2017 Q3 Investment Report Commentary
A Winning Hand
This year’s story has been the strength of global stock markets. Equities have moved higher based on better than expected fundamentals including synchronized growth across most economies. Other factors—such as central banks, North Korea, hurricanes, and politics—have not been enough to disrupt an economic environment that could easily be characterized as “good but not great.” The strength of equities outside the U.S. is not surprising given the more attractive valuations in foreign markets. Other themes this year include the strength of high yield bonds, non-U.S. REITs, and gold.
Daintree portfolios have been positioned well for this year’s market trends, delivering superb returns in our opinion. While this quarter’s relative returns versus the Policy Benchmark vary with different client portfolios, we are generally pleased with the results. Here are a few items of note:
- Client portfolios typically generated investment returns in a range of 2% to 5% for Q3 and 7% to 15% for the year-to-date. Equities, real assets, and non-core fixed income were the main contributors. Clients with more aggressive allocations, and therefore more equities, generally experienced higher returns and better performance relative to their benchmarks.
- Daintree portfolios benefited from an overweight to emerging market stocks. These stocks, as measured by the MSCI Emerging Market index, have been market leaders, returning 8% in Q3 and 28% so far in 2017.
- We continue to like high quality stocks; however, they have faced headwinds. Quality portfolios typically trail somewhat in strong up-markets so we are not concerned. In addition, the two key characteristics, quality and value, remain relatively inexpensive in a market that seems to prefer, if not chase, lower quality and growth.
- Returns for Diversifying Strategies (formerly labeled “Alternatives”) were disappointing overall, down less than 1% in Q3 and roughly 2% YTD. We are reducing positions in weaker sectors while acknowledging that this asset class remains an important component of a diversified portfolio.
Recent Portfolio Positioning Shifts
We deem U.S. equities increasingly expensive along with related asset classes (e.g., high yield bonds). As a result, we have made incremental shifts away from those investments.
Daintree portfolios are tactically underweight U.S. equities and overweight non-U.S. equities. With profits captured through high yield and REIT sales, we are adding to inflation protection– overweighting Treasury Inflation Protected Securities (TIPS), infrastructure MLPs, and short-term bonds. We believe these areas are attractively priced due to the perception that interest rates and inflation are going to be low forever. Of course, we do not know precisely what will happen in the near-term, but experience gives us confidence in buying now while valuations are attractive.
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