Commentary Archive 2017

Commentary Archive 2017 background

Commentary Archive 2017

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 2017

Hanseatic Market Commentary

THIRD QUARTER 2017

Hanseatic Market Commentary

U.S. equity markets posted strong returns in both September and in 3rd quarter 2017. The September gain in the S&P 500 marked the sixth consecutive monthly gain on a price basis and the eleventh on a total return basis including dividends. The S&P 500 is up 14% year-to-date while the tech heavy NDX 100 index’s 2017 gain is nearly 24%. Outside of Technology; Healthcare, Industrials, and Basic Materials each have posted YTD gains between 15% and 20%. Energy and Telecom are the only sectors with negative returns -6% and -9% respectively.

We are impressed, both historically and currently, with how the U.S. equity market maintains focus on the essential underlying economic variables and their outlook. Despite the backdrop of the nuclear saber rattling from North Korea, divisive political discourse, and the economic and physical devastation from three hurricanes, the stock markets delivered impressive returns. Economic and business confidence remain strong, and corporate earnings have finally moved into the green in a major way, with double digit growth in the past two quarters and more growth expected. Expectations were quite low at the start of 2017.

The most salient feature of the U.S. equity market this year has been the persistence of the uptrend. The S&P 500 is up more than 14% YTD but maximum drawdown has been just 3%, tied for the lowest in 37 years according to J.P. Morgan. The median annual drawdown is 8%. Our studies of market behavior prior to secular bull market tops show that the weekly-monthly price time series typically exhibits increased choppiness and volatility prior to the peak. Our message is that persistent, low volatility trends do not quickly reverse and we do not believe the topping process has started yet.

Bull markets tend to peak with some degree of euphoria which is why sentiment measures can provide insight about the market environment. Currently, market data is somewhat split. Attitudinal surveys such as those supplied by Investors Intelligence indicate that investors are currently bullish which is bearish from a contrarian standpoint. But longer term sentiment measures tell a different story. A survey of fund managers by Bank of America Merrill Lynch found that they were underweight U.S. equities by the most in 10 years. Also, Investment Company Institute (ICI) data showed more than $31 billion in outflows from domestic equity mutual funds and ETFs in July and August, the largest two months of outflows since January and February 2016. According to these measures, euphoria is a ways down the road.

One of the negative criticisms about the market is that the advance is not healthy because the leadership resides in only a few large names. But looking beneath the market surface, this claim doesn’t hold up. Consider the NDX 100 market index where the combined weight of AAPL, MSFT, AMZN, Alphabet and Facebook is 42%, or the XLK, a technology ETF where 3 of the 4 FAANG stocks, AAPL, FB and GOOG are together 43% of the stock weightings. In both cases these indices are underperforming RYT, an unweighted technology ETF in which these large stocks have negligible weights. Also, our weekly/monthly trend measures for the unweighted S&P 500 are nearly as strong as the S&P 500 index which has significant weights for AAPL, AMZN, FB and GOOG/GOOGL. The point is that there is considerably more underlying strength in the markets than what is conveyed by the FAANG narrative.

The difference in performance between domestic growth and value stocks continues to persist. The S&P 500 Value index returned 2.8% for the quarter and 6.5% for the year, but the S&P 500 Growth index fared better with returns of 4.9% and 17.9% respectively. Looking back, growth in the form of tech stocks outperformed in the last half of the 90’s. Then value dominated growth over the course of the 2000-2002 bear market and up until mid-2006. The past 11 years of relative strength is certainly one of the longest periods of growth outperformance. During the slow growth economic environment of the past four years, earnings growth is at a premium while over the same period stubbornly low inflation and interest rates have restrained value stocks which primarily reside in financial and natural resource stocks. The relationship between Financials and Technology is currently the key determinant in the growth-value contest. Higher interest rates and a steeper yield curve could change this dynamic in favor of value stocks.

Outside of the U.S., the news has been good and the outlook optimistic. We noted in the Q2 commentary that global equity markets are experiencing the first synchronized secular bull market since the 2007 top and this persists. Economic growth and confidence have been improving all year and are now at multiyear highs. YTD returns for Germany, France, Spain, and Italy range from 24%-32%. Even the turmoil surrounding Spain’s Catalonian independence movement has not derailed its strong secular trend. The MSCI ACWI ex-U.S. index is up about 22% YTD, handily outperforming the S&P 500. In general, there has been strong global trade which has expanded global markets especially manufacturing and exports. In China, import demands continue to grow. However, tightening policy is expected to limit China’s current economic expansion. The labor market in Japan improved during the quarter boosting equity returns.

Emerging markets in the form of the EEM ETF are up nearly 29% YTD, as they have collectively benefited from increased global growth and, more recently, from a weaker U.S. dollar. As with Europe and Asia, stock market appreciation has largely been due to improving fundamentals, and therefore, more likely to be sustained past emerging market trends.

