Commentary Archive 2018

Commentary Archive 2018 background

Commentary Archive 2018

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 2018

Hanseatic Market Commentary

Stocks ended 2018 in negative territory, the worst performance since 2008 and only the second negative year over the past decade. The S&P 500 and NASDAQ averages closed the year down 6% and 1% respectively, while small caps lost 12%. Treasury bonds also dropped for the year as did commodities. December was a particularly awful month; the S&P 500 was down 9% and the Dow industrials lost 8.7%, the worst December for the latter average since the Great Depression almost ninety years ago. The S&P 500 had been up 10% in late September before sliding 20% into the Christmas Eve low. By our reckoning, 1946 was the last comparable late year selloff.

Given the strong performance over the first nine months of 2018, it certainly would not have been surprising for stocks to languish some or trade sideways through the last quarter, but recent market behavior has been outside of our expectations. The market declines over the past three months and in December are very low probability events, but that doesn’t change the fact that they have been both costly and stressful.

December in particular has exacted a toll on investor confidence. Investors have yanked $75 billion from mutual funds and exchange traded funds that track stocks during the month, the biggest exodus from stock funds in a single month ever according to Lipper data going back to 1992. Also, according to a recent American Association of Individual Investors recent survey, only 32% of investors expected prices to rise over the next six months.

In addition to performance woes, 2018 was also notable for its extreme volatility. There have been only seventeen extreme overbought readings in the volatility index (VIX) by our measure since 1990. Four of those occurred in the past year making 2018 the most volatile in almost thirty years.

The proximate cause of the most recent selloff was the Fed decision to raise interest rates in late December. While expected, the rate decision and Chairman Powell’s subsequent commentary about its balance sheet reduction program being on “autopilot” conveyed a Fed that was oblivious to market realities and wrongheadedly risking a recession by tightening monetary policy too quickly. Federal Reserve Bank of New York President Williams did a commendable job after the meeting by making it clear that “autopilot” may have been a poor choice of words. But the damage was done. In recent days, however, there has been a shift in the Fed’s rhetoric. Speaking to economists on January 4, Chairman Powell raised the possibility of a pause in the Fed’s interest-rate hiking campaign and an alteration in its balance sheet reduction plans in response to the downside risks investors perceive to the economy. The latest shift in the Fed’s tone is significant. The forward equity market outlook is certainly more positive with a flexible data-driven monetary policy than a Fed that automatically raises rates because that was their plan from a year ago.

Market volatility will likely persist at least in the early part of 2019 as investors digest the multiple forces impacting corporate earnings, interest rates and the economy. Trade policy will likely remain a significant uncertainty. Potential escalation of US-China trade tensions, including more and bigger tariffs, are a key risk to corporate profits as the recent Apple report makes clear. It is likely that more companies with international earnings exposure will also lower forward earnings guidance. There are also significant risks in the European economies that can have a serious impact on the global economy. There are the Brexit and Italy issues of course, but perhaps of more concern is the recent decline of German business confidence measures. If Germany, which is the locomotive of the Eurozone, were to slow then what happens to the rest of Europe?

In the context of all the downside volatility and potential risks, it is understandable that investor sentiment measures are depressed and anxiety increased. On the other side of the coin, there is positive news. A welcome respite from the downbeat of bad news was the December employment report which showed that employers added the most workers in 10 months, wage gains accelerated and labor-force participation jumped. If the job numbers hold up through revisions (next 2 months) this will be the second-best year for employment since 2000. Across-the-board strength in the job market will support further gains in consumer spending, the biggest part of the economy. This is a clear signal that the economy is on solid footing even as the markets fret about a potential trade war and other risks.

Another positive for the economy is that inflation and interest rates remain low. The uptick in wages is not a significant inflation problem and commodity markets have been weak over the last several months. Interest rates are also low. With the recent “flight to quality” rally in bond prices (lower yields), the 10-year Treasury is again trading below the psychological barrier of 3%.

An important positive for the equity market is that valuations have become more attractive. Stock valuations rose to levels well above historical averages as the market advanced over the first three quarters of 2018. But the combination of strong earnings, low interest rates and falling prices have restored P/E ratios to more “normal” levels. Also, stocks at their December lows were down about as much as we have historically seen in non-recessionary bear markets, which is what we believe this is. Non-recessionary bear markets also occurred in 1987, 1990, 1998 and 2011. Technical and sentiment measures are extremely negative, which is a plus from a contrarian viewpoint. Gas prices are down and consumer financial health is more positive than it has been in a long time. Corporate buyback activity is robust, supported by strong corporate balance sheets.

In conclusion, there is no doubt that this has been a challenging time for investors. The kind of market weakness we have recently experienced is alarming and perhaps especially troublesome because there seems to be a disconnect between the fears embedded in market behavior and the quite positive economic and financial environments. Though we cannot rule out more near-term turbulence, we believe there are plenty of catalysts to make 2019 a positive year for stocks.

HANSEATIC QUARTERLY STRATEGY PERFORMANCE AND ATTRIBUTION

LARGE CAP EQUITY (LG)

The Large Cap Equity strategy return was down 22.39%, the Russell 1000 Growth benchmark return was down 15.89%. The strategy’s fourth quarter underperformance was derived from relative underperformance in five of eleven sectors. Communication Services, Industrials, and Financials contributed 1.01%, 0.34%, and 0.10% respectively to the relative performance. Real Estate and Staples contributed a combined 0.05%. Healthcare, Tech, Energy, Consumer Discretionary, and Materials detracted 2.66%, 2.41%, 1.63%, 1.24%, and 0.07% respectively from relative performance. Utilities had no impact. The portfolio is overweight Consumer Discretionary and Healthcare and underweight Communication Services.

ALL CAP GROWTH EQUITY (AG)

The All Cap Growth Equity strategy return was down 21.48%, the Russell 3000 Growth benchmark return was down 16.33%. The strategy’s fourth quarter underperformance was derived from relative underperformance in five of eleven sectors. Utilities, Materials, Staples, and Industrials were the only sectors that were relatively flat during the quarter, from down 0.01% to up 0.02%. Communication Services contributed 1.02% to relative performance. Real Estate and Financials contributed a combined 0.13% to relative performance. Healthcare, Energy, Tech and Consumer Discretionary detracted 2.27%, 2.02%, 1.04%, and 0.99% from relative performance. The portfolio is overweight Staples and Healthcare, and underweight Tech and Communication Services. Cash is about 35%.

