Commentary Archive 2015

Commentary Archive 2015 background

Commentary Archive 2015

Disclosure

Performance results are based on estimates. Although the information contained in the commentary sections have been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. Past performance is not necessarily indicative of future results. Different types of investments involve varying degrees of risk.

FOURTH QUARTER 2015

  • The Large Cap Institutional Equity composite gained 5.28%, underperforming the Russell 1000 Growth benchmark by 2.04%.
  • The All Cap Growth Equity composite gained 0.34%, underperforming the Russell 3000 Growth benchmark by 6.75%.
  • The Mid Cap Equity composite gained 2.82%, underperforming the Russell Midcap Growth benchmark by 1.30%.
  • The SMID Cap Equity composite lost 2.16%, underperforming the Russell 2500 Growth benchmark by 5.97%.
  • The Small Cap Equity composite lost 2.28%, underperforming the Russell 2000 Growth benchmark by 6.60%.by 4.65%.
  • The Latin America Equity composite gained 2.82%, outperforming the Russell Latin America benchmark by 5.10%.
  • The Americas Equity composite gained 2.32%, underperforming the MSCI All Cap Americas Index by 3.05%.

The stock market's recent weakness brings price volatility, which is challenging for our process and can negatively impact performance. However, once a clear trend emerges, whether bull or bear, the process has the capability to recognize and adapt to emerging sector, group, and/or individual stock leadership. In the weeks ahead, we will be monitoring our Defensive Index and other risk-off environmental indicators. Should the market develop the characteristics of a more enduring period of market weakness, our investment process is designed to adapt the portfolio to a more defensive and relative strength-oriented posture. As always, Hanseatic will continue to stick to our proprietary investment process and disciplines to guide portfolio management.

Hanseatic Market Commentary

It was a lackluster 2015 for the stock market with the S&P 500 managing a total return of just 1.4% but losing 0.7% excluding dividends. However, the outperformance of a few large stocks masked the weakness in most stocks; the average stock in the S&P 500 was down around 4%. Performance of stocks in 2015 reflected the bifurcated economy as secular growth sectors (Technology, Healthcare, and Consumer Discretionary) generated positive returns while the cyclical sectors (Energy, Materials, and Industrials) performed poorly. Large capitalization stocks trumped mid and small cap stocks by a large margin. Also, it is notable that high yield stocks underperformed stocks without dividends. 2015: a chaotic and unsettling year for investments across the spectrum.

Much of the weak stock market internal measures that have prevailed over much of 2015, and continue into 2016, relate to the pervasive weakness in the energy sector caused by the collapse of crude oil. With prices now below $32, oil has sunk below the $33.87 closing low that was registered at the bottom of the 2008 financial crisis. As steep as the current decline has been from a 2011 peak price of $116, the 2008 crash in crude oil was even more precipitous. From a peak price of $150, oil plummeted 77% over a six month period. Of course, a major difference was that everything collapsed in 2008, while in the current environment energy stocks are a distinct negative outlier.

Beyond the impact on the energy sector, oil prices impact capital spending, the Industrials, credit markets, overall S&P 500 earnings and emerging markets. The supply/demand equation for oil is complex, and geopolitical factors now play a major role in energy outcomes. But after two consecutive down years for energy stocks, and painful cuts by energy companies in capital spending, jobs and dividends, we believe there is a good chance investors will begin to discount a recovery in the months ahead.

For 2016, especially with all the early turmoil, an obvious concern is whether a bear market is on the horizon, or as some suggest already begun. Historically, bear markets have been triggered by the discounting of recession that begins in succeeding months or by the Fed aggressively raising interest rates and having the unintended effect of tipping the economy into recession.

The U.S. economy is bifurcated: manufacturing is in recession while the service part of the economy is robust. The ISM Manufacturing Index for December declined for the second month in a row, and now stands at the lowest level since June, 2009. Manufacturing is the victim of low energy prices, a strong dollar and weak global demand. In contrast the broader economy as indicated by the measures of the services economy, employment, housing, auto sales and consumer balance sheets are relatively healthy.

In addition to the growing service sector, which is a much larger part of the economy than industry, there is another key factor that likely precludes economic contraction or a bear market in the foreseeable future - the yield curve. According to the Bespoke Investment Group ("BIG"); a consistent characteristic of US recessions has been an inverted yield curve (yield on 3-month treasuries exceeds 10-year note yield). According to BIG, while there have been instances when the yield curve inverted and a recession did not follow, every recession has been preceded by an inverted yield curve. The current yield curve is quite positive.