In conclusion, the combination of positive low volatility trends in our market models, and a favorable fundamental environment, leads to a bullish conclusion about equity markets, at least for the intermediate term. The Fed has communicated its policy intentions quite clearly which has diminished the risk of a policy error, at least for the next several months. One caveat for the short term is that technology stocks are extended and we believe have a better than normal probability of correcting in time and/or price. If so, the correction in these stocks could induce more volatility than the market has experienced in recent months.

HANSEATIC QUARTERLY COMPOSITE PERFORMANCE AND ATTRIBUTION

LARGE CAP EQUITY

The Large Cap Equity composite return was 8.83%, the Russell 1000 Growth benchmark return was 5.90%. The composite’s third quarter outperformance was derived from relative outperformance in seven of eleven sectors. Technology, Materials, Industrials, and Financials were the most notable sectors contributing 1.68%, 0.54%, 0.37%, and 0.26% respectively to the relative performance. Consumer Staples, Healthcare, and Consumer Discretionary, contributed 0.23%, 0.19%, and 0.18% respectively. Real Estate, Telecom, and Energy detracted 0.32%, 0.13%, 0.06% respectively from the relative gain. The portfolio is overweight Financials, Materials and Industrials and underweight Staples, Real Estate and Consumer Discretionary.

ALL CAP GROWTH EQUITY

The All Cap Growth Equity composite return was 7.72%, the Russell 3000 Growth benchmark return was 5.93%. The composite’s third quarter outperformance was derived from relative outperformance in six of eleven sectors. Technology, Consumer Discretionary, Materials, Industrials, Consumer Staples, and Financials contributed 1.11%, 0.77%, 0.57%, 0.38%, 0.33%, and 0.18% to the relative outperformance. Healthcare, Real Estate, Telecom, Energy, and Utilities detracted 1.22%, 0.14%, 0.10%, 0.05% and 0.05% respectively from the relative outperformance. The portfolio is overweight Materials, Financials and Technology and underweight Staples, Consumer Discretionary and Real Estate.

ALL CAP GROWTH CONCENTRATED EQUITY

The All Cap Growth Concentrated Equity composite return was 6.42%, the Russell 3000 Growth benchmark return was 5.93%. The composite’s third quarter outperformance was derived from strong performance by 4 technology stocks: Micron Technology, Inc. (MU), Advanced Energy Industries, Inc. (AEIS), NVidia (NVDA), and Cognex Corporation (CGNX) contributing 2.24%, 1.62%, 1.41%, and 1.13% to the gain for the quarter. Notable detractors were Zillow Group, Inc. (Z, Real Estate), United Continental Holdings, Inc. (UAL, Industrials), Veeva Systems Inc. (VEEV), and Ulta Beauty, Inc. (ULTA) detracting a combined 2.81%. Performance was spread evenly over the balance of stocks in the portfolio ranging from up 0.66% to down 0.30%. The portfolio is overweight Financials, Utilities, and Energy and underweight Staples and Consumer Discretionary.

MID CAP EQUITY

The Mid Cap Equity composite return was 8.95%, the Russell Midcap Growth benchmark return was 5.28%. The composite’s third quarter outperformance was derived from relative outperformance in six of eleven sectors. Technology, Healthcare, and Materials were the most notable contributing 2.57%, 1.20%%, and 0.59% sequentially to relative performance. Industrials, Utilities and Staples contributed a combined 0.40%. Relative underperformance in Financials, Real Estate, Energy, Consumer Discretionary, and Telecom ranged from 0.41% to 0.05%. The portfolio is overweight Technology, Materials, and Financials and is underweight Consumer Discretionary, Staples, Real Estate and Healthcare.

SMID EQUITY

The SMID Cap Equity composite return was 11.49%, the Russell 2500 Growth benchmark return was 5.78%. The composite’s third quarter outperformance was derived from relative outperformance in eight of eleven sectors. Consumer Discretionary, Healthcare, Tech, and Industrials were the most notable contributing 1.60%, 1.31%, 1.29%, and 1.27% respectively to relative performance. Staples, Materials, Telecom, and Utilities contributed a combined 0.56% to relative performance. Real Estate, Energy, and Financials detracted a combined 0.33% from relative performance. The portfolio is overweight Healthcare, Materials and Industrials and is underweight Staples and Real Estate.

SMALL CAP EQUITY

The Small Cap Equity composite return was 10.23%, the Russell 2000 Growth benchmark return was 6.22%. The Small Cap Equity composite’s third quarter outperformance was derived from relative outperformance in four of eleven sectors. Technology, Consumer Discretionary, Staples, and Industrials were all notable contributing 2.63%, 1.88%, 0.61%, and 0.53% respectively to relative performance. Healthcare was the only notable lag detracting 1.15% from relative performance. Financials, Energy, Materials, Real Estate, Telecom, and Utilities detracted 0.49% from relative performance. The portfolio is overweight Consumer Discretionary and underweight Healthcare, Financials and Industrials.

