Relative weakness in developed international equities was most acute in the financials, materials, and technology sectors, although healthcare was the only S&P sector in which the MSCI EAFE Index outpaced the S&P 500 during the month. At the country level, Brexit weakness impacted stocks in the United Kingdom, the biggest drag on the developed international equity index. Losses in Germany and France also weighed as economic growth in Europe continued to significantly lag behind the United States. The MSCI Japan index was roughly flat, outperforming the MSCI EAFE but trailing the S&P 500.

Emerging markets also fell during the month, with weakness most pronounced in Asia where the trade dispute has had the most impact. MSCI country indexes in Korea and India fell most among the biggest country allocations, but the modest decline in the MSCI China Index was a big contributor to emerging markets’ losses because of its large weight in the index.

Indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

FIXED INCOME

10-Year Yield stalls in July

Treasury yields were largely unchanged in July as weakening global growth, trade tensions, and loosening monetary policy hampered a rally from an improving domestic economic picture.

The 10-year Treasury yield rose one basis point (0.01%) in July, closing the month at 2.01%. The benchmark yield hovered around 2% for most of the month after climbing as high as 2.14% on July 11.

Still, the Treasury yield curve remained inverted (long-term yields below short-term yields). The spread between the 3-month and 10-year yield remained in negative territory (-0.05%). The spread between the 2-year and 10-year yields remained positive but fell to 14 basis points (0.14%).

Ten of 11 fixed income asset classes that we track rose in July, as shown in the Fixed Income Performance Table. Riskier debt outperformed in the month, led by preferred shares with a 2.1% gain. The Bloomberg Barclays U.S. Aggregate Index rose for a fifth straight month in June, its longest monthly winning streak since July 2016.

ALTERNATIVE INVESTMENTS

Managed Futures Lead Gains

Alternative investment performance was led by the HFRX Macro: Systematic Diversified Index (3.1%) for the second month in a row, as long fixed income and long equity exposure continued to support portfolios. Currency positioning was also profitable, as short holdings in the British pound and the euro versus the U.S. dollar were positive contributors to performance and provided an attractive source of diversification from traditional markets. Discretionary macro strategies performed well, with the HFRX Macro/CTA Index returning 1.8% during the month and 4.5% on the year. Ongoing trade negotiations between the United States and China, as well as several adjustments by central banks around the world have led to an increasingly attractive opportunity set and additional relative value opportunities within currency and rate trading.

The HFRX Merger Arbitrage Index gained 0.3%, as low rates, CEO confidence, and significant private equity capital available for deployment have all supported the mergers and acquisitions landscape. A widespread position in the wireless telecommunication industry received clearance from the U.S. Department of Justice, conditional on certain assets being divested beforehand. While this was a positive step in the formal completion of the deal, it still faces numerous challenges from state attorney generals.

Long/short equity managers provided attractive risk-adjusted returns, as the HFRX Equity Hedge Index (1.1%) captured 80% of the S&P 500’s 1.4% gain, with a beta lower than 0.5. The HFRX Market Neutral Index (-0.7%) continues to struggle, as the long value component across the industry has weighed on returns. The HFRX Relative Value Index continues to perform well (0.3%), specifically managers specializing in structured products, as residential and commercial mortgage-backed securities (MBS) have been supported by resilient real estate market trends.

ALTERNATIVE INVESTMENTS

Macro Strategies Deliver

The HFRX Equity Hedge Index gained 1.4% during June, as the industry encountered difficulty keeping pace with the impressive 7% rally in the S&P 500. In general, long/short equity positioning remains rather conservative, and managers maintained their net equity exposures even as the market continued to march higher. With all the underlying S&P 500 sectors positive for the month, short exposure was generally a headwind, with limited opportunities to add value.

The HFRX Index Performance Chart was the best performing sub strategy, with a gain of 3.1%. As has been the case for most of 2019, long equity and long bond exposure drove returns, as the market has begun to assume further accommodations from the Fed. Select commodity exposure also supported returns, as the price of gold gained over 6% and closed above $1,400 per ounce (Source: NYMEX) for the first time since 2013. Unfortunately, long positions in oil detracted from performance, as prices have declined since reaching their year-to-date high in April. For 2019, the HFRX Systematic Diversified Index has gained 4.4%, which represents the best first half of a year since 2015. Discretionary macro strategies also performed well during June, as the HFRX Macro Index gained 2.6%. 

While the HFRX Merger Arbitrage Index declined 0.3% during June, it was still an active month for new deal announcements. An aerospace and defense merger, as well as a large pharmaceutical announcement showed that the merger and acquisition market remains healthy.

REAL ASSETS 

ONLY U.S. REITS PRODUCED POSITIVE RETURNS

Liquid real assets mostly lagged U.S. and global equities during July. Only U.S. REITs produced positive returns among the major categories we track.

Master Limited Partnerships (MLP)

The Alerian MLP Index slipped 0.2% in July, lagging behind the broad equities indexes despite lower interest rates and generally stable energy prices. The S&P GICS Energy Sector Index slipped 1.2% in July as energy-related investments were generally out of favor. MLPs have produced solid returns so far in 2019 with a 17% year-to-date return, although the group has trailed the S&P 500 Index by about 3 percentage points year to date.

REITs and Global Infrastructure

The MSCI US REIT Index modestly trailed the S&P 500 in July with a 1.2% return, and it trailed the S&P 500 by about 1% during the first seven months of 2019. Office was the best performing real estate sub-sector for the month, outperforming the broad real estate index by more than 2 percentage points. Hotels and lodging was the worst performing sub-sector, even as interest rates moved lower. Since hotel rooms generally turn over daily, the sector’s short-duration characteristics present challenges for this group relative to broad real estate as interest rates fall.