NEWS
2012-04-01 :: 2012 1st Quarter Commentary
Looking Back
The best start to the equity markets in 14years! Growth did out-perform value, but not by any significant amounts. The non-US markets rebounded with Emerging Markets the big standout. The Greek bailout somewhat tempered the Euro-zone during the quarter. Trading volumes on equities were very low in the quarter which translates to a very low participation rate for the institutional and retail sector.
Fixed income put in a positive quarter but relatively low returns as the equity market rally pushed people to sell out some bonds. The 10 year treasury yield moved up a great deal this quarter from 1.96% to 2.2%. US treasuries did not have a good quarter as yields moved up a decent amount.
Absolute return hedge funds were up for the quarter roughly 3-6% which is traditional for this asset class in a big up quarter in equities.Real Estate: Continued to be on shaky ground as the economic data did not point to any major upsurge in housing. Rentals continued to shine but the retail sector is still not making any major headway. Some good news on refinancing as interest rates continue to stay low. This will most likely help the commercial sector more than the housing sector but it is helpful. Commodities Gold, metals and energy put in a decent quarter but flattened out as caution on future growth began to infiltrate the markets.
Looking Forward
Equities: We have not changed our longer term perspective (5-10yrs) of low to moderate single digit returns in the equity markets. From our perspective, the markets have come a little too far too fast this year. The economy is healing and moving forward, but there are still many global headwinds. The big one to watch, that does not get much airtime, is Spain. Spain suffers from the same problems as Greece, except that Spain has a much bigger economy. An organized default in Spain would be much more painful to the banking systems in Europe as there is not enough money to bail them out. Oil prices continue to go up which does not bode well for disposable income. The United States finances are not in good shape. This will become a bigger and bigger problem if we do not make any changes to the current deficit spending. We still favor dividend growth and dividend value along with stock buybacks due to the low growth environment, as well as Emerging Markets due to demographics.
Fixed income markets We believe yields could slightly increase this year due to many factors but it will trade within a range. If equities move down, there will be a move back into fixed income and hence lower yields during that period. The long term view does not favor a lower interest rate environment and therefore we still feel owning a portfolio of shorter duration municipal or corporate bonds is the best bet for investors in the fixed income market. We continue to be negative on US Treasuries. For proper diversification with in bonds, inflation protected and emerging markets bonds would complement a fixed income portfolio.
Commercial & Residential Real Estate There continues to be no change to our forecast in real estate: Housing has not improved much and we expect it is going nowhere for years. Even with low interest rates, demand has not improved significantly. We are not as negative on housing but still see little upside in that sector. Our feeling is we will not see significant housing price appreciation for 7-10yrs. Please refer to our previous commentaries starting from Q3 2005. We think multiple unit rental properties are one of the few places to be in real estate. As for commercial real estate, we continue to be flat on office space and negative on the retail sector.
Absolute return hedge funds will continue to be a good place to hedge out equity volatility. . Our perspective is that with the equity markets already pricing in perfection the first quarter, absolute return hedge funds should outperform equities in the last 3 quarters of the year. Additionally, in this low interest rate environment, this asset class should have a better outcome than bonds.
Commodities may get more volatile from here. All commodities moved up during the quarter assuming better growth. If any signs of weakness occur these commodities will get hit. The US dollar may play a hand in this as well all commodities trade in US dollars. The weaker the dollar the higher the price of commodities.2011 YTD
2011 YTD (Total Return)
Russell 1000 12.90% Mid-cap 12.94% Russell 2000 12.44%
Russell 1000 Value 11.12% Mid-cap Value 11.41% Russell 2000 Value 11.59%
Russell 1000 Growth 14.7% Mid-cap Growth 14.52% Russell 2000 Growth 13.28%
MSCI EAFE 9.97% MSCI Emerg Mkts 13.65% S&P 500 13.44%
