Investment Insights Podcast: Shaping up to be a pretty good year for diversified asset allocators with an active management bias

Rosenberger_Podcast

Andrew Rosenberger, CFA, Senior Investment Manager

On this week’s podcast (recorded September 22, 2017), Andy discusses the performance of asset allocators with an active management bias thus far in 2017.

 

Quick hits:

  • 58% of primary shareclass mutual funds in the Lipper Large Growth & Value and Small Growth & Value style boxes have outperformed their passive benchmarks.
  • Upwards of 63% of fixed income managers are outperforming the Barclays Aggregate while 55% of international managers are outperforming the MSCI EAFE.
  • The majority of active managers are outperforming and in emerging markets, where most are not, the asset class is up 31% on the year.

For Andy’s full insights, click here to listen to the audio recording.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: Changing dynamics of the active and passive debate

Chris HartHart_Podcast_338x284Senior Vice President

On this week’s podcast (recorded July 21, 2017), Chris provides some of the more interesting data points and perspectives that help shed light on this potentially changing dynamic.

 

Quick hits:

  • Just as stocks, styles, strategies, sectors, and industries go in and out of favor, so too should performance of active and passive strategies.
  • Passive investing might be peaking and future market conditions suggest a more favorable environment for active management going forward.
  • The incredible growth in the number of ETFs has created a strong headwind for active managers.
  • Correlations between stocks have been stubbornly high while the percentage of active managers outperforming has been below 50% since 2010.
  • The potential for inflation makes it increasingly difficult for markets to rely on the generosity of central banks and continued efficacy of monetary policy.  .
  • At Brinker we believe that both active and passive strategies play an important role in portfolio construction and asset allocation.

For the rest of Chris’s insight, click here to listen to the audio recording.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Monthly Market and Economic Outlook: April 2015

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

After 2014 was dominated by the strong performance of the narrow S&P 500 Index, the first quarter of 2015 showed better results for diversified portfolios and higher levels of volatility across and within asset classes—both positive developments for active management.

The focus remained on the Federal Reserve and the timing of the initial interest rate hike despite U.S. economic data coming in below expectations. The S&P 500 gained just 1% for the quarter, while mid caps and small caps fared better, gaining 4%. Growth outperformed value across all market caps, and high-dividend-paying stocks lagged amid concern of higher interest rates. The strong dollar also hurt U.S. multinationals as a high percentage of their profits are derived from overseas. Despite a strong February, commodity prices fell again in March and were the worst performing asset class for the quarter.

shutterstock_28211977While the anticipation of tighter monetary policy may have weighed on U.S. equity markets in the first quarter, looser monetary policy helped to boost asset prices in international developed markets. The MSCI EAFE Index surged 11% in local terms, but the stronger dollar dampened returns in U.S. dollar terms to 5%, still 400 basis points ahead of the S&P 500 Index. The euro fell -11% versus the dollar, the largest quarterly decline since its inception in 1999. Japan also benefited from central bank policy, gaining 10%.

Emerging market equities outpaced U.S. equities for the quarter, gaining 2.3%; however, dispersion was quite wide. All emerging regions delivered positive returns in local currency terms, although weaker currencies in Latin America had a significant impact for U.S. investors. For example, Brazil’s equity market gained 3% in local terms, but fell -15% in U.S. dollar terms. China and India posted solid gains of 5-6% for the quarter.

The 10-year U.S. Treasury yield bounced around in the first quarter, first declining 49 basis points in January, then climbing 56 basis points in February before declining again to end the first quarter at a level of 1.94%, 23 basis points lower than where it started. The Barclays Aggregate Index outperformed the S&P 500 Index for the quarter, with all sectors in positive territory. Credit spreads tightened modestly during the quarter and the high-yield sector outperformed investment grade. Municipal bonds were slightly behind taxable bonds as the market had to digest additional supply.

Our outlook remains biased in favor of the positives but recognizes that risks remain. We feel we have entered the second half of the business cycle and remain optimistic regarding the global macro backdrop and risk assets over the intermediate term. As a result, our strategic portfolios are positioned with a modest overweight to overall risk.

