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First Quarter 2016: Investment Perspective

The first quarter of 2016 saw global markets sell off and rebound on a volatile round-trip. Assets with more attractive valuations were able to bounce back to new highs while those assets that started the year richly priced struggled to recover. As we discussed in last quarter’s note on “priced for perfection” and “priced for despair,” richly valued assets essentially require everything to go right to justify their high price. In contrast, attractively valued assets benefit when investors’ worst fears fail to materialize. As investors recovered from their initial panic, a newly centered view took hold: prospects for some assets were not quite as good as previously thought and the outlook for other assets was not nearly as bad. While the noise of quarterly returns can cause any given group of strategies to outperform another, the process through which the strategies diverged this quarter is consistent with how valuation influences market movements. This chart plots style portfolios, or groups of stocks emphasizing certain characteristics. Performance for the quarter is on the vertical axis and valuation is on the horizontal axis – the larger the z-score, the more attractive the style’s valuation. The commodity and value oriented emerging markets styles enclosed by the triangle performed well and are among the most attractively valued portfolios. The orange dots represent richly valued momentum strategies. The green dots are where we have overweighted portfolios.

On a quarterly basis, Hirtle Callaghan publishes our perspective on the current market.  We have included the first page of that piece below.  If you would like to receive the full perspective, please contact us.

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Fourth Quarter 2015: Investment Perspective

Emerging market stocks now stand at the cheapest valuation relative to U.S. counterparts since the Asian Crisis of 1997–1998. The litany of challenges facing emerging market investors—weak currencies, excessive debt and political crises—are similar today as then. But so too are the fundamental strengths—favorable demographics, reform potential, and entrepreneurial energy. Reflecting on 1998, there was no particular cause for optimism for emerging markets. And yet—as the chart on page 3 illustrates—investors who braved the uncertainty were rewarded with a decade of 15% annually compounded excess returns. Our case for being overweight in emerging markets today is simply that valuations at this extreme argue for it. As in 1998, markets can over-discount adverse outcomes. In fact, the catalyst for a reversal of valuation discrepancy is not one particular and unforeseen event. All that is required is that not all of the panoply of negatives come about. If investors have priced in a 50% chance of a sovereign default by Brazil, and it does not materialize, then Brazilian assets have to reprice.

On a quarterly basis, Hirtle Callaghan publishes our perspective on the current market.  We have included the first page of that piece below.  If you would like to receive the full perspective, please contact us.

Download the first page

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Third Quarter 2015: Investment Perspective

It was a tough third quarter for investing. Most major asset classes, except for bonds, saw price declines.  The sell-off in global risk assets was initiated by a sell-off in Chinese A shares. These are stocks of Chinese companies that are owned and traded within China that have limited ownership by outside investors. The shares experienced a major run-up over the past year, and the sell-off sparked fears of a major contraction in Chinese growth, capital flight, and a devaluation of the Chinese yuan. Other markets across the globe sold off in anticipation of the contagion effects this might have on the global economy and asset values. In October, markets have rallied back as China fears have moderated and the potential
for a Federal Reserve rate hike have diminished.

On a quarterly basis, Hirtle Callaghan publishes our perspective on the current market.  We have included the first page of that piece below.  If you would like to receive the full perspective, please contact us.

Download the first page

 

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Second Quarter 2015: Investment Perspective

Financial assets had mixed performance in the second quarter. The quarter was marked by two headline events — the sell-off in the Chinese “A-share” market and the tortured negotiations surrounding the bailout of Greece. While both events caused turbulence in financial markets, we believe that neither poses the risk of systemic contagion or a threat to real economic activity. Greece represents less than 2% of euro zone output, and its liabilities are predominantly held by government entities. An eventual default and exit by Greece seems unlikely to impair confidence in the euro zone and may even work to make the euro safer in the long term. We discuss the impact of the sell-off in China more fully later, but our conclusion is that the loss of wealth is confined to a small set of domestic Chinese holders.

The two episodes highlight how vulnerable global financial markets are to temporary bouts of volatility. We are extremely mindful of exogenous shocks but also careful to discern true dislocations from temporary volatility. Frequently, the volatility affords us the opportunity to reposition portfolios to more attractive long-term risk/reward positions. We continue to find value in International Developed and Emerging Market equities and Commodities.

On a quarterly basis, Hirtle Callaghan publishes our perspective on the current market.  We have included the first page of that piece below.  If you would like to receive the full perspective, please contact us.

Download the first page

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Investment Strategy Research: Statistics

Tom Cowhey, Hirtle Callaghan's Chief Strategist, often publishes reasearch relevant to current market trends and issues.  His most recent research discusses how in the near term, macro factors are once again dominating the investment markets and psyche.  In environments like these, it is easy to draw all sorts of conclusions from graphical and analytical interpretation of data.  It is also just as easy to be misled, intentionally/unintentionally, by poorly specified or spurious relationships in the data.  

At Hirtle Callaghan, we feel that valuation is a better tool for assessing the future return potential of an investment because current prices incorporate all that is "known" about the relationship between an investment and other variables.

Read Tom Cowhey's complete research article here.

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