Author: cvernon

Retirement Basics Video Series

This video series is intended for plan sponsors and fiduciaries and covers a variety of topics related to creating and managing effective defined contribution investment programs. Co-presented by members of our consulting and research teams, these videos present the basics of retirement plans for trustees and investment staff in an educational format meant to provide guidance and insights on best practices and trends in the industry.

The series includes:

  • Fiduciary Checklist, an overview of the roles and responsibilities of fiduciaries including planning, oversight, communication, and documentation;
  • Defined Contribution Topics & Trends, industry trends and recent developments and guidance from the Department of Labor;
  • Investment Lineup Best Practices, considerations and guidance for selecting investment lineup offerings for retirement plans;
  • Target Date Funds, a deep dive into TDFs, from structure and glidepaths to why target date funds have become so popular; and
  • Stable Value Funds, an overview of stable value, exploring structure, important considerations, and recent litigation.

View each episode in the player below — use the upper-right list icon to access a specific presentation.

For more information, questions, or feedback, please send us an email.

One Year Ago, Would Anyone Have Predicted This?

What a year it has been. Officially one year after the equity market’s bottom on March 23rd, 2020, all major indices in the chart above have at least recovered back to ending 2019 levels. The groups that were hit the hardest have also rebounded the strongest, with returns over the last year exceeding 100% for some. Small-cap equities stand out, especially in the U.S. — up 121% over the last year and up 33% over the almost 15-month period since 2019. U.S. mid-cap equities are up 101% over the last year, up 25% over the full period, and U.S. large-cap equities are up 83% over the last year for a 26% return over the full period. Small-cap stocks have also outperformed internationally — the MSCI EAFE Small Cap Index is up 91% over the last year and 18% since 2019, while the MSCI EAFE Index is up 67% over the last year and 12% for the full period. Emerging markets, some of the hardest hit by the crisis last year, have more than recovered, up 78% over the last year for a 22% return since 2019. Fixed income returns have been more muted. Investment grade bonds stayed positive in early 2020 as equity markets fell precipitously and are up another 3% since. High yield bonds, bank loans, and emerging market debt were hit harder but still held up better than equities. Each group has recovered those losses but remains in positive single-digit territory over the full period.

From here, we expect returns will likely moderate. As the vaccine roll-out continues we expect further economic re-openings and renewed growth across the globe, but it seems highly unlikely capital markets returns can continue at this pace beyond the initial recovery.

Print PDF > One Year Ago, Would Anyone Have Predicted This?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Driving Toward a Green Future

Innovation and structural change were hallmarks of 2020 as the spread of COVID-19 accelerated technological advancements across many areas of the global economy. The electric vehicle (“EV”) space is one area of innovation that has especially captured the attention of global investors. While battery-powered and alternative energy vehicles have been available in some form since the early 19th century, it was not until significant developments in rechargeable lithium-ion battery technology were made in the 1970s that meaningful capital began to flow to the space. Since then, interest in EV technology has ebbed and flowed with oil prices, but the recent global push toward green energy has revitalized enthusiasm in the space.

For the three years ended 2019, the NYSE FactSet Global Autonomous Driving and Electric Vehicle Index, which tracks developed and emerging market companies that specialize in self-driving and EV innovation, underperformed the broader MSCI ACWI Index — up an annualized 8.8% versus the ACWI up 10.2%. Since then, over the 14 months from the start of 2020 through February 2021, the Global Autonomous Driving and Electric Vehicle Index is up 63.1% versus the MSCI ACWI Index up 16.3%.

To dive deeper into the different components of the electric vehicle landscape, we look at the newly-created Bloomberg Intelligence Electric Vehicle Basket, a group of 60 global companies expected to benefit from and contribute to the success of EV development. These 60 companies, equal-weighted, have outperformed the MSCI ACWI by 10.3% over the trailing three months ended February 28th. Of the four unique sub-groups,¹ Raw Materials has outperformed by the widest margin, returning 46.3% since December. This cohort includes a diverse group of specialty chemical and mining companies that produce the inputs for a variety of industries, many of which, including those tangential to EVs, have seen increased demand over the last few months. The Battery and EV Component groups have also outperformed the broader MSCI ACWI Index. EV Vehicle Manufacturer stocks have struggled more recently amid profitability concerns given the cost of inputs and headwinds to EV adoption, particularly in the U.S. Despite the push from lawmakers, still limited charging infrastructure and a lack of consistency in charging connectors across manufacturers are issues for consumers. While we expect these and other points of friction will be resolved and EV market share will continue to grow over the next several decades, in the near term, market momentum can push innovation themes ahead of expected earnings or scalability. Investors should exercise caution when allocating to a burgeoning segment of the market and always maintain portfolio diversification.

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¹A fifth Bloomberg exposure, EV Charging, included only one company and was included in the EV Components categorization for this analysis.

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Commodities: Cycle or Cyclical?