AMERICAS EQUITY

The Americas Equity composite return was 9.74%, the MSCI All Cap Americas Index return was 4.39%. The composite’s third quarter outperformance was derived from relative outperformance in eight of eleven sectors. Tech, Consumer Discretionary, Materials, Staples, and Financials were the most notable sectors contributing 2.02%, 1.30%, 0.80%, 0.71%, and 0.55% to relative performance. Industrials, Telecom, and Utilities contributed a combined 0.69% to the relative performance. Real Estate, Healthcare, and Energy detracted a combined 0.71% from relative performance. At the sector level, the portfolio is overweight Healthcare, Tech and Materials and underweight Energy, Staples and Financials. The portfolio is underweight developed U.S. by 6.53% and Canada by 2.50%, and overweight Latin America by 7.06%, a material increase from last quarter.

DEVELOPED MARKETS

The Develop Markets Equity composite return was 8.31%, the MSCI EAFE Index return was 4.81%. The composite’s third quarter outperformance was derived from positive performance in seven of eleven sectors. Materials, Industrials, Financials, and Tech were the most notable sectors contributing 2.43%, 2.15%, 1.15%, and 1.11% to performance. Consumer Discretionary, Energy, and Staples contributed a combined 1.54% to performance. Healthcare and Telecom detracted a combined 0.07% from performance. Utilities and Real Estate had no exposure. At the sector level, the portfolio is overweight Materials, Industrials, Tech, and Financials and underweight Staples, Healthcare, Real Estate, and Utilities. The portfolio is overweight France 8.34%, Netherlands 5.71%, Germany 4.10%, China 2.43% and South Africa 2.17% and underweight U.K. 10.01%, Hong Kong 9.40 and Switzerland 5.06%.

INTERNATIONAL

The International Equity composite return was 10.89%, the MSCI ACWI ex USA Index return was 5.51%. The composite’s third quarter outperformance was derived from positive performance in seven of eleven sectors. Financials, Materials, Tech, Energy, and Consumer Discretionary were the most notable sectors contributing 3.13%, 2.75%, 1.85%, 1.32%, and 1.16% sequentially to performance. Industrials and Telecom contributed a combined 0.74% to performance. Utilities, Real Estate and Staples had no exposure. Healthcare detracted 0.06% from performance. At the sector level, the portfolio is overweight Industrials, Utilities and Real Estate and underweight Financials and Staples. At the market level, the portfolio is overweight EM 7.56% and underweight DM 5.14%. At the country level, the portfolio is overweight Finland 11.00%, Sweden 8.94%, Denmark 7.68%, Thailand 6.92%, and Italy 5.27%; and underweight Japan 15.91%, U.K. 9.97%, Germany 6.44%, and Switzerland 6.18%.

LATIN AMERICA EQUITY

The Latin America Equity composite return was 13.53%, the Russell Latin America benchmark return was 14.84%. The composite’s third quarter lag was derived from a more defensive posture at the beginning of the third quarter. All sectors were positive except Real Estate losing 0.07% and Healthcare which had no exposure. Most notable were Materials, Utilities, and Financials contributing 4.87%, 2.34%, and 2.11% to performance. Telecom, Consumer Discretionary, Staples, Industrials, Energy, and Tech contributed a combined 4.28%. The portfolio is overweight Industrials, Utilities, and Real Estate and is underweight Financials, Staples, and Energy.

GROWTH & INCOME EQUITY

The Growth & Income Equity composite return was 4.81%, the S&P 500 Total Return benchmark return was 4.48%. The composite’s third quarter outperformance was derived from relative outperformance in seven of eleven sectors. Notable were Materials and Tech contributing 0.66% and 0.34% respectively to relative performance. Consumer Discretionary, Real Estate, Industrials, Utilities, and Staples contributed a combined 0.46% to relative performance. Financials and Healthcare were the two most notable sectors detracting 0.53% and 0.36% respectively from relative performance. Telecom and Energy detracted a combined 0.25% from relative performance. The portfolio is overweight Materials and Industrials and is underweight Healthcare, Staples and Energy.

SECOND QUARTER 2017

Hanseatic Market Commentary

U.S. equities finished both a strong second quarter and a first half of 2017. Stocks were boosted by solid corporate earnings and investor optimism about the prospects for improving economic growth. The NASDAQ paced the advance with a 14% gain in the first 6 months even as the index and technology stocks in general spent the entire month of June in correction mode. The S&P 500 gained 8.24% and the Russell 2000 gained 4.29% in the first half. The advances were broad from a sector standpoint. Within the S&P 500, Healthcare gained 16% and Technology gained 14% while most other sectors performed in line with the index. Energy was the sole loser down 18%. The S&P 500 Index (including dividends) gained every month in the first half of the year, and is up 8 months in a row for the first time since 1991. Historically, persistent consecutive monthly gains in the S&P 500 have been a reliable harbinger of further gains in the months ahead. Since 1990, there has been 10 prior instances where the market advanced more than 6 consecutive months. In each instance the market posted solid gains over the next year.

