Russell Changes Allocations in Some Products

Global asset manager Russell Investments is implementing a series of strategic asset allocation changes to several retail product offerings in the U.S. market.

These products include the Russell LifePoints Funds, Target Portfolio Series and Russell Core Model Strategies. The primary changes include shifts in the fixed-income, U.S. equity, international equity and alternatives asset class allocations, according to Russell. For most portfolios, the reallocations take effect during the month of January.

“Our investment strategists are forecasting an environment of modest returns through 2014, which can be challenging for some investors in achieving a desired rate of return at a level of risk they are comfortable with,” says Jeff Hussey, global chief investment officer at Russell, who is based in Seattle. “Despite a lower-return environment, our outlook is not pessimistic and we see promising opportunities for many investors maintaining diversified, multi-asset portfolios with global exposure.”

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The perspective of Russell’s team of global strategists is outlined in its recently released 2014 annual global outlook report, which highlights the firm’s expectations of modest global growth that should see equities outperform cash and fixed income, despite some expected market volatility.

“Many investors and financial advisers are struggling with the best way to approach U.S. core fixed income in an environment in which we expect interest rate increases,” says Phill Rogerson, managing director of consulting and product services for Russell’s U.S. adviser-sold business. “While we believe fixed income remains an important element of a diversified portfolio, we feel the time is right to implement a modest decrease in core fixed-income exposures and an offsetting increase to equity and high-yield bond exposures that may benefit investors’ long-term investing goals with a commensurate increase in risk.”

The specific portfolio reallocations include:

  • Fixed income. Reallocating assets from core bond exposures (Russell Strategic Bond Fund and Russell Investment Grade Bond Fund) to equities and global high-yield bonds that represent a better return potential with corresponding increase in risk.
  • U.S. equity. Increasing overall exposure to U.S. equity, with a majority of this increase going to the small-capitalization equity allocation, in an effort to compensate for the lower return expectations of fixed-income markets.
  • International equity. Taking a more targeted approach to non-U.S. equity exposure with an emphasis on emerging markets and adjustments within global equity allocations.
  • Alternatives. Changing the real asset composition by decreasing commodities and increasing infrastructure allocations in an effort to maintain non-U.S. exposure levels while also offering higher return potential.

“We believe that strategic asset allocation is one of the primary determinants of investors’ progress toward their desired outcomes,” said Rogerson. “The changes we are making to our products reflect Russell’s best thinking and our commitment to providing investment solutions that are broadly diversified, implemented utilizing some of the world’s leading money managers and strategies, and dynamically managed to reflect the realities of changing global market conditions.”

More information about these changes is available in an online video featuring Phill Rogerson.

The “2014 Annual Global Outlook” report can be downloaded here.

SEC Outlines 2014 Examination Priorities

The Office of Compliance Inspections and Examinations (OCIE), part of the Securities and Exchange Commission (SEC), released its list of examination priorities for 2014.

The OCIE is tasked with administering the SEC’s National Examination Program (NEP). As part of the NEP, auditors in Washington, D.C., and in the commission’s 11 regional offices conduct reviews of SEC-registered entities, including broker/dealers, transfer agents, investment advisers, investment companies, securities exchanges, clearing agencies and self-regulatory organizations.

The list is divided into five sections that cover market-wide priorities and the NEP’s four program areas, which include the following: investment advisers and investment companies; broker/dealers; exchanges and self-regulatory organizations; and clearing and transfer agents.

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There are six market-wide priorities identified in the report:

Retirement Vehicles and Rollovers. The SEC staff will undertake several initiatives related to retirement vehicles and rollovers, including examining the sales practices of investment advisers targeting retirement-age workers to roll over their employer-sponsored 401(k) plan into higher-cost investments. Broker/dealers will also be examined for improper marketing practices and such things as product suitability, churning (excessive trading in a client account meant to generate extra commissions), and use of misleading professional designations.

