KEY NEWS STORIES
After a modest roller-coaster of profit-taking through January and fundamental strength in February, the first quarter ended essentially where it ended in 2013. The fundamentals could have been overshadowed by headline risk - particularly from Russia, where the Crimean peninsula crisis could have shocked the system - but instead a steady appreciation of these events kept the impact limited.
In broad terms, value outperformed growth in the 1st quarter and large caps outperformed small caps, both in terms of returns and relative volatility. Emerging Markets caught a minor cold as key markets, in synchronicity with Federal Reserve Chairman Ben Bernanke’s last meeting, raised their interest rates. Although countries like Turkey, India and South Africa raised their rates, the underlying earnings within their economy didn’t justify the rates, and volatility suffered.
All index performance values are for the 1st quarter of 2014.
- US Large Cap Growth - Russell 1000 Growth: 1.12%
- US Large Cap Value - Russell 1000 Value: 3.02%
- US Small Cap Growth - Russell 2000 Growth: 0.48%
- US Small Cap Value - Russell 2000 Value: 1.78%
- Developed International Markets – MSCI EAFE: 0.66%
- Emerging Markets - MSCI EM: -0.43%
The bond market was, relative to 2013, relatively quiet with a clean handoff to new chairwoman Janet Yellen. The messages received from the Fed have been consistent. They are taking a “wait-and-see” attitude towards interest rate increases and the continuing to unwind quantitative easing programs.
Again, all index performance values are for the 1st quarter of 2014.
- Barclays US Aggregate Bond: 1.84%
- Bank of America/Merrill Lynch High Yield Master II: 3.00%
- Barclays Capital US Intermediate Credit: 1.63%
- Barclays Capital US Government: 1.31%
- Barclays Capital US Gov’t/Credit Long Duration: 6.55%
- Citi World Government Bond Index (non USD): 3.22%
Over the past few years, blended portfolios with an allocation to real assets or alternative assets have been dominated by pure equity portfolios, at least in terms of absolute investment returns. This year, the cycle may have broken. Equities with indirect exposure to real assets (for example, a gold mining company or a natural resource ETF) did not equal the performance of direct commodity exposure. Also, for the first time in years, the possibility of inflation may be real. The primary driver of sustainable inflation is wage inflation, and that hasn’t been possible for the past several years as unemployment was too high to support increased wages. Unemployment is still high, but there are significant tiers of unemployment, with discouraged, unskilled, or uneducated workers making a high proportion of the unemployed workforce, and current workers able to leverage their desirability into higher wages.
- Real Estate - FTSE NAREIT All REITs: 8.57%
- Commodities - DJ UBS Commodities: 6.99%
- Inflation – Barclays US Treasury TIPS: 1.95%
- Hedge Funds – Credit Suisse Hedge Fund: 1.78% (through 2/28/2014)