Headwinds for the current market include valuations which by any measure are a bit stretched, and the poor relative performance of small and mid cap stocks. While high valuation levels may limit market potential, they by themselves don't end bull markets. As to the issue of smaller stock performance, we see both small and mid cap stocks at the lower end of their performance range relative to the S&P 500, which has been quite cyclical in nature during the bull market.

All in all we believe there is a good chance for revival of equities in the months ahead. Our internal models currently assess the probability of a bear market around 35%, higher than any previous period in the recent bull market, but still not the dominant probability.

Hanseatic Quarterly Composite Commentary

Large Cap Institutional Equity

The Large Cap Institutional Equity composite's fourth quarter underperformance was derived from relative underperformance in five of ten sectors. Healthcare and Technology were the two most notable sectors detracting 1.26% and 0.95% respectively from the relative performance. Materials, Telecom and Financials also detracted with a combined relative loss of 0.51%. Energy, Staples, Industrials and Consumer Discretionary contributed 0.23%, 0.15%, 0.10%, and 0.10% respectively to relative performance. The portfolio is overweight Technology, Consumer Discretionary and Industrials and underweight Healthcare.

October proved to be the most challenging month during the quarter, with November outperforming and December modestly lagging the benchmark. During the quarter earnings related news, primarily guidance hurt several stocks in the portfolio. Some examples include Fortinet Inc. (FTNT), Aaron's Inc. (AAN), and Skechers U.S.A., Inc. (SKX). On October 23rd, Fortinet released solid third-quarter results, but followed with underwhelming guidance and the stock was down ~20% that day. Fortinet was purchased on January 20, 2015 at ~$31 and sold on November 3, 2015 ~$35 and is now trading at ~$29. On October 30th Aaron's stock price fell ~36% after the rental and leasing services company missed analysts' estimates and lowered guidance for the full year. Aaron's was purchased on October 8, 2015 at ~$39 and sold November 3, 2015 at ~$25 and is now trading at ~$21. On October 23rd, Skechers dropped by ~46% after its quarterly results disappointed Wall Street. Skechers was purchased on September 23, 2015, at ~$48 (split adjusted price) and sold on October 27, 2015, at ~$31 and is now trading at ~$28. These three stocks detracted 0.71% from quarterly performance. Coupled with strong negative reactions to earnings, several underperforming stocks not held in the portfolio rallied sharply.

All Cap Growth Equity

The All Cap Growth Equity composite's fourth quarter underperformance was derived from relative underperformance in eight of ten sectors. Healthcare, Technology, Consumer Discretionary, and Industrials were the four most notable sectors detracting 2.01%, 1.80%, 1.36% and 0.69% respectively from the relative performance. Staples, Materials, Financials and Telecom also detracted with a combined relative loss of 1.19%. Energy and Utilities modestly offset relative performance by 0.25% and 0.05% respectively. The portfolio is overweight Technology, Financials, Energy and Industrials and underweight Healthcare, Materials, Consumer Discretionary and Telecom.

