Following is a summary of the markets and our funds’ performance for the fourth quarter of 2017, provided by our Chief Investment Strategist David Klassen.
Global financial markets and all of the funds offered by United Church Funds finished 2017 on a positive note. The key to investors’ recent enthusiasm is a more upbeat outlook for the global economy and passage of the Tax Cuts and Jobs Act. U.S. growth prospects have been acknowledged in recent years, but many were concerned growth was waning; Europe and most emerging markets countries are improving now, and investors have renewed optimism for the U.S. economy.
International equity markets led performance throughout the year. While this trend is only one-year-old, it does affirm the proven benefits of a diversified approach to equity investing. Emerging markets investments had a positive impact on portfolios for the fourth quarter of 2017, with emerging markets equities (MSCI EM) up 7.44% and finishing up 37.28% Y-T-D. The performance of the developed market international index (MSCI EAFE) was also very strong, with a return of 4.23% for the quarter and 25.03% Y-T-D.
UCF equity and balanced portfolios still maintain significant exposure to the U.S. and large U.S. companies, as represented by the Standard & Poor’s (S&P) 500 index, gained 6.64% in the fourth quarter and 21.83% Y-T-D. The Russell® 2000 index of smaller stocks trailed behind, but still rose by 3.34% in the most recent quarter and is up 14.65% Y-T-D.
Bonds, as represented by the Barclays Capital U.S. Government/Credit Index, had a return of 0.49% for the fourth quarter and are up 4.00% for 2017. The Federal Reserve (Fed) increased interest rates in March 2017, June 2017 and December 2017 in response to wage pressures and inflation having begun to show signs of stabilization and upturn. In this environment, floating-rate senior secured bank loans have come back into favor, returning 1.11% for the fourth quarter and 4.26% for 2017.
United Church Funds performance (net of all fees) for the fourth quarter ending December 31, 2017, was as follows:
- Total Equity Fund had a return of 5.22%, 0.50% behind the benchmark.
- Domestic Core Equity Fund returned 6.81%, 0.17% ahead of the benchmark.
- Small Cap Equity Fund returned 4.26%, 0.92% ahead of the benchmark.
- International Equity Fund returned 4.33%, 0.67% behind the benchmark.
- Beyond Fossil Fuels Fund (BFF Fund) returned 4.77%, 0.95% behind the benchmark.
Equity Performance Commentary (gross of fees): UCF equity managers’ aggregate performance relative to their respective benchmarks was mixed. UCF funds were overweight international equities relative to the benchmark. In Domestic Core Equities, Quantitative Management Associates (QMA) and State Street outperformed their benchmarks, while Fiduciary Management slightly lagged. The Small Cap Equity Fund proved to be the most consistent for the quarter, outperforming its benchmark, with all three managers outperforming their respective small-cap growth, value and core benchmarks. While emerging markets were the best story in 2017, the international managers Baillie Gifford, LSV, and Oaktree Emerging Markets lagged their respective benchmarks in the fourth quarter. Finally, the BFF Fund lagged its benchmark for the fourth quarter but is comfortably ahead of the benchmark for one-year (0.95%) and three-years (0.64%).
- The Fixed Income Fund generated a return of 0.63%, 0.06% ahead of the benchmark
Fixed Income Performance Commentary (gross of fees): The Fund benefitted from a diverse allocation to U.S. Treasuries, corporate bonds, bank loans and emerging markets debt. Voya Investment Management (bank loans) was ahead of its benchmark, and core-fixed managers (Pension Boards in-house and Community Capital Management) were both ahead of their benchmarks. The emerging markets debt manager (Lazard) was below the benchmark but additive compared to core-fixed performance.
- The Alternatives Balanced Fund returned 3.93%, 0.63% ahead of the benchmark.
- Alternatives Fund had a return of 3.47%, 2.05% ahead of the benchmark.
Performance Commentary: The Fund was overweight equities during the quarter, which helped performance. Underlying equity manager underperformance held back the Fund, but outperformance by the Alternative and Fixed Income portions, led to the Fund finishing the quarter above the benchmark. The Alternatives Fund was comfortably ahead of its benchmark, in large part attributable to a solid quarter by Abbey Capital.
- Balanced Funds (Conservative, Moderate, Beyond Fossil Fuels, and Aggressive) had returns of 2.30%, 3.43%, 3.15%, and 4.14%, respectively, with returns reflecting each fund’s increasing exposure to equities).
Balanced Fund Performance Commentary: The balanced funds lagged their benchmarks for the quarter net of fees. Equity manager underperformance was the primary culprit. However, all balanced funds finished in the top quartile of their respective Lipper peer groups for the year.
Strategy Summary: Our investment approach is to be alert for signs of over-exuberance if the market gets too optimistic about the impact of policy and tax reforms. We have maintained equity exposure at an overweight position in balanced funds after the developments and continued signs of solid global economic growth. The U.S. tax reforms will help American companies. However, we remain excited about the prospects for international stocks as valuations are still attractive. As for fixed-income, we believe the risk is for interest rates to rise. For now, our duration is slightly lower than the benchmark, and we have raised some cash to mitigate against potential fixed income headwinds.