We believe the recent correction in technology stocks is healthy and likely amended some overly optimistic sentiment. This correction is ongoing and may persist a few more weeks. But our model currently has high probabilities of further gains in the tech sector. The breath-less reporting on the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) seems to suggest that these stocks are akin to the “Nifty Fifty” stock phenomenon that preceded the 1973-74 bear market and/or are so overvalued that they are in bubble territory circa 2000. Neither of these assertions are remotely accurate.

From our perspective, there are two important bullish factors taking place beneath the market surface. The first is the positive breadth in technology stocks in the ongoing secular bull market. By our model measurement, the equal weight index of technology stocks in the S&P 500 has outperformed the NDX 100 index which accords large weights to most all the FAANG stocks. The three tech stocks within FAANG have performed very well; our point is that a surprising number of other tech stocks have also delivered excellent returns.

The second significant positive market influence is the recent improvement in the industrial, healthcare, and financial sectors. After a strong rally post-election, the industrial sector has consolidated on an absolute basis, but lost ground relative to benchmarks. There is emerging leadership in capital goods/heavy industrial stocks and railroads, along with continuing performance in aerospace/defense stocks. Healthcare stocks peaked on a relative basis two years ago after four years of sustained leadership. There is considerable uncertainty about the prospect of health-care reforms, but there has been notable relative improvement in many healthcare stocks, especially within biotech. Financial stocks also topped shortly after a post-election rally, presumably on hopes of less regulatory red tape. Most all stocks in the sector have improved of late, probably helped by the recent steepening in the yield curve. Our bond models suggest the probability of higher interest rates ahead which is beneficial to this sector. We believe positive leadership across multiple sectors and industry groups is essential for a healthy secular trend.

In the second quarter, global markets were up strong led by non-US markets. The growth was broadly distributed among various countries and international indices were ahead of US indices helped by a weak US dollar. The beginning of the quarter saw a switch from emerging markets leadership to being led by developed markets, especially the EU, though much of the gains were given up in June. Japan and the emerging markets held gains for the quarter. Global political developments including in France and the UK, lead to a decline in uncertainty in Europe and an increase in uncertainty in the UK. In May, Brazilian markets corrected as bribery allegations of President Michel Temer emerged and curbed the markets enthusiasm for the pension and labor reforms. Oddly though, the second strongest country ETF is South Korea which is obviously not immune to geopolitical risk. The emerging markets equities look to be performing best helped by US dollar weakness and improving EM growth. Chinese growth is expected to slow for the rest of the year due to rising rates and a slowdown of housing and construction. This along with tighter global monetary policy is expected to lead to possible EM market volatility, though overall, looking forward to the second half of 2017, our outlook is sanguine. Our long term market model continues to display the characteristics of a low volatility persistent uptrend, attributes that are inconsistent historically with market behavior in the late stages of a secular bull market. This positive domestic outlook is supported by a synchronized bull market in global equities, the first by our estimation since 2007.

HANSEATIC QUARTERLY COMPOSITE PERFORMANCE AND ATTRIBUTION

LARGE CAP EQUITY

The Large Cap Equity composite return was 4.33%, the Russell 1000 Growth benchmark return was 4.67%. The composite’s second quarter modest lag was derived from relative underperformance in five of eleven sectors. Healthcare and Real Estate were the most notable sectors contributing 0.43% and 0.34% respectively to the relative performance. Consumer Discretionary, Materials, and Telecom, contributed 0.12%, 0.08%, and 0.03% respectively. Financials were flat relative to the benchmark returning 0.23%. Tech, Industrials, and Energy detracted 0.57%, 0.40%, 0.19% respectively from the relative gain. Staples and Utilities detracted a combined 0.17% from relative performance. The portfolio is overweight Financials, Technology and Industrials and underweight Staples and Consumer Discretionary.

ALL CAP GROWTH EQUITY

The All Cap Growth Equity composite return was 5.09%, the Russell 3000 Growth benchmark return was 4.65%. The composite’s second quarter outperformance was derived from relative outperformance in six of eleven sectors. Healthcare was again the most notable sector contributing 1.02% to relative performance with Technology adding 0.50%. Energy, Telecom, Utilities, and Staples contributed a combined 0.16% to relative performance. Underexposure to Consumer Discretionary detracted 0.74% from the relative gain. Materials, Industrials, Real Estate, and Financials detracted 0.16%, 0.15%, 0.13%, and 0.07% respectively from relative performance. The portfolio is overweight Tech, Healthcare, and Financials and underweight Staples and Consumer Discretionary.

ALL CAP GROWTH CONCENTRATED EQUITY

The All Cap Growth Concentrated Equity composite return was 6.68%, the Russell 3000 Growth benchmark return was 4.65%. The composite’s second quarter outperformance was derived from strong performance by 3 stocks: Zillow Group, Inc. (Z, Real Estate), NVidia (NVDA, Tech), and Veeva Systems Inc. (VEEV, Tech) contributing 1.73%, 1.57% and 1.18% to the gain for the quarter. Notable detractors were Advanced Energy Industries, Inc. (AEIS, Tech Semi), Continental Resources, Inc. (CLR, Energy), ONEOK, Inc. (OKE, Energy) and LCI Industries (LCII, Consumer Discretionary) detracting a combined 1.22%. Performance was spread evenly over the balance of stocks in the portfolio ranging from up 0.50% to down 0.20%. The portfolio is overweight Financials, Utilities, and Energy and underweight Staples, Healthcare, Consumer Discretionary, and Materials.