ALL CAP GROWTH CONCENTRATED EQUITY (CD)

The All Cap Growth Concentrated Equity strategy return was down 18.43%, the Russell 3000 Growth benchmark return was down 16.33%. The strategy’s fourth quarter underperformance was derived from relative underperformance in four of eleven sectors. Utilities, and Materials were the only sectors that were relatively flat during the quarter, 0% - 0.03% respectively. Communication Services, Industrials, Consumer Discretionary, Staples, and Real Estate contributed 2.01%, 0.36%, 0.35%, 0.29%, and 0.07% to relative performance. Healthcare, Energy, Financials, and Tech detracted 2.56%, 1.79%, 0.78%, and 0.07% from relative performance. The portfolio is overweight Materials, and underweight Tech, Communication Services, and Consumer Discretionary. Cash is about 45%.

ALL CAP TAX EFFICIENT EQUITY (TE)

The All Cap Tax Efficient Equity strategy return was down 18.69%, the Russell 3000 benchmark return was down 14.30%. The strategy’s fourth quarter underperformance was derived from relative underperformance in seven of eleven sectors. Utilities was the only sector that was relatively flat during the quarter -0.03%. Communication Services, Staples, Real Estate, and Materials contributed 0.91%, 0.71%, 0.28%, and 0.04% to relative performance. Energy, Healthcare, Industrials, Tech, Consumer Discretionary, and Financials detracted 2.46%, 1.40%, 1.09%, 0.90%, 0.35%, and 0.11% from relative performance. The portfolio is overweight Healthcare and Tech, and underweight Financials, Communication Services, and Consumer Discretionary. Cash is about 18%.

MID CAP EQUITY (MC)

The Mid Cap Equity strategy return was down 22.38%, the Russell Midcap Growth benchmark return was down 15.99%. The strategy’s fourth quarter underperformance was derived from relative underperformance in six of eleven sectors. Industrials, Materials, Real Estate and Communication Services contributed 0.97%, 0.20%, 0.11%, and 0.09% respectively to relative performance. Utilities were flat during the quarter. Healthcare, Energy, Consumer Discretionary, Tech, Consumer Staples and Financials detracted 3.10%, 2.12%, 1.23%, 0.93%, 0.22%, and 0.17% from relative performance. The portfolio is overweight Consumer Staples and Healthcare and is underweight Industrials and Tech. Cash is about 16%.

SMID EQUITY (SM)

The SMID Cap Equity strategy return was down 23.43%, the Russell 2500 Growth benchmark return was down 20.08%. The strategy’s fourth quarter underperformance was derived from relative underperformance in six of eleven sectors. Notable were Industrials, Financials, Tech, Real Estate, and Communication Services respectively contributing 0.93%, 0.82%, 0.61%, 0.28%, and 0.21% to the relative gain. Energy, Consumer Discretionary, Healthcare, and Consumer Staples detracted 2.59%, 1.40%, 0.82%, and 0.48% sequentially from relative performance. Utilities and Materials detracted a combined 0.12% from relative performance. The portfolio is overweight Healthcare, Industrials, Financials, Consumer Staples, and Tech while underweight Utilities. Cash is about 34%.

SMALL CAP EQUITY (SC)

The Small Cap Equity strategy return was down 21.37%, the Russell 2000 Growth benchmark return was down 21.65%. The Small Cap Equity strategy’s fourth quarter outperformance was derived from relative outperformance in seven of eleven sectors. Financials, Healthcare, Communication Services, Real Estate and Staples contributed 0.87%, 0.61%, 0.49%, 0.41% and 0.32% respectively to relative performance. Materials and Tech contributed a combined 0.10% to relative performance. Energy and Consumer Discretionary detracted 1.20% and 0.77% from relative performance. Industrials and Utilities detracted a combined 0.56% from the relative performance. The portfolio is overweight Tech and underweight Industrials, Healthcare, Consumer Discretionary, and Financials. Cash is about 33%.

DEVELOPED MARKETS (DM)

The Developed Markets Equity strategy return was down 11.98%, the MSCI EAFE Index return was down 12.86%. The strategy’s fourth quarter outperformance was derived from performance in Utilities by 0.18%. Real Estate and Communication Services had no exposure. Consumer Discretionary, Industrials, Healthcare, Energy, Tech and Materials detracted 4.58%, 2.01%, 1.85%, 1.74%, 1.02% and 0.66% sequentially from performance. Financials and Consumer Staples detracted a combined 0.29% from performance. At the sector level, the portfolio is underweight Financials, Industrials, and Healthcare. The portfolio is overweight Belgium 2.44% and Israel 1.72%; and underweight United Kingdom 15.41%, Japan 9.24%, Germany 8.78%, Switzerland 8.74%, and Australia 6.98%. Cash is about 45%.

INTERNATIONAL (IN)

The International Equity strategy return was down 12.20%, the MSCI ACWI ex USA Index return was down 11.81%. The strategy’s fourth quarter underperformance was derived from performance in Utilities by 0.52%. Real Estate and Communication Services had no exposure. Consumer Discretionary, Energy, Industrials, Healthcare, Tech and Financials detracted 3.13%, 2.49%, 2.47%, 2.01%, 1.06% and 0.71% sequentially from performance. Materials and Staples detracted a combined 0.84%. At the sector level, the portfolio is overweight Utilities and underweight Financials, Industrials, Staples, and Communication Services. At the market level, the portfolio is underweight EM 4.91% and underweight DM 42.41%. At the country level, the portfolio is overweight Brazil 9.95%; and underweight United Kingdom 9.67%, Japan 8.06%, and China 7.08%. Cash is about 41%.

LATIN AMERICA EQUITY (LA)

The Latin America Equity strategy return was down 8.06%, the Russell Latin America Index return was 0.91%. The strategy’s fourth quarter underperformance was derived from underexposure and a larger than normal cash position. Most notable were Utilities and Consumer Discretionary contributing 1.41% and 0.16% respectively to performance. Industrials, Energy, Materials, Consumer Staples, and Communication Services detracted 3.06%, 2.61%, 2.28%, 0.86%, and 0.67% sequentially from performance. Financials detracted 0.15% and there was no exposure to Real Estate, Tech or Healthcare. The portfolio is overweight Utilities; and is underweight Financials, Staples, and Communication Services. Cash is about 31%.

GROWTH & INCOME EQUITY (GI)

The Growth & Income Equity strategy return was down 13.57%, the S&P 500 Total Return Index return was down 13.52%. The strategy’s fourth quarter underperformance was derived from relative underperformance in four of eleven sectors. Notable were Healthcare, Communication Services, and Financials contributing 0.98%, 0.95%, and 0.54% respectively to relative performance. Industrials, Staples, Utilities, and Tech contributed a combined 0.25% relative performance. Consumer Discretionary, Energy, Materials, and Real Estate detracted 1.34%, 0.62%, 0.56%, and 0.26% respectively from relative performance. The portfolio is overweight Materials and slightly overweight Utilities while it is underweight all other sectors. Cash is about 39%.

