The third quarter was essentially a “risk on” period as the European Central Bank’s Quantitative Easing program finally applied a tailwind to international and emerging market equities.
The FTSE World net of tax index was up 5.26% during the quarter while the US only S&P 500 Index was up 3.85%. The S&P 500 is still out pacing for the year, but the gap is significantly narrower.
Not surprisingly, growth outpaced value during the quarter.
Atlas portfolios benefited from being underweight defensive stocks (consumer staples, utilities) and overweight cyclicals (energy) as well our overweight to Asia and emerging markets.
However, those benefits were insufficient to offset the negative effect of being underweight international versus US stocks and, more importantly, our allocation to diversifiers.
In a market were equities are the strongest performers, allocations to diversifiers like the AQR Style Premia Fund or municipal bonds will hurt performance. Such was the case for Atlas during the quarter.
Speculation mounted near the end of the quarter that the Federal Reserve is getting closer to raising the Fed Funds rate.
In our opinion, we would prefer to see the Fed finally start to normalize interest rate policy as capitalist economies cannot withstand endless negative or near- zero interest rates.
With $15 trillion in global sovereign bonds currently offering negative yields, it’s difficult to see how an increase in the Fed Funds rate will do much other than strengthen the US dollar and make US Treasury 10-year notes even more attractive to foreigners. But at least the process will have started for savers and financial institutions to begin earning some yield on short-term investments.
The chart below shows our current evaluation of the choices available to global equity investors. This evaluation drives our allocation decisions.
The markets which appear most attractive for investment are in the upper right quadrant. Those country stock markets have both good value and positive momentum. The larger energy-oriented markets (Brazil, Russia, US energy sector) are there.
However, many of the equity markets in that quadrant are relatively small, so while we’ll be overweight, the resulting aggregate portfolio exposure will be modest. The remaining over weights in our current equity allocation come primarily from the markets with good value and nearly good momentum (the top of the lower right quadrant), or the markets with nearly good value and good momentum (the right side of the upper left quadrant).
As has been the case for most of the year, most of the European markets are not well positioned at present, so we remain underweight those markets.
Overall regional weights
The chart below shows the Q4 regional positioning for Atlas portfolios in relation to the weights of the benchmark global equity index.
The weighting preferences continued the trend we’ve implemented most of the year: reducing US exposure and increasing International weightings.
We’re now underweight US equities versus both benchmark and International equities. Within international, we remain underweight Europe and have increased our Asia exposure.
Atlas Capital Advisors, LLC. is a San Francisco based registered investment adviser serving ultra-high-net-worth individuals. Jonathan Tunney is the Founder and Chief Investment Officer.
Prior to founding Atlas, he was responsible for worldwide currency risk management for Hewlett Packard, managing the firm’s exposure to billions of dollars in foreign currency exchange.