The 1st Quarter of 2016 in Review

Tuesday, April 19, 2016 4,596 views

The first quarter of this year was a textbook case on the importance of having discipline when approaching the investment process. January was a punishing month for markets around the world as fears of China’s economic slowdown precipitated across all major asset classes. The S&P 500 posted one of the worst January returns in 88 years. Prognosticators on CNBC were cautioning investors about the near future in terms of stock performance, but a forward looking market left many of these “professionals” trying to drive investment success by looking in the rear view mirror. Those who listened to these siren songs are kicking themselves for once again proving why most investors are their own worst enemies when it comes to investing. For those who exercised discipline, you came out ahead.

Major events of the first quarter included the introduction of negative nominal interest rates by the Bank of Japan and fears of Great Britain leaving the European Union, cleverly referred to as the “Brexit.” Positive news included solid economic performance in the United States while also having a budget deficit reach its lowest levels since August of 2008. For those investors who stayed tied to their long-term financial plan, they saw a broad increase in almost all major asset classes with (surprise, surprise) Emerging Markets providing the highest return amongst global equities.

No doubt we are going to experience another market contraction sometime in the future. We do not know when this is going to happen, but that doesn’t matter. When it does happen, investors should be prepared to tie themselves to the mast of their long-term strategy and asset allocation that we have provided for them.

Domestic Equities

For the different size and styles of domestic equities, the quarterly returns ranged from -1.91% for U.S. small cap growth stocks to 2.55% for U.S small cap value stocks.

For the blend of domestic equities indexes used in the IFA Index Portfolios, the quarterly return was 1.65%. This blend outperformed the entire US market, as measured by the Russell 3000 Index, which only delivered 0.97% in Q1 in comparison.

International (Developed) Equities

On the international front, equities from our developed counterparts outside of the U.S. had a negative 1st quarter. Results ranged from -4.06% for international large cap value stocks to 0.38% for international small cap stocks.

Returns by country in Q1 ranged from -10.74% (Italy) to 11.85% (Canada). Interestingly enough, Canada was the worst performing country amongst developed nations the quarter prior. Top performing countries included Canada (11.85%), New Zealand (9.29%), Singapore (5.71%), Netherlands (3.26%), and Australia (2.79%). The worst performing countries included Italy (-10.74%), Israel (-7.85%), Japan (-5.68%), Switzerland (-4.85%), and Spain (-3.66%).

For the blend of international indexes used in the IFA Index Portfolios, the quarterly return was -1.49%. This outperformed the international developed market as a whole, as measured by the MSCI World ex US Index, which only delivered -1.95% in Q1 in comparison.

Emerging Markets

For Q1, the returns in the Emerging Markets ranged from 5.15% for emerging markets small cap stocks to 8.90% for emerging markets value stocks.

Returns by country in Q1 ranged from -10.16% (Greece) to 27.87% (Brazil). Top performing countries included Brazil (27.87%), Peru (27.02%), Colombia (22.88%), Turkey (20.88%), and Hungary (17.40%). Worst performing countries included Greece (-10.16%), China (-5.36%), Egypt (-5.01%), India (-3.73%), and Qatar (4.15%).

For the blend of emerging markets indexes used in the IFA Index Portfolios, the quarterly was 7.05%. Our blend outperformed the Emerging Markets, as measured by the MSCI Emerging Markets Index, as a whole, which delivered 5.71% in Q1 in comparison.

Real Estate

Global real estate securities continued their winning streak from Q4 of last year. International REITs led the way, posting an 8.60% quarterly return. Not too far behind, U.S. REITs delivered 5.12% over the same time period.

Fixed Income

In general, we saw almost a complete parallel shift in interest rates across the entire range of maturities for US bonds. Interest rates fell by 0.55%, 0.49%, and 0.40% for the US 5-Year, 10-Year, and 30-Year treasuries, respectively. Given the inverse relationship between interest rates and bond prices, we saw returns range from 0.07% for 3-Month T-Bills to 8.06% for US Long Term Government Bonds. In terms of the four fixed income indexes used by IFA, returns ranged from 0.45% for the 1 Year Fixed Income Index to 2.32% for the 5 Year Global Fixed Index.

For the blend of fixed income used in the IFA Index Portfolios, the quarterly return was 1.27%.

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.

IFA investors were rewarded in Q1 for tilting their portfolios towards the dimensions of expected return across the globe as well as incorporating real estate securities into their overall asset allocation. We always like to remind our readers that one month’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.


 

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