Q2 2018 Market and Performance Update

August 6, 2018

Following is a summary of the markets and our funds’ performance for the second quarter of 2018, provided by our Chief Investment Strategist David Klassen.

The return of market volatility this year certainly feels different from the nearly vertical ascent of the S&P 500 Index in 2017. The continued economic expansion, earnings growth, tax cuts in the U.S., and still-accommodative monetary policies are the pillars for the market, but geopolitical risks and policy uncertainties, especially the escalating tariff talks, have resulted in near-term caution among investors.

All that said, U.S. equities were quite positive in the second quarter, as evidenced by U.S. large-cap stocks (S&P 500), which returned 3.43%, and domestic small-cap stocks (Russell 2000 Index), which returned 7.75%. In contrast, international developed stocks were down -1.24%, and emerging market equities, after a yearlong period of outperformance, lagged well behind, with a negative return of -7.96% for the quarter.

On the fixed-income front, the Barclays Government Credit Index, a proxy for the broad U.S. fixed-income market, produced returns of -0.33% for the period. Bank loans performed as expected with a positive return of 0.70%. Emerging market debt, like emerging market equities, was the weakest asset class performer for the quarter, down 7.02%.

United Church Funds performance (net of all fees) for the quarter ending June 30, 2018, was as follows:

  • Total Equity Fund had a return of -0.12%, behind the benchmark.
    • Domestic Core Equity Fund returned 3.58%, ahead of the benchmark.
    • Small Cap Equity Fund returned 4.32%, behind the benchmark.
    • International Equity Fund returned -3.5%, behind the benchmark.
  • Beyond Fossil Fuels Equity Fund (BFF Equity) returned -1.2%, behind the benchmark.

Equity Performance Commentary (gross of fees): UCF equity managers’ aggregate performance relative to their respective benchmarks was mixed. Quantitative Management Associates (QMA) and State Street outperformed the S&P 500, while Fiduciary Management slightly lagged. The Small Cap Equity Fund provided positive returns but trailed the benchmark. Westfield Capital Management, Fiduciary Management, and Dimensional all underperformed their respective benchmarks – small cap growth, value, and core. Baillie Gifford continued to deliver solid returns and outperformed its benchmark, but it was offset by LSV Asset Management’s relative underperformance. UCF transitioned its emerging markets manager from Oaktree Capital Management to Royal Bank of Canada (RBC). Finally, the BFF Equity Fund lagged its benchmark for Q2 2018.

  • The Fixed Income Fund generated a return of -0.98%, behind the benchmark.

Fixed Income Performance Commentary (gross of fees): The Fund was affected by the selloff in emerging markets debt and weak relative performance by Lazard. Voya Investment Trust Co. (bank loans) slightly lagged its benchmark but generated positive returns. Core fixed managers (Pension Boards in-house and Community Capital Management) were both ahead of their benchmarks.

  • The Alternatives Balanced Fund had a return of -0.11%, slightly behind the benchmark.

Performance Commentary: The Fund was helped by an overweight in equities but suffered from the relative underperformance of US small cap managers and LSV. While three alternative managers – Weatherlow, Magnitude, and Heitman all delivered good solid returns, Abbey had another tough quarter. Overall the Alternative Balanced Fund did better than other Balanced Funds.

  • Balanced Funds (Conservative, Moderate, Beyond Fossil Fuels, and Aggressive) returned -0.63%, -0.40%, -0.88%, and -0.28%, respectively, with returns depending on the mix among stocks, and bonds.

Balanced Fund Performance Commentary: Each of the balanced funds benefited from our asset allocation decision to overweight equities but was negatively affected by the poor relative performance from our small cap managers and LSV; and QMA in the case of Beyond Fossil Fuels.

Strategy Summary

We have maintained equity exposure at an overweight position in our balanced funds given the continued growth of corporate earnings and the overall economy. Going forward, increasing uncertainties in global trade and tariffs may warrant a closer look at our overweight position. As for fixed-income, we believe the risk is for interest rates to rise further, a reflection of inflation expectations and central bank actions. However, the shape of the yield curve and credit spreads are worth monitoring closely.

 
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