Economic Activity in the First Quarter and the Results of the International Select Portfolio

With the first quarter of 2017 over, we are reviewing the progress of our International Select portfolio. Over the past ten years (ending 3/31/2017) North American markets have seen an average of over 7% a year, while the MSCI EAFE has averaged only 1.53% per annum. Furthermore, over the past year, also ending 3/31/2017, the North American markets have increased by 17.34% with MSCI EAFE only rising by a little over 12.25%. Despite these differences between North American and European, Australasian, and Far Eastern markets, we believe that non-US markets will become market leaders over the coming few years. The outlook for the global economy is affected by Trump’s presidency, and the effect of this on US GDP growth rate back up to 3% per year. If this level of growth can be met, it should ensure long-term, positive effects on a global scale.

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In terms of the International Select portfolio, it has returned 9.75% pure gross, and 9.28% net while the MSCI EAFE Index has seen returns of 7.39%. Several factors have influenced the performance of this portfolio. Stock selection and country weightings in Switzerland, France, Belgium, the UK, and China have all proved beneficial, while the same processes in Canada, India, Norway, the Netherlands, and Panama have had hindering effects. Other factors that aided the portfolio’s return were positions in technology services, electronic technology, health technology, energy minerals, and retail trade. Hurting performance were positions in producer manufacturing, consumer non-durables, and transportation. However, portfolio activity was primarily in an upward direction, trailing one-year (ending 31/3/2017) and returning 19.21% pure gross, and 16.38% net versus the 12.25% result of the MSCI EAFE.

In terms of global growth, The US has been an influential presence and, on the political scene, populism has arrived in the UK, Italy, and various other nations. The hope is that the best characteristics of this doctrine will combine with proven economic activities, resulting in the resumption of global economic growth. This growth will hopefully occur in several sectors, including a period of rising GDP, corporate earnings growth, and a rising tide for economies in general. If this comes to fruition, it may open the door for non-US markets to come to the fore, where, up to the present, their currencies have underperformed the US dollar. In an environment of stronger non-US markets, the International Select portfolio, with a strategy of high-conviction, low-turnover which blends both quantitative and fundamental-based analysis, should thrive.

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The Rise of the ESG Fund.

In recent years, the popularity of, and demand for, ESG funds has increased due to a combination of ethical concerns and the additional risk mitigating benefits attached to taking ESG factors into consideration.

In fact, many have said that failing to consider the risk posed by poor environmental, social, and governance practices could lead to losses, both for clients and for financial advisors. Multi-asset portfolios with integrated ESG stocks are an easy way to make sure client portfolios are as diverse as possible with manageable investment risk and reduced portfolio volatility.

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Not only are ESG factors an excellent way to assess risk, ESG funds have been shown to perform just as well as conventional ETFs for the same risk. Last month, ESG funds had risen to $3.4bn – nearly 45% over the previous 18 months, with assets in ESG funds linked to MSCI indexes growing by 50% over 2015. The trend shows no sign of slowing down, with the majority of institutional investors taking ESG risk factors into account when making investment decisions.

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Last month, Morgan Stanley announced that they would be introducing two new ESG multi-asset funds, mirroring the strategy of their current Global Balanced Risk Control fund, which they believe is the best way to participate in rising markets while still providing strong downside protection. These new funds – the Global Balanced Fund and the Global Balanced Defensive Fund – are the first at Morgan Stanley to incorporate ESG factors into the process and promise to both improve returns and enhance risk management at the same time, an important consideration particularly amidst the post-Brexit uncertainty which still reigns.

money-1017463_1920In response to this growing popularity, MSCI has introduced a new suite of fund metrics, scores and rankings on FactSet to help institutional investors and wealth managers better judge the ESG characteristics of their portfolios. FactSet, which provides integrated financial information and analytical applications, will now offer a new level of transparency on the ESG quality of over 23,000 mutual and exchange-traded funds. These will be ranked or screened based on their sustainable impact, their values alignment and any other ESG risk, such as their carbon footprint, making it even easier for managers and financial advisors to respond to a client’s interest in sustainability.

