IFC: The 1st Quarter of 2017 in ReviewTom Allen and Mark Hebner
Monday, May 22, 2017
2017 started off on a positive note for global investors. With international and emerging markets leading the way, most global indices are on track for another great year. In the U.S., jobless claims fell to their lowest point since March of 1973, housing starts climbed to their highest rate since 2007, the Dow Jones Industrial Average climbed over 20,000 points for the first time ever, and consumer confidence reached its highest level since the year 2000. Around the world, China’s exports rebounded sharply after struggling near the end of 2016 and Eurozone business confidence grew.
While many may speculate as to why we have experienced such a great start to 2017, we want to remind investors that making connections not backed by empirical support can lead to bad habits. For example, there has historically been no significant correlation between who is occupying the White House and the performance of the stock market. Dimensional Fund Advisors released an article last October examining the historical trends of politics and market performance. Further, investors need to remember that there is a difference between the economy and the market and attempting to predict market movements based on economic results can lead to potentially unfavorable investment outcomes. IFA recently wrote an article discussing this particular topic.
What we can say is that regardless of the events and decisions taking place, the market is acting as your ally with millions of market participants digesting this information and setting fair prices and therefore fair expected returns based on the uncertainty of future global enterprise. The best way to harness this global activity is through buying, holding, and rebalancing a globally diversified portfolio of index funds.
For the different size and styles of domestic equities, the quarterly returns ranged from 0.25% for small cap value stocks to 9.61% for large cap growth stocks. In general, large cap stocks beat small cap stocks across both growth and value investment styles. Similarly, growth outperformed value across all size groups. This is the exact opposite from what we experienced in the prior quarter indicating the randomness of asset class returns.
The DFA U.S. Social Core 2 Portfolio (DFUEX), which makes up the domestic equities portion of the IFC Risk-Based Index Portfolios, delivered a 3.94% return for the quarter. This underperformed the US market as a whole (as measured by the Russell 3000 Index), which delivered 5.74% in Q1.
International (Developed) Equities
On the international front, equities from our developed counterparts outside of the US had a positive 1st quarter. In Q1, results ranged from 5.93% for international value stocks to 8.40% for international small cap stocks. As you can see small cap stocks made a strong comeback from Q4 of 2016 and lead the international stock rally.
Returns by country in Q1 ranged from 0.34% (Norway) to 14.02% (Spain). Top performing countries included Spain (14.02%), Singapore (13.20%), Hong Kong (12.45%), the Netherlands (11.12%), and Australia (10.57%). The worst performing countries included Norway (0.34%), Canada (2.77%), New Zealand (4.88%), Japan (4.89%), and the United Kingdom (5.21%).
The DFA International Social Core Equity Portfolio (DSCLX), which makes up the international equities portion of the IFC Risk-Based Index Portfolios, delivered a 7.38% return for the quarter. This outperformed the international developed market as a whole (as measured by the MSCI World ex US Index), which delivered a return of 6.81%.
The Emerging Markets continued their top performance from 2016 into Q1 of 2017. For Q1, the returns ranged from 13.02% for emerging markets large cap stocks to 14.82% for emerging markets small cap stocks.
Returns by country in Q1 ranged from -4.32% (Russia) to 18.85% (India). Top performing countries included India (18.85%), Poland (18.46%), Chile (16.02%), Korea (15.91%), and Mexico (15.53%). Worst performing countries included Russia (-4.32%), Greece (-0.33%), Hungary (-0.20%), United Arab Emirates (0.88%), and Qatar (1.90%).
The DFA Emerging Markets Social Core Equity Portfolio (DFESX), which makes up the emerging markets equities portion of the IFC Risk-Based Index Portfolios, delivered a 13.92% return for the quarter. This outperformed the Emerging Markets as a whole (as measured by the MSCI Emerging Markets Index), which delivered a return of 11.44% in Q1.
Global real estate securities delivered positive results in Q1. International REITs led the way delivering a return of 3.62% in Q1 versus its U.S. counterpart which delivered a return of -0.27%.
Interest rates in US income markets remained essentially flat over the shorter portion of the yield curve and slightly decreased in the longer part of the curve. 5-year US Treasuries remained unchanged (1.93%) while 30-Year US Treasuries experienced a 4 basis point decrease (3.02%).
For Q1, the four fixed income funds used by IFA delivered positive returns ranging from 0.32% for 1-year bonds to 0.76% for 5-year global bonds.
The DFA Social Fixed Income Portfolio (DSFIX), which makes up the fixed income portion of the IFC Risk-Based Index Portfolios, delivered a return of 1.15% in Q1. This outperformed the U.S. Aggregate Bond Market as a whole, which delivered a 0.82% return in Q1.
IFC Risk-Based Index Portfolios
Putting it all together, the returns of the IFC SRI Index Portfolios are shown below net of one quarter’s worth of a 0.25% advisory fee for the quarterly numbers.
A common question we receive from investors is whether or not a globally diversified portfolio with tilts towards small cap and value stocks is a reliable alternative to just buying and holding a portfolio made up of simple indexes like the S&P 500. While the IFC SRI Index Portfolio 100 is currently trailing the S&P 500 year-to-date, it is important to take a step back and take a much broader view about what we are attempting to capture with our IFC SRI Index Portfolios.
The chart below compares the performance of IFC SRI Index Portfolio 100 versus the S&P 500 for the 89-year period from 1928 to 2016. The blue bars indicate years in which IFC SRI Index Portfolio 100 outperformed and the red bars indicate when the S&P 500 outperformed. As you can see, there are more blue bars than there are red bars. Further, the average outperformance over the entire time period was 2.55% per year and the outperformance is statistically significant at the 95% confidence level (t-stat of 2.63).
What investors need to remember is that there will always be periods in which their IFC SRI Index Portfolios will underperform in the short-term. This is the very nature of taking risk. But once we expand our view to longer time horizons, you can see that a disciplined approach yields favorable results for the globally diversified investor.
Each Quarter, IFA monitors the funds they recommend for clients and as part of that process, we’ve developed a rating system. Below is a link to our Performance Monitoring Report for client portfolios: IFA 1st Quarter 2017 IFA Client Performance Monitoring Report.
We recently created the IFA Index Funds Investing Kit that includes a copy of Index Funds: A 12-Step Recovery for Active Investors book, the documentary, as well as The Random Walker, which simulates market outcomes based on fair prices right before your very eyes. You can find both through Amazon.