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.