Author: cvernon

Evolving Private Market Landscape: The Institutional Shift from Public to Private Markets

2018 Investment Symposium flash talk by Derek Schmidt, CFA, CAIA

Investors are adapting to an investment landscape altered by a 46% decline in the number of publicly traded companies and the emergence of less expensive passive investment opportunities. These changes have shifted record levels of capital into private equity as investors have pursued attractive investment opportunities in small companies. We will discuss how the private equity market has responded to increased investor demand and will attempt to identify where institutional allocations may be headed and where to find the best opportunities for returns within this increasingly diversified private market.

A summary of this flash talk can be downloaded here.

The Financial Crisis: A Decade Later

2018 Investment Symposium flash talk by Nat Kellogg, CFA

Ten years after the collapse of Lehman Brothers and the worst economic downturn since the Great Depression, we look back at the key factors that caused the crisis and reexamine the significant events of 2008. Now, a decade later, we will highlight the critical issues exposed by the crisis, including those that have been resolved and those that remain unaddressed and still pose risks for investors.

A summary of this flash talk can be downloaded here.

An October to Forget?

Stock markets around the globe “corrected” in October, experiencing a sudden and broad-based drop. The sell-off was somewhat unusual as there was no glaring fundamental event that triggered the market drop, but rather a confluence of events that all seemed to come to the forefront of investors’ minds simultaneously. These concerns, coming on the heels of a strong third quarter for stocks that left the market looking modestly overvalued, led to an unpleasant month of returns.

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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.

Buying the Dip Takes a Hit

Historically, investors have attempted to capitalize from market drops by buying at the new lows in hopes that the stocks would rebound shortly thereafter. “Buying the dip” has generally proven effective ­— albeit by small margins — however 2018 has been an interesting exception. Notably, October’s steady trend downward has caused 2018 to flip into the red; through September, the “buy the dip” theory was still rewarded.

Our chart tracks data back nearly twenty years, through 1999, and throughout this data set the only other negative calendar years were 2000–2002. This suggests that currently, investors may be more leery of equity markets and less optimistic that the markets will rebound after a negative day. While investor sentiment certainly impacts the market, this is only a short-term bearish indicator. Midterm elections are right around the corner and historically the November of midterm election years has outperformed Novembers of other years, giving investors some optimism of what the end of 2018 may have in store for their portfolios.

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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.

Defined Contribution Plan Legislative Update – 4Q 2018

Retirement savings has been a major theme on Capitol Hill this year. To better prepare our defined contribution plan sponsor clients for upcoming regulatory changes, we provide legislative updates on a bi-annual basis. For a broader view of Marquette’s approach to defined contribution consulting, see our previous research including A Roadmap for Defined Contribution Plan Sponsors and Defined Contribution Plans: A Look at the Past, Present & Future.

In this update, we summarize the following legislation and provide an overview of next steps for DC plan sponsors:

  • The Tax Cuts and Jobs Act of 2017
  • The Bipartisan Budget Act of 2018
  • Executive Order on Strengthening Retirement Security in America
  • IRS Private Letter: Student Loan Benefit Program

Download PDF> Defined Contribution Plan Legislative Update – 4Q 2018

As always, your consultant will be able to address any specific questions you may have regarding these changes.

 

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.

Market Anomaly or the Beginning of the End?

So far, October has been a forgettable month for equity performance. Internet and technology companies — once the darling of this rally — have been among the hardest hit, as many investors appear to be taking profits as signs of slower earnings and economic growth have started to appear. Meanwhile, industrial companies have also been hit hard, as trade war rhetoric continues to grow between China and Washington, and China’s GDP growth was its weakest since the financial crisis. Through Wednesday, the materials, energy, industrials, and technology sectors all are in correction territory, with the following losses:

  • Materials: -13.0%
  • Energy: -12.5%
  • Industrials: -11.6%
  • Technology: -10.8%

Not surprisingly, volatility — as measured by the VIX index — has skyrocketed as equities have sold off.

