Quarterly Markets Review

The first quarter of 2024 saw resilient economic data globally, particularly in the US, where growth exceeded expectations in Q4 2023. Composite Purchasing Managers’ Index (PMI) data remained in expansionary territory, boosting investor sentiment. The overall global economic picture suggested a soft landing, supported by encouraging macroeconomic indicators worldwide.

Global equities performed strongly during the first quarter, with the MSCI ACWI posting a 7.4% gain. Developed market equities, especially in the US, experienced robust growth, driven by the performance of growth stocks. Japan emerged as the best-performing market, despite the Bank of Japan beginning normalization of its monetary policy. European equities, while lagging behind the US and Japan, showed signs of potential attractiveness to global investors due to cheaper valuations and narrowing growth gaps relative to the US. Emerging market equities underperformed, with concerns over China’s growth prospects weighing on investor sentiment.

The period was challenging for fixed income investors due to stickier inflation prints and a less dovish tone from the Federal Reserve. Negative returns were observed in bonds, with the Bloomberg Global Aggregate Index declining by 2.1%. Interest rate-sensitive assets like real estate also suffered. However, higher yielding European sovereign bonds outperformed US Treasuries, and high yield credit outperformed investment grade, thanks to lower interest rate sensitivity and easier financial conditions.

Commodity markets saw a slight increase, with the Bloomberg Commodity Index rising by 2.2%. While gas prices fell, oil prices rose due to ongoing supply cuts and geopolitical tensions.

Outlook

Despite a positive start to the year for investors, there are concerns about concentration risks in large-cap growth stocks and rising equity market valuations. The resilience of the global economy and the potential for rate cuts in the latter part of the year could support continued market trends. However, markets remain susceptible to various risks, necessitating a well-diversified portfolio.

Fixed income markets are seen as more fairly priced and could cushion portfolio performance in the event of adverse growth shocks, while stocks with attractive dividend and share buyback yields may enhance portfolio resilience in the equity market.

Fixed Income

With inflation easing, developed market central banks have likely reached the end of their hiking cycles. That has shifted attention to the timing and pace of eventual rate cuts. With attractive valuations and yields still near 15-year highs, fixed income markets can offer an array of opportunities with the potential to weather multiple macroeconomic scenarios. Given today’s flat yield curves, we believe intermediate maturities can offer a sweet spot between cash, where yields are fleeting and will decline when central bank rate cuts begin, and long-duration bonds, which could face pressure from rising bond supply needed to finance growing sovereign debt.

In credit markets, we will favour the more active and more diversified funds, able to move across the spectrum of opportunities. By sub-asset classes we are interested by U.S. agency mortgage-backed securities and other high-quality assets backed by collateral, which offer both attractive yields and downside resiliency.

Because yield curves are unusually flat today, we don’t need to greatly extend duration. Intermediate bond maturities can help to pursue attractive yield along with potential price appreciation should bonds rally, as occurred in late 2023 and as often happens in an economic slowdown. In corporate, we overweight high quality positions in investment grade, subordinated financial sector, corporate hybrids, and Cat Bonds, while exercising greater caution with lower-quality credit and more economically sensitive sectors such as floating-rate bank loans.

Finally, we also expect to find good opportunities in emerging markets, both in terms of local and external debt.

Equity

While we see the best opportunities in the small and mid-cap area in terms of valuation in the developed markets, but we will remain cautious to increase allocation on the eve of a possible economic contraction and geopolitical tensions.

The environment of falling interest rates should be favourable to growth strategies (quality growth).

Finally, we are interested in the AI theme, looking for an active or passive fund with a global view of this theme, from both a supply and demand perspective.

Fund Selection Review

In the first quarter of the year, a remarkable 85% of the selected funds in our universe delivered positive absolute returns, showcasing robust performance across asset classes.

Both equity and fixed income funds demonstrated resilience, with 86% and 85% respectively recording positive performances.

In the alternative funds segment, all but one fund saw positive returns, averaging a worthy +3.2%, with the highest performer achieving +6.4% return.

Considering an hypothetical equally weighted portfolio of all selected funds, excluding currency effects, the quarter yielded a commendable +3.92% return, underscoring the strength of our diversification in strategies selected.

In terms of alpha creation, 56% of all fund managers surpassed their stated benchmarks by an average of +227 basis points, marking a significant improvement from previous quarters in 2023. Notably, within fixed income and equity portfolios, 80% and 45% of managers respectively outperformed their benchmarks by +204bps and +246bps on average. While this achievement is commendable across both asset classes, it’s crucial to approach alpha figures with caution in fixed income portfolios, given the nuanced nature of their benchmarks.

During the period, we observed growing interest in fixed income active strategies, both core and satellite, as investors sought the expertise of active managers to navigate interest rate transitions and associated volatility. Conversely, demand in the equity and alternative space remained subdued, with capital still flowing into money market or short-duration bond funds, albeit at a slower pace compared to last year.