Third quarter 2018 saw US equities continue their upward march. At +7.65% the S&P 500 had its best quarterly gain since Q4 2013. Large Cap US equities are now up more than 10% YTD. The difference between US equities and our typical portfolios is explained by the fact that international equities, fixed income, and alternatives are all negative YTD. While we of course always want all of our investments to do well, that is unreasonable for a diversified portfolio. Looking at each of these negative asset classes in more detail, the performance of our managers is consistent with their respective benchmarks and indices, i.e., within our expectations.
We review manager performance and asset allocation at our monthly Investment Committee meetings. We continue to believe that proper diversification is the best way to achieve your long term goals and that diversification requires continued allocation to most if not all of these recently poor performing asset classes. For example, international equities not only have shown to have diversification benefits versus US equities, the former now are significantly cheaper than US stocks based on established valuation metrics. With respect to fixed income, we continue to view it as the ballast in the portfolio and now yields are .50% – 1.00% higher than the beginning of the year. And regardless your view on Alternatives, they continue to offer diversification benefits from the traditional asset classes of stocks and bonds.
I like the following quote from a recently released paper from Cliff Asness, founder of Greenwich, CT-based asset manager AQR: “Strategies that deliver real-life reasonable risk-adjusted returns can be incredibly difficult to stick with long-term. It’s a paradox. They perhaps exist precisely because they are hard to stick with. Living through the tough times and staying disciplined seems to be the secret ingredient in the success of many historically great investors.”
That said, we are constantly evaluating our managers and allocations. We approved both an active growth manager and an active international equity manager this year. Current projects include potentially crafting a multi-manager fixed income portfolio targeting the higher yields now available to us. Stay tuned there.
Hope Q4 brings us colorful leaf watching, crisp nights and calmer markets!
Chief Investment Officer