THIRD QUARTER 2018

Hanseatic Market Commentary

U.S. stocks performed well in the third quarter, led by a 9% advance in the Dow Industrials and 7+% gains in the S&P 500 and Nasdaq Strategy indices. The Russell 2000 small cap index rose 3.3% after a strong 7.5% gain in the second quarter. The individual stock returns among the Dow Industrials are indicative of the breadth of the leadership during the quarter, independent of a few very large tech stocks plus Amazon. Among the Dow stocks with > 10% gains for the quarter were Pfizer, Walgreens, Merck, Visa, Caterpillar, Disney and Boeing. All in all, a fairly broad representation of industry groups. The S&P 500 gain of 7.2% (7.7% including dividends) was the biggest quarterly gain for the index since the fourth quarter of 2013 and its best third quarter performance since 2010.

The strong performance of the U.S. economy clearly underpinned the strength in the equity markets. GDP grew at a robust 4.2% pace in the second quarter, and expectations are for around 3% growth in the third quarter according to Bloomberg consensus forecasts. Manufacturing activity continues to be strong with ISM’s Purchasing Manager index at a 14-year high in August. Job growth remains steady and is accelerating, albeit moderately. Business confidence is also very strong, and the improving labor market has boosted consumer confidence to the highest level since 2000.

Earnings growth is also supportive of the market. With tax reform as a partial catalyst, second quarter earnings grew over 20%. For the third quarter, the estimated earnings growth is above 19% according to Factset, which if realized will mark the third highest earnings growth since Q1 2011.

The Fed raised interest rates as expected at its September meeting, marking the eighth hike of the expansion. Consensus expectations are that the Fed will continue on a gradual trajectory of interest rate hikes. Updates to the Fed’s outlook for rates (“dot plots”) by FOMC members indicate a probable fourth hike this year in December and a median forecast of three hikes in 2019. The Fed’s path to normalcy in monetary policy seems appropriate given the strength in employment and continued benign inflation. But as we enter a more mature phase of the tightening cycle, the Fed’s response to the economic growth/inflation tradeoff will be pivotal for financial markets.

Some conventional wisdom warns that rising interest rates will choke off growth. But that concern misses an essential distinction: whether rates are rising as the result of aggressive Fed tightening or not, and whether or not the central bank is trying to catch up to inflation. Today, rising rates are not being driven by the Fed since monetary policy is neutral. Higher rates are being driven by a strong economy rather than by higher inflation expectations. The real Fed funds rate is only marginally above zero. Financial conditions are optimal.

While the economy is clearly not in recession, the essential question is whether we are headed toward one. The Conference Board’s Index of Leading Economic Indicators (“LEI”), up 0.9% in August suggests not. Of the ten components of the LEI, the slope of the yield curve (generally when yields on short term Treasury instruments are higher than those of long term investments, e.g. the 10-year Treasury note yield) is the best single recession predictor. While the yield curve has become flatter, it isn’t inverted. Even when it does invert, there is often still a significant lead time before we enter a recession.

International stocks have had a very different performance profile in 2018 compared to US stocks. With the notable exception of Japan, most all equity markets outside the US have negative returns in 2018.

China has trade conflicts with the US, rising debt levels, and a cooling economy. By our measures, the Chinese stock indices are all in bear market territory. The UK’s Brexit deadline in March 2019 looms with seemingly no compromise between a “no-deal” Brexit and a path that in some form preserves access to the common market. The Eurozone itself, besides the Brexit issue, has Italy challenging the EU’s budget rules and threatening a replay of the Greece crisis but with more dire consequences. European stock markets reflect these problems with Germany, Italy, and Spain markets all more than 15% of their January 2018 peaks. France has held up much better.

Emerging markets as broadly expressed by various indices are now more than 20% off their January 2018 peak. Our model for one part of the emerging market spectrum, Latin America, is showing tangible signs of bottoming and looks to have very little downside risk.

On the negative side for US stocks, internal market conditions have become less favorable because the leadership of technology stocks as well as small cap stocks in general has been reversed over the past couple months. Sector rotation during a bull market is perfectly normal, and in this instance, tech leadership has been replaced in good measure by strong performance for stocks in the healthcare sector and the industrial sector. While the markets have performed well this year, two important sectors, financial and energy, have been laggards. Energy stocks have begun to improve and financial stocks may perform better with moderate increases in interest rates.

There is little doubt that the most significant risk to both the economy and the equity markets is the uncertainty over tariff issues between the US and China. Trade tensions overall were reduced considerably by the announcement of the revised NAFTA agreement (USMCA) with Canada and Mexico. The merits of the new agreement for the US are up for debate, but in any case it takes a risk and uncertainty off the table. But the most important of the administration’s trade negotiations is with China. A prolonged trade dispute with China poses significant risk for the US and global economy, with consequences that cannot be forecast. A more optimistic view would be that the threatened US tariff policies are essentially negotiating tactics that will result in concessions that will lead to lower tariffs, and trade with China that is more protective of US intellectual property.

Looking forward we remain positive about the return-risk profile for the stock market. The most important thing to bear in mind in our view is that this is a strong secular bull market that is underpinned by good fundamentals. Monetary policy is supportive and there is minimal risk of recession. This is a positive environment for owning stocks.

HANSEATIC QUARTERLY COMPOSITE PERFORMANCE AND ATTRIBUTION

LARGE CAP EQUITY (LG)

The Large Cap Equity strategy return was 10.25%, the Russell 1000 Growth benchmark return was 9.17%. The strategy’s third quarter outperformance was derived from relative outperformance in three of eleven sectors. Healthcare, Technology, and Energy contributed 1.37%, 0.69%, and 0.65% respectively to the relative performance. Communication Services, Staples, and Consumer Discretionary detracted 0.54%, 0.39%, and 0.23% respectively from performance. Financials, Industrials, Materials, and Real Estate detracted a combined 0.46% from relative performance. The portfolio is overweight Tech, Energy, and Healthcare and underweight Communication Services.

ALL CAP GROWTH EQUITY (AG)

The All Cap Growth Equity strategy return was 3.69%, the Russell 3000 Growth benchmark return was 8.88%. The strategy’s third quarter underperformance was derived from relative underperformance in nine of eleven sectors. Real Estate, Utilities, Energy, and Materials were the only sectors that were relatively flat during the quarter. Tech, Healthcare, Consumer Discretionary, and Industrials detracted 1.90%, 0.98%, 0.70%, and 0.65% respectively from relative performance. Communication Services, Staples, and Financials detracted a combined 0.93% from relative performance. The portfolio is overweight Energy, Tech, and Healthcare, and underweight Communication Services.

