1

Is It Time to Invest in Europe?A Case Study in Tactical Allocation

Will CarterDirector of Wealth Management

March 1, 2012

2

Help evaluate short-term opportunities and threats investing in EuropeDiscuss the practice of “tactical asset allocation” investing as a type of active management

Purpose of Today’s Webinar

3

Core Financial Services

Coordination/ Project

Management

Coaching/ Education

Delegated Expertise

4

Invest in Europe?

Europe faces serious challengesDamaged banking sectorDeficit spendingNegative or slow growth

- Corporate earnings- Gross domestic product

Declining currencyPessimistic moodLow productivity

− Inefficient labor markets− Expensive social safety net− Aging population− Bureaucratic governments

5

Invest in Europe?

Déjà vu All Over Again?

U.S. (SPY-black) v. Europe (EUE-tan) since March 2009Source: www.bigcharts.com

6

What is Tactical Allocation?

U.S. (SPX-black) v. European (SXXP-tan) markets since 1999Source: www.bigcharts.com

7

“Reversion to the mean is the iron rule of the financial markets.”

John Bogle, Vanguard (passive money manager)

“I got wiped out personally in 1968, which was the last really crazy, silly stock market before the Internet era….After 1968, I

became a great reader of history books. I was shocked and horrified to discover that I had just learned a lesson that was freely available all the way back to the South Sea Bubble.”

Jeremy Grantham, GMO (active money manager)

What Drives Portfolio Performance?

8

What Drives Portfolio Performance?

What drives portfolio performance?

Strategic allocation (passive)Tactical allocation (active)Stock picking (active)

9

What Drives Portfolio Performance?

“The debate pitting [strategic] asset allocation against active management is now moot. It is

not a matter of either/or but both/and.”

Walter Prahl, Lord Abbett Partner & Director of Quantitative Research, Citing:James X. Xiong, Roger G. Ibbotson, Thomas M. Idzorek, and Peng Chen (IbbotsonAssociates), “The Equal Importance of Asset Allocation and Active Management,”Financial Analysts Journal (March-April 2010).

10

What is Tactical Allocation?

Tactical Allocation……is a dynamic investment management

technique that adjusts a portfolio’s weightings to different asset classes based on the manager’s assessment of varying

risks and returns among those asset classes.

11

What is Tactical Allocation?

First Tier Asset Classes

Equity Fixed income

Alternative Cash

Equity Asset Classes(a sampling) 

Large Cap Mid CapSmall Cap USInt'l Developed Int'l EmergingValue Growth

12

What is Tactical Allocation?

Fixed Income Asset Classes(a sampling)

Long duration Short durationGovernment CorporateAdjustable High yield

Alternative Asset Classes(a sampling)

Long/short Event drivenCommodities Real estateManaged futures Currencies

13

What is Tactical Allocation?

14

What is Tactical Allocation?

15

What is Tactical Allocation?

U.S. (SPX-black) v. European (SXXP-tan) markets since 1999Source: www.bigcharts.com

16

What Drives Markets?

What drives stock market performance?

- Economic growth- Profit growth- Investor sentiment (valuation)- Other investment options

17

What Drives Markets: Economic Growth

18

Invest in Europe Now?

Source: The Conference Boardhttp://www.conference-board.org/data/globaloutlook.cfm

19

What Drives Markets: Corporate Profits

Source: Standard and Poor's

20

What Drives Markets: Sentiment

21

What Drives Markets: Other Investment Options

Source: Federal Reserve

22

What Drives Markets?

Source: dshort.comhttp://www.advisorperspectives.com/dshort/charts/valuation/PE-ratio-overview.html?SP-and-ttm-PE-nominal.gif

23

12-month history of European (SXXP-black) to U.S. (SPY-gold) stock indices

Source: www.bigcharts.com

Invest in Europe Now?

24

Invest in Europe Now?

25

Invest in Europe Now?

26

Invest in Europe Now?

27

Invest in Europe Now?

28

Source: The American Association of Individual Investors

Invest in Europe Now?

29

Source: The Centre for European Economic Research

Invest in Europe Now?

30

Source: The Centre for European Economic Research

Invest in Europe Now?

31

Summary

In summary:

European economy is hampered by serious structural challenges that have damaged corporate profitability, currency, and stock marketsIf it can address these problems, markets will likely turn

European markets have lagged behind for several years, and have “caught up” in the past

Some “baby” may have been thrown out with the “bathwater”:

Global markets are growingEuropean large companies are fueled by global companiesEuropean stocks are relatively inexpensiveEuropean large companies pay high dividends – relative to bonds and to price

European market sentiment is improving, so time to act may be short

32

Next Steps…

Evaluate your current portfolioTotal allocationEquity allocation

Design strategy for futureInitial target allocationsHow to adjust allocations in future

Passive (periodic rebalancing)Active (rebalance based on market mechanisms)

Discuss with othersIncreases rigor and accountability

ImplementMonitor results

33

Disclosures

This presentation is limited to the dissemination of general information pertaining to the investment advisory/management services McKinley Carter Wealth Services, Inc. (“MCWS”) and is not intended to be specific advice as to whether you should engage in a particular trading strategy or buy, sell, or hold any financial product. Investing in the stock market involves gains and losses and may not be suitable for all investors. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable.

Use of the indices contained herein is for illustrative purposes only and the volatility of these indices may be materially different from the volatility of a MCWS client account due to varying degrees of diversification and/or other factors. Indices are unmanaged, reflect reinvestment of income and dividends and do not reflect the impact of advisory fees. Investors cannot invest directly in an index.

Certain material in this work is proprietary to and copyrighted by Litman/Gregory Analytics and is used by MCWS with permission. Reproduction or distribution of this material is prohibited and all rights are reserved. Certain other material in this work is from J.P. Morgan Asset Management, the marketing name for the asset management businesses of JPMorgan Chase & Co., and Pacific Investment Management Company LLC (PIMCO).

McKinley Carter Wealth Services, Inc. (“MCWS”) is an SEC registered investment adviser with its principal place of business in the State of West Virginia. MCWS and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which MCWS maintains clients. MCWS may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by MCWS with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of MCWS, please contact MCWS or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).

For additional information about MCWS, including fees and services, send for our disclosure brochure as set forth on Form ADV from MCWS using the contact information herein. Please read the disclosure brochure carefully before you invest or send money.

6500 Brooktree Road, Suite 205 Wexford, PA 15090

724.940.4400

135 Summers Street, Suite 100Charleston, WV 25301

304.346.3700

2100 Market Street Wheeling, WV 26003

304.230.2400

Toll Free: 866.306.2400www.mckinleycarter.com