Market volatility returned in October. The S&P 500 moved up or down by more than 1% in a single day on ten occasions last month – two more times than in the whole of 2017. Surprisingly, there was no clear catalyst for the movements in broader asset markets except few signs of slowing economic growth. Economic fundamentals remain strong, with unemployment globally continuing to fall. The third-quarter earnings season got off to a good start, particularly in the US, where over 85% of companies that have reported thus far have beaten earnings-per-share estimates.

The S&P 500 ended the month down 6.8%, which now leaves the index up 3.0% year-to-date in total return terms. All other equity markets also fell on the month and value outperformed growth. The European markets ended their worst month since January 2016, falling 5% in October.

Despite the risk-off sentiment, the Global Aggregate Bond Index also ended down 1.1%. The US 10-year Treasury yield breached 3.2% in October. This sharp move higher appeared to concern some market commentators. It’s worth noting that most of the increase in yields was driven by real rates moving higher, rather than concerns over rising inflation. In fact, the headline consumer price index fell to 2.3% year on year in October. Thus, the increase in 10-year Treasury yields was for positive reasons, which suggests the growth outlook is still healthy.

Outlook

No change in the portfolio in October.

After the rebalancing we have operated in the prior period, we are monitoring closely how the active managers in our portfolios have responded to such odd month. We believe it is too early to draw any conclusions after such a particular hectic month marked by violent rotations in styles and asset classes. Going forward after having clarified why active manager succeeded or failed during that period, we will assess if a repositioning is deemed necessary. The barbell approach we have favoured until now may be reviewed to ensure the mix in risky assets will remain appropriate, should asset prices are losing momentum and enter into a prolonged consolidation period.

In alternative strategies, we will expand diversification towards less directional portfolios. The recent market movement has severely shaken many alternative, “smart betas” and other risk premia strategies, leaving many with double digit negative performance YTD. It constitutes an interesting stress test period that will help us evidence the most robust market neutral strategies.

The MSCI ACWI (USD) was down -7.5% during the month while the Barclays Global Aggregate index (USD hedged) fell by -0.2%.

In October, active management was a meaningful contributor to underperformance. Equity fund managers struggled the most, hurt by the equity style turnaround (growth underperformed value) and by the significant underperformance of small- and mid-caps names. The traditional defensive sectors such as utilities and consumer staples were outperforming in October while most active managers were under-exposed these sectors. Over the 26 funds we have in all Model Portfolios, 18 had a negative excess return, while most of them remained in the top quartile of their peer groups.

In absolute terms, the month was the worst since launch for the three portfolios. The Growth portfolio (-6.7%) lagged the Balanced portfolio (-3.6%) and the Yield and Income portfolio (-3.5%).