ALL CAP GROWTH CONCENTRATED EQUITY (CD)

The All Cap Growth Concentrated Equity strategy return was 3.69%, the SPDR S&P 500 ETF Trust (SPY) benchmark return was 7.17%. The strategy’s third quarter underperformance was derived from weak performance by 4 stocks: Weight Watchers International, Inc. (WTW, Consumer Discretionary), Micron Technology, Inc. (MU, Technology), QEP Resources, Inc. (QEP, Energy), and Copart, Inc. (CPRT, Industrials) detracting 2.29%, 0.87%, 0.84%, and 0.61% respectively from the quarterly performance. Weight Watchers beat expectations and raised full-year guidance but lost subscribers. The market did not react kindly and the stock declined until early September. Notable contributors were Veeva Systems Inc. (VEEV, Technology), NVIDIA Corporation (NVDA, Technology), WellCare Health Plans, Inc. (WCG, Healthcare), and IDEXX Laboratories, Inc. (IDXX, Healthcare) contributing 2.76%, 1.43%, 1.37%, and 0.84% to the gain for the quarter. The balance of portfolio holdings contributed in a range from up 0.61% to down 0.47%, with 17 winning stocks and 11 losing stocks during the quarter. The portfolio is overweight Technology, Healthcare, and Industrials and underweight Communication Services and Staples.

ALL CAP TAX EFFICIENT EQUITY (TE)

The All Cap Tax Efficient Equity strategy return was 5.96%, the SPDR S&P 500 ETF Trust (SPY) benchmark return was 7.17%. The strategy’s third quarter underperformance was derived from poor performance in 3 stocks: Wynn Resorts, Limited (WYNN, Consumer Discretionary), Micron Technology, Inc. (MU, Tech), and Applied Materials, Inc. (AMAT, Tech) detracting a combined 2.05% from the relative gain. Notable contributors during the quarter were Fortinet, Inc. (FTNT, Tech), Zebra Technologies Corporation (ZBRA), and Credit Acceptance Corporation (CACC, Financials) contributing a combined 3.43% to relative performance. The balance of portfolio holdings contributed in a range from up 0.64% to down 0.45%, with 22 winning stocks and 9 losing stocks during the quarter. The portfolio is overweight Tech, Industrials, and Energy and underweight Communication Services, Utilities, and Healthcare.

MID CAP EQUITY (MC)

The Mid Cap Equity strategy return was 11.10%, the Russell Midcap Growth benchmark return was 7.57%. The strategy’s third quarter outperformance was derived from relative outperformance in five of eleven sectors. Healthcare, Tech, Financials, Consumer Discretionary, and Energy contributed 2.00%, 0.97%, 0.79%, 0.59%, and 0.56% respectively to relative performance. Relative underperformance in Communication Services, Industrials, Staples, Real Estate, and Materials ranged from -0.58% (Communication Services) to -0.03% (Materials). The portfolio is overweight Healthcare and Energy and is underweight Industrials and Materials.

SMID EQUITY (SM)

The SMID Cap Equity strategy return was 6.58%, the Russell 2500 Growth benchmark return was 7.17%. The strategy’s third quarter underperformance was derived from relative underperformance in six of eleven sectors. Notable were Tech, Staples, and Energy respectively contributing 1.35%, 0.54%, and 0.43% to the relative gain. Utilities and Materials contributed a combined 0.22% to relative performance. Healthcare, Communication Services, Financials, and Consumer Discretionary detracted 1.60%, 0.59%, 0.58%, and 0.32% sequentially from relative performance. Industrials and Real Estate detracted a combined 0.05% from relative performance. The portfolio is overweight Energy, Tech, and Utilities and is underweight Financials and Industrials.

SMALL CAP EQUITY (SC)

The Small Cap Equity strategy return was 6.56%, the Russell 2000 Growth benchmark return was 5.52%. The Small Cap Equity strategy’s third quarter outperformance was derived from relative outperformance in five of eleven sectors. Tech and Industrials were notable contributing 2.20% and 1.12% respectively to relative performance. Energy, Financials, Materials, and Communication Services contributed a combined 0.50% to relative performance. Consumer Discretionary detracted 2.47% from relative performance. Healthcare, Utilities, Real Estate and Staples detracted a combined 0.31% from the relative gain. The portfolio is overweight Tech, Energy, and Consumer Discretionary and underweight Financials.

DEVELOPED MARKETS (DM)

The Develop Markets Equity strategy return was 0.47%, the MSCI EAFE Index return was 0.76%. The strategy’s third quarter underperformance was derived from negative performance in five of eleven sectors. Consumer Discretionary and Healthcare contributed 0.73% and 0.39% respectively to performance. Industrials, Utilities, and Communication Services, contributed a combined 0.16% to performance. Materials, Staples, and Tech detracted 0.30%, 0.23%, and 0.15% sequentially from performance. Energy and Financials detracted a combined 0.13% from performance. Real Estate had no exposure. At the sector level, the portfolio is overweight Energy and Tech and is underweight Financials. The portfolio is overweight Israel 4.51% and Netherlands 3.45%; and underweight Switzerland 8.31%, UK 8.31%, and Germany 7.38%.

INTERNATIONAL (IN)

The International Equity strategy return was -0.49%, the MSCI ACWI ex USA Index return was 0.03%. The strategy’s third quarter underperformance was derived from negative performance in five of eleven sectors. Healthcare and Utilities contributed 0.44% and 0.22% respectively to performance. Industrials, Communication Services, and Financials contributed a combined 0.09% to performance. Energy, Tech, and Consumer Discretionary detracted 0.36%, 0.34%, and 0.32% sequentially from performance. Materials and Staples detracted a combined 0.23%. Real Estate had no exposure. At the sector level, the portfolio is overweight Energy and Materials and underweight Financials, Staples, and Communication Services. At the market level, the portfolio is underweight EM 14.42% and underweight DM 6.13%. At the country level, the portfolio is overweight Canada 6.99%, France 3.24%, and Netherlands 2.80%; and underweight China 5.99%, Switzerland 5.70%, and UK 4.37%.

LATIN AMERICA EQUITY (LA)

The Latin America Equity strategy return was 1.03%, the Russell Latin America Index return was 4.14%. The strategy’s third quarter underperformance was derived from underexposure and a larger than normal cash position. Most notable were Energy and Materials contributing 2.15% and 0.36% respectively to performance. Industrials, Staples, Financials and Communication Services detracted 0.76%, 0.33%, 0.27%, and 0.12% sequentially from performance. There was no exposure to Consumer Discretionary, Healthcare, Tech, Real Estate, or Utilities. The portfolio is overweight cash and Industrials and is underweight Financials, Staples, and Consumer Discretionary.

