During the first quarter of 2018, the best performing asset classes were emerging markets, international small, and 5-year global bonds. Emerging markets had the only positive return for the quarter. The following chart shows the 3-month, 1-year, and 5-year performance of many DFA funds (representing different asset classes) compared to the S&P 500 Index:
Market Returns for the period ending March 31, 2018
|DFA Fund / Index||3 Month Return||1 Year Return*||5 Year Return*|
|S&P 500 Index||-0.76||13.99||13.31|
|DFA U.S. Large Value||-2.35||12.21||12.65|
|DFA U.S. Small||-1.52||8.75||11.61|
|DFA U.S. Small Value||-2.34||6.13||9.90|
|DFA Real Estate (REITs)||-6.99||-2.45||6.34|
|DFA Int’l Large||-0.99||15.52||6.46|
|DFA Int’l Large Value||-1.33||17.45||7.29|
|DFA International Small||-0.38||19.70||10.32|
|DFA Int’l Small Value||-2.26||16.11||10.37|
|DFA Emerging Markets Core||1.68||22.14||5.27|
|DFA 5-Year Global Bonds||-0.37||0.83||1.38|
|DFA Inflation Protected Bonds||-1.11||0.63||-0.15|
*Note: Returns for periods greater than 1 year are annualized. Top 3 returns are in bold.
The world’s investment markets took a different—and some would say more normal—turn in early 2018, exhibiting real volatility for the first time in over a year and offering positive and negative surprises to investors. Prices fluctuated a lot more than they did last year and did not climb in the steady pattern we saw in 2017. This is more typical of how the investment markets usually operate, swinging up and down on new and unexpected news. The steady climb upward of 2017 was an anomaly when compared to most other years.
So far, we have seen a jump in prices in the early weeks of January, a plunge in February on fears of rising inflation and higher interest rates, a recovery, and then another plunge in March on fears of a global trade war. The imposition of tariffs on imports by the United States, and the potential for retaliation by other countries, are a serious threat to the economy, and the markets were rational in their response, driving down stock prices on fears that U.S. exporters would earn less money. It is worth remembering the devastating effects of the Smoot-Hawley Tariffs of 1930, a series of protectionist measures that greatly exacerbated the Great Depression. There was hope at the end of the quarter that cooler heads would prevail and prevent a trade war; if not, we may be faced with additional economic and investment market instability.
So far this year our style of investing is a little behind major market indexes. What does this mean for your portfolio? It may be helpful to review our investment philosophy: We are asset class investors. We don’t try to predict winning stocks or winning segments of the economy. We hold mutual funds that invest in broad swathes of the world’s stock and bond markets. However, we do have a bias: We like value stocks. Our portfolios tilt toward stocks whose market prices are low compared to the inherent value of each company issuing the stocks. Growth stock investing, on the other hand, emphasizes expensive, fast-growing companies (these days, think technology: Apple, Amazon, Google, and Netflix, for example).
We emphasize value investing because long-time investment experience—and many years of academic investment research—seems to show that value stocks outperform growth stocks in the long run. Value investing made a legend out of Warren Buffett, for example. Research shows that value stock indexes consistently beat growth stock indexes over time. But there are plenty of shorter periods, sometimes extending for a number of years, when growth beats value. We saw one such period during the last half of the 1990s, when growth Internet stocks gained strongly and left value stocks behind. We are seeing another period right now. In fact, research by the value investors at Tweedy, Browne Co. show that “underperforming an index 30% to 40% of the time is a normal part of long-term investment success.” The company says “it appears to be normal” for successful value investment managers to occasionally lag the Standard & Poor’s 500 Stocks Index. In order to benefit from value investing, you have to “stick with it through good and not-so-good periods over a long period of time,” the company says. We did so in the late 1990s and early 2000s, when a brutal bear market crushed growth stocks and left value stocks relatively unscathed. We will continue to do so now, in anticipation that we will be rewarded in the future.
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Thank you for your continued trust and confidence. Feel free to reach out if you need anything.
Enjoy the spring weather!
About Christopher Jones
Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.