Performance

Performance background

Performance

Keeping clients and contacts informed about our investment approach and performance reflects Hanseatic’s longstanding commitment to transparency and an open, candid dialogue with our clients.

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Disclosure

Performance results are based on estimates. For gross and net performance results, see performance table. Commentary section is based on gross performance results only for better comparison to benchmark data. 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.

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FIRST QUARTER 2019

Hanseatic Market Commentary

For the first quarter of 2019, U.S. stocks rebounded strongly. The S&P 500 rose 13.1% this quarter and recorded its best start to a year since 1998. This was also the largest one-quarter gain since 2009. Joining the S&P 500 in its impressive 2019 start were the Dow Industrials, the Nasdaq composite and the Russell 2000. The 30-stock Dow gained over 11% while the tech-heavy Nasdaq rallied more than 16%. The small-cap Russell 2000 gained just over 14%.

The most important economic event in the quarter was the Fed’s change to a dovish tone for monetary policy, influenced by the wild volatility and significant decline in capital markets in the previous quarter. Fed Chairman Powell suggested that rates may be on hold for many months after hiking four times last year. Also important is that the Fed will end, or at least significantly slow, its balance sheet run-off. This is notable because the balance sheet reduction could have the economic impact of one to two interest rates hikes, according to some estimates.

While the equity markets welcome the more accommodative monetary policy, it comes at the expense of a gloomier economic outlook, as updates to the Fed’s voting members projections for 2019 economic growth was lowered to 2.1% for 2019 and 1.9% for 2020. The notion that Fed policymakers expect lower growth over the next two years, even with rates at or lower than the current level, is a difficult pill to swallow for fixed income investors especially. In response, the 10-year treasury yields fell in late March to a 14-month low and yields on 10-year German bonds, the debt of the Eurozone’s largest economy, fell into negative territory.

After strong market rallies in January and February, market anxiety rose in March, primarily because of the shape of the yield curve. In particular, the short end of the curve inverted as the spread between the 10-year and 3-month T-bill yields became negative on March 22, the first time since 2007. In the past, an inverted curve has been an uncanny signal of impending recession. While the inversion garnered a lot of headlines and revived recession worries, we would note that the most important spreads across the yield curve are the 2-10 and the 10-30, neither of which have inverted. In any case, the yield curve can be a long leading indicator, with a recession developing a year or even two years following an inversion. Nor does the inversion guarantee a recession. It is also difficult to believe a recession is imminent when the Conference Board Leading Economic Index is so strong and shows no sign of deterioration.

While we do not believe that the shape of the yield curve is currently of economic concern, it is not to say that there are not some clear current risks to both the economy and the markets. One is the prospect of a rise in inflation due to a very tight labor market. This has implications for profit margins, but there is also the fact that any measurable increase in inflation above the Fed’s 2% target will command attention from a policy standpoint.

The most serious of the potential risks in this environment is the uncertainty surrounding the trade negotiations, especially with China. We believe a solid agreement, especially one that addresses China’s most egregious trade practices could revive confidence in making long term investment decisions. Absent a solid agreement, markets may be disappointed by a “light” deal that only promises China’s purchase of more U.S goods. There may also be challenges as Congress votes on the impending U.S-Mexico-Canada agreement this summer.

From a sector standpoint, the leadership continues to reside with Technology and Healthcare. In both of these sectors, the breadth has been positive with performance not dependent only on the largest stocks. Going forward, we would certainly welcome better performance from the Energy and Financial sectors in particular. These important sectors have been mired in cyclical declines relative to the benchmarks for the past year. On a positive note, both absolute and relative performance has improved for Housing, Industrial and Energy stocks.

Another significant change has to do with the China and Eurozone stock markets. All of these markets peaked in January 2018 and declined sharply over the following year. At the end of 2018, for instance, the iShares China Large Cap ETF was down over 25%. In early January, international equity markets bottomed along with the U.S market and have rallied strongly since. We model and rank over 40 country stock indices and international benchmarks. By our measures, China is now the strongest equity market in the world, likely discounting the perception of improved economic performance in the months ahead.

Despite the impressive first quarter rally, investor sentiment is decidedly bearish. Fund managers’ allocation to equities sank to their lowest level in two and a half years in March (BAML). Their equity exposure is concentrated in defensive issues like REITS and Utilities, and their cash balances are unusually high. This bull market may be the longest in history, but it may also be the least loved. From 2009 through January 2019, U.S equity ETFs and mutual funds experienced net outflows in contrast to the large inflows normally seen over the course of a bull market. Stock market indices have historically ended with exuberance and some form of excess. That is not the current profile of the stock market.

