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Quarterly Summaries

2017 Quarterly Summaries

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Review of Securities Markets, Second Quarter, 2017

Investors enjoyed another solid quarter as returns were positive for most major asset classes. The S&P 500 Index increased just over 3% for the quarter while foreign stocks, as measured by the MSCI ACWI ex US Index, increased almost 6%. U.S. taxable and municipal bond returns also rose by the end of the quarter.

U.S. stocks recorded their seventh consecutive positive quarter. The S&P 500 Index reached an all-time high in mid-June before dropping slightly at the end of the quarter. Stocks were lifted by strong earnings reports from large U.S. companies and expectations for higher Gross Domestic Product (“GDP”) growth in the second half of the year. Although first quarter GDP growth was relatively low (1.4%), consumer confidence remains high and at levels not seen since before the financial crisis. In addition, the Purchasing Manager’s Index, a measure of manufacturing activity, is higher than it has been since late 2014.

Within the U.S. stock market, larger companies performed better than smaller companies and growth stocks performed better than value stocks. Healthcare (+7.1%) was the best performing sector for the quarter while Telecoms were the worst (-7.1%).

Foreign stocks outperformed U.S. stocks for the quarter as perceived political risk in Europe declined. Stocks in Europe rallied strongly in late April after the populist candidate, Marine Le Pen, lost the French presidential election to Emmanuel Macron. It had been feared that France might leave the European Union if Le Pen had won. European stocks rose 10.2% over the two-week period in which the French election was held.

Another tailwind for foreign stock returns was a decline in the value of the U.S. dollar. The dollar fell approximately 2.5% during the quarter. Improving economic data in Europe and Japan made foreign investments relatively more attractive which increased the demand for foreign currencies.

U.S. bond yields declined during the quarter as GDP growth and inflation were lower than expected. The U.S. 10-Year Treasury yield fell as low as 2.13% in mid-June before increasing to 2.30% as of June 30th. Despite the low inflation reading, the Federal Reserve increased the federal funds rate for the second time this year and reiterated their expectation for another increase in 2017. The Barclays 1-5 Year Government/Credit Index rose 0.6% during the quarter while Treasury Inflation Protected Securities (TIPS) lagged due to lower inflation expectations.

Commodity prices moved lower during the second quarter. The Bloomberg Commodity Index decreased 3% during the period. Oil prices declined as production in the U.S. increased. Natural gas and precious metals prices also declined.

Get Smart

Smart beta strategies have officially become the ‘hot new thing’ in the investment management industry. According to the Financial Times, the use of smart beta strategies has been growing by almost 30% per year since 2012, and assets in these strategies may surpass $1 trillion by the end of this year. Given this trend, it begs the question, “What are smart beta strategies and should B|O|S be investing in them?”

Smart beta strategies are defined loosely as passive strategies that use something other than market cap (price multiplied by shares outstanding) weighting to determine the weights of the securities in the portfolio. Conventional passively managed stock index strategies usually use market cap weighting because that is the methodology used for the index they are trying to mirror. The S&P 500 Index, for example, uses this method.

Smart beta strategies, on the other hand, typically use other methods to determine the proportion of each stock in the portfolio. For example, some strategies may buy stocks in equal proportions or use financial ratios such as price-to-earnings ratios to determine the proportion of each stock. Other strategies may be constructed to increase or decrease exposure to certain risk factors.

Although there are many different types of smart beta strategies, the goal across all the strategies is the same; to cost-effectively increase returns as compared to a conventional passively managed index like the S&P 500.

Not surprisingly, the investment companies that manage smart beta strategies are armed with research that suggests their methodologies would have outperformed conventional benchmarks in the past. Some of these strategies are based on rigorous academic research, but many are based on back tests of data of only 15 years or less. In these cases, it is hard to determine whether the outperformance is persistent or merely a characteristic of the market environment over that short time period.

So, should B|O|S be investing in smart beta strategies? Actually, we have been investing in smart beta strategies well before smart beta even became a term. Our equity portfolios are constructed to benefit from certain factors that are common in many of the new smart beta strategies. Specifically, our equity portfolios are tilted more towards small companies and value stocks. Unlike many smart beta strategies, these factors are grounded in academic research that has demonstrated value to investors over long periods of time.

