Bull and Bear

The Third Quarter of 2014 in Review

Bull and Bear

In the third quarter of 2014, equities pulled back around the world, particularly for international developed markets. Portfolios tilted towards small cap and value companies performed worse than portfolios tilted towards large cap and growth companies. During the quarter, the Federal Reserve renewed its zero rate pledge but hinted at a steeper rate hike path, so shorter-term interest rates ended the quarter a little higher than they started. On the international front, the biggest story continues to be the advancement of the terrorist group known as the Islamic State of Iraq and the Levant (ISIL). President Obama has committed the U.S. to an air campaign that could continue for months or even years. Mr. Obama has repeatedly promised that U.S. ground forces would not be deployed, but this assertion has been questioned by some of his military advisors. Perhaps surprisingly, the price of crude oil pulled back by about 15% during the quarter to a level of about $90 per barrel. One story currently in progress is the massive pro-Democracy protests in Hong Kong. If it ends with a Tiananmen Square-like massacre, then many investors may choose to re-evaluate their positions in China and Hong Kong.

Domestic Equities

For the different sizes and styles of domestic equities, the quarterly returns ranged from -6.85% for small cap to 1.13% for large company. The clear pattern is that large caps beat small caps, which are now negative on a year-to-date basis.

For the blend of domestic equity indexes used in the new IFA Index Portfolios, the quarterly return was -3.86% which lagged the -0.01% return of the overall market. On a year-to-date basis, the return of the IFA blend was 1.38% vs. 6.98% for the overall market.

International (Developed) Equities

On the international front, while small caps continued to underperform large caps in the third quarter. On a year-to-date basis, they are close to even.

For the blend of international indexes used in the new IFA Index Portfolios, the quarterly return was -7.84%, and the year-to-date return was -1.64%.

Emerging Markets

After a strong second quarter, the third quarter emerged as a weak one for emerging markets across the board, although tensions continue between Russia and Ukraine, and China continues to re-assert its claims over islands currently governed by Japan.

For the blend of emerging markets used in the new IFA Index Portfolios, the quarterly return was -3.42%, but the year-to-date return remained positive at 4.46%.

Real Estate

Real estate followed a strong first and second quarter with a weak third quarter. The IFA Real Estate Index delivered a quarterly return of -3.99% and a year-to-date return of 11.54%, which is the highest among all 15 asset classes used in the IFA Index Portfolios.

Fixed Income

Two of the four fixed income asset classes were down slightly in the wake of the Fed’s announcement that it may follow a steeper rate hike path.

For the blend of fixed income used in the IFA Index Portfolios, the quarterly return was -0.03%, and the year-to-date return was 0.79%. Once again, it is important to note that bond yields remain at low levels relative to their historical averages.

IFA Index Portfolios

Putting it all together, the returns of the IFA Index Portfolios are shown below, net of one quarter’s worth of IFA’s maximum annual 0.90% advisory fee for the quarterly numbers and three quarter’s worth for the year-to-date numbers.

One important thing to keep in mind when reading these quarterly reviews is that one quarter (or even one year) is absolutely meaningless in determining overall relative performance among asset classes or portfolios consisting of those asset classes. The two charts below show how the probabilities (based on historical returns data) drastically change as the time period increases.