Island Light Investment Views (Dec 2014)

Investment Views

Our investment strategy team makes a series of active decisions within our Global Portfolios based upon our current outlook on the US and global economy, global equity and fixed income markets. Every quarter, we shift assets away from our strategic allocation, tilting our allocations in certain asset classes and segments from their long term weights, in order to potentially benefit from changing conditions in global capital markets.

Q4 2014 Review: Performance, Market and Economy

Our portfolios were positive for the quarter and for the year. During the quarter and year, global equities were positive and US fixed income contributed to positive performance. Exposure to non-traditional asset classes such as commodities reduced overall portfolio performance. Alternatives, as measured by the hedge fund composite class, were positive in the quarter and for the year.

Global Equities were positive overall in a volatile quarter while fixed income classes posted small gains, as continuing concerns about declining economic growth in Europe and political instability overseas dwarfed positive economic news in the US. Declining interest rates created a positive investing environment for fixed income. US equity markets contributed strong performers in 2014 and significantly outperformed non-US markets. The US 10 Year Treasury Rate ended the year at 2.2%, down 80 basis points from the beginning of 2014 and well below its 10 year average of 3.4%.

Capital Market Estimates and Views

Capital Market forecasts and estimates are critical components in the development of our portfolio allocations. When creating capital market forecasts, we employ sophisticated statistical techniques to combine observations of history with current information and forward looking views. This advanced forecasting process is rigorous, transparent and practical, allowing us to include technical, quantitative factors and investment intuition to manage our investment portfolios in a consistent dynamic framework. We share our current and forward looking views, and the strength of those views here.

Investment Outlook – Q4 2014 / Q1 2015

All views below are as of December 22, 2014.

Overlay View                                
Economic Growth (US economic growth expectation 1 yr): we expect the US economy to grow at about at 3.0% with Moderate Confidence
US Inflation (US inflation rate expectation): we expect that Inflation will be lower than average with Moderate Confidence

Overlay View – Equities                       
Asset Class Valuation (Global Equity Risk Premium): we expect the Equity Risk Premium to be above average (6.0%) with Higher Confidence
Developed Equity Timing (US vs. non-US developed market equities): we favor US developed equities with Moderate Confidence
Non-US Regions Timing  (Europe vs. Pacific vs. Canada) we are neutral with Moderate Confidence
Emerging Equity Timing (Non-US Emerging equities vs US equities): we are neutral with Moderate Confidence
US Equity Style Tilt (US value vs. US growth equities): we Favor US growth equities with Lower Confidence
US Equity Size Tilt (US large-cap vs. US small cap equities): we favor US large-cap equities with Moderate Confidence
Non-US Equity Size Timing (Non-US large vs. non-US small equities): we favor non-US Small Cap with Low Confidence

Overlay View – Fixed Income

US Interest Rate direction (US interest rate expectation – short/mid): we expect short term interest rates to decline with Lower Confidence
US Bond view (US short bond forecast vs. inflation): we expect that bonds returns will exceed the inflation rate with Lower Confidence
US Yield Curve Timing (US long bond v. US short bond): we favor longer duration bonds with lower confidence
US Inflation-Protected Bond (US bonds vs. US inflation-protected bonds): we favor US bonds with Lower Confidence
US Credit Spread (Credit Spread vs Treasuries): we see the spread increasing with Lower Confidence
Non-US Bond View (Hedged non-US Bond vs US Bond): we favor non-US Hedged Bond with Moderate Confidence

Overlay View – Other Assets
US REITs Timing (US equities vs. US equity REITs): we favor REITs with Lower Confidence
Commodities Timing (US commodities forecast): We are negative on commodities with Moderate Confidence
MLPs Timing (Equity MLPs vs US equities): we favor US equities vs MLPs with Low Confidence
Global Macro Timing (Global Macro expectation): We are Neutral with Moderate Confidence

“Confidence” is the strength of our forecast rating from Low to High.

Island Light is pleased to share our capital market forecasts with professional investors who ask for them.  Please drop a line or give us a call for our capital market forecasts for the upcoming quarter and year. Our capital market assumptions are forecasts and reflect our forward looking views. Such views do not express or imply a guarantee or warranty of any kind, but are estimates of future market returns. All views expressed above are the views of Island Light Capital.

Matthew V. Pierce


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