Q1 2018 Investment Commentary
The team at Paritas Capital Management has developed an intuitive, common sense approach to investing. The goal of the Global Wealth Strategy (GWS) is to protect capital during periods of declining markets while capitalizing during market appreciation periods.
Our portfolio utilizes a proprietary, balanced risk, “all-weather” approach to increase the probability of producing consistent return streams over various market cycles. By systematically rebalancing using the risk metrics we analyze each month, the portfolio can adapt to changing market conditions to achieve the type of positive outcomes we are targeting over market cycles.
What an interesting quarter. January was a continuation of 2017, producing positive returns with relatively low volatility. U.S. and International Equities were up as much as 7% in January. The S&P 500 recorded only 6 down days, with only 1 day down slightly more than 1%.
February, however, was a different story. There were some significant moves of size we haven’t seen in quite some time. The S&P 500 Index recorded a 2% decline on 2/2, 4% decline on 2/5, and a 3.7% decline on 2/8. Nine out of 19 trading days were down.
The trend continued in March, recording 12 down days, 5 of which were down greater than 1%. Volatility and large declines spread to the international markets as well. To illustrate what happened globally, we show five broad market indices below.
Source: FactSet. As of 03/31/2018.
Interestingly, since GWS launched in July of 2015, this is the first quarter where these five broad market indices simultaneously produced a negative return as shown above. MLPs and REITs were hit the hardest down -11% and -8% respectively.
Reallocating Capital to Balance Risk
|Asset Class||January 2018||February 2018||March 2018|
As a result of the increased risk, the portfolio became more defensive over the quarter. We increased our allocation to Fixed Income by 9%, of which, over 7% was to U.S. Treasuries.
The chart below shows the Q1 2018 return contribution for each asset segment in the GWS portfolio.
Source: FactSet. Contribution of Return calculated vs GWS Model for Q1 2018 and is as of 03/31/18.
Overall, it was a challenging quarter with 9 out of the 12 market segments detracting from GWS’ performance.
A majority of the negative return contribution was derived from the Inflation Hedge asset class with MLPs and REITs detracting a combined -1.21%. It has been over a year since we have experienced such a significant divergence in return contribution among the asset segments that comprise GWS.
GWS produced a return of -1.92% while the benchmark finished the quarter with a return of -1.14%.
Although no one likes to see a negative return, it certainly is normal and to be expected. The last several years have been anything but normal. Positive returns have been too easy to come by which can bring about complacency and unrealistic expectations for future market returns.
Trying to predict the markets is very difficult, if not impossible. We believe it is critical to have a disciplined process that adapts to changes in market risk with no emotion or subjectivity.
Broad Market Returns
US Equities – Russell 3000 Total Return
International Equities – MSCI ACWI (x-us) Net Return
Fixed Income – Bloomberg Barclays US Aggregate
MLPs – Alerian MLP Total Return
REITs – MSCI US REIT Index
THIS DOCUMENT HAS BEEN PREPARED BY PARITAS CAPITAL MANAGEMENT, LLC (“PARITAS”) SOLELY FOR THE PURPOSES OF PROVIDING SUMMARY INFORMATION REGARDING PARITAS AND ITS GLOBAL WEALTH STRATEGY (“GWS”) COMPOSITE. THE INFORMATION CONTAINED HEREIN IS NOT, AND SHOULD NOT BE CONSTRUED, AS AN OFFER OR SOLICITATION OF AN OFFER TO BUY ANY FINANCIAL INSTRUMENT. AN INVESTMENT IN ACCORDANCE WITH THE GWS COMPOSITE DESCRIBED HEREIN HAS NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (“SEC”), ANY STATE SECURITIES COMMISSION, OR OTHER ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THESE AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OR THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL AND A CRIMINAL OFFENSE.
ANY REPRODUCTION, DISTRIBUTION, OR OTHER UNAUTHORIZED USE OF THIS DOCUMENT, AS A WHOLE OR IN PART, OR THE DISCLOSURE OF THE CONTENTS HEREOF, OTHER THAN TO THE RECIPIENTS FINANCIAL, TAX AND/OR LEGAL ADVISORS WITHOUT THE PRIOR WRITTEN CONSENT OF PARITAS IS PROHIBITED.