October proved to be the most challenging month during the quarter with November modestly outperforming and December lagging the benchmark. During the quarter earnings related news, primarily guidance, hurt several stocks in the portfolio. Some examples include Skechers U.S.A., Inc. (SKX), Clovis Oncology, Inc. (CLVS), 2U, Inc. (TWOU), Papa John's International Inc. (PZZA), BofI Holding, Inc. (BOFI), Virtusa Corporation (VRTU), and Fortinet Inc. (FTNT). On October 23rd, Skechers dropped by ~46% after its quarterly results disappointed Wall Street. Skechers was purchased on December 22, 2014, at ~$19 (split adjusted price) and sold on October 27, 2015, at ~$31 and is now trading at ~$28. On November 16th Clovis Oncology plunged nearly 70% after the company announced that the Food and Drug Administration had asked for additional clinical data for its efficacy analysis of its lung-cancer treatment candidate rociletinib. Clovis was purchased on July 7th at ~$85 and sold on December 2nd at ~$32 and is now trading at ~$28. On October 12th 2U shares fell nearly 18% on strong volume with more shares changing hands than in a normal session. This continued the recent downtrend for 2U after they announced preliminary Q2 results on October 5th, the stock was now down nearly 34% over the past month. 2U was purchased on September 1st at ~$34 and sold on October 20th at ~$24 and is trading at ~$24. On November 4th, Papa John's shares were down ~14% after its quarterly results and outlook disappointed Wall Street. Papa John's was purchased on September 24, 2014 at ~$51 and sold on November 18, 2015 ~$55 and is now trading at ~$49. On October 14th BofI was down 30% on alleged wrongdoing reported by the New York Times. The New York Times reported that one of the bank's former auditors sued the bank for firing him "after revealing what he believed to be wrongdoing at the bank to federal regulators and management at Bank of Internet." Bofl was purchased on July 1, 2015 at ~$27 and sold on October 20, 2015 ~$24 and is now trading at ~$18 (all pricing is split adjusted). On November 4th, Virtusa reported its financial results delivering EPS of $0.50 and revenue of $143 million, beating analyst estimates of $0.34 in EPS and $142 million in revenue and the stock was down ~10% that day. Virtusa was purchased on October 27, 2015, at ~$57 and sold on December 18, 2015, ~$43 after declining ~25% and is now trading at ~$42. On October 23rd, Fortinet released solid third-quarter results, but followed with underwhelming guidance and the stock was down ~20% that day. Fortinet was purchased on October 20, 2015 at ~$44 and sold on November 3, 2015, ~$35 and is now trading at ~$29. These seven stocks detracted 2.54% from quarterly performance. Coupled with strong negative reactions to earnings, several underperforming stocks not held in the portfolio rallied sharply.

Mid Cap Equity

The Mid Cap Equity composite's fourth quarter underperformance was derived from relative underperformance in six of ten sectors. Most notable was the relative underperformance in Technology, Consumer Discretionary and Healthcare detracting 0.66%, 0.63%, and 0.32% respectively. Industrials, Materials and Telecom detracted a combined 0.51% from relative performance. Consumer Staples, Financials, Energy and Utilities contributed 0.27%, 0.25%, 0.15% and 0.14% respectively to relative performance. The portfolio is overweight Technology and Consumer Staples and is underweight Consumer Discretionary, Industrials and Materials.

SMID Equity

The SMID Equity composite's fourth quarter underperformance was derived from relative underperformance in eight of ten sectors. Most notable was the relative underperformance in Healthcare, Technology, Materials, Consumer Staples, Financials, and Consumer Discretionary detracting 2.22%, 1.19%, 0.79%, 0.68%, 0.57% and 0.56% respectively. Telecom and Utilities detracted a combined 0.08% from relative performance. Energy and Industrials were the only contributors adding 0.13% to relative outperformance. The portfolio is overweight Financials and Consumer Staples and is underweight Healthcare and Consumer Discretionary.

Small Cap Equity

The Small Cap Equity composite's fourth quarter underperformance was derived from relative underperformance in eight of ten sectors. Most notable was the relative underperformance in Healthcare and Technology detracting 3.00% and 1.71% respectively. Consumer Discretionary, Financials, Consumer Staples, and Industrials detracted 0.58%, 0.43%, 0.43% and 0.40% from relative performance. Telecom and Utilities combined detracted 0.20% from relative performance. Energy was the only contributor during the month adding 0.14%. The portfolio is overweight Financials and is underweight Healthcare and Consumer Discretionary.

Americas Equity

The Americas Equity composite's fourth quarter underperformance was derived from relative underperformance in eight of ten sectors. Consumer Discretionary, Financials, Technology, and Consumer Staples were the four most notable sectors detracting 0.96%, 0.88%, 0.64% and 0.57% respectively from relative performance. Materials, Healthcare, Telecom and Utilities also detracted a combined 0.95% from performance. Industrials and Energy modestly contributed to performance by 0.23% and 0.11% respectively. The portfolio is overweight Technology and Industrials and underweight Financials and Energy.

