Services Tags: Asset Allocation

2016 Market Preview

January 2016

Similar to previous years, we offer our annual market preview newsletter. Each year presents new challenges to our clients, and 2016 is off to a volatile start with equity markets down significantly, oil dropping below $30, the Fed poised to further increase interest rates, and fears of a China slowdown rippling through the markets. However, other headlines will emerge as the year goes on, and it is critical to understand how asset classes will react to each new development and what such reactions will mean to investors. The following articles contain insightful analysis and key themes to monitor over the coming year, themes which will underlie the actual performance of the asset classes covered.

Download PDF

Why is Portfolio Diversification Important?

This week’s Chart of the Week shows what is commonly referred to as a “Periodic Table of Investment Returns”. It is a table showing historic calendar year returns for various asset classes ranked in order of performance from best to worst. One of the key takeaways from this table is that 2015 was a particularly challenging year for investment returns.

This week’s Chart of the Week shows what is commonly referred to as a “Periodic Table of Investment Returns.” It is a table showing historic calendar year returns for various asset classes ranked in order of performance from best to worst. One of the key takeaways from this table is that 2015 was a particularly challenging year for investment returns. With the exception of real estate, there were no major asset classes that posted double-digit gains in 2015, and except for emerging market equities, there were no major asset classes that posted double-digit losses for the year. In an environment where most asset classes posted low single-digit returns for the year (either positive or negative), it was extremely difficult for diversified portfolios to achieve their target rates of return in 2015.

The other key takeaway from this table is the importance of diversification within a portfolio. As seen in the table, there has been very little consistency in the best and worst performing asset class from year to year. In fact, since 2007 just about every asset class that was the best performing asset class for a year was also the worst performing asset class for a year during this time frame. Just because an asset class performs well in one year it will not necessarily perform well the next, and just because an asset class performs poorly in one year it will not necessarily perform poorly again the next. This illustrates the importance of adhering to strategic asset allocation targets and rebalancing portfolios back to targets over time.

1Represents YTD return as of 9/30/15.  4Q 2015 returns are not yet available.
2Represents YTD return as of 11/30/15.  December 2015 returns are not yet available.

Asset Class Benchmark
Large Cap Russell 1000
Mid Cap Russell Mid Cap
Small Cap Russell 2000
Core Fixed Barclays US Agg Bond
High Yield Barclays US Corporate High Yield
Bank Loans Credit Suisse Leveraged Loan
Developed Lg Cap MSCI EAFE
Developed Sm Cap MSCI EAFE Small Cap
Emerging Markets MSCI EM
Real Estate NFI
Hedge Funds HFRI FOF: Diversified Index
Private Equity Cambridge All PE

2015 Investment Symposium Briefing

This video summarizes Marquette’s 2015 Investment Symposium on October 16, 2015, including the opening sessions and flash talks, which covered the current market environment, emerging investment themes and investment stewardship challenges in the year ahead. The new flash talk session format is designed to brief attendees on more popular topics in less time and encourage timely conversations with investment consultants.

Flash talk sessions discussed:

 

How to Position Fixed Income Portfolios for the Rate Hike

October 2015 Investment Perspectives

Much has been written and discussed in the media about when the rate hike will begin and the pace at which it will occur. Ultimately, the timing and pace are difficult to predict because they depend on many moving parts, including unemployment, inflation, and a host of unpredictable economic and political factors. The right question to ask is: How should an institutional investor position a fixed income portfolio for the rate hike, regardless of the associated timing and speed?

Download PDF

How Have Capital Market Valuations Evolved Over the Last Year?

This week’s chart shows that current valuations across equity and fixed income markets are lower today compared to where they stood at the end of September last year. The big takeaway here is that equities broadly appear to still be cheaper than bonds.

This week’s chart shows that current valuations across equity and fixed income markets are lower today compared to where they stood at the end of September last year. The big takeaway here is that equities broadly appear to still be cheaper than bonds.

Japanese Government Bonds and German Bunds are some of the most expensive debt instruments currently available to investors. As it relates to the former, the Bank of Japan’s unprecedented stimulus has helped push Japanese Government Bond yields to record lows, and earlier this year, yields on securities with maturities up to five years turned negative for the first time. Looking ahead, the Fed’s willingness to delay an increase in U.S. interest rates should support demand for riskier assets and as a result, fixed income valuations may normalize over time. Compared to last year, the most precipitous drop in valuations has taken place in U.S. High Yield, U.S. Credit and U.S. dollar-denominated Emerging Markets Debt.

As it relates to equities, with the exception of the U.S., South Africa, and Mexico, valuations around other parts of the globe are on the lower end of their historical averages.  Finally, valuations in Canadian, Spanish, and Taiwanese equity markets have come down the most over the past year as these markets have sold off over the near term.

Note: Percentile ranks show valuations of assets versus their historical ranges. Example: If an asset is in the 75th percentile, this means it trades at a valuation equal to or greater than 75% of its history. Valuation percentiles are based on an aggregation of standard valuation measures versus their long-term history.

Asset Class Review: What Has Worked So Far in 2015?

This week’s chart shows broad asset class returns through July 31st of this year. Perhaps the most surprising performer has been international equity, which has outperformed even U.S. equities. Much of the outperformance is due to the strong U.S. dollar, which has increased international developed countries’ exports and the number of tourists.

This week’s chart shows broad asset class returns through July 31st of this year. Perhaps the most surprising performer has been international equity, which has outperformed even U.S. equities. Much of the outperformance is due to the strong U.S. dollar, which has increased international developed countries’ exports. The same factor has in turn contributed to the lower performance of U.S. equities. With so many of the S&P 500 companies’ revenues dependent on international growth (about 46%), the strong dollar has weighed heavily on EPS growth. In addition, the same factors many of our readers have heard before — the slowdown in the energy sector and the cold winter — have also played major roles.

The other darling this year, as widely predicted, has been Real Estate. Throughout the first half of the year, growth has in large part been due to income, lease turnover, and appreciation (most notably in the Southwest U.S.). The remainder of the year is likely to see less contribution from income and more contribution from appreciation.

Now let us turn to the poor performers. Bonds, both Global and U.S., continue their same old story: the specter of the Fed rate hike continues to loom, in addition to the Greek debt crisis and China’s now not-so-secret efforts to prop up growth. Emerging Markets have been the worst performers this year, thanks in large part to their dependence on commodities and the domino effect of China’s slowing growth which has translated into weakening currencies.

Where will the rest of the year take us? As the issues we have discussed will continue to weigh on asset classes, it will not be surprising if meandering to disappointing returns across asset classes continue for the rest of 2015.

1 Real Estate Returns through 6/30/15; Private Equity Returns through 3/31/15

Creating Social Impact Through Responsible Investing

August 2015 Investment Perspectives

A growing population of socially conscious investors has energized socially responsible investment (SRI) strategies in the past decade. The Forum for Sustainable and Responsible Investment defines SRI as the process of integrating personal values and societal concerns into investment decision making. SRI has increased in the U.S. from $639 million in 1995 to $6.6 trillion in 2014. These assets account for roughly 17% of total dollars under management in the U.S.

This newsletter outlines a brief history of SRI, approaches to implementing an SRI program including positive and negative screening and shareholder activism; impact investing; example products and solutions in equities, fixed income, and real estate; investor concerns around performance and fiduciary liability, and considerations for implementing a sustainable investing program.

Download PDF