Investment Consulting Archives — Page 29 of 37

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.

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.

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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Infrastructure Position Paper – 2018 Update

Infrastructure is a relatively new asset class to institutional investors and over the last twelve years has emerged as a sustainable addition to client portfolios. The following paper examines the asset class in great detail, from its early beginnings in the 1980s to its current day role in an institutional portfolio. In particular, the nuances of infrastructure — as well as its unique characteristics — are discussed in an effort to cultivate a thorough understanding of the asset class. Recommendations and guidance towards the manager search process and making an allocation to the asset class are also included.

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Is Either Side Winning the U.S.–China Trade War?

Given everything that’s going on in the markets it is easy to get confused about what’s happening in our trade war with China, especially since the U.S. has engaged several other countries with tariffs, or at least threats of them. For all the back and forth that has occurred, the current situation isn’t overly complicated. So far, the U.S. and China have both implemented a 25% tariff on $50B worth of imports from one another. The U.S. is threatening an additional tariff on $200B worth of Chinese goods, which is now undergoing the mandatory review process. In response, China is planning to retaliate with tariffs on $60B should the U.S. enact this additional tariff. This would put a tariff on nearly all goods exported from the U.S. to China.

This potentially means the U.S. has the upper hand, since if these tariffs are implemented China will be left with little room to escalate things further, at least through traditional means. However, this doesn’t mean things will be resolved quickly or that the U.S. economy won’t feel any pain. In fact, the U.S. has already seen some impact as this week the Trump administration was forced to provide $4.7B in relief from the USDA to help farmers make up some of the losses from the trade conflict. At this point there’s no serious talk about a deal, so while many may be hoping for a quick resolution to the trade dispute things could get worse before they get better.

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Will Rising Rates Damage Real Estate Returns?

Our chart this week examines the historical¹ total returns of the NCREIF Property Index (“NPI”) during times of rising interest rates. As illustrated in the chart, real estate has historically showed little correlation with interest rates indicating changes in interest rates do not immediately translate to asset prices. In fact, the average annual total return during periods of rising rates is 12.3%; typically rising rates are accompanied by stronger economic growth and/or inflation, both which inevitably draw investors to real assets. It is important to keep in mind, however, that private real estate is valued less frequently than its publicly traded (daily valued) counterparts. This is important because changes in private real estate prices will typically lag changes in interest rates as a result of less frequent valuations.

With interest rates expected to rise further, the spread between the 10-Year Treasury and real estate cap rates will continue to shrink, but strong fundamentals – such as rent growth and economic growth – are much more important than movements in the 10-year Treasury. There is no magic number for the 10-year that would trigger a re-pricing of real estate, but some property types are more susceptible to higher rates such as those with longer-term bond-like leases. Going forward, we believe that a mix of strong fundamentals mixed with stable rising rates will translate into moderate, income-driven returns to core real estate in the mid to high single-digit range.

¹Since inception

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Is it Value’s Turn?

This week we examine factor performance from the Russell 1000, with a focus on the dynamic between growth and value stocks. For the month of July, value finally pulled ahead of growth as a contributor to performance. This is a shift from recent behavior as growth leads on a trailing 7-year basis. Typically, growth and value have operated in a cyclical relationship so value’s shift from detractor in 2Q to a positive contributor in July could signal a reversal in relative performance between the two styles.

Financials, particularly banks, did well in July by posting strong earnings; these tend to be value stocks and contributed to the relative outperformance. While tech has been a very strong performer year to date, some of the FANG stocks, namely Facebook and Netflix, hit potholes in July. Facebook encountered more trust and brand issues surrounding privacy and Netflix battled disappointing subscriber growth. These specific company pullbacks likely hurt the growth factor.

Growth has outperformed value since 2011 and the rolling 10-year outperformance is at a high point, now bumping up against two standard deviations from its long-term average. This paired with value’s recent edge above growth may indicate that growth’s outperformance versus value could be coming to an end.

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A “Halftime” Review of Asset Allocation for 2018

As of June 30th, the Russell 3000 index was up only 3.2%, a far cry from its 10-year annualized return of almost 9%; the MSCI ACWI ex-U.S. — a broad proxy for international stocks — has been even more disappointing, down 3.8% compared to its 2017 return of 27%. Furthermore, most bond strategies are negative for the year, thus dispelling the notion of diversification. However, the year is only halfway complete and as we have seen repeatedly in the capital markets, fortunes can change rapidly and unpredictably. In an effort to formulate explanations and expectations, the following newsletter investigates the disappointing performance from the first half of the year, as well as potential outcomes for the remainder of 2018.

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