MID CAP EQUITY

The Mid Cap Equity composite return was 2.86%, the Russell Midcap Growth benchmark return was 4.21%. The composite’s second quarter underperformance was derived from relative underperformance in seven of eleven sectors. Technology, Consumer Discretionary, and Real Estate were the most notable contributing 0.51%, 0.32%, and 0.15% sequentially to relative performance. Staples were flat relative to the benchmark, detracting 0.09%. Underperformance in Healthcare, Materials, Financials, Industrials, Energy, and Telecom detracted 0.99%, 0.43%, 0.32%, 0.29%, 0.15%, and 0.12% respectively from relative performance. The portfolio is overweight Financials, Technology, Industrials, and Materials and is underweight Consumer Discretionary, Healthcare, Real Estate and Staples.

SMID EQUITY

The SMID Cap Equity composite return was 3.63%, the Russell 2500 Growth benchmark return was 4.13%. The composite’s second quarter underperformance was derived from relative underperformance in six of eleven sectors. Industrials and Consumer Discretionary were the most notable contributing 0.76% and 0.73% respectively to relative performance. Healthcare, although the strongest portfolio performer during the quarter at 1.81%, only contributed 0.03% to relative performance. Staples were relatively flat. Notable detractors were Technology, Materials, and Energy at 0.78%, 0.34%, and 0.29% respectively from relative performance. Financials, Telecom, Utilities, and Real Estate detracted a combined 0.61% from relative performance. The portfolio is overweight Technology, Industrials, and Consumer Discretionary and is underweight Real Estate and Staples.

SMALL CAP EQUITY

The Small Cap Equity composite return was 4.18%, the Russell 2000 Growth benchmark return was 4.39%. The Small Cap Equity composite’s second quarter modest underperformance was derived from relative underperformance in eight of eleven sectors. Consumer Discretionary, Healthcare, and Industrials were the most notable contributing 1.31%, 1.22%, and 0.38% respectively to relative performance. Tech was the most notable lag detracting 1.52% from relative performance. Financials, Real Estate, and Staples detracted 0.44%, 0.32%, and 0.30% sequentially from relative performance. Telecom, Materials, Energy, and Utilities detracted a combined 0.55%. The portfolio is overweight Consumer Discretionary and underweight Industrials and Real Estate.

AMERICAS EQUITY

The Americas Equity composite return was 3.59%, the MSCI All Cap Americas Index return was 2.31%. The composite’s second quarter outperformance was derived from relative outperformance in five of eleven sectors. Healthcare, Tech, and Consumer Discretionary were the most notable sectors contributing 1.44%, 0.83%, and 0.46% to relative performance. Real Estate and Telecom contributed a combined 0.31% to the relative performance. Financials, Materials, Industrials, and Utilities detracted 0.72%, 0.29%, 0.23%, and 0.22% sequentially from relative performance. Energy and Consumer Staples detracted a combined 0.30% from relative performance. At the sector level, the portfolio is overweight Tech, Healthcare, and Consumer Discretionary and underweight Energy, Staples and Financials. The portfolio is underweight developed U.S. by 2.75% and Canada by 3.46%, and overweight Latin America by 4.78%, a material decrease from last quarter.

DEVELOPED MARKETS

The Develop Markets Equity composite return was 5.33%, the MSCI EAFE Index return was 5.03%. The composite’s second quarter outperformance was derived from positive performance in six of eleven sectors. Financials, Tech, and Industrials were the most notable sectors contributing 2.20%, 1.35%, and 1.11% to performance. Healthcare, Consumer Discretionary, and Telecom contributed a combined 1.11% to performance. Materials, Energy, and Staples detracted a combined 0.43% from performance. Utilities and Real Estate had no exposure. At the sector level, the portfolio is overweight Materials, Financials, Industrials, and Tech and underweight Staples, Healthcare, Consumer Discretionary, Real Estate and Utilities. The portfolio is overweight Japan 6.87%, Netherlands 5.32%, and Germany 5.00%, and underweight U.K. 10.15% and Switzerland 5.46%.

INTERNATIONAL

The International Equity composite return was 2.04%, the MSCI ACWI ex USA Index return was 4.80%. The composite’s second quarter underperformance was derived from negative performance in four of eleven sectors. Tech, Consumer Discretionary, Industrials, and Healthcare were the most notable sectors contributing 2.60%, 1.40%, 1.04%, and 0.40% sequentially to performance. Materials, Energy, and Financials detracted 2.00%, 0.89%, and 0.50% respectively from performance. Telecom was flat and Utilities, Real Estate and Staples had no exposure. At the sector level, the portfolio is overweight Financials and Materials and underweight Staples. At the market level, the portfolio is overweight EM 10.14% and underweight DM 2.78%. At the country level, the portfolio is overweight Sweden 11.26%, Finland 11.12%, Thailand 7.90%, Denmark 7.66%, Russian Federation 5.71%, and Italy 5.70%; and underweight Japan 16.29%, U.K. 10.26%, Germany 6.54%, and Switzerland 6.32%.