October proved to be the most challenging month during the quarter with November outperforming and December lagging the benchmark. During the quarter earnings related news, primarily guidance, hurt several stocks in the portfolio. Some examples include Skechers U.S.A., Inc. (SKX), Universal Insurance Holdings Inc. (UVE), BofI Holding, Inc. (BOFI), 2U, Inc. (TWOU), Fortinet Inc. (FTNT), and Papa John's International Inc. (PZZA). On October 23rd, Skechers dropped by ~46% after its quarterly results disappointed Wall Street. On November 17th Universal Insurance dropped 34% due to statements made by a hedge fund. On October 12th 2U shares fell nearly 18% on strong volume with more shares changing hands than in a normal session. On November 4th, Papa John's shares were down ~14% after its quarterly results and outlook disappointed Wall Street. On October 14th BofI was down 30% on alleged wrongdoing reported by the New York Times. The New York Times reported that one of the bank's former auditors sued the bank for firing him "after revealing what he believed to be wrongdoing at the bank to federal regulators and management at Bank of Internet." On October 23rd, Fortinet released solid third-quarter results, but followed with underwhelming guidance and the stock was down ~20% that day. These six stocks detracted 1.61% from quarterly performance. Coupled with strong negative reactions to earnings, several underperforming stocks not held in the portfolio rallied sharply.

Latin America Equity

The Latin America Equity composite's fourth quarter outperformance was derived from maintaining a large cash position and outperformance in Financials, Materials and Energy. The three sectors contributed 2.80%, 1.16% and 0.77% toward performance. Utilities, Technology, and Consumer Discretionary combined added 0.55% to performance. Telecom detracted 0.67% from performance during the quarter. The portfolio is overweight Industrials, and is underweight Financials, Consumer Staples, Energy, and Utilities. The portfolio maintains a high cash position at ~37%.

THIRD QUARTER 2015

  • The Large Cap Institutional Equity composite lost 7.16%, underperforming the Russell 1000 Growth benchmark by 1.87%.
  • The All Cap Growth Equity composite lost 7.69%, underperforming the Russell 3000 Growth benchmark by 1.76%.
  • The Mid Cap Equity composite lost 8.47%, underperforming the Russell Midcap Growth benchmark by 0.48%.
  • The SMID Cap Growth Equity composite lost 5.85%, outperforming the Russell 2500 Growth benchmark by 5.20%.
  • The Small Cap Equity composite lost 10.97%, outperforming the Russell 2000 Growth benchmark by 2.09%.
  • The Americas Equity composite was created on 10/01/2015 and does not have a full quarter of performance.

Hanseatic Market Commentary

The market climate changed dramatically in the third quarter as the relatively low volatility trading range that persisted for most of the calendar year devolved into a tumultuous and volatile correction over the last several weeks, for both the U.S. Equity market and global markets in general. The initial catalyst for the instability was the Chinese Central Bank decision to devalue its currency relative to the U.S. Dollar, the largest move since 1994. The intervention was widely perceived to be the opening salvo in a new round of currency wars. Fears over a China slowdown, and tepid global demand in general, further exacerbated the ongoing secular commodity bear market. The tipping point on whatever mix of risks that included China, the prospect of rising interest rates, U.S. Dollar strength, and stretched valuations came on August 24th with a chaotic rout in global stock markets. China's Shanghai Index was off more than 8%, Germany's DAX fell into bear market territory and all U.S. Indices were down over 5%.

In Mid-September the Fed revived uncertainty with its decision to leave interest rates unchanged despite strong domestic economic indicators. Rather than looking directly at the domestic economy, the Fed cited concerns about China and other Emerging Markets as well as disinflationary pressures. A couple days later Fed Chair Janet Yellen said she still expected a rare hike before the end of the year. But it seems unlikely the Fed governors will confront anything but a weak global economy anytime soon. Puzzling.

The market begins the new quarter mired in the steepest correction since 2011. The markets main concern is the slowdown in global economic growth. Portions of the U.S. economy are linked to soft global demand, including energy and commodity producers and parts of the manufacturing sector (e.g. Caterpillar). Multinational companies are negatively impacted by the strong U.S. Dollar. While the US economy remains strong beyond the realm of these two negative influences, investors are justifiably concerned that the poor economic performance of the world will increasingly weigh on the U.S.