Fund companies continue to introduce new smart beta strategies and this trend is likely to persist for some time. We are open to the possibility that some of these new strategies might enhance the structure of our clients’ portfolios. At the same time, we maintain a healthy skepticism towards many of these new strategies. We are well aware of the many new investing styles that have come and gone over the years, often to the detriment of those investors who embraced them. Consequently, we rigorously review any new strategy. This philosophy has worked well for us and our clients in the past and, in our view, is the smartest thing we can do going forward.

Written by Jeffrey Blanchard, CFA, Investment Analyst; [email protected]

Quarterly Review of Securities Markets: Total Return

IndexMarket03/31/17 – 06/30/17Year-to-Date 6/30/17
Standard & Poor’s 500Large Co. U.S. Stocks3.09%9.34%
Russell 1000 ValueLarge Co. Value U.S. Stocks1.34%4.66%
Russell 2000Small Co. U.S. Stocks2.46%4.99%
MSCI All-Country World ex U.S.Foreign Stocks5.78%14.10%
Barclays 1-5 Year Gov’t/CreditU.S. Shorter-Term Taxable Bonds0.56%1.14%
Barclays Aggregate BondU.S. Taxable Bonds (Broad-based)1.45%2.27%
Barclays 1-5 Year Muni BondU.S. Shorter-Term Tax Exempt Bonds0.56%1.77%
JPMorgan Global Ex-U.S. BondsHedged Foreign Bonds0.55%0.17%

Key Economic Indicators

  • The latest U.S. GDP figures (first quarter 2017) showed the economy growing at an annual rate of 1.4%. Strength in residential and business investment was offset by weakness in consumer spending and inventory growth.
  • The latest U.S. employment report showed continued job growth. Nonfarm payrolls increased by 222,000 in June while the unemployment rate rose slightly to 4.4%. Wage growth increased to 2.5%, but remains lower than expected given low unemployment.
  • U.S. inflation continues to remain low due to low wage growth and lower commodity prices. The latest Consumer Price Index data (June) showed an annual inflation rate of 1.6%. Core CPI (CPI less food and energy) posted an annual increase of 1.7%.
  • The U.S. Fed raised the federal funds rate in June for the third time in the past seven months, increasing the target range to 1.0% – 1.25%. Federal Reserve members expect to raise the federal funds rate one more time in the second half of this year. The Federal Reserve also announced a preliminary plan for reducing the bond holdings they accumulated during the financial crisis.
  • The Bloomberg Commodity Index dropped 3.0% during the second quarter. The price of oil fell 9% to $46.04 per barrel. Gold edged down slightly to $1,242 an ounce and silver declined 9% to $16.63 per ounce.

Key economic indicators compiled by Jeffrey Blanchard, CFA, Investment Analyst; [email protected]

Data Sources: Morningstar; Econoday;

(1) Source: MSCI. MSCI has not approved, reviewed or produced this report, makes no express or implied warranties or representations and is not liable whatsoever for any data in the report. MSCI data may not be redistributed or used as a basis for other indices or investment products.

Disclosures and Footnotes:

The information presented within is for informational purposes only and is not intended to be used as a general guide to investing or financial planning, or as a source of any specific recommendations, and makes no implied or express recommendations concerning the manner in which any individual’s account should or would be handled, as appropriate investment or financial planning strategies depend upon the individual’s specific objectives. It is the responsibility of any person or persons in possession of this material to inform himself or herself of and to seek appropriate advice regarding, any investment or financial planning decisions, legal requirements, and taxation regulations which might be relevant to the topic of this report or the subscription, purchase, holding, exchange, redemption or disposal of any investments.

The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. Future returns are not guaranteed and inherent in any investment is the potential for loss.

This report does not constitute a solicitation in any jurisdiction in which such a solicitation is unlawful or to any person to whom it is unlawful. Moreover, this report neither constitutes an offer to enter into an investment agreement nor an invitation to respond by making an offer to enter into an investment agreement.

Opinions expressed are current opinions as of the date appearing in this material only and are subject to change. No part of this material may, without the prior written consent of Bingham, Osborn & Scarborough, LLC, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.


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