In this Newsletter
While returns for the first quarter of 2018 were sobering, unexpectedly high 2017 returns resulted in higher-than-average returns for the 12-months ending March 31. Client portfolios ended the 12-month period with positive returns.
Emerging markets stocks were the performance winner in the first quarter of 2018, rising 2.5%. Extra exposure to large cap value in the emerging markets asset class helped client returns. Outside of emerging markets, the major stock and bond indices had negative returns. For the 12-months ending March 31, emerging markets were up 21.5%.
Selected Headlines from the Past 12 Months Graphed with the World Stock Market Performance (MSCI All Country World Index)
The chart above highlights some of the year’s prominent headlines in the context of global stock market performance as measured by the MSCI All Country World Index-Investable Market Index (MSCI ACWI IMI). 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.
As we wrote in our last newsletter, it is well documented that stocks with higher expected return potential, such as small cap and value stocks, do not realize these returns every year. Maintaining discipline to these parts of the market is the key to effectively pursuing the long-term returns associated with the size, value, and profitability premiums.
For the quarter ending March 31, 2018, the small cap premium (the return difference between small and large cap stocks) was generally negative across U.S., developed international, and emerging markets. The value premium (the return difference between value and growth stocks) was positive in emerging markets but negative in U.S. and developed international markets.
|Benchmark Funds||Q1 2018||12 Months
|U.S. Large Cap
Vanguard 500 Index Fund
|U.S. Large Cap Value
iShares Russell 1000 Value Index
|U.S. Small Cap
iShares Russell 2000 Index
|U.S. Small Cap Value
iShares Russell 2000 Value Index
Vanguard Total International Stock Index Fund
Vanguard FTSE Emerging Markets ETF
Vanguard REIT ETF
iShares Core Total U.S. Bond Market ETF
Individual Asset Classes
World Asset Classes
Looking at broad market indices, emerging markets outperformed developed markets, including the U.S., in the first quarter. The value effect was positive in emerging markets but negative in developed markets, including the U.S. Small caps outperformed large caps in developed markets, including the U.S., but underperformed in emerging markets.
The U.S. equity market posted a negative return for the quarter. Value underperformed growth across large and small cap indices. Small caps outperformed large caps.
International Developed Market Stocks
In U.S. dollar terms, developed markets outside the U.S. underperformed the U.S. and emerging markets during the quarter. Value underperformed growth in non-U.S. developed markets across large and small cap indices. Small caps outperformed large caps in non-U.S. developed markets.
Emerging Markets Stocks
In U.S. dollar terms, emerging markets outperformed developed markets, including the U.S., during the quarter. The value effect was positive in large cap indices but negative in small cap indices within emerging markets. Small caps underperformed large caps in emerging markets.
Real Estate Investment Trusts
Non-U.S. real estate investment trusts outperformed U.S. REITs in the first quarter.
Interest rates increased in the U.S. during the first quarter. The yield on the 5-year Treasury note rose 36 basis points (bps), ending at 2.56%. The yield on the 10-year Treasury note increased 34 bps to 2.74%. The 30-year Treasury bond yield rose 23 bps to finish at 2.97%.
On the short end of the yield curve, the 1-month Treasury bill yield increased 35 bps to 1.63%, while the 1-year Treasury bill yield rose 33 bps to 2.09%. The 2-year Treasury note finished at 2.27% after a yield increase of 38 bps.
In terms of total return, short-term corporate bonds dipped 0.38% and intermediate corporates fell 1.50%. Short-term municipal bonds advanced 0.10%, while intermediate munis declined 1.29%. Revenue bonds performed in-line with general obligation bonds, declining 1.19% and 1.20%, respectively.
New Fixed Income Holdings
We implemented two new positions in most fixed income portfolios at the end of 2017. Dimensional Five Year Global returned -0.37% while the index returned +0.17% (underperforming the index by 54 bps) for the quarter ending 3/31/18. This was mainly due to the portfolio’s greater allocation to 3- to 5-year bonds, which caused underperformance relative to the index as rates rose. We held a higher allocation to 3- to-5-year bonds (95.13%) while the index only held (43.42%) in this bucket.
Dimensional Investment Grade returned -1.71% while the index returned -1.46% (underperforming the index by 25 bps) for the quarter ending 3/31/18. This was mainly due to slight differences in allocation and composition in the 5- to 9-year range that led to underperformance relative to the benchmark. The fund was also slightly more overweight to lower-tier investment grade bonds (38.89% in A and BBB vs. 24.88% for the index), which led to some underperformance as well.
Working with an unbiased advisor who is your fiduciary is a great way to tune out the noise and remain invested during volatile times. Uncertainty and volatility are part of a normal investment experience.
As always, if you have concerns about your portfolio, let us know.