D3 Business Update:

Remember June 2nd at the Morton Arboretum:


Adam passed his CIMA exam:  Adam completed the final stage of becoming a Certified Investment Analyst last week by passing their 4 hour comprehensive examination.  He will continue  assuming responsibilities as the assistant portfolio manager at D3. Congratulations Adam.


Kelly Scaramella has started interning with us. She may be answering the phone when you call.


We are working diligently on the financial plan updates for our family office clients.  We will notify you when we complete your update and will load it into your client portal.


D3 Investment Insight:

We continue to gather as much information from the brightest minds in the industry on the three major investment issues we currently face: the Greek impact on Europe, the Chinese economic slowdown, and the “fiscal cliff” (increased taxes and decreased spending scheduled for 2013) facing the United States.

A quote we heard last week regarding Greece was “the markets have had three years to discount the departure of Greece from the Euro and if the markets are efficient it should already be priced in.”  We think economically, Greece’s departure is priced into the markets (primarily because Greece represents less than 5% of total European output and most of the debt is held by the ECB and French and German Banks.  All of the European private banks have already written down their Greek exposure by 25% or more.  The headline risk of “Euro failure” is the biggest risk we see on the horizon because that could affect confidence in the European banking system.  Similar to how the U.S. Federal Reserve reacted to the liquidity crisis in 2008, the ECB has vowed and taken action to provide ample liquidity to the European banking system.  They are following the same script as the Federal Reserve and will now be examining the Spanish Banks.

Adam and Don reviewed all of the developed market international funds clients currently have exposure in. Adam has summarized the exposure below:

Although a Greek exit from the Euro should not have a fundamentally large impact on the European economy, we believe the headline risk would create a flight to quality throughout developed European markets.  Two of our international funds are overweight developed Europe compared to the Europe Asia and Far East (EAFE)index; which weights developed Europe at 40%. 


The Manning & Napier World Opportunities (EXWAX) fund had 53% direct exposure to developed Europe  as of April 30th.  The fund’s exposure to defensive sectors was approximately 30% (which is the highest of all of our developed international holdings), and exposure to the financial sector, which we believe would be the hardest hit in a Greek exit, was at 7% (the lowest of all of our international funds).  Although this funds developed European exposure is the highest of all of our holdings, its defensive positioning will likely cushion some of the blow if a Greek exit does occur. No client has more than 3% exposure to this fund.

Dow Jones Select Dividend Ishares ETF (IDV)is the only other fund  D3 clients own that is overweight developed Europe. This fund has developed European exposure of 44%.  The index this fund tracks is designed to focus on strong dividend paying companies.  We believe that the high dividend paying nature of this fund will help mitigate potential losses in a Greek exit scenario.  High dividend paying stocks have historically outperformed the market.  During the bear market between July and October of last year, this ETF outperformed the EAFE international index by 2%.  No client has more than 5% exposure to this fund.

Moving on to China, economic growth will slow down this year. We are already seeing an impact on commodity prices.  Don attended a presentation by Michael Pettis, Professor of Finance at Peking University, describing China’s transformation from an investment and export driven economy to more of a consumption based economy.  If the Central Government is successful in this transformation, the Chinese middle class will thrive (lowering potential political dissention) but GDP growth may be cut in half.

From the April 2, 2012 high this year, the S&P 500 has declined by 7.2%  and the NASDAQ composite has corrected by 9.5%.   By historic valuation standards, U.S. stocks look cheap.  Over the past 80 years the average 10-year annualized return on equities has been 12% when price/earnings ratios have been as low as they are right now.

The uncertainty regarding the next president, large tax hikes and large spending cuts scheduled to go into effect on January 1, 2013 are major headwinds facing the U.S. equity markets.  For the time being the markets seem to be ignoring this political, self-imposed “fiscal cliff.”  Based on the history of August 2011, when U.S. politicians played Russian roulette with the debt ceiling, we are a little less sanguine about the “U.S. fiscal cliff” compared to many of our peers.


D3 Investment Outlook:

Over the past few weeks, we did not hear anything that changes our belief that U.S. equities continue to be inexpensive relative to bonds.  We continue to focus on high quality, dividend paying stocks to generate income, and maintain low volatility.  For our clients with fixed income positions, we continue to invest in funds with higher yields and lower interest rate risk than the bond index (high yield, floating rate, investment grade, and alternative fixed income).


D3 Investment Strategy:

Portfolio cash flow generation strategy remains our focus.  We are exploring if we can implement a cost effective hedging strategy for some of our U.S. equity exposure just in case our politicians can’t agree on a less draconian fiscal policy than what is scheduled to occur on January 1, 2013.



If anyone anticipates cash flow needs that cannot be covered by your emergency funds or that we have not incorporated into your plan, please let us know.


Everybody have a great Memorial Day and remember the purpose of the holiday; it is the day when we pause to give thanks to the people who fought for the freedoms we have.


Don Duncan MBA CPA CFA™ CFP®                    Neil LeFort, MBA J.D. CPA

Michael Meyers MBA CFP®                                   Patty Shipinski Office Manager

Adam Glassberg CFP®                                           Ryan Pace Jr. Financial Planner