LATIN AMERICA EQUITY

The Latin America Equity composite return was -4.63%, the Russell Latin America benchmark return was -1.49%. The composite’s second quarter underperformance was derived from corrections in six of eleven sectors. Most notable were Industrials and Utilities contributing 0.44% and 0.38% to performance. Telecom and Staples contributed a combined 0.17%. Financials, Energy, and Materials detracted 2.21%, 1.85%, and 0.93% sequentially from performance. Tech and Real Estate detracted a combined 0.36%. Healthcare had no exposure and was flat. The portfolio is overweight Real Estate, Industrials, Utilities, Telecom and Materials and is underweight Financials and Staples. Several stocks in the portfolio corrected sharply which impacted the quarter negatively. Cash in the portfolio is modestly higher at ~10%.

GROWTH & INCOME EQUITY

The Growth & Income Equity composite return was 3.21%, the S&P 500 Total Return benchmark return was 3.09%. The composite’s second quarter outperformance was derived from relative outperformance in six of eleven sectors. Notable were Industrials and Consumer Discretionary contributing 0.64% and 0.42% respectively to relative performance. Real Estate, Telecom, Staples, and Materials contributed a combined 0.49% to relative performance. Utilities was flat relative to the benchmark, contributing 0.05%. Healthcare and Tech were the two most notable sectors detracting 0.78% and 0.35% respectively from relative performance. Financials and Energy detracted a combined 0.31% from relative performance. The portfolio is overweight Industrials, Materials, Financials, and Utilities and is underweight Healthcare, Staples and Energy.

FIRST QUARTER 2017

Hanseatic Market Commentary

U.S. stock market indices posted strong results in Q1 of 2017; the total return for the S&P 500 was 6.1% and the NASDAQ rose 10.1% paced by an extraordinary 25% gain in Apple. Stocks are generally responding positively to the pro-business agenda emanating from the new leadership in Washington. Catalysts for the market’s advance included the promise of lower taxes and less regulation.The year 2016 was a year of surprises, confounding conventional wisdom at every turn. The year commenced with one of the worst starts ever as stocks dropped 10% during the first five weeks in response to the collapse in oil prices. But by the end of the first quarter, the market had erased all the early carnage and climbed into positive territory. Then came the election surprises, both the Brexit vote in June and the Trump election ran counter to conventional wisdom as did the resilience of the equity markets following these events. Against this chaotic and unpredictable backdrop, US Equities closed the year with healthy gains.

Most notable in Q1 was the Federal Funds rate increase in March which is the second hike in three months and the third overall since December 2015. To put this in some perspective, the December 2015 rate increase was the first monetary tightening since June 2006. Historically, Fed tightening cycles have not ended well because of policy overshoot that induced recessions and equity bear markets. In the current environment with the real 10-year treasury yield negative, we view the recent interest rate hikes as the initial steps in the process of removing the substantial monetary accommodation that has accumulated in recent years. We think that it will take considerable time before monetary policy by itself poses a substantial risk for equity markets.

The strong post-election rally has been attributed to the rising business and investor confidence tied to the pro-business policy agenda of the incoming administration which includes tax reform, regulatory relief and infrastructure spending. One could argue, however, that economic and stock fundamental improvement had already begun prior to the election. For instance, the Citigroup Economic Surprise Index which measures how economic data releases compare to the consensus expectations bottomed in October 2016. Also, aggregate S&P500 earnings also turned positive in October following a one-year earnings recession. The market itself had been trending positively since the February 2016 bottom although it corrected about 4% for the S&P500 and 7% for the Russell 2000 over the several week period leading up to the election. The point is that things were notably more constructive from an economic, earnings, and market trend standpoint compared to the 12 months prior.

Near term, there are plenty of reasons to be cautious about the U.S. stock market. Valuations are elevated from the perspective of Price/Earnings and Price/Sales ratios as well as profit margins. Retail investors who have been rather timid over much of the bull market have belatedly become bullish in recent months with near panic buying, mostly passive ETFs. The volatility index (VIX) remains very low suggesting complacency, although the recent market correction has reigned in some excess in sentiment measures. Political rancor, foreign election uncertainty, and a more hawkish Fed all have the potential to prompt a deeper pullback than the markets have experienced recently.e good odds that the current leadership can persist.

On a positive note, the fundamental driver of stock prices, earnings, are strong. According to Factset, the estimated earnings growth rate for the S&P 500 in Q1 of 2017 is 9.1%, the best reading since Q4 of 2011. A number of factors have supported the improvement including stability in energy prices and the U.S. dollar plus the fact that economic growth is on the upswing both domestically and globally.