Earnings season begins this week with Alcoa's announcement. Overall earnings are likely to be negative owing to the twin drags of depressed energy sector profits and a strong U.S. Dollar, though the latter's strength has moderated in recent months. Companies in other sectors and industry groups that have little or no overseas exposure, or are the beneficiaries of cheaper energy prices, seem well positioned for earnings season. However it plays out, expectations are very low for both analysts and investors in general. Over the last four weeks, according to the Bespoke Investment Service, analysts have cut estimates on 634 companies in the S&P 1500 and raised forecasts for just 269. In addition to the bearish sentiment of the analyst community, investors are extremely negative according to surveys. Also, Bank of America tracks the average recommended exposure to stocks recommended by Wall Street strategists. The current degree of bullishness from this indicator is close to the level observed at the market lows of March 2009. Taken together these sentiment measures suggest that market risk is quite low from a contrarian standpoint.

The secular bull market in U.S. equities is now six and one-half years old, one of the longest in history. Hanseatic has expressed concern internally that over the past year the market has exhibited some of the characteristics of late cycle historical bull markets, including increased volatility. That said, we believe that bull markets end with excess. The current bull market has been different in character in that its rise has been punctuated with sharp declines (2010, 2011, 2014, 2015) discounting various economic/monetary outcomes that would have ended the bull market. Currently, we see no evidence of the types of excesses that have ended past bull markets. The probability of the bull market surviving the current correction is fairly high. Hanseatic does not dismiss the negative deflationary global demand scenario, but we attach a low probability to that outcome.

Hanseatic Quarterly Composite Commentary

Large Cap Institutional Equity

The Large Cap Institutional Equity composite's third quarter relative underperformance was primarily derived from relative underperformance in five of ten sectors. Technology, Healthcare and Consumer Staples detracted 1.39%, 0.92% and 0.73% respectively. Consumer Discretionary and Financials each detracted a relative 0.36% during the quarter. Select stocks from Industrials, Materials and Energy were the only notable contributors, adding 0.70%, 0.65%, and 0.40% respectively in those sectors. Underexposure to Telecom also contributed 0.13% to the relative performance. The portfolio is overweight Consumer Discretionary, Healthcare, Consumer Staples and underweight Financials, Technology, and Telecom.

All Cap Growth Equity

The All Cap Growth Equity composite's third quarter underperformance was derived from relative underperformance in five of ten sectors. Technology, Consumer Staples, and Financials were the three most notable sectors detracting 1.78%, 0.50% and 0.28% respectively to the relative underperformance. Healthcare and Utilities also detracted with a combined relative loss of 0.16%. Energy, Materials, Industrials, and Consumer Discretionary contributed 0.39%, 0.22%, 0.17%, and 0.04% respectively. Underexposure to Telecom contributed 0.13% to the relative performance during the quarter. The portfolio modestly overweight Healthcare and Industrials, and underweight Materials and Telecom.

Mid Cap Equity

The Mid Cap Equity composite's third quarter underperformance was derived from relative underperformance in seven of ten sectors. Most notable was the relative underperformance in Technology, Healthcare, Financials and Consumer Staples detracting 0.92%, 0.48%, 0.45%, and 0.44% respectively. Industrials, Telecom, and Utilities also detracted a combined 0.07% from the relative performance. Materials, Consumer Discretionary, and Energy contributed 0.97%, 0.48% and 0.43% respectively to offset the relative lag. The portfolio is overweight Consumer Staples, Utilities and Healthcare, and is underweight Industrials, Materials, Financials, Consumer Discretionary and Technology.

SMID Growth Equity

The SMID Growth Equity composite's third quarter outperformance was derived from relative outperformance in eight of ten sectors. Most notable was the relative outperformance in Healthcare, Materials, Industrials, Consumer Discretionary and Technology contributing 1.37%, 1.28%, 0.97%, 0.65%, and 0.62% respectively. Energy and Financials also contributed 0.31% and 0.25% to the relative performance. Consumer Staples was the only notable underperformer detracting 0.29% from the relative outperformance. The portfolio is modestly overweight Consumer Staples and Energy, and is notably underweight Industrials, Technology, Healthcare, and Materials. The portfolio has a modestly higher than normal cash position at ~16%.

Small Cap Growth Equity

The Small Cap Growth Equity composite's third quarter outperformance was derived from relative outperformance in eight of ten sectors. Most notable was the relative outperformance in Materials, Industrials, Energy, and Consumer Discretionary contributing 0.87%, 0.78%, 0.51%, and 0.36% respectively. Financials, Telecom (underexposure) and Consumer Staples also contributed a combined 0.15% to the relative performance. Technology and Healthcare detracted 0.58% from the relative outperformance. Healthcare, Biotech and Pharma in particular, lost 5.10% during the quarter. The portfolio is overweight Financials, and is notably underweight Industrials, Technology, Healthcare, and Consumer Discretionary. The portfolio has a modestly higher than normal cash position at ~15%.

