CIO Commentary: Q1 2013
So far in 2013, UCF market participants have benefitted from a strong rally in domestic equity markets along with price appreciation in the more credit-sensitive parts of the fixed-income markets, such as corporate bonds.
International and emerging market equities are flat to down, with the exception of Japan, which has had a strong upward price move. Core fixed income is down in price slightly. Supportive monetary policy around the globe, especially in Japan, has been decidedly positive for markets, along with modestly positive economic news. In addition to returns being above average, volatility, a negative for investors over the past few years, has also decreased.
In equities, we remain invested with well-positioned managers and companies in the US and around the globe. In the US, we have added two new managers, Fiduciary Management of Milwaukee (FMI) and State Street Global Advisors (SSgA) to our large-cap lineup. In terms of balanced funds, long-term valuations favor equities over fixed income, but we are cognizant of the strong equity rally recently, particularly in the US, and the possibility of a correction if the economy does not strengthen.
As for bonds, our United Church Fund’s fixed-income team has been focused on positioning portfolios to lessen the impact that any future interest rate increases may have. The preceding 30-year bull market in bonds has driven yields to their lowest levels in 50 years. As such, we continue to look for higher-yielding substitutes where prudent and appropriate. For example, we are considering allocating to a new fixed income managerwhich invests in bank loans. These are floating-rate securities with a profile similar to high-yield bonds, but with the added advantage of seniority in the capital structure, and the ability to benefit if interest rates rise, due to their floating-rate structure.
As we look to the remainder of 2013, we are watching the US economy and the continued deliberations by policymakers on US budget issues. Unemployment is falling slowly, house prices are rising, and consumers have less debt and are feeling more confident. Corporate profit margins are historically high, but an offset remains analysts’ concern about a fall to more normal levels. Internationally, Europe remains a challenge, and the projections for equity gains there are not as high as this time last year. An interesting question is whether emerging markets can thrive without help from slower-growing developed economies.
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 UCF portfolio for the upcoming years.