Half Year Wrap
Markets made it to the half-way mark on the calendar year last week and took a pretty volatile route to get there. What is most interesting to us is that, while there was tremendous headline volatility that took the broad markets through one of the shortest-lived bear markets in history, a lot of the trends in relative performance across geographies and sectors of the Equity markets over the past three to five years remained firmly in place. That meant that year-to-date (“YTD”) US Growth and Large-cap Equities continued to beat US Value and Small-cap Equities - and the rest of the world in general. The word “trounced” is actually a more apt description.
On the year, our Equity benchmark, the MSCI All Country World Index (“ACWI”) has lagged the S&P 500 by just over 3%, while it lagged the tech-heavy NASDAQ 100 (“QQQ”) by over 23%. The S&P 500 Value ETF (RPV) even lagged ACWI by over 23%, and the S&P 600 Value ETF (IJR) did relatively better, lagging by only 18%. Doing some additional math nets Large-Cap growth beating Large-cap Value YTD by over 46%.
And those excesses have only been stretched further this week. But “stretched” implies that they will snap back and there is no guarantee that will happen. Many of the bigger Factor-based disciples in the space from firms like AQR to Dimensional Fund Advisors to Research Affiliates have been sounding the alarm over how cheap Value and Small-caps have become – and the Coronavirus only added to those sectors’ woes. The high-profile winners in the Coronavirus market have been the large Tech companies, but others benefited as well including the big-box retailers like Walmart and select consumer goods companies like Clorox and General Mills.
Our Equity allocations do have exposure to those better performing sectors, including the largest tech companies that have been leading the broad indices higher. And our exposure to Value has been significantly reduced due to its consistently weak performance. Our performance in the second quarter was further helped by the overweight exposure to the US in general and Small-caps specifically, leaving Equity allocations up about 2.5% on the month and 18% on the quarter but still down roughly 16% YTD. Our exposures have been significantly adjusted with our quarter-end rebalancing to a more neutral geographic market-cap weighting and a more neutral weighting to Small-caps. Value’s weighting remains relatively low and will continue to be so until it shows some sustained relative outperformance – and, again, there is no guarantee that will happen.
For our Fixed Income allocation, the performance was up marginally on the month and about 3.75% on the quarter leaving it up about 1.3% YTD. The allocations in our Multisector ETF, FWDB, remained defensive given the continued high levels of market volatility. In the meantime, High Grade and High Yield Corporate Credit have ground to higher valuations thanks to Federal Reserve buying activity which has masked what has been a generally deteriorating fundamental picture that is yet to play out fully in terms of its actual impact on individual companies’ performance.
Source: Morningstar
