August: Best and Worst Asset Classes of 2008
Aug/13/08 11:49 AM Filed in: Market
Commentary
What asset classes are winning in 2008 as of
Wednesday, August 13th?
1) +15.45% - Biotechnology (XBI)
2) +14.77% - Commodities (GSG)
3) -0.66% - Domestic Real Estate Investment Trusts (RWR)
What asset classes are losing in 2008 as of Wednesday, August 13th?
1) -21.16% International Real Estate (RWX)
2) -20.73% Domestic Listed Private Equity (PSP)
3) -19.39% Emerging Markets (EEM)
How are the broad markets as of Wednesday, August 13th?
Domestic: Stocks (SPY): -12.06% and Bonds (AGG): -1.22%
International: Stocks (EFA): -18.69% and Bonds (BWX): +0.20%
Emerging Market: Stocks (EEM): -19.39% and Bonds (PCY): -7.75%
Our Comments: An interesting trend has emerged within the markets in the last few weeks. We're finally seeing some strength from the dollar and weakness in commodities. This trend change is matched by a strengthening of domestic stocks and a dramatic decline of the foreign stock markets.
Most importantly in our minds we have seen great strength from Micro Cap. This may be signaling that the US markets are out of the woods. We are well aware that things are looking better for the domestic markets.
While the US economy is facing significant challenges in some industries not all is doom and gloom. We must always remember that the markets are a leading indicator and they seem to be indicating things will begin to improve.
1) +15.45% - Biotechnology (XBI)
2) +14.77% - Commodities (GSG)
3) -0.66% - Domestic Real Estate Investment Trusts (RWR)
What asset classes are losing in 2008 as of Wednesday, August 13th?
1) -21.16% International Real Estate (RWX)
2) -20.73% Domestic Listed Private Equity (PSP)
3) -19.39% Emerging Markets (EEM)
How are the broad markets as of Wednesday, August 13th?
Domestic: Stocks (SPY): -12.06% and Bonds (AGG): -1.22%
International: Stocks (EFA): -18.69% and Bonds (BWX): +0.20%
Emerging Market: Stocks (EEM): -19.39% and Bonds (PCY): -7.75%
Our Comments: An interesting trend has emerged within the markets in the last few weeks. We're finally seeing some strength from the dollar and weakness in commodities. This trend change is matched by a strengthening of domestic stocks and a dramatic decline of the foreign stock markets.
Most importantly in our minds we have seen great strength from Micro Cap. This may be signaling that the US markets are out of the woods. We are well aware that things are looking better for the domestic markets.
While the US economy is facing significant challenges in some industries not all is doom and gloom. We must always remember that the markets are a leading indicator and they seem to be indicating things will begin to improve.
Yipee! Inflation is here...
Jul/16/08 12:10 PM Filed in: Market
Commentary
Well, everything (except real estate) has been getting a lot more expensive and it looks like it’s not going to get any better. Consumer prices increased by 1.1% month over month in June. This was a lot higher than the consensus forecast and it’s the biggest monthly rise since Hurricane Katrina. The annual inflation rate jumped to a 17 year high of 5%.
So what does this mean for you and your portfolio? For discussion purposes let me highlight some of the techniques used by universities to hedge against inflation.
Often in managing their endowments, universities construct portfolios that include several hedges against inflation. To begin with, Treasury Inflation Protected Securities (TIPS) is an allocation that universities often use. These are bonds that typically go up when the consumer prices go up. David Swensen, the former head of the Yale Endowment, believes TIPS are an important component to a portfolio. Universities often allocate to commodities, precious metals and natural resources as well. On a sad note, usually real estate is a good inflation hedge, but unfortunately the deleveraging of the credit markets will likely prevent an appreciation in real estate in the near term. Important Disclosure
June: Best and Worst Asset Classes of 2008
Jun/15/08 03:56 PM Filed in: Market
Commentary
What asset classes are
winning in 2008 as of
Tuesday, June 10?
1) +33.24% - Commodities (GSG)
2) +11.89% - Natural Resources (IGE)
2) +3.10% - Domestic Real Estate Investment Trusts (RWR)
What asset classes are losing in 2008 as of Tuesday, June 10?
1) -10.97% International Real Estate (RWX)
2) -10.64% International Listed Private Equity (PFP)
3) -9.31% Domestic Listed Private Equity (PSP)
How are the broad markets as of Tuesday, June 10?
Domestic Stocks (SPY): -7.00%
Domestic Bonds (AGG): -1.22%
International Stocks (EFA): -7.01%
International Bonds (BWX): +0.82%
Emerging Market Stocks (EEM): -6.17%
Emerging Market Bonds (PCY): -0.32%
Our Comments: In the last 30 days we have seen the return of volatility to the markets. Oddly enough, there has been strength from micro cap (FDM). Since our last email it's only down -0.24% and considering the S&P 500 (SPY) has fallen -4.62% during this same period, that's quite remarkable. Historically micro cap and small cap has led us out of recessions, so if we are in a recession those are the asset classes that may signal a recovery.
