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The Managers' MARKET VOLATILITY CHALLENGES INVESTORS IN 1996
Overview
A roundtable discussion with the fund management team for
AIM V.I. Capital Appreciation Fund, a portfolio of AIM
Variable Insurance Funds, Inc., about the six-month
reporting period ended June 30, 1996.
Q. WHAT WERE CONDITIONS LIKE IN FINANCIAL MARKETS THE PAST
SIX MONTHS?
A. Uncertainty dominated financial markets as investors
became increasingly concerned about the possibility of
rising inflation. The economy had slowed to a feeble annual
growth rate of 0.5% in the fourth quarter of 1995, and that
began to turn around early this year. The rate of growth of
the gross domestic product shot up to 2.0% in the first
quarter of 1996, and growth in the second quarter had been
predicted at 3.5% to 5%.
The foremost concern was that the Federal Reserve Board
would nudge interest rates higher to slow economic growth
and forestall inflation, and that drove most bond yields
higher--and prices lower--during most of the reporting
period. In addition, stock investors anticipated that
corporate profit growth would fall below 1995's robust pace,
particularly if rising market interest rates began to erode
profit margins.
The Fed expects
economic growth Q. HOW WERE THE MARKETS BY THE END OF THE REPORTING PERIOD?
to slow during A. We saw more stability in stock markets as reports began
the second half to indicate that the U.S. economy had grown with surprising
of the year, and strength, but with little evidence of inflation. Stocks
that would lessen resumed a halting advance toward record levels, and market
the likelihood leadership was broadly divided across selected sectors
that monetary including cyclical consumer, energy, industrial, and
policy would be technology.
tightened.
Fixed-income investors seemed less certain that inflation
would be contained, and that continued to fuel bond market
volatility through the end of the reporting period. The
yield curve remained steeply sloped, with the spread between
the three-month U.S. Treasury bill, which is influenced by
rates pegged by the Fed, and the 10-year U.S. Treasury note,
whose yield is set by the market, at a relatively wide 1.56
percentage points by June 28, 1996.
Q. HOW WAS THE FUND POSITIONED AS OF JUNE 30?
A. The Fund took advantage of volatile markets by adding new
names to its portfolio, taking it to over 320 during the
reporting period. The mix of securities was further
diversified by paring its weightings in technology stocks
from 45% to 25%, and increasing its emphasis on health care
stocks and consumer cyclicals like retail stocks. Among the
largest technology holdings were software developers and
computer designers like Parametric Technology Corp. and
Cisco Systems, Inc. The Fund also featured such medical
patient service companies as HEALTHSOUTH Corp. and
Columbia/HCA Healthcare Corp. We were also interested in a
variety of companies in the retail sector that dominated
specific themes--The Gap, Inc., Staples Inc., and PetSmart
Inc.
Keep in mind, the Fund's portfolio composition is subject
to change and there is no guarantee the Fund will continue
to hold any particular security mentioned in this report.
Q. WHAT IS YOUR MARKET OUTLOOK FOR THE NEXT FEW MONTHS?
A. We anticipate continued volatility in fixed-income
markets for months to come. The specter of possible
inflation continues to concern investors, despite mounting
evidence that the U.S. economy is growing reasonably and
that inflationary pressures remain modest. In its July
meeting, the Fed elected to leave monetary policy unchanged;
the outlook for the rest of 1996 is less certain.
Reports of accelerating economic growth during the first
half of 1996, and possibly in the third quarter as well,
have prompted some analysts to predict that the Fed will
raise short-term interest rates in the coming months. Others
have suggested that market interest rates that have been
rising for most of the year may have forestalled any
inflation threat, precluding the necessity for Fed
intervention. The Fed expects economic growth will slow
during the second half of the year, and that would lessen
the likelihood that monetary policy would be tightened.
The continued pace of economic growth is the key.
Interestingly, the consumer may play an important role in
determining the strength of the economy in the second half
of the year. Strong consumer demand has helped spur economic
growth. While there has been much speculation about the
climbing level of consumer debt and its eroding effect on
demand, household balance sheets have thus far remained
healthy.
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