GROWTH & INCOME EQUITY (GI)

The Growth & Income Equity strategy return was 3.52%, the S&P 500 Total Return Index return was 7.71%. The strategy’s third quarter underperformance was derived from relative underperformance in nine of eleven sectors. Notable were Energy and Materials contributing 0.75% and 0.20% respectively to relative performance. Healthcare, Tech, Financials, and Industrials detracted 1.54%, 1.44%, 0.51%, and 0.51% respectively from relative performance. Consumer Discretionary, Communication Services, Staples, Real Estate, and Utilities detracted a combined 1.13% from relative performance. The portfolio is overweight Energy, Consumer Discretionary, and Real Estate and is underweight Healthcare and Communication Services.

SECOND QUARTER 2018

Hanseatic Market Commentary

U.S. equities advanced in the second quarter despite rising trade tensions among the United States, China, Canada, Mexico and the European Union. Economic data was supportive as the unemployment rate reached an 18-year low of 3.8% accompanied by robust wage growth. Robust first-quarter earnings reports also helped push stock markets higher.

The tech-oriented Nasdaq gained over 6%, only to be bested by the Russell 2000 small cap index which rose by almost 7.5%. The S&P 500 advanced 2.9% while the Dow Industrials lagged with a 0.7% gain.

For the first half of 2018, returns among the major equity indices and underlying sectors were mixed. Despite the net positive performance by the broad averages in 2018, seven of the eleven industry sectors are negative for the year. The Consumer Discretionary and Technology sectors were the strongest with gains just over 10% while the Consumer Staples and Telecom sectors posted negative returns of around 10%.

At the year’s mid-point, the US has handily outperformed the rest of the world’s equity markets. Europe and Japan are down 2.4% over the first half and emerging markets are down 7.4%. This is despite the Fed engaging in a modest tightening of monetary policy while the central banks in Europe and Japan are still easing. The outperformance of the US shares relative to the rest of the world is also notable because the consensus view has been that non-US markets had better valuations and more attractive forward return profiles than US stocks. Now, hopes of a prolonged synchronized period of global growth seem to have lessened because of weaker than expected data out of Europe and China.

The six month sideways consolidation in most markets and the divergent sector performance has coincided with increased economic and market risks. The economic expansion remains solid, but there are certainly risks that could negatively impact continued growth. By far the largest and most prominent risk to the economy is the escalation in trade war rhetoric, which reduces global demand, raises prices and eventually leads to lower investment. A second potential risk, and to some extent, a corollary to strong economic growth is tighter labor markets and inflation. Job openings are now the best in the history of the available data (Dec. 2000) and reflects the fact that there simply isn’t enough available skilled labor within the US economy. Labor markets are like any other product market, and the cost of labor will generally increase when the demand for labor outstrips supply. Tight labor markets have implications for Fed policy as well as profit margins.

While volatility has moderated in the second quarter after a tumultuous first quarter saw an end to the abnormal calm of 2017, it is unlikely that the markets will have the luxury of low volatility in the months ahead. One reason to expect bouts of volatility is the generally tighter monetary policy and rising interest rates. Ten Year Treasury yields have been rising and have now breached a multi-decade downtrend. Also 2-10 and 10-30 yield curves have been flattening and could invert in the months ahead. Past instances of yield curve inversions have been reliable recession signals. Another potential source of volatility and risk is that mid-term election uncertainty has historically been the catalyst for larger than average market drawdowns. Given the nature of current political discourse, seatbelts may be in order.

Looking ahead, with the market risks described above duly noted, we retain our positive market outlook for the months ahead. Despite rhetoric that is uncomfortable for investors, we believe that both the United States and China each care about their respective self-interests. Shutting off trade channels between the two countries would inflict economic harm to both and is in neither’s best interest. In addition, the amount of stimulus going into the US economy from tax cuts and deficit spending dwarfs the value of the tariffs announced to date. Also, the risk of recession remains quite low.

More important for us than the external news environment, our market models generally remain in positive low volatility trends which have historically tended to persist. Also, we have yet to observe warning signs from our internal risk models.

HANSEATIC QUARTERLY COMPOSITE PERFORMANCE AND ATTRIBUTION

LARGE CAP EQUITY (LG)

The Large Cap Equity composite return was 6.16%, the Russell 1000 Growth benchmark return was 5.76%. The composite’s second quarter outperformance was derived from relative outperformance in four of eleven sectors. Healthcare, Energy, Industrials, and Staples were the most notable sectors contributing 1.78%, 0.43%, 0.32%, and 0.12% respectively to the relative performance. Tech, Consumer Discretionary, Materials, and Real Estate detracted 1.29%, 0.54%, 0.24%, and 0.11% respectively from performance. Financials and Telecom detracted a combined 0.09% from relative performance. The portfolio is overweight Energy and underweight Tech.

ALL CAP GROWTH EQUITY (AG)

The All Cap Growth Equity composite return was 9.21%, the Russell 3000 Growth benchmark return was 5.87%. The composite’s second quarter outperformance was derived from relative outperformance in seven of eleven sectors. Energy and Consumer Discretionary contributed 1.28% and 1.24% to relative performance. Financials, Healthcare, Staples, Industrials, and Tech contributed a combined 1.10%. Materials, Real Estate, Telecom, and Utilities detracted 0.16%, 0.09%, 0.02%, and 0.01% respectively from relative performance. The portfolio is overweight Energy and underweight Tech.

ALL CAP GROWTH CONCENTRATED EQUITY (CD)

The All Cap Growth Concentrated Equity composite return was 4.64%, the SPDR S&P 500 ETF Trust (SPY) benchmark return was 3.09%. The composite’s second quarter outperformance was derived from strong performance by 2 stocks: Weight Watchers International, Inc. (WTW, Consumer Discretionary) and WellCare Health Plans, Inc. (WCG, Healthcare) contributing a combined 4.09% to the relative outperformance. Notable detractors were Northrop Grumman Corporation (NOC, Industrials) and Morgan Stanley (MS, Financials) detracting a combined 1.20% from the relative gain. The balance of portfolio holdings contributed in a range from up 0.74% to down 0.26%, with 11 winning stocks and 13 losing stocks during the quarter. The portfolio is overweight Industrials and Materials and underweight Staples.