THE BENCHMARK INDEX REFERRED TO HEREIN IS A BLEND OF 60% MSCI ACWI INDEX AND 40% BARCLAYS US AGGREGATE BOND INDEX. THE INDICES INCLUDED TO SHOW RELATIVE MARKET PERFORMANCE FOR THE PERIODS INDICATED ARE NOT NECESSARILY STANDARDS OF COMPARISON, SINCE INDICES ARE UNMANAGED, BROADLY BASED AND DIFFER IN NUMEROUS RESPECTS FROM THE GWS COMPOSITE. MARKET INDEX INFORMATION WAS COMPILED FROM SOURCES THAT PARITAS BELIEVES TO BE RELIABLE. HOWEVER, PARITAS DOES NOT GUARANTEE THE ACCURACY OR COMPLETENESS OF SUCH DATA.
AN INVESTMENT IN ACCORDANCE WITH THE GWS COMPOSITE MAY NOT BE SUITABLE FOR ALL INVESTORS. THIS MATERIAL HAS BEEN PREPARED FOR INFORMATIONAL PURPOSES ONLY, AND IS NOT INTENDED TO PROVIDE, AND SHOULD NOT BE RELIED ON FOR, INVESTMENT, ACCOUNTING, LEGAL OR TAX ADVICE.
INVESTING INVOLVES RISK, INCLUDING THE POTENTIAL OF LOSS OF SOME OR ALL PRINCIPAL INVESTED. INTERESTED PARTIES ARE ENCOURAGED TO REVIEW PARITAS’ FORM ADV PART 2, AS WELL AS PERTINENT PROSPECTUS/PRODUCT DESCRIPTIONS TO CONSIDER SUCH RISK PRIOR TO INVESTING. THERE IS NO GUARANTEE THAT A DIVERSIFIED PORTFOLIO WILL ENHANCE OVERALL RETURNS OR OUTPERFORM A NON-DIVERSIFIED PORTFOLIO. DIVERSIFICATION DOES NOT PROTECT AGAINST MARKET RISK. STOCK INVESTING INVOLVES RISK INCLUDING LOSS OF PRINCIPAL. PAST PERFORMANCE IS NO GUARANTEE OR PROMISE OF FUTURE SUCCESS.
A PRO FORMA 0.60% MANAGEMENT FEE WAS APPLIED TO THE GROSS PERFORMANCE OF THE GWS COMPOSITE TO ARRIVE AT NET PERFORMANCE.
THE SHARES OF EXCHANGE-TRADED FUNDS (“ETFS”) MAY TRADE AT PRICES AT, BELOW, OR ABOVE THEIR MOST RECENT NET ASSET VALUE. EQUITY SECURITIES WILL FLUCTUATE IN PRICE; THE VALUE OF INVESTMENTS IN ACCORDANCE WITH THE GWS COMPOSITE WILL THUS FLUCTUATE, AND THIS MAY RESULT IN A LOSS. SECURITIES IN CERTAIN FOREIGN COUNTRIES MAY BE LESS LIQUID, MORE VOLATILE, AND LESS SUBJECT TO GOVERNMENTAL SUPERVISION THAN IN THE UNITED STATES. THE VALUES OF THESE SECURITIES MAY BE AFFECTED BY CHANGES IN CURRENCY RATES, APPLICATION OF A COUNTRY’S SPECIFIC TAX LAWS, CHANGES IN GOVERNMENT ADMINISTRATION, AND ECONOMIC AND MONETARY POLICY. EMERGING MARKET SECURITIES CARRY SPECIAL RISKS, SUCH AS LESS DEVELOPED OR LESS EFFICIENT TRADING MARKETS, A LACK OF COMPANY INFORMATION, AND DIFFERING AUDITING AND LEGAL STANDARDS.
AN INVESTMENT IN BONDS CARRIES RISK. IF INTEREST RATES RISE, BOND PRICES USUALLY DECLINE. THE LONGER A BOND’S MATURITY, THE GREATER THE IMPACT A CHANGE IN INTEREST RATES CAN HAVE ON ITS PRICE. SELLING A BOND BEFORE IT REACHES ITS MATURITY MAY RESULT IN A LOSS UPON ITS SALE. BONDS ALSO CARRY THE RISK OF DEFAULT, WHICH IS THE RISK THAT THE ISSUER IS UNABLE TO MAKE FURTHER INCOME AND PRINCIPAL PAYMENTS. OTHER RISKS, INCLUDING INFLATION RISK, CALL RISK, AND PRE-PAYMENT RISK, ALSO APPLY. HIGH YIELD SECURITIES (ALSO REFERRED TO AS “JUNK BONDS”) INHERENTLY HAVE A HIGHER DEGREE OF MARKET RISK, DEFAULT RISK, AND CREDIT RISK.
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