October 2017

Market Returns: Global stock markets rose in the third quarter, continuing the trend of gains made in the year’s first half, as investors shrugged off geopolitical tensions with North Korea and prospects for tighter monetary policies by the world’s central banks. U.S. stocks generated excellent returns over the summer (with historically low volatility) as investors weathered the impact from hurricanes and looked favorably towards the possibility of corporate tax reforms. Developed market international stocks notched another quarter of outperformance over U.S. stocks, as both economic fundamentals in Europe and European stock valuations lured investor attention. Emerging market stocks delivered another quarter of strong results as momentum in Chinese stocks continued along with some recoveries in recently weak Brazilian and Russian shares. High quality U.S. bonds managed a positive return last quarter despite the Fed’s intent to begin slowly unwinding its balance sheet in the fourth quarter. The impact from the Trump election win and three Fed interest rate increases have held bond returns flat over the last 12 months, however. As noted below, these rate increases have helped improve cash returns, although they were still modest over the last year.

Asset Class Index 3rd Qtr 2017 Trailing 12 Months as of 9/30/17
US Large Cap Equities S&P 500 Index 4.48% 18.61%
Int’l Developed Equities MSCI EAFE Index 5.40% 19.10%
Emerging Market Equities MSCI Emerging Equities Index 7.89% 22.46%
Fixed Income Barclays Aggregate Bond Index 0.85% 0.07%
Cash US Treasury Bill 1-month 0.23% 0.61%


Insurance-linked Securities:  Most clients participating in our Premier offer will have a small overall allocation to funds that invest in insurance-linked securities within the alternatives portion of their portfolios.  Both the Stone Ridge Reinsurance Risk Premium Interval and Pioneer ILS Interval funds collect premiums in exchange for accepting risks similar to those that large globally diversified insurance or reinsurance companies may undertake.  We have been invested in these types of strategies since 2014, and they have not only delivered good return results for clients, but they also provided diversification benefits for portfolios.  For example, in 2015, a year when global stocks and bonds generated negative returns, these strategies were our best performing investments with solidly positive returns.

While these insurance-linked funds are globally diversified across peril risks, events such as strong earthquakes and hurricanes may trigger the investments that they hold to pay against claims from these events.  As mentioned, one of the main benefits of owning investments in insurance-linked securities is the inherent diversification it can add to a portfolio of stocks and bonds.  While returns in stocks and bonds are driven by such factors as possible changes in interest rates or company earnings growth projections, what drives changes in interest rates or earnings growth has no correlation with risks that can cause wind storms or tsunamis – these are completely unrelated.

September saw three destructive hurricanes make landfall in Texas, Florida, Puerto Rico, and other parts of the Caribbean, while Mexico experienced two powerful earthquakes.  Outside of the obvious human toll these events have caused, they have also led to losses for our investments in insurance-linked securities.  It is still too early to determine what the final impact to the funds will be as claims are still being calculated. Barring other major events this year, the overall impact to client portfolios is likely to be somewhat modest as these investments made up only a small portion of client portfolios.  While we never like to see losses for clients, we are bolstered by the fact that clients have made money in these investments in the past. When large events occur that trigger losses for the insurance industry, this can mean the possibility for increased premiums for investors in the near future – creating what is known as a “hard market” for insurance pricing.  The diversification benefits provided by insurance-linked securities have not changed, and while we cannot predict the weather or the likelihood of an earthquake, the potential for increased premiums resulting from recent events may actually improve the prospects for future returns within the asset class.

Other Investment Markets: With the rapid stock market appreciation of the last year, coupled with low interest rates and high commercial real estate prices, we anticipate challenging return environments for portfolios over the next 5 years. We’re positioned to offset some of those challenges with our value stock tilt and alternatives allocation, but recognize that markets don’t have great returns indefinitely. We’re paying a lot of attention to global valuations.

Conclusion:  Unfortunately, loss is an inherent risk in investing. While this was a bad year for insurance-linked securities, 2017 (thus far) has been a good year for global stocks, bonds, and other alternative investments in our portfolios.  As we mention often in our correspondence, diversification can help portfolios avoid absorbing large drawdowns in value that occasionally occur in a specific asset class.  As always, feel free to either reach out to one of us or your Wealth Advisor if you would like to discuss specifics regarding your portfolio, or if you have any other questions.

Thank you for your business and your continued trust.  We hope you have a wonderful holiday season!

(Your 3Q17 and trailing periods personal account performance is reflected on your quarterly performance report, a version of which your advisor will review with you during your next portfolio or annual planning meeting.)

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