The Fed shifts on inflation – What does it mean?
The Fed unveiled a revision to its monetary policy, allowing for higher inflation to help support the labor market. We believe this action could keep interest rates low for years.
The Fund was expected to produce lower downside participation, but instead the Fund performed in-line with the market during the downturn and outperformed on the way back up. Why?
We felt the Fund was positioned to do well in a more typical downturn. We expected the downturn to be caused by a market dislocation (such as during 2000 or 2008) where one side of the market became overloaded, the bubble popped, and then other assets outperform. Overloading generally occurs when there is great valuation disparity, which recently has been quality growth. In this downturn, the quality growth story was actually reinforced, and the economic downturn hurt cyclical value companies more versus secular stories. This prompted quick reaction by central banks across the globe. The Fund’s top performers included allocations to cash, gold and financials as well as an underweight allocation to real estate. We were pretty active during the downturn in allocating to stocks that we believe were unfairly punished, resulting in perceived relative value. We believe our relative value investment philosophy helped reposition the Fund for the rebound, and we were able to take advantage of volatility in March and April.
What environments should be favorable or unfavorable for the strategy?
The range of market outcomes is very wide right now. We believe the market is positioned for a continued low interest rate, low growth environment and the same set of stocks that performed well in the past have potential to do so again. In our view, many governments and central banks seem to be in favor of this environment. That said, if a different market environment unfolds – higher interest rates, growth or inflation, negative rates, etc. – we would expect the Fund to perform well. Additionally, a market where value stocks perform well (including energy) would be a good environment for the Fund. We believe there is overconfidence that the economic and market environment of the last 10 years will continue.
Has there been a lot of Fund turnover in the last six months? I thought the Fund had a defensive tilt since 2016?
The defensive/cyclical mix has remained approximately neutral over the last three years. We expected the valuation gap between perceived cheaper stocks and higher priced stocks to act as a “floor,” and that cheaper stocks would prove to be more defensive. Unfortunately, that outcome has not occurred. We are in an increasingly narrow market for growth stocks. Buying quality, low volatility companies has continued to do well in the market. In order for the market to broaden out, something has to break the current market trend. While COVID-19 surprised markets, it reinforced the current market trend. During the downturn, the Fund repositioned into perceived oversold stocks, which did increase turnover.
Past performance is no guarantee of future results. This information is not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 17, 2020, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This information is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.
Risk Factors: The value of the Fund’s shares will change, and you could lose money on your investment. International investing involves additional risks including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. To the extent the Fund invests a significant portion of its assets in a particular geographical region or country, economic, political, social and environmental conditions in that region or country will have a greater effect on Fund performance than they would in a more geographically diversified equity fund and the Fund’s performance may be more volatile than the performance of a more geographically diversified fund. These and other risks are more fully described in the Fund’s prospectus. Not all funds or fund classes may be offered at all broker/dealers.
The impact of COVID-19, and other infectious illness outbreaks that may arise in the future, could adversely affect the economies of many nations or the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.