More generally, October’s sell-off has been related to the health of the global economy; investors appear concerned about rising U.S. interest rates, a strong U.S. dollar, slowing global growth and trade wars. Only time will tell if October is part of a larger sell-off in global markets and the end of a nine-year bull market in the U.S., or just an anomaly. Going forward, investors will dissect third quarter earnings and be focused on company guidance going into 2019. If growth prospects for 2019 look tepid, many expect this sell-off to continue into year-end and the VIX to remain elevated.

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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.

Real Estate Position Paper – 2018 Update

This real estate position paper seeks to establish a fundamental understanding of the asset class. More specifically, the various styles, benefits, risks, mechanics, and benchmarks relevant to commercial real estate investments are examined, with an emphasis on quantitative and qualitative illustrations. Recommendations and guidance towards the investment manager search process and making an allocation to the asset class are also included.

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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.

Italy Looks to Increase Its Budget Deficit

The yield on Italian 10-year government bonds has risen this year as investor concern about the country’s fiscal policies mounts. This week Italy approved its 2019 budget targeting a 2.4% deficit to gross domestic product — a larger number than markets anticipated and a higher targeted deficit than 2018’s 1.8%. The Italian coalition government is targeting higher spending to implement a monthly income for low-income citizens and reduce the retirement age despite its high public debt to GDP ratio, 131% in 2017. The European Union will provide its formal comments on the proposed budget in the coming weeks and this will likely create some short-term market movements.

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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.

A Shining Light for China?

On September 25, MSCI, Inc. — a leading global provider of research-based indices and analytics — announced its plans to consult on a further weight increase to China A-shares in the MSCI Global Investable Market Indexes. The changes under consideration include quadrupling the weighting of Chinese A-share large companies in its global benchmarks, adding mid-cap names, and including ChiNext as an eligible stock exchange segment. This consultation follows the successful implementation of an initial 5% inclusion of China A-shares in the MSCI China and related composite indices (such as the MSCI Emerging Markets Index) in May and August 2018.

Let’s unpack the full proposal, piece by piece. The first change would be an increase to the inclusion factor of China A-share large cap securities from 5% to 20% over two phases. Specifically, MSCI would target a 7.5% increase coinciding with their May 2019 semi-annual index review and another 7.5% bump up with their August 2019 quarterly index review. Second, MSCI would increase the list of eligible Chinese stock exchange segments by adding the ChiNext board of the Shenzhen Stock Exchange during the May 2019 review. The ChiNext board, where most technology firms make their debut, represents 20% of the total China A-shares opportunity set and has a larger free-float adjusted market capitalization than Shenzhen main and SME boards. Lastly, China A-share mid cap securities would be included with a 20% inclusion factor as part of the May 2020 semi-annual index review.

MSCI’s rationale for the suggested expansion of A-share inclusion is largely driven by the incremental improvements in market accessibility implemented by China. Since the announcement of MSCI China A shares inclusions in July 2017, the daily trading limit and number of new accounts opened has significantly increased within the Stock Connect program, which is an investment channel between Hong Kong, Shanghai, and Shenzhen that allows international and mainland Chinese investors to trade securities in each other’s markets. There has also been a considerable drop in the number of trading suspensions. For example, the number of large cap trade suspensions in the MSCI China A International IMI Index has decreased from 16 to zero over the past 15 months.

The above chart depicts the pro-forma country weights should these changes be implemented. As indicated, Chinese A-shares’ portion of the index would increase from 0.7% to 3.4%. The anticipated net effect would be a slight increase in China’s overall representation in the MSCI Emerging Markets index by 1.0%.

While MSCI’s consultation may or may not lead to changes in the MSCI indices, this proposal indicates growing confidence in market liberalization within China. And, if implemented, these moves will increase foreign investor inflows into China’s $7 trillion stock market. Chinese markets have been able to handle increased trading volumes. This reaffirms our view that institutional investors will increasingly have exposure to China’s local markets over medium to long term.

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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.