Our investment team makes a series of investment tilts based upon our current outlook on the US and global economy, global equity and fixed income markets.
Every quarter, we produce new capital market estimates that we use to manage our portfolio allocations within and between major asset categories and sub-classes in order to benefit from changing conditions in global capital markets.
Global equity markets took a major step backwards in the third quarter.
Fears of slowing economic growth, monetary tightening and the impact of a strong US dollar and low commodity prices on emerging markets contributed to a major decline in global wealth as the benchmark global equity index All Country MSCI ACWI dropped 9.5% for the quarter and 7.0% year to date.
The rate of change in markets caught many by surprise; from August 14th to August 24th, we observed a decline of more than 10% in all major equity markets.
Since then, volatility has decreased and equities have settled into a new, lower trading level. While not uncommon for market corrections of 10% or more in a lengthy bull market, any loss is still painful.
We are optimistic that this correction is but a temporary halt in the great bull market of the last seven years.
For the third quarter, US markets, as measured by the S&P 500 lost 6.4%, and are off 5.3% for the year.
Non-US developed markets (MSCI EAFE) dropped 10.2% in the third quarter, eliminating the entire first half of the year gains to finish the year to date at -5.3% while Emerging Markets were severely punished, off 3.0% for the quarter and 17.9% for the year to date.
US Aggregate Bonds, moving in the opposite direction of equity markets, returned an anemic 1.2% for the quarter and are up only 1.1% for the year.
Capital Market forecasts and estimates are critical components in the development of our portfolio allocations.
When creating capital market forecasts, we employ sophisticated statistical techniques to combine observations of history with current information and forward looking views.
This sophisticated forecasting process is rigorous, transparent and practical, allowing us to include technical, quantitative factors and investment intuition to manage our investment portfolios in a consistent dynamic framework.
We use advanced portfolio optimization technology to turn our capital market assumptions into investable portfolios.
This patented asset allocation methodology, known as Michaud optimization, is designed with the goal of improving risk-adjusted returns through enhanced diversification of asset classes, selected to satisfy a range of investment objectives.
Capital market assumptions are forecasts and reflect our intermediate-term forward looking views. Such views do not express or imply a guarantee or warranty of any kind, but are estimates of future market returns. All views expressed above are the views of Island Light Capital.
Photo Credit: Walter Rodriguez via Flickr Creative Commons