CIO Commentary: Q2 2013
Once again, the roller coaster analogy applies to financial markets in the most recent three months. However, we must happily exclude domestic equity markets, where early year gains are largely intact (S&P Index of 500 stocks up 13.82% as of June 30).
International equity markets were less robust, with emerging markets particularly weak as the quarter came to a close. Fixed income prices have also declined as interest rates have moved up. While we have been preparing for this possibility, the move happened rather suddenly. After 30 years of declining rates, and global government statements of supportive monetary policy, many investors were counting on and positioned for low interest rates to persist for the foreseeable future.
Over half of our equity portfolios are allocated to the US where we remain invested with well-positioned managers and strong companies. Although we have become more cautious and less exposed to higher growth emerging markets during the recent quarter, we remain poised to take advantage of long-term opportunities when it is prudent to do so.
Our UCF fixed-income team has been maneuvering bond portfolios to lessen the impact of rate increases. Even after the recent selloff, yields are at historic lows. Therefore, we continue to look for higher-yielding substitutes where appropriate. During the recent quarter, we allocated to a new fixed-income manager of bank loans. Bank loans are floating-rate securities similar to high-yield bonds, but which enjoy seniority in the capital structure. Their floating-rate structure has provided protection as interest rates have risen.
For the rest of 2013, we will be closely monitoring the gradually improving US economy. Unemployment is declining, house prices are increasing, and consumers are more confident. However, there will likely be a slowing impact from higher interest rates. Corporate profitability remains historically high, but concerns abound about a return to more normal levels. Internationally, Europe remains challenging, and the question remains as to whether there will be a more aggressive policy response from policy makers including the European Central Bank (ECB). As mentioned, we have a close eye on emerging markets and their relative growth trajectories and economic policies compared to developed economies.
There are many challenges, despite headlines about a higher Dow Jones Industrial Average. We appreciate your confidence in us, and remain focused on capturing the opportunities presented by shorter-term market moves in order to position your investment portfolio for the upcoming years.