If you go back 10 years (June 6th 1998) and take a look at the S&P 500 (SPY), the market appreciation is only 24%. That's an average annual return of 1.89% over that 10 year period. With S&P 500 having a long term annualized return of 10% to 12%, we've got a significant deviation from the mean return. So what does this mean? We feel that US stocks are due for a rally in the next few years.
Just as the emerging markets quietly started their charge towards the tail-end of the dot com boom, we feel that towards the tail-end of this commodity boom US stocks will start their next upward move. In the last week, almost every asset class has gotten killed. However, there has been surprising relative strength from the S&P 500, which is a rare occurrence. We'll be watching for a consistent trend change.
What do we do with this information? For one, we don't try to anticipate what's going to happen in the short run. Our firm studies very long-term trends and tries to build portfolios that do well through them all. Currently, our average University Endowment Styled Portfolio is up in 2008 (0.84% after fees). Our portfolios are generally globally diversified so we just need one of the markets to improve for performance to kick up. We are constantly researching how to make our portfolios more stable without sacrificing return. Our historical research is designed to help us understand how to make those improvements.
Important Disclosure
1) +33.24% - Commodities (GSG)
2) +11.89% - Natural Resources (IGE)
2) +3.10% - Domestic Real Estate Investment Trusts (RWR)
What asset classes are losing in 2008 as of Tuesday, June 10?
1) -10.97% International Real Estate (RWX)
2) -10.64% International Listed Private Equity (PFP)
3) -9.31% Domestic Listed Private Equity (PSP)
How are the broad markets as of Tuesday, June 10?
Domestic Stocks (SPY): -7.00%
Domestic Bonds (AGG): -1.22%
International Stocks (EFA): -7.01%
International Bonds (BWX): +0.82%
Emerging Market Stocks (EEM): -6.17%
Emerging Market Bonds (PCY): -0.32%
Our Comments: In the last 30 days we have seen the return of volatility to the markets. Oddly enough, there has been strength from micro cap (FDM). Since our last email it's only down -0.24% and considering the S&P 500 (SPY) has fallen -4.62% during this same period, that's quite remarkable. Historically micro cap and small cap has led us out of recessions, so if we are in a recession those are the asset classes that may signal a recovery.
If you go back 10 years (June 6th 1998) and take a look at the S&P 500 (SPY), the market appreciation is only 24%. That's an average annual return of 1.89% over that 10 year period. With S&P 500 having a long term annualized return of 10% to 12%, we've got a significant deviation from the mean return. So what does this mean? We feel that US stocks are due for a rally in the next few years.
Just as the emerging markets quietly started their charge towards the tail-end of the dot com boom, we feel that towards the tail-end of this commodity boom US stocks will start their next upward move. In the last week, almost every asset class has gotten killed. However, there has been surprising relative strength from the S&P 500, which is a rare occurrence. We'll be watching for a consistent trend change.
What do we do with this information? For one, we don't try to anticipate what's going to happen in the short run. Our firm studies very long-term trends and tries to build portfolios that do well through them all. Currently, our average University Endowment Styled Portfolio is up in 2008 (0.84% after fees). Our portfolios are generally globally diversified so we just need one of the markets to improve for performance to kick up. We are constantly researching how to make our portfolios more stable without sacrificing return. Our historical research is designed to help us understand how to make those improvements.
Important Disclosure
May: Best and Worst Asset Classes of 2008
May/20/08 03:57 PM Filed in: Market
Commentary
We follow about 25 asset classes. Of those, here is
what we're seeing in 2008:
What asset classes are winning in 2008 as of Friday, May 16?
1) +28.86% - Commodities (GSG)
2) +14.58% - Natural Resources (IGE)
2) +10.85% - Domestic Real Estate Investment Trusts (VNQ)
What asset classes are losing in 2008 as of Friday, May 16?
1) -4.76% Domestic Listed Private Equity (PSP)
2) -4.12% Domestic Micro Cap Stocks (FDM)
3) -3.46% International Listed Private Equity (PFP)
What about the broad markets?
Domestic Stocks (SPY): -2.17%
Domestic Bonds (AGG): +2.05%
International Stocks (EFA): +1.08%
International Bonds (BWX): +6.39%
Emerging Market Stocks (EEM): +3.19%
Emerging Market Bonds (PCY): +0.94%
Our Comments: Predicting the short term movement of any asset class is similar to predicting the weather, but over the long run we can be quite certain of their return. Therefore, the historic performance of an asset class gives us the best guidance for long term future returns.
We know that the long term returns of commidities are about 10%. When they outperform this rate for a period of years we should remind ourselves that they will have to eventually go through a severe correction to revert to their mean returns.
