Investment Review

Spring 2016

Stocks of U.S. companies plunged 10%, then recovered with a gain of 0.9% in the first quarter of 2016. Emerging market stocks also had a big plunge but ended the quarter with a gain of nearly 6%.

We’ve graphed the headlines over the past 12 months to world stock market performance, and then we review the performance of each of the major asset classes.

 
Selected Headlines from the Past 12 Months Graphed with the World Stock Market Performance (MSCI All Country World Index)

 
We are not offering these headlines to explain market returns. But they do serve as a reminder that investors should view daily events from a long-term perspective and avoid making financial decisions based solely on the news.

 
Investment Review

Benchmark Funds	Q1 2016	12 Months Ending 3/31/2016
U.S. Large Cap Vanguard 500 Index Fund	+1.3%	+1.7%
U.S. Large Cap Value iShares Russell 1000 Value Index	+1.6%	-1.7%
U.S. Small Cap iShares Russell 2000 Index	-1.5%	-9.7%
U.S. Small Cap Value iShares Russell 2000 Value Index	+1.8%	-7.8%
International Vanguard Total International Stock Index Fund	-0.2%	-8.2%
Emerging Markets Vanguard FTSE Emerging Markets ETF	+5.9%	-12.9%
U.S. REITs Vanguard REIT ETF	+6.3%	+4.0%
Investment-Grade Bonds iShares Core Total U.S. Bond Market ETF	+3.0%	+2.0%

 
Individual Asset Classes

World Asset Classes

Looking at broad market indices, emerging markets outperformed both U.S. and international developed markets, while international developed market REITs recorded the highest returns.

The value effect was positive in the U.S. and emerging markets but negative in developed markets outside the U.S. Small cap stocks outperformed large cap stocks in the international markets, but underperformed in the U.S. and emerging markets.

U.S. Stocks

The broad U.S. equity market recorded slightly positive performance for the quarter. Value indices outperformed growth indices across all size ranges. Small cap stocks underperformed large cap stocks.

International Developed Market Stocks

In U.S. dollar terms, developed markets outside of the U.S. lagged both the U.S. equity market and emerging markets indices during the quarter. Small cap outperformed large cap international developed markets.

The value effect was negative in international developed markets using broad market indices. Large cap value indices underperformed large cap growth indices. The opposite was true in small caps; small cap value indices outperformed small cap growth indices.

Emerging Markets Stocks

In U.S. dollar terms, emerging markets indices outperformed developed markets, including the U.S. Value stocks outperformed growth stocks across all size ranges. Small cap indices underperformed large cap indices.

Real Estate Investment Trusts

REITs in developed markets posted very strong performance for the quarter. U.S. REITs outperformed broad market U.S. equity indices.

Fixed Income

Interest rates across the U.S. fixed income markets generally decreased during the quarter. The yield on the 5-year Treasury note fell 55 basis points (bps) to 1.21%. The yield on the 10-year Treasury note declined 49 bps to 1.78%. The 30-year Treasury bond declined 40 bps to finish at 2.61%.

The yield on the 1-year Treasury bill dipped 6 bps to 0.59%, and the 2-year Treasury note declined 33 bps to 0.73%. The 3-month T-bill increased 5 bps to yield 0.21%, while the 6-month T-bill decreased 10 bps to 0.39%.

Short-term corporate bonds gained 1.16%, intermediate-term corporate bonds returned 2.76%, and long-term corporate bonds returned 6.83%. Short-term municipal bonds returned 0.71% while intermediate-term munis gained 1.55%. Revenue bonds slightly outperformed general obligation bonds for the quarter.

In Conclusion

While value stocks underperformed growth stocks by a material margin in the U.S. in 2015, in the first quarter of 2016 this trend reversed with the return of the value premium. (The value premium is the greater risk-adjusted return of value stocks over growth stocks.) A portfolio with a “value tilt” and “small cap tilt” can be challenging to hold over shorter time periods, since returns don’t come nice and even; however based upon past history, over long periods of time pursuing this discipline has rewarded our clients and other investors who practice this strategy.