What stands out about 2018 is the breadth of negative returns across almost every asset class and financial market. U.S. and global stocks dropped sharply in the last quarter, capping a year marked by turbulence. For the year, U.S. stocks were down a more modest 4.5%. Foreign stocks struggled as well. Even core investment-grade bonds were in the red until the final weeks. It was extremely difficult to make money in the financial markets last year.
It was also a very challenging year for our globally diversified active portfolios, driven by sharp declines in foreign stock markets and underperformance from most of our active equity managers. But as students of financial market history, we know the headwinds our portfolios have faced over the past few years will eventually turn to tailwinds. Sticking to our process may feel uncomfortable at times, but it’s exactly what’s necessary to achieve long-term success and avoid the pitfalls of performance chasing and emotionally driven investing.
We don’t believe the divergences between value and growth investing and between U.S. and international stocks are sustainable. Like most market cycles, these will turn again, though the precise timing is uncertain and unknowable. The last 10 years’ performance is certainly not going to repeat over the next 10 years.
Our portfolios are positioned to perform well over the medium to long term and to be resilient across a range of potential economic scenarios. There are scenarios where our portfolios wouldn’t do as well. However, we don’t make investment decisions based on a short-term forecast. The uncertainty is too high, the unknowns too many, and the range of potential outcomes too wide for us to have the confidence to do so. We are optimistic, though, about our portfolios’ potential for strong performance in the years ahead as the headwinds and trends shift.
Over the short term, if the current recession fears are overdone, we expect to generate strong overall and relative returns. Outperformance should come from our foreign equity positions, active managers, and flexible bond funds. On the other hand, if U.S. stocks slide into a full-fledged bear market, our portfolios have allocations to lower-risk fixed-income and alternative strategies that should hold up much better than stocks. We can then put this capital to work more aggressively at lower prices that imply much higher expected returns. We would also expect managed futures funds to widen the margin of outperformance over equities they exhibited in the fourth quarter and contribute positive returns to our balanced portfolios.
However, throughout the history of our firm, we’ve emphasized the importance of having a long-term perspective. As your time horizon lengthens, the range of reasonable expected outcomes narrows, the shorter-term cyclical spikes and dips are smoothed out, and the underlying fundamental/economic drivers of financial asset returns play out. Over the long term, we are highly confident of the benefits from owning a globally diversified portfolio.
Successful investing is a process of consistently making sound, well-reasoned decisions over time, and across market and economic cycles. We believe our diversified, fundamental, valuation-based investment approach meets this definition. As long as we continue to execute our approach with discipline and remain patient during the inevitable periods when it is out of favor, we have no doubt we will continue to achieve successful and rewarding long-term results for our clients.
Cyber Security: Our Focus on Protecting Clients
Research has shown that the best defense against cyber risks are people, so we have partnered with an experienced third-party technology-service provider to manage our full information technology program and oversee the protection of our systems. Watch our video on cyber security to learn more.
Investment Key Takeaways—First Quarter 2019
Our portfolios generated strong performance for the first quarter, benefiting from the rebound in financial markets as they reversed much of the market downturns from fourth quarter 2018. The first quarter was a strong period for equities around the world. Bond markets and certain alternative strategies also performed well.
Commentary from Our Chief Investment Officer—First Quarter 2019 Review & Outlook
The market rebound was due more to a shift in Fed monetary policy than any meaningful improvements in the economic fundamentals. Our portfolios have exposure to a wide range of investments that will particularly benefit if global growth continues.