A commodities supercycle is generally defined as a sustained period of broad-based above-trend movement. In the first quarter of 2020, almost a decade of commodities price weakness was capped off with a more than 20% drop, and since then, prices have rebounded more than 40% to levels last seen in 2018, inspiring headlines debating whether this is the start of the next supercycle. Proponents argue reopening demand, a potential uptick in global growth and inflation, and a weaker U.S. dollar, among other factors, point to yes. Skeptics contend that an initial demand normalization complicated by temporary supply disruptions does not a supercycle make, at least yet. Commodity price movements can be especially volatile given lumpy physical market characteristics. Oil prices moving into sharply negative territory last April demonstrate exactly that. Whether this latest move is cyclical and temporary or structural and sustainable is still to be determined.

In this newsletter, we explore a few of the key factors that could support or suppress a sustained commodities bull market.

Read > Commodities: Cycle or Cyclical?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

What Does the Latest Stimulus Mean for the Economy and Fixed Income Markets?

President Joe Biden signed the $1.9 trillion pandemic relief package yesterday amidst rising inflation and interest rates since the beginning of the year as the markets price in future growth. With Fed Chair Jerome Powell’s recent reaffirmation of the central bank’s accommodative monetary stimulus, continued vaccine rollout, a drop in COVID-19 cases and deaths, and Biden’s statement that the U.S. will have enough vaccines for every adult by the end of May, a key question on many investors’ minds is, “How much more inflation and rising interest rates could we expect in the road ahead?” This edition of Marquette Perspectives will attempt to answer that question by examining this relief aid in connection with vaccination progress and the economic recovery.

Read > What Does the Latest Stimulus Mean for the Economy and Fixed Income Markets?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

GDP Growth Hits Highs vs. Bond Yields

The gap between U.S. GDP growth and bond yields is expected to rise to the highest level since the 1970s amid unprecedented amounts of fiscal and monetary stimulus and an accelerating vaccination roll-out. The chart depicts nominal U.S. GDP growth rates year-over-year less the 10-year U.S. Treasury yield over the last 60 years. Beyond 2020, we profile the U.S. Congressional Budget Office (“CBO”) forecasted nominal GDP growth rate for 2021 and 2022, minus the forecasted 10-year U.S. Treasury yield from the Treasury forwards market, which projects a 25 basis point rise each year over the next four years.

The quarterly GDP growth rate is much more volatile than bond yields. It can decline precipitously in a recession much faster than bond yields as well as rebound much faster than bond yields in a recovery. The ratio has spiked down several times in the past: during the early 1980s and early 1990s recessions, following the dot-com bust of 2000 and the housing bust of 2008, and most recently after the COVID panic of March 2020. This is because the GDP growth rate reflects actual economic growth, measured year-over-year quarterly, while bond yields reflect the market’s anticipation of economic growth over a longer time period. While this gap is expected to reach its highest level in roughly 50 years as the economy rebounds from the depths of COVID, it is then expected to moderate back to pre-pandemic levels, as the CBO forecasts GDP growth to normalize throughout 2021 and 2022 after the initial recovery. Therefore, despite the spike in this ratio it is not a fundamental concern for investors and is not suggestive of a coming market downturn.

Print PDF > GDP Growth Hits Highs vs. Bond Yields

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Sustainable Investing Among Equity Asset Classes

Sustainable investing continues to grow in both size and relevance among institutional investors and asset managers. As a matter of background, sustainable investing is a term that encompasses three broad approaches: ESG Integration, Socially Responsible Investing, and Impact Investing. As elaborated on in Marquette’s Sustainable Investing video series, the definitions of each of these terms are:

  • ESG Integration: Returns-focused investing that incorporates long-term sustainability factors (Environmental, Social, Governance) into the investment process.
  • Socially Responsible Investing (SRI): Investments driven first by ethical values.
  • Impact Investing: Investments with the specific intent to create and measure social and/or environmental impacts alongside financial returns.

While SRI and Impact Investing are more targeted strategies driven by underlying initiatives and/or beliefs, ESG integration has allowed portfolio management teams of more traditional approaches to consider social and environmental issues in a more tangible way than in the past. As ESG factors are more ingrained in the investment processes, there will be more investment options that contribute, directly or indirectly, to some of the ideals sought after in SRI and Impact portfolios. As shown in the above chart, investors have options across the global equity universe for both ESG integrated funds as well as dedicated SRI/Impact Investing funds. The proportions of each are likely to expand as sustainability investing trends accelerate globally.

Along with this growth comes an increased emphasis on measurable impact and standardized reporting, both of which have been a challenge in the sustainable investing space. We have started to see investment managers adopt the United Nations Sustainable Development Goals (UN SDGs) as a framework for expressing the sustainable intent or reach of their portfolio. For instance, there is a growing contingent of investment managers that have mapped their portfolio holdings to one or more SDGs based on whether the firm’s product or service aided or harmed the stated end goal. We have also seen many investment managers become signatories of the UN Principles for Responsible Investment (PRI) over the last three years. The UN PRI are comprised of six foundational principles that work to support and encourage ESG investing. Another sustainable investing reporting metric that has become more readily available is carbon intensity measures. While there have been many positive developments in recent years, investors should be cognizant of potential greenwashing — disingenuous or misleading attempts to present strategies as more ESG-focused than they actually are.