ALL CAP TAX EFFICIENT EQUITY (TE)

The All Cap Tax Efficient Equity composite return was 1.80%, the SPDR S&P 500 ETF Trust (SPY) benchmark return was 3.09%. The composite’s second quarter underperformance was derived from poor performance in 3 stocks: National Instruments Corporation (NATI, Tech), Applied Materials, Inc. (AMAT, Tech), Alnylam Pharmaceuticals, Inc. (ALNY, Biotech) detracting a combined 1.72% from the relative gain. Notable contributors during the quarter were Diamond Offshore Drilling, Inc. (DO, energy), PBF Energy Inc. (PBF, energy), and SVB Financial Group (SIVB, Financials) contributing a combined 2.06% to relative performance. The balance of portfolio holdings contributed in a range from up 0.47% to down 0.38%, with 19 winning stocks and 14 losing stocks during the quarter. There was a corporate action during the quarter which resulted in a modest loss, 0.05%. Wyndham Worldwide Corporation (WYN, Consumer Discretionary) spun off into two entities: Wyndham Destinations, Inc. (WYND, Consumer Discretionary) and Wyndham Hotels and Resorts, Inc. Both resulting holdings were sold because of the lack of historical data. The portfolio is overweight Tech, Industrials, and Energy and underweight Healthcare and Utilities.

MID CAP EQUITY (MC)

The Mid Cap Equity composite return was 3.29%, the Russell Midcap Growth benchmark return was 3.16%. The composite’s second quarter outperformance was derived from relative outperformance in four of eleven sectors. Energy, Healthcare, Industrials, and Staples contributed 0.72%, 0.63%, 0.49%, and 0.19% respectively to relative performance. Relative underperformance in Consumer Discretionary, Tech, Materials, Financials, Real Estate, and Telecom ranged from -0.68% (Consumer Discretionary) to -0.05% (Telecom). The portfolio is overweight Energy and is underweight Tech.

SMID EQUITY (SM)

The SMID Cap Equity composite return was 10.53%, the Russell 2500 Growth benchmark return was 5.53%. The composite’s second quarter outperformance was derived from relative outperformance in eight of eleven sectors. Notable were Energy, Staples, and Real Estate respectively contributing 2.79%, 0.99%, and 0.76% to the relative gain. Tech, Telecom, Utilities, Consumer Discretionary, and Financials contributed a combined 2.18% to relative performance. Healthcare, Industrials, and Materials detracted 0.84%, 0.67%, and 0.20% sequentially from relative performance. The portfolio is overweight Energy and is underweight Industrials.

SMALL CAP EQUITY (SC)

The Small Cap Equity composite return was 11.80%, the Russell 2000 Growth benchmark return was 7.23%. The Small Cap Equity composite’s second quarter outperformance was derived from relative outperformance in eight of eleven sectors. Energy, Healthcare, Tech, Telecom, Consumer Discretionary, and Utilities were all notable contributing 1.52%, 1.12%, 0.78%, 0.72%, 0.60%, and 0.53% respectively to relative performance. Materials and Staples contributed a combined 0.16% to relative performance. Industrials, Real Estate, and Financials detracted 0.71%, 0.14%, and 0.01% sequentially from relative performance. The portfolio is overweight Tech and underweight Industrials and Healthcare.

DEVELOPED MARKETS (DM)

The Develop Markets Equity composite return was -2.84%, the MSCI EAFE Index return was -2.34%. The composite’s second quarter underperformance was derived from negative performance in seven of eleven sectors. Consumer Staple and Energy contributed 0.69% and 0.65% respectively to performance. Financials, Industrials, Materials, and Consumer Discretionary detracted 1.26%, 1.21%, 0.59%, and 0.57% sequentially from performance. Tech, Healthcare, and Telecom detracted a combined 0.55% from performance. Utilities and Real Estate had no exposure. At the sector level, the portfolio is overweight Energy and underweight Financials. The portfolio is overweight China 3.40% and Netherlands 3.30%; and underweight Germany 7.56%, Switzerland 6.13%, Japan 4.25%, and Hong Kong 3.64%.

INTERNATIONAL (IN)

The International Equity composite return was -4.60%, the MSCI ACWI ex USA Index return was -3.59%. The composite’s second quarter underperformance was derived from negative performance in eight of eleven sectors. Energy contributed 0.94% to performance. Financials, Materials, and Consumer Discretionary detracted 2.74%, 0.86%, and 0.71% sequentially from performance. Tech, Staples, Telecom, Industrials, and Healthcare detracted a combined 1.22%. Utilities and Real Estate had no exposure. At the sector level, the portfolio is overweight Energy and Materials and underweight Financials, Staples, and Industrials. At the market level, the portfolio is underweight EM 3.26% and underweight DM 14.17%. At the country level, the portfolio is overweight China 5.60% and Canada 3.30%; and underweight Japan 5.85%, Switzerland 3.73%, and Korea 3.67%.

LATIN AMERICA EQUITY (LA)

The Latin America Equity composite return was -17.03%, the Russell Latin America Index return was -17.57%. The composite’s second quarter modest outperformance was derived from increasing cash. Almost all sectors performed negatively during the quarter. Most notable were Industrials, Financials, Energy, and Materials detracting 4.17%, 3.40%, 3.11%, and 1.96% respectively from performance. Utilities, Telecom, Staples, Consumer Discretionary, and Tech detracted a combined 4.43%. Real Estate contributed a very modest 0.04% to performance. Brazil and Latin American stocks are the weakest country and international benchmark respectively in terms of second quarter 2018 performance. In early May, Brazilian stocks, and by extension Latin American stocks, began a waterfall decline, sinking 22% over a six week period. The primary catalyst for the slump in stocks was a truck driver strike which paralyzed the economy and raised political uncertainty. Trade tensions and a strong US Dollar also hurt performance.

Latin American stocks are currently very oversold by our measures, and should benefit from a reversion retracement move even in the least favorable scenario. Also, emerging markets in general are perceived to be very attractive from a valuation standpoint (J.P. Morgan Global Equity Views 2Q 2018). The portfolio is overweight cash and is underweight Financials and Staples.

GROWTH & INCOME EQUITY (GI)

The Growth & Income Equity composite return was 2.13%, the S&P 500 Total Return Index return was 3.43%. The composite’s second quarter underperformance was derived from relative underperformance in five of eleven sectors. Notable were Energy, Financials, and Staples contributing 1.18%, 0.28%, and 0.25% respectively to relative performance. Consumer Discretionary, Telecom, and Materials contributed a combined 0.27% to relative performance. Tech and Healthcare detracted 2.20% and 0.82% respectively from relative performance. Industrials, Real Estate, and Utilities detracted a combined 0.27% from relative performance. The portfolio is overweight Energy and Consumer Discretionary and is underweight Healthcare and Tech.

FIRST QUARTER 2018

Hanseatic Market Commentary

U.S. stocks fell slightly over the first quarter. The S&P 500 index lost 0.8% on a total return basis and ended a streak of nine positive quarterly returns. The return of market volatility was the most notable market feature during the quarter as the index suffered its first 10% correction since January 2016. The selloff and enhanced volatility was aggravated by the unwinding of short volatility trades by speculators who made leveraged bets on the continuation of the low volatility environment. The primary catalyst for the correction which began in early February was increased concern that the Fed would hasten its pace of rate hikes after the reports of larger than expected increases in wages. Heightened volatility continued through the end of the quarter with escalating trade tensions the primary focus.

