4th Quarter 2017 Market Update

15 January 2018

By Geremy van Arkel, CFA®
Principal

What a year 2017 turned out to be! Global stocks, as measured by the MSCI AC World Index, rose in every month of the year, and did so with record low volatility. This has been the longest period on record for the S&P 500® Index not losing more than 3% in value – and to give you a better idea: this record dates back to 1957. Stock markets around the world have been impervious to the usual threats, and asset prices have kept on marching higher through: political theatre, sabre rattling, natural disasters, high asset prices, and the Federal Reserve Bank (Fed) tightening of short-term interest rates. Coordinated global growth and investor confidence has rolled over all other issues, and almost every stock market in the world produced earnings growth in 2017. Even fixed income investments performed remarkably well in this risk-seeking environment, as investors were yield takers in their efforts to store excess liquidity. In the 4th quarter of 2017, these trends accelerated, and stock markets around the world produced their best returns of the year. This year proved to be a great year to be a Frontier investor.

Every asset class that we follow produced a positive return in the 4th quarter: stocks, bonds, alternative investments, commodities, and real estate. That has only happened 6 other quarters over the last 20 years. The post-2008 recovery has been characterized by slow growth, low inflation, and unprecedented central bank stimulus, which have all led to high asset prices. Now that the world’s economic engine is firing on all cylinders, and as most central banks are still excessively accommodative, money seems to be flowing into all areas of capital markets, leaving some to claim a “bubble in everything”. But, while asset prices are high, the world’s economies are performing well according to most measures. Employment is strong, economic growth is solid, asset prices are way up, corporate earnings are growing, and investors are risk-seeking. Plus, U.S. tax reform was one more positive factor for corporations to cheer in the 4th quarter. There seems to be little on the horizon for investors to worry about, and markets have acted accordingly.

It is under precisely these circumstances when investors find it easy to be risk-seeking. Capital markets, in general, lead the economy and the performance of capital markets and prices of assets already reflect the positive economic developments. But past performance is a strong lure for investors. It is easy for investors to extrapolate past capital market and economic performance into the future, especially when it seems like risks are low. However, history tells us that when asset prices and returns are high, when the economy is performing well, and when volatility is low, this is exactly when investors need to pay attention. All stock market catastrophes have been preceded by these comforting factors.

Looking forward, Frontier strategies are cautiously positioned. We manage all of our strategies to maximize expected return for possible loss. But we are also downside first managers. It is future possible loss that is considered first and primary in the management of our strategies. Even when capital markets are roaring and risk taking seems easy, we are still focused on risk management. Why? Because it is precisely when the asset prices are high, the global growth seems indefinite, and when changes and shifts are not being factored, that risk management is critical. That being said, let’s hope that the positive growth trends of 2017 continue into 2018, albeit, in a responsible manner.

4th Quarter Strategy Review

2017’s 4th quarter capital markets continued their phenomenal up trend that began late in 2016. December was the 14th month in a row that both the S&P 500® Index and MSCI World Index had gains. That is the longest stretch of such consistent positive monthly returns since the World Index’s inception in 1970. Wow! Not only did stocks go up in the quarter, all 16 of the asset classes we follow closely were up.

It was therefore an easy quarter for Frontier Asset Management’s Globally Diversified strategies to post solid positive returns. As a group, they pretty much matched their blended benchmarks. That is pretty remarkable considering we are positioned somewhat conservatively to help guard against a future market decline that might impact our ability to stay within our downside risk targets (When market prices are high and future return expectations are low, market declines can be exaggerated). During the quarter, our conservative positioning did hurt relative performance modestly, but the funds used within the strategies performed well, making up all of the return lost from our relatively conservative long-term asset allocation mixes.

Calendar year 2017 performance of the Globally Diversified strategies was quite good when considering the across the board conservative posturing. Longer-term performance continues to be admirable relative to benchmarks for all commonly shown performance periods back to our strategies’ inception dates.

Frontier Asset Management’s unconstrained Alternative Strategies performed well in the 4th quarter with solid positive returns and easily outperformed the average hedge fund according to the HFRX Global Hedge Fund Index. Absolute Return and Absolute Return Plus also easily outperformed their hedge fund benchmarks. Longer-term performance for these strategies continues to look favorable relative to the hedge fund universe and alternative strategies available in mutual fund formats.

– Gary A. Miller, CFA®

Additional Information
FRONTIER COMMENTARY:
Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Diversification does not ensure a profit or protect against a loss. Before investing, consider investment objectives, risks, fees and expenses.
In reviewing any performance information presented, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance. We present performance information for short time periods because we understand that clients and potential Investors are interested in this information, however, we recommend against making any investment decisions based on short-term performance information. Performance should be considered in light of the market and economic conditions that prevailed at the time those results were generated.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable but it is not guaranteed and Frontier does not warrant or guarantee the accuracy or completeness of such information.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision.
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