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Second Quarter Markets Review


In an effort to stimulate the economy, the Federal Reserve has implemented five distinct quantitative easing programs since 2008. The Fed’s present pace of decreasing asset purchases will end by the middle of this fall. This will allow the economic recovery to progress through the maturing growth stage that favors sectors such as energy, materials, industrials and electronic technology. The Sit growth funds emphasize these sectors.

Despite mixed news on the economy, June was primarily a "risk-on" month for stocks. Investors continue to be less risk averse, viewing the Fed’s quantitative easing as a safety net for both the economy and financial markets. This low level of risk aversion has caused investors to remain focused on lower quality companies because of the perceived safety net.

Domestic equities had a strong month and quarter through June 30th. Stocks with lower quality ratings continued to lead performance in June, the quarter, year-to-date and longer periods.

We are becoming more concerned that Europe’s economic growth may be stalling, as recent economic data has been mixed. Indicators suggest that Japan’s economy is finding its footing and appears to be weathering the consumption tax hike that went into effect in early April. Thanks to a series of growth stabilization measures introduced in China in early April, along with improving external demand, there appears to be a stabilization of economic growth.

Fixed Income

We expect the Fed’s asset purchases, which have artificially held interest rates down, to end entirely late this year and cause interest rates to rise. As such, our strategies underweight U.S. Treasury bonds and overweight securities that minimize (or benefit from) the negative effects of rising rates, while emphasizing a yield advantage relative to the benchmark. We think the unusually high level of market complacency and potential volatility in GDP reports will provide tactical trading opportunities in the coming months.

Continued reductions in the Fed's asset purchase program (QE) and weak economic growth alleviated inflation fears, causing longer-dated U.S. Treasury yields to fall modestly. The Barclays Aggregate Bond Index return for the quarter was +2.0%. Corporate bonds were the best performing sector, primarily due to their longer duration and increased demand as investors continued to search for yield. Mortgage-backed securities were the next best performing sector, as declining purchases by the Federal Reserve was offset by a low level of issuance thus far this year.

Despite the slight rise in June, tax-exempt yields ended the quarter lower across the yield curve. Lower than average bond issuance volume, combined with demand from reinvestment and modestly positive funds flows, continued to be the main driver of performance for tax-exempt bonds during the quarter. As supply of new issuance is expected to remain light, we believe that our longer-than-portfolio tax-free benchmark durations will be rewarded in the near term. Our tax-free strategy is to remain focused on securities that provide a high level of interest income, which is the primary source of returns over longer-term cycles. We also continue to look for security structures that provide added yield without additional credit risk.

Manage Risk With Asset Allocation

Asset allocation is a very important part of risk management within an investment portfolio. By investing in multiple asset classes, such as stocks, bonds, real estate, etc., that do not have closely correlated returns, investors can lower the variability of the returns that their portfolio experience over time. After an allocation method has been selected, periodically rebalancing the portfolio becomes an integral component to this process.

Through different allocation and diversification strategies, it may be possible to create portfolios with reduced risk (as measured by return variability) that can produce more consistent returns. For example, the S&P 500® Index, which is often used as a proxy for U.S. large cap stocks, fluctuated in annual returns from a low of -37.00% (2008) to a high of 26.47% (2009) for the five years ended December 31, 2012, while the Barclays U.S. Aggregate Bond Index, a proxy for the U.S. taxable bond market, only fluctuated between +4.22% (2012) and +7.84% (2011) over the same time period. During the calendar year of 2008, a portfolio comprised of holdings from both indices would have experienced a smaller decline than one made up entirely of the S&P 500 Index. In 2012, investing only in bonds (as defined by the Barclays U.S. Aggregate Bond Index) would have produced a positive return of 4.22%, but adding stocks to the equation would have increased the return on a portfolio for that year.

Asset Allocation

Read the full article "Manage Risk With Asset Allocations".

October 1, 2014

The Sit Mutual Funds are managed by Sit Investment Associates, Inc., which has been operating under the highest ethical and professional standards since it was founded in 1981 by Eugene C. Sit. We maintain an uncompromising commitment and adherence to our investment philosophy and style, while continually seeking ways to enhance our investment process.

Eugene Sit

Read about Sit Investment Associates & Sit Mutual Funds founder Eugene Sit.

Sit Mutual Funds Annual Shareholder Luncheon is October 27th

For additional information please visit the Annual Luncheon page.

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