With the announcement of steel and aluminum tariffs and the more recent tariffs of up to $60 billion on Chinese imports, trade war concerns are now at the forefront of market risks. Tariffs can bestow advantages and perhaps fairness at the micro level by leveling the playing field for US producers in this case, but they penalize everyone at the macro level. Consumers pay higher prices and exporters face smaller markets, lowering overall demand. That said, few would argue that China does not engage in a litany of unfair trade practices, but the fact is that past administrations have been unsuccessful in solving unfair trade issues with import restrictions, most recently in the early 2000s. In that case, the costs to the economy and the layoffs from U.S. companies which relied on steel imports were such that the tariffs were abandoned in 2003.

As expected, the Fed raised the Fed funds rate by another quarter of a percentage point at its March meeting. The Fed also continues with its forecast of three hikes this year. The Central Bank raised its forecast for the number of rate hikes beyond this year, implying a planned three rate hikes in 2019 and 2020. The Fed also upgraded its estimates for economic growth and inflation for 2018 and 2019. Despite the somewhat more hawkish tone from the Fed, our take is that the current monetary policy is not a threat to equity markets; rather they are likely following the market’s lead and adjusting rates in line with at least moderately better growth. Monetary policy is at this point a tailwind for growth, not a headwind.

Volatility levels have been quite high over the past two months, but certainly not unprecedented. By our measures, volatility reached similar levels in September 2015, January 2016, and late 2011. Volatility scares investors, but volatility itself isn’t necessarily bad. High volatility is an environment where the magnitude and frequency of the market’s rallies and corrections are greater than normal. From our perspective, volatility is the market’s mechanism for adjusting expectations of earnings, valuations or market risk to the perception of a new forward environment. Sometimes high volatility can be a warning sign of fundamental economic problems, something that could cause a recession. This was the case over much of the year 2000 as well as early 2008. Volatility levels in the current environment remain elevated, but in our view it likely represents an adjustment in expectations, rather than a warning of something more ominous.

The proximate cause for the decline in February seems to have been concerns about the rise in interest rates and inflation. The yield on the 10-year Treasury note has risen from about 2.4% at the end of 2017 to just above 2.8% currently. The dividend yield on the S&P 500 index is about 1.8%, so the 10-year now yields around 1000 basis points more than stocks for the first time in several years. Rising interest rates typically do not have a negative impact on stock returns, but with recent market volatility and ongoing political and geopolitical turmoil, a shift in sentiment is possible.

While stocks have historically fared well in rising rate environments, especially when interest rates are low, that has not been the case when inflation was higher, i.e. greater than 3%. According to the U.S. Labor Department, the current U.S. inflation rate is 2.2% for the 12 months ending February, 2018. The Fed prefers the Personal Consumption Expenditures Price Index which had a core inflation rate of 1.5% YOY as of January 2018.

Bear markets in stocks nearly always take place within the context of economic decline. There have been nine bear markets in the post-World War II era. Only two bear markets, 1966 and 1987, were not accompanied by recession. The 1966 selloff was provoked by excessive tightening of monetary policy that was quickly reversed. The 1987 market crash was preceded by a tighter monetary policy initiated in 1986 to combat inflation and a steep run-up in stock prices. There is little threat of recession or a meaningfully tighter monetary policy on the horizon, and certainly not the euphoria about stocks that is usually present at market tops.

The macro U.S. economic data continue to suggest positive growth, and there is optimism about the upcoming earnings season. S&P 500 companies are expected to post an 18% increase in earnings for fiscal 2018, according to analysts surveyed by FactSet. That would be the strongest annual earnings increase since 2010. Meanwhile, valuations have contracted. The forward 12-month P/E ratio for the S&P 500 is 16.1, which is exactly the 25-year average, also according to FactSet. The implication is significant: appreciation in stock prices can now be potentially driven by both earnings growth AND valuation expansion.

Finally, regarding the U.S. markets, we are also encouraged by the health of the Tech, Financial, and Industrial market sectors as measured by our models. It is notable that our trend measures for Guggenheim’s unweighted index of the S&P 500 Tech companies (RYT) is stronger than the equivalent scores for the Nasdaq 100 index and XLK Tech ETF, both of which have large weights in the so-called FAANG stocks. For us, the most important aspects of the Tech leadership has been its breadth and persistence, and very little to do with the outsized importance attributed to the FAANG stocks.

Turning to non-U.S. markets, one year ago in our Q1 2017 commentary, we noted that with the emergence of European equities from a three year bear market along with positive monthly trends in Asian and emerging market stocks, we were witnessing the first synchronized global bull market in several years. One year later that remains the case with the notable exceptions of India and Mexico. It is interesting that without exception every country ETF in our country universe has experienced the same correction/volatility profile in February/March 2018 as the U.S. equity markets. Also of note is the fact that Chinese stocks, which one year ago were relative laggards, are now the top ranked country.

HANSEATIC QUARTERLY COMPOSITE PERFORMANCE AND ATTRIBUTION

LARGE CAP EQUITY (LG)

The Large Cap Equity composite return was 5.05%, the Russell 1000 Growth benchmark return was 1.42%. The composite’s first quarter outperformance was derived from relative outperformance in seven of eleven sectors. Healthcare, Tech, Financials, and Industrials were the most notable sectors contributing 2.04%, 1.24%, 0.44%, and 0.36% respectively to the relative performance. Real Estate, Telecom, and Staples contributed a combined 0.22%. Consumer Discretionary, Materials, and Energy detracted 0.05%, 0.26%, and 0.36% respectively from performance. The portfolio is overweight Financials and Industrials, and underweight Staples.

ALL CAP GROWTH EQUITY (AG)

The All Cap Growth Equity composite return was 1.05%, the Russell 3000 Growth benchmark return was 1.48%. The composite’s first quarter lag was derived from relative underperformance in six of eleven sectors. Consumer Discretionary and Industrials contributed 1.05% and 0.40% to relative performance. Real Estate and Utilities contributed a combined 0.14%. Technology, Healthcare and Materials detracted 0.82%, 0.68%, and 0.41% respectively from relative performance. Telecom, Staples, and Financials detracted a combined 0.11% during the quarter. The portfolio is overweight Financials, Industrials, and Consumer Discretionary and underweight Tech and Staples.

