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Institutional investors are mostly a skeptical group. By institutional, I mean those of us that manage large pools of other people's money. Institutional investors manage mutual funds, pension funds, profit sharing plans, charitable foundations, etc. They like to have solid reasons to commit investment capital, and ideally, at a valuation that provides a margin of safety. However, there are risk and return expectations for institutional investors. Not surprisingly, clients expect that your investment results will be competitive against both your peers and the market benchmarks. Remaining on the sidelines is not an option. Institutional clients have Investment Policy Statements that govern how their assets are invested and managed within a prescribed return requirement and risk tolerance. A pension fund that needs a 7% return over time to meet its future benefit obligations also has an obligation to its current beneficiaries that limits the investment risk the fund can take in the near term. Its investment manager has to balance both of these mandates. Invest aggressively enough to meet the longer term return target, but control the shorter term volatility of the fund's value.
Once upon a time, investors could reliably earn mid to high single-digit returns on investment grade bonds, and high single-digit to low double-digit returns on equities. Achieving expected returns was not an uncomfortable effort. We affectionately refer to this time period as the pre-financial crisis era. Times changed. Post-financial crisis interest rates fell to zero and traditionally lower risk asset class returns fell with them. This obviously had implications for investment managers and investors. The shift towards riskier asset classes in search of greater return was on, by necessity. Of course, this was the goal of much lower interest rates. Investors were extremely cautious during this time period, so central banks did everything possible to revive risk-taking. The acronym TINA, or "There Is No Alternative" was born. If a pension fund, or personal retirement account in the case of an individual investor, had any hope of reaching its long-term return targets without increasing contributions or decreasing benefits, it would require a greater allocation to equities, high yield, or some other exposure to higher risk than a treasury or investment grade bond. There was no alternative. I can't count the number of times I heard "TINA" uttered by investment managers bemoaning necessary asset allocation decisions they would rather not have made at the time. But guess what? "TINA" turned out to be right. At a time when no one wanted to take risk, risk was the right call. Investors were too skeptical during the early 2010s.
In our last Investment Insight, published at the end of October, we discussed how the healthy consumer has carried the economy during 2019, while manufacturing and business activity slowed. We pointed to early signs of a turn in the manufacturing trend and suggested that a change may be underway. Interest rate cuts and hints of positive trade talks appeared to be working through the global economy in a constructive fashion.
Markets have responded to these hints of data. Cyclical stocks began to outperform defensive stocks beginning in mid-August. The US Treasury yield curve began to steepen about the same time. We openly wondered if these market trend shifts were sustainable, or head fakes, especially where global trade headlines were concerned. Now, with another several weeks of economic data available, the idea of a positive shift in global manufacturing has become more reliable. Major economies remain under the neutral 50 level on their manufacturing surveys, but the overall pattern now strongly suggests a sustainable turn is underway. For the Global and China Manufacturing PMIs, the levels have actually moved above 50 into expansion once again.
Certainly monetary and fiscal stimulus across the globe are tailwinds and part of the trend change. But so are the trade and geopolitical headlines. News of a Phase One trade deal between the U.S. and China has significantly reduced measures of uncertainty. Even though details are not fully known, and more work needs to be done, the shift to a constructive and less-adversarial tone has been enough to excite markets. The absence of escalation is enough for now. The Federal Reserve's trade uncertainty index measure has fallen significantly.
Now, will the next quarterly measure of CEO confidence at the end of December show a rebound commensurate with the trade index improvement? A return of business confidence should lead to a return of business spending. The consumer should remain healthy. So should the housing market. Current GDP growth expectations for 2020 might prove too low should business and manufacturing catch up with the consumer and housing sectors.
This backdrop of an improving global trade environment takes us to the second part of our Investment Insight title for this month. The decade began with "TINA", or "There is No Alternative", when it came to equity investing allocations. Investment managers bought stocks out of necessity to produce needed returns when interest rates on investment grade bonds were near zero. It turned out they were overly concerned about risk at the time. We are past "TINA" today. Even though interest rates are still historically low, they are high enough to offer some return in a lower risk alternative investment.
Today, the acronym is FOMO, or "
Fear
of
Missing
Out". The S&P 500 Index will post a 30%-plus return for 2019 if current levels hold or move higher during these last few calendar days. Those skeptical institutional investors are now less skeptical but more worried about how they will stack up against their peers and market benchmarks as the year draws to a close. They are trying to capture every little bit of return between now and December 31. Are they overly concerned with chasing returns today?
We are working on our economic and market outlook for 2020, and will be visiting many of our markets during the first quarter to present this information to you in person. It promises to be interesting. All roads point to excellent stock and bond market returns for 2019, and economic momentum into 2020. But economics and markets don't always go hand-in-hand. Returns this year were produced by higher valuations and an ultimately accommodative Federal Reserve. How might that change in 2020? Throw in a U.S. Presidential Election and there will be no shortage of excitement.
Please reach out to your local IBERIA Wealth Advisors or IBERIABANK contact to see if we will be visiting your market in 2020.
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Executive Vice President, Director of Equity Strategies
Tracy joined the IBERIA Wealth Advisors team in September 2010 and has over 20 years of investment management experience. She has a broad background in fiduciary asset management which includes portfolio management for high net worth individuals and institutions, asset allocation policy making, investment management consulting, equity research, and equity and fixed income trading. Tracy manages client accounts across the IBERIA Wealth Advisors footprint and oversees the construction and management of IWA's three proprietary equity strategies, Dividend Focus, Growth Focus, and Total Return. She serves as a member of the IWA Asset Allocation Council and chairs the IWA Investment Policy Council. Tracy is a frequent speaker on economic and investment topics within the community and authors many of IWA's investment publications. She has been included twice in the Birmingham Business Journal's Table of Experts Series. Tracy graduated from the University of Alabama with a Bachelor of Science degree in finance and is a CFA Charterholder. She is a member of the CFA Institute of Alabama and has a Series 65 license. She has served as an industry mentor for the CFA Student Research Teams from both The University of Alabama and Samford University. Tracy is a past member of the Episcopal Dioceses of Alabama Finance Department and the University of Alabama at Birmingham (UAB) Finance Department Advisory Board. She is currently a Board member for Girls, Inc. of Central Alabama.
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Disclosures
Views are as of the date above and are subject to change based on market conditions and other factors. The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.
The information contained in this presentation has been compiled from third party sources and is believed to be reliable, but its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. This information does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities or sectors listed. Diversification and asset allocation do not assure a profit nor protect against loss.
The actual return and value of an account fluctuate and, at any time, the account may be worth more or less than the amount invested. Past performance results are not indicative of future results.
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Presentation is prepared by: IBERIA Wealth Advisors
Copyright © 2019, by IBERIA Wealth Advisors; All rights reserved.
Investment Products: * Not FDIC Insured * Not a Bank Deposit
* Not Insured By Any Federal Government Agency * No Bank Guarantee * May Lose Value
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