Market Review
Source: Bloomberg
In equities, the All-Country World Equity Index (ACWI) moved higher in April, continuing its steady climb since the events surrounding Silicon Valley Bank and Credit Suisse back in March. From a regional perspective, international developed ex-USA (EFA) outperformed both the U.S. (S&P 500) and Emerging Markets (EEM). Fixed income was also largely positive on the month as interest rates dropped and spreads tightened.
Macro data in April showed that economic activity has remained resilient this year, especially in the services sector, and inflation continues to moderate. However, leading economic indicators such as Manufacturing PMI (Purchasing Managers Index), new Building Permits and the ISM Business New Orders Index are signaling concern and the closure of another US financial institution, First Republic, at the end of the month suggests that the cumulative impact of central bank tightening may have further implications for asset prices and the economy.
Portfolio Review
Equities
Our equity portfolio outperformed the All-Country World Index (ACWI) in April largely because of our position in GSIE (Goldman ActiveBeta International ETF). GSIE is an international developed, non-US equity ETF that employs multi-factor analysis whereby stocks are scored on four distinct factors: Value, Momentum, Quality, and Low Volatility. GSIE has consistently outperformed the global benchmark this year as they are overweight Western Europe.
Our exposure to emerging markets via GEM (Goldman ActiveBeta Emerging Markets ETF) detracted from relative returns. Emerging markets were dragged down by China, where policy uncertainty and geopolitical risk continue to spook investors.
Moving forward, we favor defensive exposure in equities, particularly in the United States. Our US exposure comes through hedged ETFs that use options to create a downside buffer and an upside cap. These innovative ETFs are low-cost, liquid, and come with no counterparty risk. We have a cautious outlook towards equities in the short term, and Buffer ETFs allow us to maintain our equal-weight exposure to the asset class but provide downside protection and lower beta.
Fixed Income
Lower interest rates, a weaker US dollar, and a narrowing of the discount to NAV (Net Asset Value) helped our position in EDD (Morgan Stanley Emerging Market Domestic Debt Closed-End Fund) contribute to our fixed income portfolios’ outperformance against the US Aggregate Bond Index (AGG) in April.
At the same time, falling interest rates saw the shorter duration positions in our laddered bond portfolio underperform. 2023 High yield bonds (IBHY), 2024 Investment grade bonds (IBDP), and 2026 investment grade bonds (IBDR) detracted from relative returns versus the AGG.
We are moderately underweight fixed income as we move into May. While we believe inflation has peaked, it remains high, thereby eroding real returns. We are limiting volatility and interest rate risk by remaining short duration within our portfolios and we are taking advantage of the high yields at the shorter end of the yield curve through a bond laddering strategy. By laddering target-term bond fund maturities into the future and allowing them to mature at par, the portfolio is locking in today’s attractive yields and delivering predictable income while mitigating interest rate risk.
Alternatives
Our position in GLD (Gold) posted positive returns in April. Gold has served as an effective defensive real asset throughout the year. It has also improved the risk/reward profile of our portfolios by providing diversification benefits.
Detractors from Performance
Contributors to Performance
ActiveBeta Emerging Markets ETF (GEM)
Laddered iBond ETFs
ActiveBeta International Developed Equity ETF (GSIE)
Emerging Market Domestic Debt Closed End Fund (EDD)
Overweight
UnderWeight
Gold
Fixed Income
Disclosures: This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.
The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing. The information provided may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that shown here. The information presented, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.