ALL CAP GROWTH CONCENTRATED EQUITY (CD)

The All Cap Growth Concentrated Equity composite return was 7.30%, the SPDR S&P 500 ETF Trust (SPY) benchmark return was negative 1.39%. The composite’s first quarter outperformance was derived from strong performance by 6 stocks: Veeva Systems Inc. (VEEV, Tech), Weight Watchers International, Inc. (WTW, Consumer Discretionary), NVIDIA Corporation (NVDA, Tech), Micron Technology, Inc. (MU), Copart, Inc. (CPRT, Industrials), and IDEXX Laboratories, Inc. (IDXX, Healthcare) contributing a combined 8.23% to the relative gain. Notable detractors were Exelixis, Inc. (EXEL, Healthcare), Cognex Corporation (CGNX, Tech), AbbVie Inc. (ABBV, Healthcare) detracting a combined 2.30% from performance. The balance of portfolio holdings contributed in a range from up 0.72% to down 0.56%, with 13 winning stocks and 9 losing stocks during the quarter. The portfolio is overweight Industrials, Materials, Consumer Discretionary, and Tech and underweight Staples and Energy.

ALL CAP TAX EFFICIENT EQUITY (TE)

The All Cap Tax Efficient Equity composite return was 5.57%, the SPDR S&P 500 ETF Trust (SPY) benchmark return was -1.39%. The composite’s first quarter outperformance was anchored by strong performance in 3 stocks: Herbalife Ltd. (HLF, Staples), Micron Technology, Inc. (MU), and Zebra Technologies Corporation (ZBRA, Tech) contributing a combined 3.57% to the relative gain. There were no notable detractors during the quarter. The balance of portfolio holdings contributed in a range from up 0.96% to down 0.71%, with 23 winning stocks and 11 losing stocks during the quarter. The portfolio is overweight Consumer Discretionary, Industrials, and Tech and underweight Staples, Financials, Utilities, and Healthcare.

MID CAP EQUITY (MC)

The Mid Cap Equity composite return was 3.50%, the Russell Midcap Growth benchmark return was 2.17%. The composite’s first quarter outperformance was derived from relative outperformance in five of eleven sectors. Tech and Healthcare were the most notable contributing 1.26% and 1.12% respectively to relative performance. Financials, Real Estate, and Telecom contributed a combined 0.31%. Relative underperformance in Materials, Energy, Consumer Discretionary, Staples, and Industrials ranged from -0.57% (Materials) to -0.09% (Industrials). The portfolio is overweight Tech and Financials and is underweight Healthcare and Real Estate.

SMID EQUITY (SM)

The SMID Cap Equity composite return was -1.88%, the Russell 2500 Growth benchmark return was 2.38%. The composite’s first quarter underperformance was derived from relative underperformance in six of eleven sectors. Utilities, Real Estate, Staples, Telecom, and Industrials contributed a combined 0.75% to relative performance. Healthcare, Consumer Discretionary, Tech, Financials, Materials, and Energy detracted 1.23%, 1.04%, 0.97%, 0.77%, 0.72%, and 0.27% sequentially from relative performance. The portfolio is overweight Consumer Discretionary, Telecom, and Utilities and is underweight Industrials and Real Estate.

SMALL CAP EQUITY (SC)

The Small Cap Equity composite return was -0.24%, the Russell 2000 Growth benchmark return was 2.30%. The Small Cap Equity composite’s first quarter underperformance was derived from relative underperformance in six of eleven sectors. Consumer Discretionary, Technology, Utilities, Real Estate, and Telecom were all notable contributing 0.92%, 0.23%, 0.22%, 0.12%, and 0.09% respectively to relative performance. Healthcare, Materials, Industrials, Energy, Financials, and Staples detracted 2.54%, 0.66%, 0.50%, 0.22%, 0.18%, and 0.03% sequentially from relative performance. The portfolio is overweight Consumer Discretionary and underweight Industrials and Real Estate.

DEVELOPED MARKETS (DM)

The Develop Markets Equity composite return was 0.24%, the MSCI EAFE Index return was -2.20%. The composite’s first quarter outperformance was derived from positive performance in three of eleven sectors. Consumer Discretionary, Tech, and Healthcare contributed 0.76%, 0.56%, and 0.13% respectively to performance. Energy, Financials, Materials, Industrials, Telecom, and Staples detracted a combined 1.21% from performance. Utilities and Real Estate had no exposure. At the sector level, the portfolio is overweight Materials, Energy, Industrials, Consumer Discretionary, and Tech and underweight Healthcare, Real Estate, Staples, and Utilities. The portfolio is overweight Netherlands 5.56%, Japan 4.55%, South Africa 4.20%, and China 3.54%; and underweight Switzerland 5.95%, U.K. 4.89%, and Hong Kong 3.60%.

INTERNATIONAL (IN)

The International Equity composite return was 1.17%, the MSCI ACWI ex USA Index return was -1.76%. The composite’s first quarter outperformance was derived from positive performance in five of eleven sectors. Materials, Tech, Financials, Healthcare, and Telecom contributed 0.72%, 0.66%, 0.31%, 0.14%, and 0.10% sequentially to performance. Utilities, Real Estate and Staples had no exposure. Energy, Consumer Discretionary, and Industrials detracted 0.47%, 0.27%, and 0.03% respectively from performance. At the sector level, the portfolio is overweight Materials, Financials, Consumer Discretionary, and Energy and underweight Staples, Real Estate, and Industrials. At the market level, the portfolio is overweight EM 12.28% (due to appreciation, no more EM will be added) and underweight DM 13.28%. At the country level, the portfolio is overweight Brazil 7.43%, China 6.46%, South Africa 3.89%, and Netherlands 3.66%; and underweight Germany 4.84%, Korea 3.81%, and U.K. 2.82%.

LATIN AMERICA EQUITY (LA)

The Latin America Equity composite return was 4.82%, the Russell Latin America Index return was 7.20%. The composite’s first quarter underperformance was derived from negative performance in two of eleven sectors. Most notable were Energy, Financials, Industrials, and Materials contributing 2.64%, 1.50%, 1.50%, and 1.01% respectively to performance. Utilities, Tech, Staples, and Telecom contributed a combined 0.87%. Consumer Discretionary and Real Estate detracted 1.86% and 0.83% from performance. The portfolio is overweight Industrials and is underweight Financials and Staples.

GROWTH & INCOME EQUITY (GI)

The Growth & Income Equity composite return was -0.69%, the S&P 500 Total Return Index return was -0.76%. The composite’s first quarter outperformance was derived from relative outperformance in six of eleven sectors. Notable were Tech, Staples, Financials, Telecom, Healthcare, and Industrials contributing 0.76%, 0.27%, 0.20%, 0.16%, 0.10%, and 0.09% respectively to relative performance. Consumer Discretionary, Materials, Real Estate, Energy, and Utilities detracted a combined 1.50% from relative performance. The portfolio is overweight Industrials, Consumer Discretionary, and Materials and is underweight Healthcare and Staples.