2Q/2013: The Quarter in Review

In the second quarter of 2013, risk continued to be rewarded for US equities but not for foreign equities, REITs, or fixed income. Perhaps the most noteworthy event during the quarter was the negative reaction to Fed Chairman Ben Bernanke’s statement that the Fed’s program of bond buying known as Quantitative Easing would eventually taper down. Volatility has been especially high in the bond market where the yield on the 10-year Treasury has moved from 1.84% to 2.48% during the quarter. Meanwhile, Japan’s central bank continues with its aggressive currency moves that have devalued the Yen relative to the dollar and have cut the value of Japanese equities by about 12.5% from the high point reached on May 22. There was nowhere to hide, as even gold dropped by 25.4% and silver dropped by 34.2% during the quarter.

Domestic Equities

Since we traditionally start this report with US equities, we get to start with the good news. As the two tables below show, it was a good quarter and continues to be a good year, particularly for small cap and value equities.

Returns of IFA Domestic Equity Indexes for 2Q/2013

Sources and disclosures: dfaus.com, vanguard.com, ifaindexes.com, and ifabt.com

Returns of IFA Domestic Equity Indexes for Year-to-Date 6/30/2013

Sources and disclosures: dfaus.com, vanguard.com, ifaindexes.com, and ifabt.com

For the mixture of domestic equity indexes used in the majority of IFA’s Index Portfolios, the 2Q/2013 return was 3.53%, which is 0.76% higher than the 2.77% return of the IFA US Total Stock Market Index. The year-to-date numbers are 16.45% for the IFA domestic equity blend and 14.10% for the total market.

International (Developed) Equities

International developed equities were under pressure from a strengthening dollar and the actions of the Japan Central Bank which has been attempting to fight the ongoing deflation that has hindered Japan’s economy for many years now. As the tables below show, although it was a difficult quarter for international, it remains positive on a year-to-date basis.

Returns of IFA International Equity Indexes for 2Q/2013

Sources and disclosures: dfaus.com, ifaindexes.com, and ifabt.com

Returns of IFA International Equity Indexes for Year-to-Date 6/30/2013

Sources and disclosures: dfaus.com, ifaindexes.com, and ifabt.com

For the mixture of international equity indexes used in the majority of IFA's Index Portfolios, the 2Q/2013 return was -1.15% and the year-to-date June 30^th return was 3.22%.

Emerging Markets Equities

For the second quarter, emerging markets also suffered from a strengthening dollar, but the biggest story in emerging markets was the possible beginning of the end of the Chinese real estate bubble. A compelling article from BusinessInsider details several reasons why the bubble may now be ready to burst. Emerging markets showed continued weakness for the second quarter and year-to-date returns.

                                2Q/2013 Return          Year-to-Date 6/30/2013 Return

Sources and disclosures: dfaus.com, ifaindexes.com, and ifabt.com

For the mixture of emerging markets indexes used in the majority of IFA's Index Portfolios, the 2Q/2013 return was -8.84% and the year-to-date June 30^th return was -8.81%.

Real Estate

For 2Q/2013, the IFA real estate index was down 4.04%, and on a year-to-date June 30^th basis, it was up 2.77%. This index is a blend of domestic and international real estate investment trusts (REITs). Domestic REITs were down 1.49% for the quarter, while international REITs were down 7.82%. On a year-to-date basis, domestic REITs were up 5.95% while international REITs were down 1.93%. The primary reason for the downward movement in REITs this quarter is their sensitivity to interest rates which increased.

Fixed Income

For the first time in recent memory, fixed income turned in a negative quarter and is now showing negative year-to-date returns.

                                 2Q/2013 Return          Year-to-Date 6/30/2013 Return

Sources and disclosures: dfaus.com, ifaindexes.com, and ifabt.com

Even though interest rates climbed upward during the quarter, they are still at very low levels relative to their historical averages, so it is possible that we will see more quarters like this one. For the mixture of fixed income indexes used in the majority of IFA's Index Portfolios, the 2Q/2013 return was -0.70% and the year-to-date June 30^th return was -0.49%.

IFA Index Portfolios

Putting it all together, the returns for the IFA Index Portfolios are shown below, net of IFA’s 0.90% annual advisory fee.

                             2Q/2013 Return          Year-to-Date 6/30/2013 Return

Sources and disclosures: dfaus.com, ifaindexes.com, and ifabt.com

Since fixed income had a negative return for the quarter, IFA Index Portfolios 50 and below had a negative return as well. On a year-to-date basis, it is still a strong year for the IFA portfolios, especially the ones that are heavy in equities.

Quarter Review2013Ifa Index PortfolioIfa Indexes

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Index Fund Advisors, Inc. (IFA) is a fee-only advisory and wealth management firm that provides risk-appropriate, returns-optimized, globally-diversified and tax-managed investment strategies with a fiduciary standard of care.

Founded in 1999, IFA is a Registered Investment Adviser with the U.S. Securities and Exchange Commission that provides investment advice to individuals, trusts, corporations, non-profits, and public and private institutions. Based in Irvine, California, IFA manages individual and institutional accounts, including IRA, 401(k), 403(b), profit sharing, pensions, endowments and all other investment accounts. IFA also facilitates IRA rollovers from 401(k)s and 403(b)s.

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About the Authors

Mark Hebner and additional IFA employees contributed to this article

Founder and President of Index Fund Advisors, Inc., and author of Index Funds: The 12-Step Recovery Program for Active Investors. He is a Wealth Advisor, with an MBA from the University of California at Irvine and a BS in Pharmacy from the University of New Mexico with a specialization in Nuclear Pharmacy.

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