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Nuveen Intelligent Risk Portfolios

1Q 2012 Commentary


Performance Summary
Volatility continued to fall during the first quarter of 2012, as investor confidence continued to rise.  While the MSCI All Country World Index, a broad representation of equity securities across the globe, rose by 12% over the quarter, most investors became enamored with the skyrocketing stock price of Apple Inc., which jumped 48% during the quarter.  At the end of March, the market had valued Apple at nearly $600 billion with some Apple bulls predicting that Apple will eventually reach $900 billion in market cap.  Only time will tell, but the track record for companies that breach $600 billion in market cap has historically not been positive.

While economic news during the first quarter was relatively quiet, with most headlines focused on the GOP primaries and November’s election, the increasing price of gasoline did attract some negative attention.  NYMEX Gasoline futures rose 20% during the quarter, causing concern among some investors, but it was not enough to cause a pullback in stocks.

The CBOE VIX Index, often referred to as the “Fear Index,” continued to fall during the quarter, finishing at 15.50.  As we previously discussed, low VIX levels often correlate with supportive equity markets, and the first quarter was no exception.  While market confidence has started to return, investors remain concerned that Europe’s peripheral economies (e.g. Portugal and Spain) will require additional bail-outs to prevent further economic contraction.

All three Intelligent Risk Portfolios generated positive returns for investors during the quarter.  Discussed in more detail later, the Intelligent Risk Portfolios increased their allocations to equity securities at the end of the fourth quarter and during the fi rst quarter, generated positive returns for each portfolio.  However, due primarily to their allocations to commodities, they underperformed their respective benchmarks net of fees.

Market Volatility
Our estimates for volatility fell dramatically in a majority of the asset classes during the first quarter.  On the equity side, US equities experienced the largest decline in volatility.  Our estimates of US large cap volatility fell from 21.7% at the beginning of the quarter to 9.9% at the end of February before picking back up slightly in March.  Volatility in the emerging markets also fell significantly during the quarter, from 19.1% on December 30th to 15.2% at the end of the quarter.

We also saw large declines in volatility across most of the fixed income markets covered by the portfolio management team.  The largest change in volatility within fixed income occurred in 20+ year treasuries, where our volatility estimates fell from 21.7% to 14.5%.

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