2015 Investment Symposium flash talk session
Flash talk by Greg Leonberger, FSA, EA, MAAA at Marquette’s 2015 Investment Symposium on strategic vs. tactical asset allocation and U.S. equities.
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?
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.
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
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.
July 2015 Investment Perspectives
With a history rich in theatre, Greece’s starring role in the “Grexit” drama has featured several rounds of inconclusive negotiations, the resignation of a finance minister, the closing of Greek banks, and a missed payment to the IMF. Finally, on July 13, Greece and its creditors reached an agreement on a third rescue package that likely ensures that Greece remains in the Eurozone. Key pension and tax reforms constitute some of the key austerity measures while Greek officials promised to set up a privatized fund by selling $50 billion in state owned assets. The funds will be devoted to the recapitalization of banks as well as debt servicing.
Liquid alternative assets, as defined by Morningstar, have continued to grow since 2009 and by the end of 2014, reached nearly $158 billion, up 11% from the previous year. The top 2014 fund flows within Morningstar’s liquid alternative category were concentrated across multi-alternatives (+$9.8B), long/short equity (+$6.5B), and managed futures strategies (+$2.3B).
Liquid alternative1 assets, as defined by Morningstar, have continued to grow since 2009 and by the end of 2014, reached nearly $158 billion, up 11% from the previous year. The top 2014 fund flows within Morningstar’s liquid alternative category were concentrated across multi-alternatives (+$9.8B), long/short equity (+$6.5B), and managed futures strategies (+$2.3B). Additionally, multi-alternative flows have already totaled $1 billion in the first month of 2015, continuing to lead all other categories.
Before jumping on the bandwagon, it is important to take a step back and analyze how some of the liquid alternative strategies have performed compared to their private counterparts. Although not an exact apples-to-apples comparison, this week’s chart of the week compares the growth of $1 since January 2000 of the HFR equity hedge index (private) vs. the Morningstar long/short category (liquid). Interestingly, while the liquid long/short equity strategies outperformed private HFR equity hedge from early 2001 through mid-2003, private funds have beaten their liquid counterparts by a significant margin over the long run. Although liquid alternatives offer an attractive liquidity profile, they come with all the restrictions of a 40 Act mutual fund which limit illiquid holdings and leverage. When it comes to investing in alternative strategies, this is one reason we believe that private vehicles are most appropriate for institutional investors.
1Liquid alternatives encompass non-traditional investment strategies or asset classes (beyond equities and bonds) such as REITs, MLPs, commodities, currencies, distressed debt, or hedge fund strategies in a mutual fund format.
January 2015
Similar to previous years, we offer our annual market preview newsletter. Each year presents new challenges to our clients, and 2015 is no different: U.S. equities are at all-time highs, uncertainty reigns for international equities, and to everyone’s surprise, interest rates fell dramatically in 2014…but are poised to rise from historic lows over the next year. In the alternative space, real estate remains a solid contributor to portfolio returns, and private equity delivered on return expectations, though dry powder is on the rise. Hedge fund results were mixed, but have shown to add value in past rising interest rate environments. Further macroeconomic items that bear watching for their potential impact on capital markets include the precipitous fall in oil prices, the strengthening U.S. dollar, job growth, and international conflicts.
A briefing on our 2015 Market Preview report, covering the overall U.S. economy, fixed income, U.S./non-U.S. equity, hedge funds, private equity, real estate and infrastructure.
Live Webinar – Thursday, January 15, 2015 – 1:00-1:45 PM CT
Please join Marquette’s asset class analysts for a live webinar briefing on 2015 capital market expectations. Potential market drivers and general outlooks will be discussed for the overall U.S. economy, fixed income, U.S./non-U.S. equity, hedge funds, private equity, real estate and infrastructure.
Live webinar attendees will be able to submit questions to the presenters and vote in audience polls during the event. Questions will be answered during the final 15 minutes of the webinar, as time allows.
If you are unable to attend the webinar live, you can also view it afterward on demand. Registrants will automatically receive a follow-up email shortly after the end of the webinar to notify them of webinar recording availability.
Please contact us for access to this video.
2014 Marquette Investment Symposium session
In this presentation from our 2014 Investment Symposium, we explore current interest rate levels, our perspective as consultants, and strategic solutions for mitigating the effects of rising rates on portfolios.
Recorded Friday, September 12, 2014
2014 Marquette Investment Symposium
Please contact us for access to this video.
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