ). Due to the compounding effect, investors can enjoy higher returns in a very short period of time provided the trend remains a friend. However, these funds are extremely volatile and are suitable only for traders and those with high risk tolerance. These run the risk of huge losses compared to traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period when compared to a shorter period (such as, weeks or months). Despite this drawback, investors have been jumping into these products for quick turns. Will these allure continue in the months ahead if the new rules proposed by the SEC are enacted? Inside the New Proposed Rules Under the proposed rules , the fund has to limit its notional exposure to derivatives of up to 150% of the net assets or 300% if the fund actually offers lower market risk. Additionally, it should manage the risks associated with derivatives by segregating certain assets (generally cash and cash equivalents) equal to the sum of two amounts: Mark-to-Market Coverage Amount: A fund would be required to segregate assets equal to the amount that the fund would pay if the fund exited the derivatives transaction at the time of determination. Risk-Based Coverage Amount: A fund would also be required to segregate an additional risk-based coverage amount representing a reasonable estimate of the potential amount the fund would pay if the fund exited the derivatives transaction under stressed conditions. Apart from these, the fund would implement a formalized derivatives risk management program administered by a risk manager. ETF Impact These rules, if enacted, would shake the leveraged ETF world, in particular the triple leveraged funds. This is because the funds might be forced to increase exposure to low risk and low-return safe assets like cash and equivalents in order to offset the risk of derivatives exposure. This could eat away the outsized returns that the leveraged ETFs have been providing to investors (see: all Leveraged Equity ETFs here ). Notably, there are 135 leveraged products and 87 leveraged inverse products as per xtf.com. Of these, 46 leveraged and 36 leveraged inverse products have three times exposure to the underlying index and would be the most in trouble. In particular, the proposed rules would hurt the leveraged long and short ETFs structured via the Investment Company Act of 1940, potentially forcing providers to change the legal structure or leverage factor, or to close them. Notably, Direxion and ProShares are the two issuers that would be the most impacted as they have several equity and fixed income ETFs that rely on three times derivatives-based leverage and has been structured via the Investment Company Act of 1940. Some of the most popular ones are the ProShares UltraPro QQQ ETF (NASDAQ: TQQQ ) , the Direxion Daily Financial Bull 3x Shares ETF (NYSEARCA: FAS ) , the ProShares UltraPro S&P 500 ETF (NYSEARCA: UPRO ) , the Direxion Daily Small Cap Bull 3x Shares ETF (NYSEARCA: TNA ) , the Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEARCA: TMV ) , the ProShares UltraPro Short S&P 500 ETF (NYSEARCA: SPXU ) , the Direxion Daily Small Cap Bear 3x Shares ETF (NYSEARCA: TZA ) and the ProShares UltraPro Short QQQ ETF (NASDAQ: SQQQ ) . However, some commodity leveraged ETFs providing investors’ triple exposure to the index could escape the new rules by virtue of their registration as commodity pools with the Commodity Futures Trading Commission (CFTC). In Conclusion While the SEC proposal is a concern for leveraged ETF providers, it is not yet finalized or may fall apart. Even if the rules are adopted, it will take months or a year to have a full impact on the ETF world. Link to the original post on Zacks.com