Another positive development in Q1 was the emergence of European equities following a nearly three year bear market. Over the course of the secular decline, benchmarks for German and Spain equities declined 30% and 47% respectively. Now, despite political uncertainty and a looming banking crisis in Italy, European stocks are, from the standpoint of our model, positioned better than any time since 2012. Europe’s improvement along with current positive trends in U.S., Asian and emerging market stocks constitute the first synchronized global bull market in several years.congress. That is, to what extent will reality match the hopes and promises? Is the market priced for perfection? A valid concern in our view. Markets typically climb a wall of worry, but this currently seems in short supply.

Despite the strong overall performance of U.S. stocks in Q1, there was considerable sector rotation beneath the market surface. Energy stocks performed poorly, correcting most of their Q4 2016 appreciation. Industrial and Financial stocks in general spent most of the first quarter consolidating their gains on an absolute basis, but losing ground relative to most benchmarks. Most notable was the strong showing from technology stocks. Capitalization-weighted tech indices were strong because of Apple’s performance, but by our measures tech stock gains were equally robust measured on an unweighted basis.In conclusion, the U.S. stock market remains in a secular bull market, the second longest in market history. While long from a calendar standpoint, the market is remarkably absent the excesses in sentiment and relative valuation that have historically characterized market tops. Also, the market has only recently emerged from a 2+ year consolidation period that was in effect a cyclical bear market from a time perspective. What also seems likely from our work is that new and more focused and enduring leadership has emerged in the form of the cyclical and financial market sectors.

We continue to believe that the underlying characteristics of the uptrend in U.S. stocks are positive and from a probability standpoint can endure beyond conventional expectations.

HANSEATIC QUARTERLY COMPOSITE PERFORMANCE AND ATTRIBUTION

LARGE CAP INSTITUTIONAL EQUITY

The Large Cap Institutional Equity composite return was 8.57%, the Russell 1000 Growth benchmark return was 8.91%. The composite’s first quarter modest lag was derived from relative underperformance in six of eleven sectors. Technology and Healthcare were the most notable sectors contributing 0.99% and 0.70% respectively to the relative performance. Industrials, Materials and Telecom contributed 0.27%, 0.26%, and 0.06% respectively. Consumer Discretionary, Energy, Consumer Staples, and Financials detracted 1.08%, 0.68%, 0.48%, and 0.22% respectively from the relative gain. Real Estate and Utilities detracted a combined 0.18% from relative performance. The portfolio is overweight Industrials, Financials, and Technology and underweight Staples, Consumer Discretionary, and Healthcare.The Large Cap Institutional Equity composite return was -0.43%, the Russell 1000 Growth benchmark return was 1.01%. The composite’s fourth quarter lag was derived from relative underperformance in eight of eleven sectors. Technology was the most notable sector contributing 0.87% to the relative performance. Energy and Utilities contributed a combined 0.09%. Industrials, Staples, Consumer Discretionary, Materials, and Real Estate detracted 0.56%, 0.54%, 0.48%, 0.35%, and 0.26% respectively from the relative gain. Healthcare, Financials, and Telecom detracted a combined 0.21% from relative performance. The portfolio is overweight Industrials, Financials, and Energy and underweight Consumer Discretionary, Staples, and Healthcare.

ALL CAP GROWTH EQUITY

The All Cap Growth Equity composite return was 8.69%, the Russell 3000 Growth benchmark return was 8.63%. The composite’s first quarter modest outperformance was derived from relative outperformance in five of eleven sectors. Healthcare was the most notable sector contributing 1.31% to relative performance. Utilities, Materials, Telecom and Consumer Discretionary contributed a combined 0.20% to relative performance. Energy, Staples, and Industrials detracted 0.39%, 0.35%, and 0.32% respectively from relative performance. Technology, although returning 3.85% during the quarter was outpaced 0.17% by the 4.02% return in the benchmark sector. Real Estate and Financials combined detracted 0.26% from relative performance. The portfolio is overweight Financials and Energy and underweight Staples and Consumer Discretionary. Most of the other sector weights in the portfolio are in line with the benchmark +/- 1.50%.The All Cap Growth Equity composite return was -0.42%, the Russell 3000 Growth benchmark return was 1.20%. The composite’s fourth quarter underperformance was derived from relative underperformance in eight of eleven sectors. Technology was the most notable sector contributing 1.32% to relative performance. Materials and Energy contributed a combined 0.37% to relative performance. Consumer Discretionary, Healthcare, and Industrials detracted 0.91%, 0.87%, and 0.82% respectively from relative performance. Financials, Staples, Real Estate, Utilities, and Telecom combined detracted 0.73% from relative performance. Underexposure to Consumer Discretionary, Industrials and Financials were the main drivers behind the lag coupled with corrections in select Healthcare stocks. The portfolio is overweight Financials and Industrials and underweight Staples and Consumer Discretionary.

