The 3rd Quarter of 2016 was a great example of the disconnect between markets and economies that many often believe are closely tied together. While economic indicators are extremely important in terms of the market’s anticipation of long term growth, the two do not necessarily move in unison like partners in the tango. Many times, markets move much faster than the economic information that is delivered to market participants. We always like to remind our own investors that current news is old news when it comes to the markets.
For example, in the 3rd quarter we saw a deceleration in China’s exports, the Eurozone economy slowed, Japan’s economy nearly stalled, and world trade is on set for its slowest yearly growth since the depths of the financial crisis of 2008. Nonetheless, we saw robust returns across global stock markets and even positive returns for almost every single developed and emerging country around the world. In fact, as of the writing of this article, we are on track for one of the best years since 2013. Further, investors have been well served by being globally diversified with tilts towards small cap and value stocks, like our investors here at Index Fund Advisors.
This serves as a simple reminder that we need to be cautious about acting on the news that is presented to us and instead focus on playing the long game. Market prices are constantly adjusting to accommodate new information, future expectations from participants, and even risk preferences. More often than not, these changes are quicker than the spreading of economic information to the masses. By the time it comes through your TV, the markets have already moved on.
For the different size and styles of domestic equities, the quarterly returns ranged from 3.90% for U.S. large cap stocks to 7.51% for U.S small cap value stocks. Year-to-date, returns have ranged from 7.82% for US large cap stocks to 11.80% for US small cap value stocks. In general, value has outperformed growth amongst small cap and large cap stocks and small cap stocks have outperformed large cap stocks across both value and growth.
For the blend of domestic equities indexes used in the IFA Index Portfolios, the quarterly return was 6.23% and 10.31% for the year. This blend has outperformed the entire US market, as measured by the Russell 3000 Index, which has delivered 8.18% for the year in comparison.
International (Developed) Equities
On the international front, equities from our developed counterparts outside of the U.S. delivered even better results than the U.S. Results ranged from 8.50% for international large cap value stocks to 10.54% for international small cap value stocks. Year-to-date, returns have ranged from 3.16% for international large cap value stocks to 8.01% for international small cap stocks.
Returns by country in Q3 ranged from -4.12% (Denmark) to 16.01% (Austria). Top performing countries included Austria (16.01%), Hong Kong (11.47%), Germany (10.00%), Spain (9.61%), and Finland (9.38%). The worst performing countries included Denmark (-4.12%), Singapore (0.77%), Israel (0.92%), Italy (2.47%), and Switzerland (3.05%).
For the blend of international indexes used in the IFA Index Portfolios, the quarterly return was 9.30% and 5.79% year-to-date. This has outperformed the international developed market as a whole, as measured by the MSCI World ex US Index, which has delivered 6.29% in Q3 and 3.29% year-to-date in comparison.
For Q3, the returns in the Emerging Markets ranged from 7.70% for emerging markets stocks to 9.72% for emerging markets value stocks. Year-to-date, returns have ranged from 17.89% for emerging market small cap stocks to 21.01% for emerging market value stocks.
Returns by country in Q3 ranged from -4.97% (Philippines) to 15.73% (Egypt). Top performing countries included Egypt (15.73%), China (13.49%), Taiwan (11.54%), Brazil (11.45%), and Hungary (10.37%). Worst performing countries included the Philippines (-4.97%), Turkey (-4.66%), Mexico (-2.29%), Malaysia (-0.46%), and Chile (-0.36%).
For the blend of emerging markets indexes used in the IFA Index Portfolios, the quarterly return was 8.50% and 18.87% year-to-date. Our blend has outperformed the Emerging Markets as a whole, as measured by the MSCI Emerging Markets Index, 15.40% year-to-date in comparison.
Global real estate securities were the only asset class that didn’t have stellar results in the 3rd quarter. US REITs ended up slightly negative, posting a -1.24% quarterly return. In contrast, International REITs ended in slightly positive territory, posting a 2.27% return for the quarter. Taken together, Real Estate was essentially flat for the quarter, but still significantly positive year-to-date.
In contrast to last quarter, we saw an overall steepening in the yield curve across shorter maturities and generally remained flat for longer term maturities. Yields increased by 0.13%, 0.11%, and 0.02% for the US 5-Year, 10-Year, and 30-Year treasuries, respectively. Based on the 4 fixed income indexes used by IFA, returns ranged from -0.25% for the IFA Short Term Govt. Index to 0.00% for the IFA 5 Year Global Fixed Index.
For the blend of fixed income used in the IFA Index Portfolios, the quarterly return was -0.07% and 1.85% year-to-date.
IFA Index Portfolios
Putting it all together, the returns of the IFA Index Portfolios are shown below net of three quarter’s worth of IFA’s maximum annual 0.90% advisory fee.
We always like to remind our readers that one quarter’s worth of results is absolutely meaningless in terms of extrapolating information about the future. It is important to maintain a constant risk exposure that matches an investor’s capacity to take risk over time in order to reap the benefits that capital markets provide.
Each Quarter, IFA monitors the funds they recommend for clients and as part of that process, we’ve developed a rating system. Below is a link to our Performance Monitoring Report for client portfolios: IFA 3rd Quarter 2016 IFA Client Performance Monitoring Report
About the Authors
Tom Allen is an Accredited Investment Fiduciary (AIF®), Certified Cash Balance Consultant (CBC) and a Chartered Financial Analyst (CFA®) Level III Candidate. Tom received his Bachelor of Science in Management Science as well as his Bachelor of Art in Philosophy from the University of California, San Diego.
Mark Hebner - Founder, Index Fund Advisors, Inc.
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.