Diversified Equity Strategic Allocation Portfolio, 3rd Quarter 2012 Series
Investors have long recognized the importance of balancing risk and creating
diversification by dividing assets among major asset categories such as stocks
and bonds. Finding the right mix of investments is a key factor to successful
investing. Because different investments often react differently to economic
and market changes, diversifying among investments that focus on different areas
of the market primarily helps to reduce volatility and also has the potential
to enhance your returns.We believe there are three hallmarks to a successful
long-term investment plan-asset allocation, diversification, and rebalancing.
The Diversified Equity Strategic Allocation Portfolio is a unit investment
trust that has been developed to provide investors with asset allocation, diversification,
and an annual rebalancing opportunity through a single investment.
The Importance of Asset Allocation
Perhaps the most important investment decision is not the specific investments
that are selected, it's the manner in which the assets are allocated. Asset
allocation is the process of developing a diversified investment portfolio by
combining different assets in varying proportions. Spreading capital across
a range of investments within each major asset class makes your portfolio less
dependent on the performance of any single type of investment. Studies have
shown that the number one factor contributing to a portfolio's performance is
asset class selection and not security selection.*
Diversification makes your portfolio less dependent on the performance of any
single asset class.The adjacent chart illustrates the annual performance of
various asset classes in relation to one another over the past 20 years as well
as a diversified portfolio consisting of an evenly-weighted combination of the
asset classes.As you can see, the performance of any given asset class can have
drastic changes from year to year making it nearly impossible, even for the
most astute investors, to accurately predict the best combination of asset classes
to maximize returns and minimize risk. It is important to keep in mind that
diversification does not guarantee a profit or protect against loss.
The Relationship Between Risk and Return of Stocks & Bonds
As risk increases in an investment portfolio so do the return expectations.
Investors can manage their risk tolerance through asset allocation and by selecting
investments that meet their risk/return expectations. Effective asset allocation
requires combining assets with low correlations-that is, those that have performed
differently over varying market conditions. Investing in assets with low to
negative correlation can reduce the overall volatility and risk within your
portfolio and may also help to improve portfolio performance. The adjacent chart
illustrates the effects of low correlation on the risk and return of varying
combinations of stocks and bonds.
Return is measured by average annual total return, and risk is measured by
standard deviation, for the 30 year period from 1980 to 2009. Standard deviation
is a measure of price variability.The higher the standard deviation, the greater
the variability (and thus risk) of the investment returns.
Rebalance to Avoid Unnecessary Risk
According to the College For Financial Planning, less than 45% of investors
actively rebalance their portfolios after the initial allocation.Over time,
the asset mix in a portfolio can begin to drift from its original allocation.
If an asset class performs well for an extended period of time, it can grow
to become a higher percentage of a portfolio and subsequently have a much higher
impact on the intended overall risk and return of the portfolio going forward.
Rebalancing can be a crucial element to helping reduce risk while ensuring a
portfolio remains aligned with an investor's intended investment plan.
Consider the example illustrated in the adjacent charts which shows the effect
that changing markets can have on an asset allocation that is not rebalanced
over time.The stellar stock market performance in the 1990s resulted in a portfolio
that became overweighted in stocks just prior to the bear market which began
in 2000 and made the portfolio subject to greater volatility than the investor
may have originally planned.
With the Strategic Allocation Portfolios, rebalancing is simple. When a portfolio
terminates, investors have the option to reinvest their proceeds, at a reduced
sales charge, into a new, rebalanced and reconstituted portfolio. It is important
to note that rebalancing may cause a taxable event unless units of the portfolio
are purchased in an IRA or other qualified plan.
Diversified Equity Strategic Allocation Portfolio, 2nd Quarter 2011 Series
The Diversified Equity Strategic Allocation Portfolio is a unit investment
trust which is designed to provide broad equity diversification by investing
in common stocks across various market capitalizations, growth and value styles,
sectors and countries.The trust invests in a fixed portfolio of stocks which
are selected by applying pre-determined screens and factors and holds the stocks
for approximately 15 months. The trust seeks to provide the potential for above-average
total return; however, there is no assurance the objective will be met.
A Tactical Approach to Security Selection
When selecting stocks for the portfolio we apply a proprietary rules-based
selection process which analyzes stocks to assess valuations based on multiple
factors. Our goal is to identify stocks which exhibit the fundamental characteristics
that enable them to provide the greatest potential for capital appreciation.
1. Identify the universe of eligible stocks:
This first step in our selection process is to establish a universe of stocks
from which the portfolio will be selected.The universe is divided into seven
distinct styles consisting of six domestic equity asset classes and one international
equity asset class.