While we often include an allocation to commodities in clients' portfolios, we are well aware that the odds of a severe downward correction are increasing. Earlier this year we were rebalancing into real estate and domesitc stocks (at the time they were underperforming); now we are evaluating reblancing into underperforming classes like private equity and micro cap. This helps us manage the risk of our portfolios and ensures that we are selling high and buying low.
Important Disclosure
What asset classes are winning in 2008 as of Friday, May 16?
1) +28.86% - Commodities (GSG)
2) +14.58% - Natural Resources (IGE)
2) +10.85% - Domestic Real Estate Investment Trusts (VNQ)
What asset classes are losing in 2008 as of Friday, May 16?
1) -4.76% Domestic Listed Private Equity (PSP)
2) -4.12% Domestic Micro Cap Stocks (FDM)
3) -3.46% International Listed Private Equity (PFP)
What about the broad markets?
Domestic Stocks (SPY): -2.17%
Domestic Bonds (AGG): +2.05%
International Stocks (EFA): +1.08%
International Bonds (BWX): +6.39%
Emerging Market Stocks (EEM): +3.19%
Emerging Market Bonds (PCY): +0.94%
Our Comments: Predicting the short term movement of any asset class is similar to predicting the weather, but over the long run we can be quite certain of their return. Therefore, the historic performance of an asset class gives us the best guidance for long term future returns.
We know that the long term returns of commidities are about 10%. When they outperform this rate for a period of years we should remind ourselves that they will have to eventually go through a severe correction to revert to their mean returns.
While we often include an allocation to commodities in clients' portfolios, we are well aware that the odds of a severe downward correction are increasing. Earlier this year we were rebalancing into real estate and domesitc stocks (at the time they were underperforming); now we are evaluating reblancing into underperforming classes like private equity and micro cap. This helps us manage the risk of our portfolios and ensures that we are selling high and buying low.
Important Disclosure
Homebuilders Index off 68%
Sep/14/07 04:02 PM Filed in: Market
Commentary
While retail investors are selling out of their
REIT's and watching the value of their homes decline,
the smart money on Wall Street is gearing up to buy
everything on sale. The S&P Homebuilders index
(ETF: XHB) peaked in July of 2005 and has fallen 68%
since then. The real estate bust has sent individual
investors running for the hills, while veteran
investors like Warren Buffet, Bill Miller and The
Carlyle Group have rolled up their sleeves and
started buying into the weakness.
They have proven to be a bit early, but listen to what Bill Miller had to say in his recent letter to investors: "The headlines today are all about this being the worst housing market since the early 1990’s. Had you bought housing stocks during that previous period of duress, you would have made many times your money and handily outperformed the market over the subsequent decade."
While Buffet and Miller have focused on the homebuilders, other institutions are not shying from buying hard assets. Carlyle just finished raising $3 billion for a private equity fund and it plans to put it to work in a relative value strategy. The leverage will be low, they will only borrow $4 billion, giving them a total of $7 billion to invest. One thing's for sure, a weak dollar is making U.S. assets like real estate look more attractive to foreign investors and over the next few years their appetite for these discounted assets may be the stabilizing factor for the sector.
In 2005 the homebuilders index signaled the eventual real estate slow down. It acted as a leading indicator falling before other housing related stocks and as a result it is likely to be the first real estate sector to turn around. While the average individual investor is thinking, "real estate is just getting worse!" and the average institutional investor is saying, "I can't buy them because I need to make next month's numbers," investors with a longer time horizon, like Warren Buffet and Bill Miller, are likely to be well rewarded. Most people are calling for the real estate slowdown to continue into 2009 and 2010. If that prediction is true, it's likely that housing related stocks, and XHB, will bottom well before that time.
They have proven to be a bit early, but listen to what Bill Miller had to say in his recent letter to investors: "The headlines today are all about this being the worst housing market since the early 1990’s. Had you bought housing stocks during that previous period of duress, you would have made many times your money and handily outperformed the market over the subsequent decade."
While Buffet and Miller have focused on the homebuilders, other institutions are not shying from buying hard assets. Carlyle just finished raising $3 billion for a private equity fund and it plans to put it to work in a relative value strategy. The leverage will be low, they will only borrow $4 billion, giving them a total of $7 billion to invest. One thing's for sure, a weak dollar is making U.S. assets like real estate look more attractive to foreign investors and over the next few years their appetite for these discounted assets may be the stabilizing factor for the sector.
In 2005 the homebuilders index signaled the eventual real estate slow down. It acted as a leading indicator falling before other housing related stocks and as a result it is likely to be the first real estate sector to turn around. While the average individual investor is thinking, "real estate is just getting worse!" and the average institutional investor is saying, "I can't buy them because I need to make next month's numbers," investors with a longer time horizon, like Warren Buffet and Bill Miller, are likely to be well rewarded. Most people are calling for the real estate slowdown to continue into 2009 and 2010. If that prediction is true, it's likely that housing related stocks, and XHB, will bottom well before that time.