New York, April 16th, 2015, Markets in Motion™
International equities have continued to outperform their American peers, and we have benefitted greatly from our large positions in the Eurozone and Japan. This period of outperformance, about 6.6% YTD as measured by the S&P 500 vs. the MSCI ACWI ex US, is the greatest since 2009. We have been very well-positioned for this environment—our Risk-Managed Allocation Fund was up +4.79% in the first quarter, an outperformance of 2.98% to our Morningstar peer group (Tactical Allocation) and 5.43% to our Blended Benchmark.
At the beginning of the year we expected Japanese and European equity markets to outperform in 2015 and positioned our portfolio to reflect that. One of the primary drivers of the US equity rally during the past several years has been the ultra-accommodative monetary policy pursued by the Federal Reserve. However, the Fed has now ended its bond purchase program and is preparing to raise the Fed Funds target rate. Meanwhile, the Bank of Japan (BOJ) has maintained its massive asset purchase program and the European Central Bank (ECB) has initiated a quantitative easing program of its own. We therefore expect broad US equity underperformance to continue, and remain well-positioned to benefit.
In addition, divergent central bank policies between the US and Europe and Japan have had a significant impact on currency markets. The yen and euro have depreciated significantly against the dollar as a result of those two central banks’ quantitative easing programs, a trend we have benefitted from by hedging portions of our equity exposure against those currencies. The use of ETFs makes hedging foreign currency exposure very easy and cost-effective, and we expect our strategy to continue to outperform in a strong-dollar environment.
We hold a large position in developed market equities and have relatively lower exposure to fixed income. Overall, our GTA portfolio holds 28% dollar denominated fixed income, 24% US equities, 32% international equities, 8% alternatives, and 8% cash and equivalents. We favor equities to fixed income and hold a small tactical cash position in expectation of a buying opportunity in Europe.
Our exposure in fixed income is limited to dollar denominated securities. We hold positions in high yield bonds, preferred stock, Build America Bonds, and dollar denominated emerging market debt. This gives us exposure to spread product and the long end of the interest rate curve while avoiding treasuries and foreign currencies.