To learn more about ESG funds and how Henry James International Management could help you, please get in touch via email at info@hj-intl.com or by telephone on (646) 722-2739

Market Commentary – Quarter 2, 2016 – Part 2

Last week’s Market Commentary examined how the global markets performed over the last quarter and this week we will be focussing on the individual performances of each of our portfolios following Brexit.

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Emerging Markets

For 2016, we are expecting broad-based growth in the emerging markets with the exception of Brazil whose recession is largely self-inflicted. We expect GDP good economic growth in Asia: India 7.4%, China 6.5%, Malaysia 4.4%, Korea 2.8%, Thailand 3.2%, and Taiwan 1%.  In Latin American GDP growth is expected to recover modestly in 2016 with Mexico 2.4%, Colombia 2.5%, Peru 4%, and Chile 1.5% leading the group. Brazil, which is in a recession, had a better than expected -6% contractions in the first quarter beating expectations with -5.4% GDP growth. The good news was that Brazil had stronger than expected GDP growth, which was the result of lower imports and higher exports.  Economists expect the Brazilian economy to hit bottom in the third quarter followed by the start of a recovery in the fourth quarter.  Globally with the help of the emerging markets we are expecting global growth to approach 3.2% and a continuation of a Goldilocks economy.

Over quarter two of 2016, the Emerging Markets Portfolio returned 3.27% (pure gross) and 2.81% (net) versus 0.80% for the benchmark. For one year the portfolio returned -4.64% (pure gross) and -6.29 (net) versus -11.71% for the MSCI- Emerging Markets Index. Stock selection and/or country weightings in Russia, Indonesia, South Korea, Taiwan and Brazil aided the portfolio’s performance. However, stock selection and/or country weightings in Mexico, Philippines, Chile, Thailand and China hindered performance. In relation to sectors, positions in finance, energy, consumer durables, communications and technology services aided performance. Sector positions in non-energy minerals, consumer services, electronic technology, retail trade and utilities hurt the portfolio’s return.

The Emerging Market economies are back in growth mode, their currencies are recovering and GDP growth is accelerating

 

International Equity Portfolio

For the second quarter of 2016, the International Equity Portfolio returned 1.43% (pure gross) and 1.20% (net) versus 0.05% for the benchmark. For one year the portfolio returned -6.29% (pure gross) and -7.28 (net) versus -9.72% for the MSCI-EAFE Index. Stock selection and/or country weightings in Spain, Germany, Indonesia, the United Kingdom, and Japan aided the portfolio’s performance. However, stock selection and/or country weightings in India, Australia, Hong Kong, Canada and Sweden hindered performance. In relation to sectors, positions in finance, communications, consumer durable, health technology, and retail trade aided performance. Sector positions in transportation, electronic technology, utilities, consumer non-durables and technology services hurt the portfolio’s return.

International Select Portfolio

The International Select Portfolio returned -0.58% (pure gross) and -1,04 (net) versus -1.19% for the benchmark for the second quarter of 2016. For one year the portfolio returned -8.19% (pure gross) and -9.87 (net) versus -9.72% for the MSCI-EAFE Index. Stock selection and/or country weightings in Germany, Ireland, Belgium, Spain and Brazil aided the portfolio’s performance. However, stock selection and/or country weightings in the Netherlands, Hong Kong, Switzerland, France and Canada hindered performance. In relation to sectors, positions in finance, industrial services, health technology, distribution services and consumer durables aided performance. Sector positions in energy minerals, non-energy minerals, consumer services, utilities, and consumer non-durables hurt the portfolio’s return.

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Want to learn more about each of our portfolios? Check in next week where we will be taking you through Henry James International Management’s Emerging Markets Portfolio or head to our website.