A number of factors should support the economy and markets over the intermediate term:

  • Global monetary policy accommodation: Despite the Federal Reserve heading toward monetary policy normalization, the ECB and the Bank of Japan have both executed bold easing measures in an attempt to support their economies.
  • U.S. growth stable: U.S. economic growth remains solidly in positive territory and the labor market has markedly improved.
  • Inflation tame: Reported inflation measures and inflation expectations in the U.S. remain below the Fed’s 2% target.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets are beginning to put cash to work through capex, hiring and M&A. Earnings growth outside of the energy sector is decent, and margins have been resilient.
  • Less uncertainty in Washington: After serving as a major uncertainty over the last few years, Washington has done little damage so far this year; however, Congress will still need to address the debt ceiling before the fall. Government spending has shifted to a contributor to GDP growth in 2015 after years of fiscal drag.

However, risks facing the economy and markets remain, including:

  • Timing/impact of Fed tightening: The Fed has set the stage to commence rate hikes later this year. Both the timing of the initial rate increase and the subsequent path of rates is uncertain, which could lead to increased market volatility.
  • Slower global growth: While growth in the U.S. is solid, growth outside the U.S. is decidedly weaker. It remains to be seen whether central bank policies can spur sustainable growth in Europe and Japan. Growth in emerging economies has slowed as well.
  • Geopolitical risks: Issues in the Middle East, Greece and Russia could cause short-term volatility.
  • Significantly lower oil prices destabilizes global economy: While lower oil prices benefit consumers, should oil prices re-test their recent lows and remain there for a significant period, it would be a negative not only for the earnings of energy companies but also for oil dependent emerging economies and the shale revolution in the U.S.

While valuations have moved above long-term averages and investor sentiment is neutral, the trend is still positive and the macro backdrop leans favorable, so we remain positive on equities. The ECB’s actions, combined with signs of economic improvement, have us more positive in the short term regarding international developed equities, but we need to see follow-through with structural reforms. We expect U.S. interest rates to normalize, but remain range-bound, and the yield curve to flatten. Fed policy will drive short-term rates higher, but long-term yields should be held down by demand for long duration safe assets and relative value versus other developed sovereign bonds.

As we operate without the liquidity provided by the Fed and move through the second half of the business cycle, we expect higher levels of market volatility. This volatility should lead to more opportunity for active management across asset classes. Our portfolios are positioned to take advantage of continued strength in risk assets, and we continue to emphasize high-conviction opportunities within asset classes, as well as strategies that can exploit market inefficiencies.

Asset Class Outlook Comments
U.S. Equity + Quality bias
Intl Equity + Neutral vs. U.S.
Fixed Income +/- HY favorable after ST dislocation
Absolute Return + Benefit from higher volatility
Real Assets +/- Oil stabilizes; interest rate sensitivity
Private Equity + Later in cycle

Source: Brinker Capital

Views expressed are for informational purposes only. Holdings subject to change. Not all asset classes referenced in this material may be represented in your portfolio. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Past performance is not a guarantee of similar future results. An investor cannot invest directly in an index.

Investment Insights Podcast – November 21, 2014

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded November 20, 2014):

What we like: Allocations to active managers and passive managers; passive may help save on fees; active may earn a return above fees

What we don’t like: When one side, active or passive, fairs better than the other; active has generally underperformed this year; passive has declared victory

What we’re doing about it: Generally if one is outperforming the other for a few years, the situation will reverse, thus, we are looking at more active managers

Click here to listen to the audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

Monthly Market and Economic Outlook: May 2014

Amy MagnottaAmy Magnotta, CFASenior Investment Manager, Brinker Capital

The severe rotation that began in the U.S. equity markets in early March continued throughout April. Investors favored dividend-paying stocks and those with lower valuations at the expense of those trading at higher valuations. Large caps significantly outpaced small caps (+0.5% vs. -3.9%) and value led growth. From a sector perspective, energy (+5.2%), utilities (+4.3%) and consumer staples (+2.9%) led while financials (-1.5%), consumer discretionary (-1.4%) and healthcare (-0.5%) all lagged. Real assets, such as commodities and REITs, also continued to post gains.

International equity markets finished ahead of U.S. equity markets in April, eliminating the performance differential for the year-to-date period. In developed international markets, Japan continues to struggle, while European equities are performing well, helped by an improving economy. After a strong March, emerging markets were relatively flat in April. There has been significant dispersion in the performance of emerging economies so far this year; this variation in performance and fundamentals argues for active management in the asset class. Valuations in emerging markets have become attractive relative to developed markets.

