17 Jun 2021
Confidence redefined
Mark Twain once said, “It is strange the way the ignorant and inexperienced so often and so undeservedly succeed when the informed and the experienced fail. All you need in this life is ignorance and confidence, and then success is sure.” Kind of makes me wonder if he was somehow looking into the future and observing what is happening with meme stocks, cryptocurrencies, and retail stock favorites in general. The ignorant and inexperienced are indeed exuding confidence – and winning the day in many cases. Does that make me sound bitter? It should.
But confidence is not just a retail phenomenon at present. Confidence is a cheap commodity, period (the only commodity that is cheap for that matter). The Conference Board recently reported that CEOs have never felt better about the future. KKR penned that analysts have never projected that as many companies would improve margins as are assumed in 2022 (86% of S&P companies that is, building on top of likely all-time high margins in Q1, according to S&P). And short interest for the typical stock is extremely low, matching the level hit in 2000, according to Goldman Sachs. Confidence overfloweth.
While consumer confidence hasn’t hit new highs, the consumer is feeling just fine thank you. And why not? Personal income, while well off the highs, is still elevated above pre-crisis levels, and personal savings remains impressive at about 15% of disposable income. Add to that the fact that consumer spending is back in line with the pre-Covid trend, and I think we can safely say that the idea that you can’t have your cake and eat it too is patently false. Oh, we have cake, yes we do, and we are gorging on it.
What happened in the markets in May?
- Equities: Investor Appetites Remain Insatiable
May was just another ho hum month for equities, with the MSCI All Country World Index advancing by about 1.6%, taking it to almost 11% year-to-date. There was meaningful differentiation in terms of what worked however, with the Russell 2000 Growth Index falling by almost 3%, while international stocks – aided by a falling dollar – were up about 3.3% (MSCI EAFE Index), small value stocks returned 3.1% (Russell 2000 Value) and the MSCI Emerging Markets Index gained 2.3%. Incidentally, the positive return for the Russell 2000 Index was the eighth straight monthly gain, a feat which hasn’t been repeated since 1995.
Returning to the confidence (or ignorance) theme, according to Goldman Sachs, share buyback authorizations through April approached $500 billion, which was the highest reading in the data provided going back to 2000. It’s likely the largest number we’ve ever seen. Corporate America is buying, or at least preparing to buy back huge amounts of stock with valuations near or at all-time highs. Kind of makes you question the decision making of corporate finance types and suggests they don’t see growth opportunities worth redeploying retained earnings into. Instead, they’re throwing up their hands and bowing at the altar of shareholder value, which makes everyone happy in the short run. Although, to be fair, equity issuance as a percentage of GDP (Gross Domestic Product) is also at an all-time high, so at least some companies are taking advantage of sky-high valuations. The net issuers would seem to be the ones falling into the “informed and experienced” camp, and perhaps “failing” as a result, again, at least in the short run.
- Bonds: Not Much More to Squeeze
The Bloomberg Barclays U.S. Aggregate Corporate OAS (Option-Adjusted Spread) recently hit 0.84%, marking the tightest spreads since 2007. Bond managers have been saying for some time that yes, yields are low on investment grade and high yield debt but look at those spreads! We’ll see how that story evolves, but at least for the month of May, attractive and narrowing spreads helped investment grade corporates gain 0.8%, and pushed high yield bonds to advance by 0.3%. But the “real” money was made in TIPs this month, as the Bloomberg Barclays U.S. Treasury TIPs Index returned 1.2% on investor anxiety over inflation. Seemingly contradictory to the former, duration paid off as well, since nominal rates held steady at the upper end of the curve, and long-term Treasuries were up by about 50 basis points. Mortgage-backed securities were the only losers, printing a return of -0.2% (Bloomberg Barclays U.S. Mortgage-Backed Securities Index).
- Commodities: R – E – S – P – E – C – T (Just a Little Bit)
The run for commodities continued, with the Bloomberg Commodity Index returning 2.7% for the month; the Index is up 19% year-to-date. There were plenty of winners within the commodity complex once again, with coffee (+15%), tin (+10%), lean hogs (+8.5%) and the precious metal duo of silver (+8%) and gold (+8%) leading the way. Agricultural commodities surrendered some of their recent gains, with wheat (-10%), cotton (-7%) and corn (-2.5%) all falling.
How are Frontier strategies positioned?