SECOND QUARTER 2015

  • The Large Cap Institutional Equity composite gained 1.56%, outperforming the Russell 1000 Growth benchmark by 1.44%.
  • The All Cap Growth Equity composite gained 1.15%, outperforming the Russell 3000 Growth benchmark by 0.88%.
  • The Mid Cap Equity composite gained 4.54%, outperforming the Russell Midcap Growth benchmark by 5.68%.

Hanseatic Market Commentary

The market maintained a tight trading range with a slight upward bias over the second quarter, an environment that has persisted throughout 2015. With the exception of the Dow Jones Industrials, most equity benchmarks managed to edge into positive territory for the year, with Mid Cap and Small Cap averages notably better than Large Cap indices. Stocks have been grudgingly pushed higher by robust merger and acquisition activity and the continued strong appetite of U.S. companies to purchase their own shares.

From a market sector perspective, performance has been decidedly mixed and subpar overall. Healthcare has been the only consistently strong sector, with selected stocks primarily in the Consumer Discretionary and Technology sectors also performing well. However there has been little thematic leadership even at the industry group level, while Energy, Materials and Utility stocks have posted notable declines over recent months. All in all, a rather tepid stock market environment.

The intermediate term bearish case rests upon a couple main factors. One, valuation measures such as P/E are historically high; trailing P/E at Q1 was about 18.5 relative to the historic average of 16.2. There is a reasonable argument that the historically low interest rate environment warrant higher valuations. In any case, let's just say stocks in general are not cheap. The other factor that gives us pause is the poor internal leadership noted previously. For the market to advance in the second half, it will need support from new leadership, not just extending the current Healthcare dominance. A potential catalyst on that front is the recent improvement in Financial stocks.

Looking ahead, the Federal Reserve has been clear that it intends to raise interest rates although there remains some uncertainty about exactly when. A rational response to the Fed trying to normalize monetary policy in a near-zero interest rate/inflation environment would be muted. But that expectation is likely naive, so expect increased market volatility at least for the near term. The most salient current observation is that the U.S. equity markets remain in a secular bull market and the probability of positive intermediate term performance is quite good.

Hanseatic Quarterly Composite Commentary

Large Cap Institutional Equity

The Large Cap Institutional Equity composite's second quarter outperformance was derived from relative outperformance in eight of ten sectors. Technology and Consumer Staples were the two most notable sectors contributing 0.97% and 0.62% respectively to the relative outperformance. Industrials, Healthcare, Financials, Materials and Telecom also contributed with a combined relative gain of 0.91%. Consumer Discretionary and Energy detracted 0.89% and 0.15% respectively. The portfolio is overweight Consumer Discretionary and Healthcare and underweight Industrials and Energy.

All Cap Growth Equity

The All Cap Growth Equity composite's second quarter outperformance was derived from relative outperformance in seven of ten sectors. Healthcare, Technology and Financials were the three most notable sectors contributing 0.62%, 0.45% and 0.31%% respectively to the relative outperformance. Consumer Staples, Industrials, Telecom and Utilities also contributed with a combined relative gain of 0.38%. Consumer Discretionary, Energy and Materials detracted 0.54%, 0.21% and 0.14% respectively. The portfolio is overweight Technology, modestly overweight Healthcare and Consumer Discretionary, and underweight Industrials, Consumer Staples, Energy and Telecom.

Mid Cap Equity

The Mid Cap Equity composite's second quarter outperformance was derived primarily from relative outperformance in six of ten sectors. Most notable was the relative outperformance in Healthcare and Consumer Discretionary contributing 1.67% and 1.03% respectively. Technology, Consumer Staples and Industrials also contributed 0.67%, 0.60% and 0.0.44% respectively to the relative outperformance. The remaining outperforming sector, Financials, contributed 0.18% to the relative gain. Energy was the only notable detractor from performance with a relative loss of 0.33%. Telecom, Materials and Utilities detracted a combined 0.12% during the month. The portfolio is overweight Technology and Healthcare and is underweight Consumer Discretionary, Industrials and Energy.

