CIO Commentary: 2012 year-end review
For the calendar year 2012, market participants have benefitted from exposure to both equity and fixed income markets. The backdrop, of course, was a fair amount of uncertainty both economically and politically.
The year-long tug of war included headwinds such as a softening of economic data around the world, election uncertainty in Europe and in the U.S., and scrutiny over the ability of developed nations (including the U.S.) to address high levels of government debt. In contrast, supportive monetary policy around the globe proved overwhelmingly positive for markets. The “safety net” provided by the European Central Bank assured investors that the threat of the Eurozone breaking up was not imminent. The Federal Reserve also participated in the stimulus action and the combined efforts of the two central banks set the stage for a strong rally throughout the late summer and fall.
Worldwide equity markets were up from 16% to over 18%, a much different story than 2011. But while the markets had a great year in 2012, the economy has not kept up; the spread between the S&P 500’s performance and the U.S. Purchasing Manager’s Index (a leading economic indicator) has not been this wide since 2007, indicating that either the economy needs to pick up or the market may be in store for a correction.
In equities, our portfolios benefitted from the relative attractiveness of higher growth emerging markets and the decision to add to these allocations in late 2011. Our emerging markets equity manager, Aberdeen Asset Management, had a particularly impressive year, outstripping its benchmark with a return of 26.15% (gross of fees) compared to 18.22% for the benchmark. On the developed international front (i.e. UK, Europe and Japan), Neuberger Berman and LSV added strong returns as well, benefitting from the improvements in Europe’s sovereign debt situation. In all, our international investment portfolio was up 19.77% (gross of fees) compared to a policy benchmark return of 17.68%. Finally, manager performance on the U.S. side also added nicely to results.
As for bonds, our UCF fixed income team has taken advantage of the price appreciation in bonds in order to lessen the impact that any future interest rate increases may have. Since the 30 year bull market in bonds has resulted in the lowest bond yields in 50 years, we continue to look for higher-yielding substitutes where prudent and appropriate. For example, we allocated to a new fixed income manager in 2012, BNY Mellon, which invests in emerging market country sovereign bonds. This manager will seek to profit from the higher yields in emerging countries as well as price appreciation from potential rating upgrades.
As we look forward to 2013, we are watching the U.S. economy and the continued deliberations by policy makers on U.S. budget issues. Looking globally, our eyes are on the Eurozone to see whether politics will derail progress made in 2012, and whether emerging markets can expand and truly decouple from slower growing developed economies. Finally, long term valuations favor equities over fixed income, although risks are higher.
In short, while there are many crosscurrents, we remain focused on achieving the best combination of shorter- and longer-term strategies in order to position your endowment portfolios for the upcoming years.
We look forward to keeping you informed.