Allocation Changes
For the second straight month, the asset mixes that guide our strategies increased their target allocations to U.S. large-cap equities and high-quality bonds by reducing allocations to TIPs and T-Bills, although the magnitude of the changes were nominal this go around. Relative to our long-term allocations, we are underweight REITs, high-yield bonds, absolute return and U.S. large caps, and we are overweight long-term Treasuries, managed futures and U.S. small caps. While our risk models aren’t spitting out particularly troubling readings, we remain slightly conservative across all of our globally diversified strategies compared to what we expect positioning to be over the long run.
Performance Attribution
For the month, all our Globally Diversified Strategies generated positive returns, before advisory fees, that largely scaled with their risk exposures. However, as has been the case for an extended period due to risk limits, our equity positioning was below long-term targets, and thus held back relative performance. Considering the various tilts we have in the portfolios, generally speaking, the overweights to managed futures, emerging markets and to small caps were helpful for the month, especially since we target quality focused managers for small caps and there was a major gap between the lower quality Russell 2000 (+0.2%) and the higher quality S&P 600 (+2.1%). But our underweight to large cap stocks was a bit of a headwind, and the underweight to REITs detracted from performance. On the fixed income side, our exposure to duration was beneficial, as long-term Treasuries outperformed the broad bond market, and our underweight to high yield was largely immaterial to relative performance.
Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains and losses, but gross of advisory fees. 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 an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses. Frontier may modify its process, opinions and assumptions at any time without notice as data is analyzed.
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. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.
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. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. 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. Frontier does not directly use economic data as a part of its investment process.
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. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.
Hypothetical expected returns have certain limitations, are discussed for illustrative purposes only and it should not be assumed that actual results will match the hypothetical expected returns referred to. Unlike actual performance, hypothetical expected returns do not represent actual trading and since trades have not been executed, the results shown may have under or overcompensated for the impact, if any, of certain unforeseen market factors. Hypothetical expected returns, whether backtested or forecasted, have many inherent limitations and no representation is being made that any account will or is likely to achieve the results expected. In fact, there are frequently material differences between hypothetical expected results and actual results achieved. One of the limitations of hypothetical expected results in that they do not take into account that material market factors may have impacted the adviser’s decision-making process if the firm were actually trading clients’ accounts. Also, when calculating the hypothetical expected returns, the adviser has the ability to change certain assumptions and criteria in order to reflect better returns. There are numerous other factors related to the markets in general or to the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of hypothetical expected results, all of which can adversely affect actual trading and performance. Importantly, it should not be assumed that investors who actually invest in this strategy will have positive returns or returns that equal either the hypothetical expected results expected. In addition, performance can, and does, vary between individuals.
In reviewing the performance information presented here, 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.
Nominal GDP measures a country’s gross domestic product using current prices, without adjusting for inflation. Contrast this with real GDP, which measures a country’s economic output adjusted for the impact of inflation.
Real Return – The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external factors
Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.
© Morningstar 2021. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.
It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
Frontier’s ADV Brochure and Form CRS are available at no charge by request at info@frontierasset.com or 307.673.5675 and is available on our website www.frontierasset.com.
INDEX |
INDEX DESCRIPTION |
S&P 500 |
Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ |
MSCI All Country World |
Designed to represent performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 27 emerging markets. |
MSCI EAFE |
An equity index which captures large and mid cap representation across 21 Developed Markets countriesaround the world, excluding the U.S. and Canada. |
MSCI Emerging Markets |
An Index that captures large and mid cap representation across 27 Emerging Markets (EM) countries |
Russell 2000 |
Measures the performance of the small-cap segment of the U.S. equity universe. |
Russell 2000 Growth |
Measures the performance of the small-cap growth segment of the U.S. equity universe. |
Russell 2000 Value |
Measures the performance of the small-cap growth segment of the U.S. equity universe. |
Bloomberg Commodity |
This is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities. |
Barclays U.S. Aggregate Bond |
Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable. |
Bloomberg Barclays U.S. Mortgage-Backed Securities |
Includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value |
Bloomberg Barclays U.S. Treasury US TIPS |
Represents inflation-protected securities issued by the U.S. Treasury. TIPS are indexed to the non-seasonally adjusted Consumer Price Index for All Urban Consumers |
Bloomberg Barclays U.S. Corporate OAS |
Represents the Option-Adjusted Spread (OAS) of the Bloomberg Barclays U.S. Corporate Index, which measures the investment grade, fixed-rate, taxable corporate bond market. |