2019 Q4 Market Review: IFC

Mary Brunson and Murray Coleman
Tuesday, January 28, 2020

An easing of trade tensions between the U.S. and China along with signs of improved eurozone economic data helped stocks around the world produce strong gains in 2019's fourth quarter. 

Returns were hardly uniform, however. While large-cap equities tracked by IFC's socially responsible indexes outperformed respective global real estate and fixed-income benchmarks, both wound up lagging the IFC Emerging Markets Social Core Index. 

The swings came amid headlines of a trade deal being cut by negotiators in Washington and Beijing. The U.S. Federal Reserve also helped to calm markets by issuing a statement after lowering short-term interest rates indicating economic pressures for more such moves were waning. Adding to rising sentiment was increased consumer spending in Germany and an uptick in core machinery orders in Japan. A landslide general election victory by the Conservative Party eased near-term geopolitical concerns in the U.K.

So, what does all of this mean? In reviewing Q4 equity and fixed-income results as tracked by IFC Index Portfolios, it's probably worth noting that investors would be well-advised to assume that the expected return for a consistent level of investment risk remains essentially constant over time. 

Of course, investment risk requires that there are surprises and sometimes significant differences between the expected return and realized returns. (In fact, our research shows that realized returns wind up looking something like a bell curve with the expected return falling in the center when sample sizes are very large.)

For example, if the current prices of securities in a diversified portfolio -- which are fair prices because they were set by millions of willing buyers transacting with millions of willing sellers in a free market -- declined by 1.75% today, investors can assume that the uncertainty of the expected return of those securities in total increased by 1.75%.

The increased uncertainty of the expected return was created by negative news and information. This free market price discovery process keeps the expected return for the portfolio of securities essentially the same regardless of the news and information.

It's also important to be aware of the randomness of future news resulting in the randomness and unpredictability of future prices and the resulting returns.

To help visually explain how markets work, we've created the Hebner Model. (See the graphic below.) It's designed to illustrate what happens to an essentially constant risk-appropriate monthly expected return -- and the risk-appropriate monthly return -- for a given index portfolio set at the fulcrum of a teeter-totter. The intersection of good and bad news results in a level of uncertainty on the left side and the price that millions of buyers and sellers agree to on the right side.

The price moves inversely proportional to the uncertainty so that the expected return is held essentially constant. But it also illustrates the range of outcomes of realized returns compared to the expected return over long periods of time. 

IFC Indexes

Across all categories of global equities, the fourth quarter proved to be a productive three months. That was particularly true in developing economies and international developed stocks as measured by IFC's indexes, which are screened to align with guidelines set by the United States Conference of Catholic Bishops (USCCB). 

The IFC Emerging Markets Social Core Index finished Q4 with a strong 10.82% return, reversing the previous quarter's loss. For the year, this emerging stocks benchmark generated a gain of 17.13%. 

Meanwhile, the IFC International Social Core Equity Index rose 9.52% in Q4, rebounding from a negative showing in Q3. In 2019, this core foreign developed markets index wound up returning 21.11%. 

Keeping with a broader trend in the year, the IFC U.S. Social Core Equity Index came out ahead of the field by returning 30.21% in 2019.  That was more than three percentage points greater on the year than the second-best category reviewed, the IFC Global REIT Index 26.40%.

The IFC Social Fixed Income Index, which completed calendar 2019 by posting a healthy 9.83% return, slid slightly in Q4 (-0.03%). 

 

IFC Risk-Based Index Portfolios

The returns of the IFC Index Portfolios are shown below net of the maximum annual 0.90% advisory fee through Dec. 31, 2019. 

 

Investing for Catholics' process for evaluation, selection and recommendation of investments is shaped by our extensive research into the areas of historical long-term investment success, with consideration to the tenets of Modern Portfolio Theory and the Multi-Factor Model developed by professor Eugene Fama and another leading academic, Kenneth French.

The findings that make up this important compilation of research reveal that longer-term returns are not driven by price speculation, but rather arise from a portfolio's specific exposure to defined factor premiums (market, size, value, profitability and high investment levels).

This sound reasoning provides support for the primary goal to capture market returns at minimal expense. Such a goal can be accomplished by abandoning efforts to beat the market and buy the market through risk-appropriate doses of index funds that are passively managed, style pure, low cost and are screened to adhere to socially responsible guidelines.

Each quarter, IFC monitors the funds we use in our client portfolios. As part of that process, we've developed a rating system. Below is a link to our Performance Monitoring Report for client portfolios: IFC Fourth Quarter 2019 IFC Client Performance Monitoring Report.

Our parent company, Index Fund Advisors, has created an Investing Kit that includes a copy of "Index Funds: The 12-Step Recovery Program for Active Investors" book and documentary film based on the book, as well as the Galton Board, Stock Market Edition, which simulates the distribution of 600 monthly returns right before your very eyes.


Performance results for actual clients that invested in accordance with the IFA Index Portfolio Models will vary from the backtested performance due to the use of funds for implementation that differ from those in the index data, market conditions, investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA's advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower advisory fees, varying custodian fees, and/or the timing of fee deductions.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. IFC Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFC Risk Capacity Survey (http://www.investingforcatholics.com/tools/survey/) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Investing For Cathoics, a division of Index Fund Advisors, Inc. (IFA), please review our brochure at https://www.adviserinfo.sec.gov/