Comprehensive Wealth Management Services – CIO Forum – March 15, 2016

Mercer Global Advisors

Description

CIOFORUM as a ratio, such as “debt to equity”. A firm’s total assets always equal its debt plus equity. This is a basic (though sacred) accounting formula that is pounded into the heads of aspiring CPAs everywhere. The beta of a firm’s equity basically comes from its debt-to-equity ratio.2 The value of a firm’s equity is the market value of its outstanding stock. The value of a firm’s debt is basically the book value of all its outstanding bonds.

The higher a firm’s debt to equity (more debt, less equity), the higher the beta of the firm’s stock (all other things held constant). Less debt relative to firm equity results in a lower beta. by definition flawed since they are oversimplifications of the real world. Further, research has evolved the CAPM quite significantly in the five decades since its birth in the halls of academia.

But despite all its flaws, the many investing lessons we continue to learn from this simple, yet elegant model continue to help investors earn superior risk-adjusted returns. And as always, Mercer Advisors continues to stay at the very cutting edge of scientific developments in finance to ensure that everything we do in your investment portfolio is always academically validated, institutional caliber, and implemented in the most cost-effective manner possible. How does Mercer Advisors invest in low-beta stocks? NOTE: We welcome your feedback and questions. Feel free to send us an email at CIOForum@merceradvisors.com. Mercer Advisors invests in low beta stocks either directly or through institutional-class mutual funds.

For example, many clients own the AQR U.S. Large Cap Defensive Style Fund (AUEIX) and AQR International Defensive Style Fund (ANDIX). Both seek to invest in stocks with lower-than-average betas.

AUEIX has returned +2.34% YTD and ANDIX has returned +1.70% YTD,3 despite a volatile start to the year. This is not to say that advisors and clients should abandon the Capital Asset Pricing Model and load up exclusively on low-beta stocks. Diversification is still critical in any investment portfolio and that includes investing across many different types of stocks. It’s also important to remember that the CAPM is only a model; models are Eye on the Week Ahead There’s plenty of information available this week. Reports on producer prices, retail sales, industrial production, and the Fed’s announcement from its latest meeting are sure to have some influence on the equity markets. 3/15: Producer Price Index, Retail Sales, Business Inventories, Housing Market Index 3/16: Consumer Price Index, Housing Starts, Industrial Production, FOMC Meeting Announcement 3/17: Job Openings and Labor Turnout Survey (JOLTS) 3/18: Consumer Sentiment D COVim si Sources: J.P.

Morgan Asset Management, Bloomberg, FactSet, Broadridge/Forefield. The statistical formula for beta is: b1 = – = – x rim  2Formally, a firm’s equity beta is defined as: bE = bA + – (bA – bD)  3As of close of business on March 11, 2016. sm E s2 m 1 Market/Index DJIA NASDAQ S&P 500 VIX Russell 2000 MSCI EAFE MSCI ACWI Euro/USD 10 Year Treas. Oil (WTI) Gold 52-week High 18351.36 5231.94 2134.72 53.29 1296.00 1956.39 443.98 1.17 2.48% 61.83 1277.50 52-week Low 15370.33 4209.76 1810.10 10.88 943.10 1471.88 351.25 1.05 1.66% 26.21 1049.40 Prior Week 17006.77 4717.02 1999.99 16.86 1081.94 1628.83 387.33 1.10 1.88% 35.92 1277.50 3/11/16 17213.31 4748.47 2022.19 16.50 1087.56 1644.94 391.75 1.12 1.98% 38.50 1264.75 Week Change 1.34% 0.69% 1.19% -2.14% 0.57% 1.03% 1.19% 1.37% 10 bps 7.18% -1.00% YTD Change -0.53% -4.91% -0.56% -9.39% -4.00% -3.73% -1.55% 2.71% -29 bps 3.94% 19.32% 1-year Change 0.20% -0.92% 1.30% -2.19% -9.25% -6.59% -4.10% 5.77% -13 bps -20.07% 9.98% Source: Bloomberg 1801 East Cabrillo Boulevard, Santa Barbara, California 93108  |  800.898.4642  |  merceradvisors.com The information provided above is for educational purposes and should not be considered as investment advice. For investment advice and financial planning specific to you, talk to a qualified professional at Mercer Advisors.

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