Stocks, of course, will not continue the first quarter’s pace of gains going forward, but we do think stocks will likely be higher than current levels at year end. Notwithstanding the risks noted above, we believe the combination of positive probabilities from our market models, an accommodative monetary policy and a positive sentiment picture constitute a favorable market environment.

HANSEATIC QUARTERLY STRATEGY PERFORMANCE AND ATTRIBUTION

LARGE CAP EQUITY (LG)

The Large Cap Equity strategy return was up 15.19%, the Russell 1000 Growth benchmark return was up 16.10%. The strategy’s first quarter underperformance was derived from relative underperformance in six of eleven sectors. Consumer Discretionary, Healthcare, and Energy contributed 1.50%, 0.86%, and 0.26% respectively to the relative performance. Materials were relatively flat. Communication Services, Financials, and Staples detracted 2.01%, 0.41%, and 0.41% respectively from relative performance. Industrials, Real Estate, and Technology detracted a combined 0.70% from relative performance. Utilities had no impact. The portfolio is overweight Healthcare, Consumer Discretionary, and Technology and underweight Communication Services.

ALL CAP GROWTH EQUITY (AG)

The All Cap Growth Equity strategy return was up 11.36%, the Russell 3000 Growth benchmark return was up 16.18%. The strategy’s first quarter underperformance was derived from relative underperformance in seven of eleven sectors and a large cash position (~35%) at the beginning of the quarter for risk management. At the end of January and February cash was ~25% and ~11% respectively, by the end of March all risk models had turned off and the strategy was fully invested. Healthcare, Materials, and Energy contributed 0.98%, 0.24%, and 0.10% to relative performance. Communication Services, Technology, Financials, Industrials, and Staples detracted 1.88%, 1.05%, 0.90%, 0.82%, and 0.63% from relative performance. Real Estate and Consumer Discretionary detracted a combined 0.86% from relative performance. The portfolio is overweight Technology and Healthcare, and underweight Communication Services.

ALL CAP GROWTH CONCENTRATED EQUITY (CD)

The All Cap Growth Concentrated Equity strategy return was up 10.84%, the Russell 3000 Growth benchmark return was up 16.18%. The strategy’s first quarter underperformance was derived from relative underperformance in eight of eleven sectors and a large cash position (~45%) at the beginning of the quarter for risk management. At the end of January and February cash was ~45% and ~20% respectively, by the end of March all risk models had turned off and the strategy was fully invested. Materials and Financials contributed 1.07% and 0.23% to relative performance during the quarter. Communication Services, Industrials, Consumer Discretionary, Healthcare, and Real Estate detracted 2.07%, 1.38%, 1.18%, 1.07%, and 0.43% from relative performance. Staples, Energy, and Technology detracted a combined 0.49% from relative performance. The portfolio is overweight Technology, Materials, and Healthcare and underweight Communication Services, Consumer Discretionary, and Industrials.

ALL CAP TAX EFFICIENT EQUITY (TE)

The All Cap Tax Efficient Equity strategy return was up 18.87%, the Russell 3000 benchmark return was up 14.04%. The strategy’s first quarter outperformance was derived from relative outperformance in seven of eleven sectors. Cash at the beginning of the quarter was 18% for risk management purposes. The strategy was fully invested by the end of the first quarter. Notable sectors were Technology and Healthcare contributing 3.55% and 1.98% respectively to relative performance. Energy, Real Estate, Materials, Financials, and Consumer Discretionary were also positive contributing a combined 1.26% to relative performance. Consumer Staples detracted 1.46% from relative performance. Utilities, Industrials, and Communication Services detracted a combined 0.50% from relative performance. The portfolio is overweight Technology and Healthcare, and underweight Financials, Communication Services, and Utilities.

MID CAP EQUITY (MC)

The Mid Cap Equity strategy return was up 13.69%, the Russell Midcap Growth benchmark return was up 19.62%. The strategy’s first quarter underperformance was derived from relative underperformance in eight of eleven sectors. Cash at the beginning of the quarter was 16% for risk management purposes. The strategy was almost fully invested by the end of the first quarter. Energy and Healthcare contributed 0.33% and 0.32% respectively to relative performance. Utilities were flat during the quarter. Technology, Industrials, Consumer Discretionary, Financials, and Staples detracted 2.18%, 1.65%, 0.72%, 0.72%, and 0.51% from relative performance. The portfolio is overweight Healthcare and is underweight Industrials and Consumer Discretionary.