The domestic universe is established by identifying the 3000 largest U.S. stocks and then separating them into large-cap (largest 10%), mid-cap (next 20%), and small-cap (remaining 70%). The stocks in each group are then divided evenly between growth and value by their price-to-book ratios to establish the universe of stocks eligible for selection from within each asset class. In the case of the small-cap universe, only the 250 largest stocks with a minimum average daily trading volume of $1,000,000 within each growth and value group are included to ensure sufficient liquidity. The international universe consists of the 100 largest companies from Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom which are either ADRs or directly listed in the U.S.
2. Apply the rules-based stock selection models:
We then rank the stocks within each of the seven universes based on a multi-factor
models. Half of a stock's ranking is based on a risk model and the remaining
half is based on a model which is determined by their style designation.Value
and international stocks are ranked on one model while growth stocks are ranked
using a separate model.
3. Select the highest scoring stocks:
The 30 stocks with the best overall ranking from each of the seven style classes
are selected for the portfolio, subject to a maximum of six stocks from any
one of the ten major market sectors.The seven style classes are approximately
weighted based on the allocation shown below. Stocks are approximately equally-weighted
within their style.
|Not FDIC Insured Not Bank Guaranteed May Lose Value
||Average Annual Total Returns*
||S&P 1500 Index
||S&P 1500 Index
|Annual Total Returns
||S&P 1500 Index
Past performance is no guarantee of future results and the actual current
performance of the portfolio may be lower or higher than the hypothetical performance
of the strategy. Hypothetical returns for the strategy in certain years were
significantly higher than the returns of the S&P 1500. Hypothetical
strategy returns were the result of certain market factors and events which
may not be replicated in the future. You can obtain performance information
which is current through the most recent month-end by calling First Trust Portfolios
L.P. at 1-800-621-1675 option 2. Investment return and principal value of the
portfolio will fluctuate causing units of the portfolio, when redeemed, to be
worth more or less than their original cost.
Simulated strategy returns are hypothetical, meaning that they do not represent actual trading, and, thus, may not reflect material economic and market factors, such as liquidity constraints, that may have had an impact on actual decision making. The hypothetical performance is the retroactive application of the strategy designed with the full benefit of hindsight. Strategy returns reflect a sales charge of 2.95% in the first year, 1.95% in subsequent years, estimated annual operating expenses of 0.187%, plus organization costs, but not taxes or commissions paid by the portfolio to purchase securities. Strategy returns assume that dividends are reinvested semi-annually while index returns assume dividends are reinvested monthly. Actual portfolio performance will vary from that of investing in the strategy stocks because it may not be invested equally in these stocks and may not be fully invested at all times. It is important to note that the strategy may underperform the S&P 1500 Index in certain years and may produce negative results.
The S&P 1500 Index is an unmanaged index of 1500 stocks representing the large
cap, mid cap and small cap segments of the U.S. equity market.The index cannot
be purchased directly by investors.
Standard Deviation is a measure of price variability (risk). A higher degree of variability indicates more volatility and therefore greater risk.
You should consider the portfolio's investment objective, risks, and
charges and expenses carefully before investing. Contact your financial advisor
or call First Trust Portfolios, L.P. at 1.800.621.1675 to request a prospectus,
which contains this and other information about the portfolio. Read it carefully
before you invest.
An investment in this unmanaged unit investment trust should be made with an
understanding of the risks involved with owning common stocks, such as an economic
recession and the possible deterioration of either the financial condition of
the issuers of the equity securities or the general condition of the stock market.
An investment in a portfolio containing small-cap companies is subject to additional
risks, as the share prices of small-cap companies are often more volatile than
those of larger companies due to several factors, including limited trading
volumes, products, financial resources, management inexperience and less publicly
Certain of the securities in the portfolio are issued by REITs.Companies involved
in the real estate industry are subject to changes in the real estate market,
vacancy rates and competition, volatile interest rates and economic recession.
An investment in foreign securities should be made with an understanding of the additional risks involved with foreign issuers, such as currency and interest rate fluctuations, nationalization or other adverse political or economic developments, lack of liquidity of certain foreign markets, withholding, the lack of adequate financial information, and exchange control restrictions impacting foreign issuers.
The value of the securities held by the trust may be subject to steep declines or increased volatility due to changes in performance or perception of the issuers.
Although this unit investment trust terminates in approximately 15 months,
the strategy is long-term. Investors should consider their ability to pursue
investing in successive portfolios, if available.There may be tax consequences
unless units are purchased in an IRA or other qualified plan.