FIRST QUARTER 2015

  • The Large Cap Institutional Equity composite gained 6.02%, outperforming the Russell 1000 Growth benchmark by 2.18%.
  • The All Cap Growth Equity composite gained 7.87%, outperforming the Russell 3000 Growth benchmark by 3.82%.
  • The Mid Cap Equity composite gained 7.32%, outperforming the S&P 400 Total Return benchmark by 2.01%.

Hanseatic Market Commentary

The S&P 500 ended the first quarter with a modest gain of 0.95%. Growth stocks outperformed value, and the small and mid cap indices outperformed their large cap counterparts. By sector, Consumer Discretionary, Healthcare and Telecom were quite strong while Energy, Industrials, Financials and especially Utilities were underwater for the quarter. Underneath the market surface, there was a lot of volatility as we count seven distinct up and down price cycles during the first quarter ranging from 3-7%.

Economic activity measures in the first quarter were generally weaker than expected, topped off with a disappointing March jobs report. Job growth was significantly less than expected and data for the first two months of the year were revised downward. The question is whether the weakness in the economy goes beyond the effects of bad weather, West Coast port disruptions and slowdowns in the Energy sector. There seems to be a pattern in recent years of having a weak first quarter followed by a resumption of moderate growth in succeeding quarters. This was the case in 2010, 2011, and 2014. Also, the strong dollar and the decline in Energy prices impact the economy both positively and negatively. In what order and to what degree these forces affect economic growth is difficult to estimate. In any case, the weak tenor of the data may temper any eagerness the Fed may have to raise short term interest rates this summer.

The most notable change in stock market character has been the ascension of small cap stocks relative to large companies. Our model for judging which cap range is likely to outperform triggered a buy signal in favor of small stock in mid-December, reversing a signal in favor of large stocks in April 2014. Fundamentally, small stocks benefit from greater exposure to the domestic economy and are comparatively insulated from the negative effects of the strong U.S. dollar. Recent earnings reports from Proctor & Gamble and Microsoft noted the strong dollar as the primary cause for reduced sales revenues.

Looking forward, the most important thing to observe is that while extended in time with valuations that are moderately stretched, the stock market remains in a secular uptrend. This will of course end at some point, but the probable preconditions of a tightened monetary policy and inverted yield curve are not in place and not likely to be for some time. This macro environment does not, of course, preclude cyclical corrections.

Within the framework of secular uptrend, the market has regained a risk-off status according to our model after having flirted with a risk-off posture last fall.

Hanseatic Quarterly Composite Commentary

Large Cap Institutional Equity

The Large Cap Institutional Equity composite's first quarter outperformance was derived from relative outperformance in seven of ten sectors. Consumer Discretionary and Healthcare were the two most notable sectors contributing 0.90% and 0.89% respectively to the relative outperformance. Industrials, Consumer Staples, Materials, Financials and Telecom also contributed with a combined relative gain of almost 1%. Technology and Utilities detracted 0.37% and 0.11% respectively and underexposure to Energy also detracted 0.11% during the quarter. The portfolio is overweight Healthcare and Consumer Discretionary and underweight Energy.

All Cap Growth Equity

The All Cap Growth Equity composite's first quarter outperformance was derived from relative outperformance in eight of ten sectors. Healthcare and Consumer Discretionary were the two most notable sectors contributing 1.44% and 1.08% respectively to the relative outperformance. Financials, Technology, Consumer Staples, Materials, Industrials and Energy also contributed with a combined relative gain of 1.59%. The portfolio is overweight Healthcare, modestly overweight Technology and Consumer Discretionary, and underweight Energy, Consumer Staples, Telecom and Materials.

Mid Cap Equity

The Mid Cap Equity composite's first quarter outperformance was derived primarily from relative outperformance in seven of ten sectors. Most notable was the relative outperformance in Healthcare contributing 2.55%. Technology and Consumer Discretionary also contributed 0.88% and 0.78% respectively to the relative outperformance. The remaining outperforming sectors of Energy, Telecom, Consumer Staples and Utilities had a combined relative gain of 0.58%. Performance was penalized by underexposure to the best performing Financial and Industrial stocks detracting 1.16% and 1.05% respectively from the relative performance during the month. The portfolio is overweight Healthcare, Technology and Consumer Discretionary and is underweight Financials, Industrials, Materials, Utilities and Energy.