SMALL CAP EQUITY (SC)

The Small Cap Equity strategy return was up 8.78%, the Russell 2000 Growth benchmark return was up 17.14%. The Small Cap Equity strategy’s first quarter underperformance was derived from relative underperformance in seven of eleven sectors and a large cash position (~33%) at the beginning of the quarter for risk management. At the end of January and February cash was ~33% and ~18% respectively, by the end of March all risk models had turned off and the strategy was fully invested. Technology and Utilities contributed 0.62% and 0.42% respectively to relative performance. Materials and Communication Services were relatively flat. Healthcare, Consumer Discretionary, Industrials, Financials, Staples, Real Estate, and Energy detracted 3.81%, 2.04%, 1.43%, 0.98%, 0.49%, 0.48%, and 0.17% from relative performance. The portfolio is overweight Technology and underweight Industrials and Financials.

DEVELOPED MARKETS (DM)

The Developed Markets Equity strategy return was up 2.23%, the MSCI EAFE Index return was up 9.04%. The strategy’s first quarter underperformance was derived from a large cash position (~45%) at the beginning of the quarter for risk management. At the end of January, February, and March cash was ~45%, ~27%, and ~32% respectively. Energy and Communication Services had no exposure. Industrials, Materials, Technology, and Real Estate contributed 0.80%, 0.27%, 0.22%, and 0.06% sequentially to performance. Staples, Consumer Discretionary, Healthcare, Financials, and Utilities detracted 0.27%, 0.21%, 0.12%, 0.11%, and 0.10% from performance. At the sector level, the portfolio is overweight Consumer Discretionary and underweight Financials, Healthcare, Communication Services, and Industrials. The portfolio is overweight Hong Kong 7.80%, Norway 3.02%, Italy 3.65% and Israel 1.52%; and underweight United Kingdom 11.21%, Switzerland 6.95%, Japan 5.95%, Germany 4.69% and the Netherlands 3.55%.

INTERNATIONAL (IN)

The International Equity strategy return was up 6.01%, the MSCI ACWI ex USA Index return was up 9.55%. The strategy’s first quarter underperformance was derived from a large cash position (~41%) at the beginning of the quarter for risk management. At the end of January, February, and March cash was ~34%, ~17%, and ~10% respectively. Real Estate and Communication Services had no exposure. Materials, Utilities, Industrials, Staples, Energy, Tech, and Consumer Discretionary contributed 1.52%, 1.04%, 0.94%, 0.57%, 0.49%, 0.41%, 0.23% sequentially to performance. Healthcare and Financials detracted a combined 0.25%. At the sector level, the portfolio is overweight Materials, Utilities, and Consumer Discretionary and underweight Financials, Communication Services, Energy and Healthcare. At the market level, the portfolio is overweight EM and underweight DM. At the country level, the portfolio is overweight Brazil 11.59% (appreciation) South Africa 6.44%, and Canada 3.15%; and underweight Switzerland 6.31%, United Kingdom 6.11% and Japan 5.23%.

LATIN AMERICA EQUITY (LA)

The Latin America Equity strategy return was up 2.10%, the MSCI EM Latin America Index return was up 7.02%. The strategy’s first quarter underperformance was derived from poor performance in five of eleven sectors. Cash at the beginning of the quarter was ~31% for risk management purposes. The strategy was almost fully invested by the end of the first quarter. Most notable were Utilities, Energy, Industrials, and Technology contributing 2.24%, 2.19%, 1.45%, and 0.12% respectively to performance. Consumer Discretionary, Consumer Staples, Financials, Communication Services, and Materials detracted 1.86%, 1.16%, 0.64%, 0.16%, and 0.07% sequentially from performance. There was no exposure to Healthcare or Real Estate. The portfolio is overweight Utilities; and is underweight Consumer Staples, Materials, and Financials.

GROWTH & INCOME EQUITY (GI)

The Growth & Income Equity strategy return was up 9.60%, the S&P 500 Total Return Index return was up 13.65%. The strategy’s first quarter underperformance was derived from relative underperformance in seven of eleven sectors. Cash at the beginning of the quarter was 39% for risk management purposes. At the end of January and February cash was ~40% and ~13% respectively, by the end of March all risk models had turned off and the strategy was fully invested. Notable were Technology, Materials, and Utilities contributing 0.74%, 0.57%, and 0.45% respectively to relative performance. Healthcare contributed slightly with 0.08% and Real Estate detracted slightly with 0.02%. Consumer Discretionary, Consumer Staples, Communication Services, and Financials detracted 2.00%, 1.01%, 0.94%, and 0.93% respectively from relative performance. Energy and Industrials detracted a combined 1.00%. The portfolio is overweight Utilities, Real Estate, and Technology and underweight Financials and Communication Services.