ALL CAP GROWTH CONCENTRATED EQUITY

The All Cap Growth Concentrated Equity composite return was 3.33%, the Russell 3000 Growth benchmark return was 1.20%. The composite’s fourth quarter outperformance was derived from relative outperformance in three of eleven sectors. Technology, Utilities, and Energy were the most notable contributing 4.96%, 0.63%, and, 0.54% sequentially to relative performance. Staples, Healthcare, Materials, Industrials, and Financials detracted 1.55%, 1.03%, 0.94%, 0.21%, and 0.13% respectively from relative performance. Telecom and Real Estate detracted a combined 0.09% and underexposure to Telecom contributed a modest 0.06% relatively. The portfolio is overweight Energy, Financials, Utilities, and Industrials and underweight Healthcare, Staples, and Consumer Discretionary.

MID CAP EQUITY

The Mid Cap Equity composite return was -0.95%, the Russell Midcap Growth benchmark return was 0.46%. The composite’s fourth quarter underperformance was derived from relative underperformance in eight of eleven sectors. Technology, Utilities, and Consumer Discretionary were the most notable contributing 1.02%, 0.14%, and 0.12% sequentially to relative performance. Underperformance in Staples, Materials, and Real Estate detracted 1.04%, 0.75%, and 0.46% respectively from relative performance. Financials, Energy, Healthcare, Industrials, and Telecom detracted a combined 0.50%. The portfolio is overweight Financials, Industrials, Energy, and Materials and is underweight Consumer Discretionary, Healthcare, and Staples.

SMID EQUITY

The SMID Cap Equity composite return was 1.29%, the Russell 2500 Growth benchmark return was 2.60%. The composite’s fourth quarter underperformance was derived from relative underperformance in nine of eleven sectors. Energy and Technology were the most notable contributing 0.94% and 0.62% respectively to relative performance. Industrials, Consumer Discretionary, Materials, and Financials detracted 0.95%, 0.77%, 0.45%, and 0.36% respectively from relative performance. Underexposure to Industrials, Consumer Discretionary, and Financials were the main detractors. The portfolio is overweight Energy and Tech and is underweight Consumer Discretionary, Real Estate, Healthcare, and Staples.

SMALL CAP EQUITY

The Small Cap Equity composite return was 0.79%, the Russell 2000 Growth benchmark return was 3.57%. The Small Cap Equity composite’s fourth quarter underperformance was derived from relative underperformance in eight of eleven sectors. Energy, Tech, and Staples were the most notable contributing 0.49%, 0.17%, and 0.01% respectively to relative performance. Consumer Discretionary, Materials, Healthcare, Financials, and Real Estate detracted 0.73%, 0.66%, 0.65%, 0.52%, and 0.38% sequentially from relative performance. Utilities, Industrials, and Telecom detracted a combined 0.47%. The portfolio is overweight Tech and Energy and is underweight Real Estate and Healthcare.

AMERICAS EQUITY

The Americas Equity composite return was -0.02%, the MSCI All Cap Americas Index return was 2.85%. The composite’s fourth quarter underperformance was derived from relative underperformance in nine of eleven sectors. Tech was the most notable sector contributing 2.27% to relative performance. Energy contributed a modest 0.30% to the relative performance. Healthcare and underexposure to Financials were the two most notable sectors detracting 1.94% and 1.44% sequentially from relative performance. Consumer Discretionary, Materials, Staples, Industrials, Utilities, Telecom, and Real Estate detracted 0.55%, 0.39%, 0.37%, 0.36%, 0.19%, 0.13%, and 0.10% respectively from relative performance. At the sector level, the portfolio is overweight Tech, Industrials, Materials, and Financials and underweight Staples, Consumer Discretionary, Telecom, and Real Estate. The portfolio is underweight developed U.S. and Canada by 13%, and overweight emerging markets by 11%.

LATIN AMERICA EQUITY

The Latin America Equity composite return was 2.43%, the Russell Latin America benchmark return was -1.68%. The composite’s fourth quarter outperformance was derived from consistent performance across six of eleven sectors. Most notable were Financials, Materials, Utilities, Energy, Industrials, and Consumer Discretionary contributing 1.64%, 1.15%, 0.55%, 0.49%, 0.35%, and 0.08% sequentially to performance. Tech, Staples, Real Estate and Telecom detracted 0.96%, 0.71%, 0.21%, and 0.16% respectively from performance. Healthcare had no exposure and was flat. The portfolio is overweight Industrials, Utilities, Real Estate, and Materials and is underweight Financials, Staples, Telecom, Consumer Discretionary, and Energy.

GROWTH & INCOME EQUITY

The Growth & Income Equity composite return was 3.89%, the S&P 500 Total Return benchmark return was 3.82%. The composite’s fourth quarter outperformance was derived from relative outperformance in six of eleven sectors. Notable were Technology, Energy, Healthcare, and Materials contributing 0.89%, 0.77%, 0.51%, and 0.34% respectively to relative performance. Utilities and Industrials contributed a combined 0.10% to relative performance. Real Estate and Financials were notable detracting 1.17% and 0.59% respectively from relative performance. Consumer Discretionary, Staples, and Telecom detracted a combined 1.00% from relative performance. The portfolio is overweight Materials, Financials, Utilities, and Industrials and is underweight Staples and Telecom.