Fixed income notched another month of decent gains in April as Treasury yields fell shutterstock_105096245_stockmarketchartslightly. At 2.6%, 10-year Treasury note yields remain 40 basis points below where they started the year and only 60 basis points higher than when the Fed began discussing tapering a year ago. All fixed income sectors were in positive territory for the month, led again by credit. Both investment grade and high yield credit spreads continue to grind tighter. Within the U.S. credit sector fundamentals are solid and the supply/demand dynamic is favorable, but valuations are elevated, especially in the investment grade space. We favor an actively managed best ideas strategy in high yield today, rather than broad market exposure. Municipal bonds have outpaced the broad fixed income market, helped by improving fundamentals and a positive technical backdrop.

While we believe that the long term bias is for interest rates to move higher, the move will be protracted. Sluggish economic growth, low inflation and geopolitical risks are keeping a lid on rates for the short-term. Despite our view on rates, fixed income still plays an important role in portfolios, as protection against equity market volatility. Our fixed income positioning in portfolios – which includes an emphasis on yield advantaged, shorter duration and low volatility absolute return strategies – is  designed to successfully navigate a rising or stable interest rate environment.

We approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds as we move through the second quarter, with a number of factors supporting the economy and markets over the intermediate term.

  • Global monetary policy remains accommodative: Even with the Fed tapering asset purchases, short-term interest rates should remain near-zero until 2015 if inflation remains low. In addition, the ECB stands ready to provide support if necessary, and the Bank of Japan continues its aggressive monetary easing program.
  • Global growth stable: U.S. economic growth has been slow but steady. While the weather had a negative impact on growth in the first quarter, we expect growth to pick up in the second quarter. Outside of the U.S., growth has not been very robust, but it is still positive.
  • Labor market progress: The recovery in the labor market has been slow, but we have continued to add jobs. The unemployment rate has fallen to 6.3%.
  • Inflation tame: With the CPI increasing just +1.5% over the last 12 months and core CPI running at +1.7%, inflation is below the Fed’s 2% target. Inflation expectations have also been contained, providing the Fed flexibility to remain accommodative.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets that are flush with cash that could be reinvested, used for acquisitions, or returned to shareholders. Deal activity has picked up this year. Corporate profits remain at high levels and margins have been resilient.
  • Less Drag from Washington: After serving as a major uncertainty over the last few years, there has been some movement in Washington. Fiscal drag will not have a major impact on growth this year. Congress agreed to both a budget and the extension of the debt ceiling. The deficit has also shown improvement in the short-term.
  • Equity fund flows turned positive: Continued inflows would provide further support to the equity markets.

However, risks facing the economy and markets remain, including:

  • Fed Tapering/Tightening: If the Fed continues at the current pace, quantitative easing should end in the fourth quarter. Risk assets have historically reacted negatively when monetary stimulus has been withdrawn; however, this withdrawal is more gradual and the economy appears to be on more solid footing this time. The new Fed chairperson also adds to the uncertainty. Should economic growth and inflation pick up, market participants will shift quickly to concern over the timing of the Fed’s first interest rate hike.
  • Emerging Markets: Slower growth and capital outflows could continue to weigh on emerging markets. While growth in China is slowing, there is not yet evidence of a hard landing.
  • Election Year: While we noted there has been some progress in Washington, market volatility could pick up in the summer should the rhetoric heat up in Washington in preparation for the mid-term elections.
  • Geopolitical Risks: The events surrounding Russia and Ukraine are further evidence that geopolitical risks cannot be ignored.

Risk assets should continue to perform if real growth continues to recover; however, we could see volatility as markets digest the continued withdrawal of stimulus by the Federal Reserve. Economic data will be watched closely for signs that could lead to tighter monetary policy earlier than expected. Equity market valuations are fair, but are not overly rich relative to history, and may even be reasonable when considering the level of interest rates and inflation. Credit conditions still provide a positive backdrop for the markets.

Our portfolios are positioned to take advantage of continued strength in risk assets, and we continue to emphasize high conviction opportunities within asset classes, as well as strategies that can exploit market inefficiencies.

Source:  Brinker Capital

Source: Brinker Capital

Data points above compiled from FactSet, Standard & Poor’s, MSCI, and Barclays. The views expressed are those of Brinker Capital and are for informational purposes only. Holdings subject to change.