Fraud Detection and Prevention. The U.S. capital markets are built on trust, says the OCIE, and such events as scams, theft, unfair advantage and other fraudulent conduct erode that trust and adversely affect investors and the efficient functioning of markets. For that reason, the NEP will continue to utilize and enhance its quantitative and qualitative tools and techniques to identify market participants engaged in fraudulent behavior.

Corporate Governance, Conflicts of Interest, and Enterprise Risk Management. The NEP will continue to meet with senior management boards of entities registered with the SEC, including their affiliates when appropriate, to discuss how each firm actively identifies and mitigates conflicts of interest and other legal, compliance, financial and operational risks.

Technology. The capital markets are experiencing a decades-long revolution in technology, says the OCIE, and the increasing complexity, interconnectivity and speed fostered by technology continue to challenge market participants and regulators. The NEP will continue to examine governance and supervision of information technology systems, operational capability, market access, information security and preparedness to respond to sudden malfunctions and outages.

Dual Registrants. The convergence among broker/dealers and investment advisers continues to be a significant risk for investors, argues the OCIE. Auditors will examine whether representatives of dual registrants may influence whether a customer establishes a brokerage or investment advisory account, which may in turn create a risk that customers are placed in inappropriate accounts.

New Laws and Regulation. SEC staff will review general solicitation practices and verification of accredited investor status under newly adopted Rule 506(c) under the Securities Act of 1933. The staff will also be conducting reviews to assess compliance with recently adopted rules by municipal advisers. Similarly, in the event that rules are put in place regarding security-based swaps dealers and other registered entities created or impacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC expects to allocate resources to conduct reviews of those registrants.

For the investment adviser and investment company examination program, the SEC plans to examine such areas as safety of assets, conflictions of interest inherent in certain investment adviser business models, and marketing practices.

Other priorities in the investment adviser/company space include examining SEC-registered advisers that have not yet been subject to any examination, wrap fee programs, quantitative trading models, presence exams, payments for distribution in guise, and fixed-income investment companies. Money market funds and alternative investment companies are also slated for closer examination, along with securities lending arrangements.

For broker/dealers, the SEC plans to examine inappropriate sales practices and fraud risks, as well as general firm supervision levels and securities trading practices. Also of importance for the 2014 NEP are anti-money laundering programs.

Another area of regulatory concern for broker/dealers is the suitability of variable annuity buybacks, following reports that insurance companies are offering to repurchase variable annuity products with less favorable terms.

Looking to self-regulatory organizations (SROs) and market oversight, the SEC plans to continue regular reviews of the Financial Industry Regulatory Authority (FINRA), the Municipal Securities Rulemaking Board, and the national securities exchanges for both equity and options markets.

Specific priorities in this area include targeted examinations of perceived control weaknesses at the national exchanges. The staff will continue its review of order types by focusing on the options exchanges in 2014.

In addition, the examination staff plans to coordinate with the Division of Trading and Markets to conduct pre-launch reviews of new exchange applications to determine whether each has the capacity to carry out its responsibilities as an SRO by enforcing members’ compliance with federal law and the exchange’s own rules.

Finally, the SEC also announced priorities for its clearance and settlement exam program.

First, examiners will focus on the implementation of annual exams for clearing agents, as mandated by the Dodd-Frank Act. That law requires the SEC to annually audit the clearing agents for which it serves as the primary supervisory agency. These include the Depository Trust Company, the National Securities Clearing Corporation, the Fixed Income Clearing Corporation and the Options Clearing Corporation.

Areas for review will be determined through a risk-based approach that incorporates new rules and standards.

In examining transfer agents, SEC staff will focus on three core activities: the timely turnaround of items and transfers; accurate recordkeeping and associated retention; and the safeguarding of funds and securities.

Other areas of focus will involve transfer agents that service micro-cap securities and private offerings, policies and procedures adopted by transfer agents for handling and transferring certain damaged certificates, and agents serving as third-party administrators (TPAs) for parties other than the issuer of a Section 12 security (such as a retirement plan).

The complete list of 2014 examination priorities is available here.

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