2019 Q3 Market Review: IFCMary Brunson and Murray Coleman
Tuesday, October 15, 2019
Despite a rise of doom and gloom in financial news, IFC Risk-Based Index Portfolios focused on U.S. stocks kept gaining ground in this year's third quarter. In fact, with three-fourths of 2019 in the books, all of IFC's faith-based benchmarks remained in solid positive territory, especially those steeped in domestic equities.
The third quarter produced a script worthy of the best tear-jerking romantic novel. The U.S. and China couldn't resolve an ongoing trade tiff, political gridlock in the U.K. about Brexit and sliding manufacturing data in key developed markets contributed to a growing sense of economic malaise around the world.
The U.S. Federal Reserve also cut short-term interest rates in the quarter, further pressuring investment-grade domestic bond fund yields.
It's an old story. Trying to invest -- or, to be more precise trade -- on a dime is quite a slippery slope to try to climb. That can be particularly true when murky geopolitical conditions prevail.
Consider the interactive chart below showing benchmark results covering the past 20 years from our sister company, Index Fund Advisors Inc. (Investing for Catholics is a wholly owned division of IFA, a registered fee-only independent financial adviser.)
For example, if you went by past performance, the latest completed quarter would've produced even more market whiplash in terms of portfolio reckoning.
If you click on the chart's "LC" button, you can see how bumpy of an investment path large cap stocks as represented by the IFA index had over smaller snapshots in time. Last year, it actually wound up down by 4%. A year earlier, it gained 22%.
Other parts of the market, however, have been even more volatile over shorter stretches. Try selecting different benchmarks in the chart to see just how faulty of a picture looking just at past performance provides in evaluating any strategic investment and wealth building planning process.
Still, our portfolio management and research team keeps up with shorter-term trends in stocks and bonds across the world. The takeaway from this year's Q3 is consistent with what we've found in past quarters, however.
Instead of making any rash moves, IFC recommends its clients base any portfolio decisions on as large of a set of data as possible. (See the article "Advisor Alpha: The View from Vanguard.")
In keeping with a general trend throughout 2019, domestic and global real estate stock indexes continued to advance in the third quarter. Total returns were 0.79% for the IFC U.S. Social Core Equity Index and 6.05% for the IFC Global Real Estate Index in Q3. Such results continued an upward trend on the year. These benchmarks finished the quarter up by double-digits in percentage terms for 2019.
So did the IFC Social Fixed Income Index, which rose by 2.26% in Q3 to wind up with a return of 9.87% through three quarters.
At the same time, foreign stock markets were more turbulent in the quarter. The IFC International Social Core Equity Index lost 1.73% in Q3. It still finished the quarter with a year-to-date gain of 10.58%. Meanwhile, the IFC Emerging Markets Social Core Index fell by 4.11% in the last completed three-month period, while posting a 5.70% positive returns on the year through September.
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 September 30, 2019. Reflecting positive performances across indexes in both equity and fixed-income categories, each continued to post relatively solid year-to-date results by the end of the third quarter.
As we've stressed in the past, diversification across IFC's stock and bond portfolios allocated in a faith-based manner has proven to be a quite valuable tool for our clients over both longer- and shorter-timeframes. This year's third quarter turned out to be another good case-in-point.
The IFC Risk-Based Index Portfolio 100, which didn't include any bonds, produced a return of 0.15% in Q3. In a period marked by slower global economic growth, a slight gain might've seemed to some investors like a fairly positive result.
Consider, however, what mixing in a little more exposure to bonds did in the quarter. Adding some exposure to fixed-income securities helped the IFC Risk-Based Index Portfolio 70, which is still heavily allocated to stocks, to return almost 0.68%. And going with 60% in stocks through the IFC Risk-Based Index Portfolio 60 gained 0.86% in Q3. An equal weighting to stocks and bonds (via IFC Risk-Based Index Portfolio 50) produced a slightly better-than 1% return in the quarter.
Of course, three months are a blip on the radar of longer-term minded passive IFC investors. As Harry Markowitz observed as part of his pioneering research in developing the Modern Portfolio Theory, investors need to balance their financial expectations with how much portfolio risk is really necessary to reach each person's unique longer-term financial goals.
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 risk factors.
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 Third 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.
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. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you. For more information about Index Funds Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/