Overall, sustainable investing is moving in the right direction as more allocators and investment managers realize that returns need not be sacrificed in pursuit of positive change. In fact, a fundamental concept of sustainable investing is that firms with better ESG practices tend to fare better over the long run due to a reduced likelihood of litigation, increased diversity, and capitalization on emerging sustainable technologies, among others. Marquette continues to monitor these developments and stands ready to assist clients in pursuing their sustainable investing goals.

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eVestment Universes
U.S. Large-Cap: “US Large Cap Equity” 1,129 Products
U.S. Mid-Cap: “US Mid Cap Equity” 289 Products
U.S. Small-Cap: “US Small Cap Equity” 640 Products
International Large-Cap: “EAFE Large Cap Equity” 219 Products & “ACWI ex-US Large Cap Equity” 142 Products
International Small Cap: “EAFE Small Cap Equity” 101 Products & “ACWI ex-US Small Cap Equity” 67 Products
Emerging Markets: “All Emerging Markets Equity” 654 Products

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Fear is the Return-Killer

Frank Herbert’s science fiction novel Dune contains a litany which states that “fear is the mind-killer.” Indeed, anxieties brought on by periods of turmoil can cause individuals to forsake rational thinking and act impulsively, usually to their own detriment. This phenomenon often manifests itself in equity markets, particularly when investors choose to curtail or altogether abandon equity allocations amid (or in expectation of) steep declines in the prices of risky assets. These impetuous actions stem from various emotional biases held by market participants including loss-aversion, which describes the asymmetrical response many individuals feel with respect to gains and losses (i.e., investors derive more pain from a loss than pleasure from a gain of equal value).

The aim of this newsletter is to demonstrate that, save for a modicum of intangible psychological comfort, sales of risky assets motivated by fear and panic provide investors no value, and can ultimately have disastrous impacts on the long-term returns of a portfolio.

Read > Fear is the Return-Killer

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Small-Cap: Much Ado About Quality

2020 was a year in which some small-cap asset managers flourished while most struggled to adapt to the changing tides of an unprecedented global pandemic. Active managers will not soon forget the difficulty of investing in 2020, but the dynamics that predicated the market may go overlooked.

In this newsletter, we seek to address the underperformance of small-cap active managers over the last several years, focusing on factor fallout and the definition of quality. We will specifically look to address how the rise of thematic versus fundamental investing came to the forefront in 2020.

Read > Small-Cap: Much Ado About Quality

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

What Is the Most Attractive Segment of the Private Equity Market?

As private equity matures further as an asset class, median private equity returns will continue to move closer to the public markets. Nevertheless, as a result of active management and private market inefficiencies, the top quartile to median spread for private equity is still more than 2x greater than it is for public market-oriented managers. When we take a closer look at fund performance within private equity, there is significantly more upside as well as performance variability for smaller buyout funds as compared to larger buyout funds. As seen in this week’s chart, funds that are less than $1B in size had a median Net IRR of 13%, a 1st quartile range of 21–37%, and a 4th quartile range of -10–6% whereas funds greater than $6B in size had a median Net IRR of 9%, a 1st quartile range of 17–23%, and a 4th quartile range of 2–8%.

This performance dispersion is largely driven by smaller funds sourcing opportunities outside of intermediated processes, leveraging a repeatable and focused operational playbook to professionalize and grow portfolio companies quickly, and a growing list of paths to liquidity, including larger funds with an increasing amount of dry powder that are sourcing investments out of smaller managers’ funds. With that said, larger funds buy companies that are typically more mature, have built-out teams, and are capable of weathering business shocks with greater success, which accounts for the tighter band of outcomes at the larger end of the market.

Due to COVID and an inability to meet with potential investors in person, first-time funds and emerging managers which typically fall in the “small” fund size had difficulty raising capital in 2020. This dynamic is expected to have two significant effects on the 2021 private equity ecosystem: 1) first-time funds and emerging managers fundraising is likely to be more active in 2021 and 2) dry powder has been further concentrated in larger funds, which should create an increasingly attractive exit environment for smaller funds.

Given the compelling upside opportunity of investing in smaller funds and an expected increase in the number of these funds raising capital in 2021, these managers represent an attractive area of the private equity market to be allocating capital towards. Given the greater performance variability of smaller funds, allocations to funds at this size should be focused within a program that allows for a number of high-quality commitments, such as those provided by fund-of-funds.

Print PDF > What Is the Most Attractive Segment of the Private Equity Market

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Opinions, estimates, projections, and comments on financial market trends constitute our judgment and are subject to change without notice. Past performance does not guarantee future results.