Director of ETF and mutual fund research, CFRA
Heading into 2018, CFRA predicted that investors would continue to embrace ETFs regardless of how old the funds are, focusing instead on holdings and costs. This has proved to be accurate, as 138 ETFs that are less than three years old have gathered $100 million or more in assets as of mid-July. For example, just look at the Goldman Sachs ActiveBeta US Large Cap and the Vanguard Tax-Exempt Bond ETFs.
However, we were incorrect to predict that the S&P 500 industrials sector would be a strong performer. Despite a growing US economy, investor concerns about global economic trade and other factors have resulted in a relatively weak showing for industrials.
Looking to the second half of 2018, we predict that more asset managers will launch actively managed ETFs, with Janus and Prudential among those who have already filed to expand their line-ups with more bond products. As investors continue to embrace ETFs, traditional active managers have found and will continue to find opportunities to offer their own expertise and potentially gather assets.
Chief investment officer, Regions Bank
Our right call was being overweight stocks over bonds since the beginning of the year. We felt that continued earnings growth coupled with rising inflation and rates would make for a compelling stocks-over-bonds call.
Our incorrect call was that we started the year with an overweight to international stocks over their domestic counterparts. We felt that global growth coupled with lower valuations would carry the day. Unfortunately, fears of trade wars and weakening global dynamics have caused relative underperformance. We reallocated back to domestic a few weeks ago.
We predict that emerging market equities will outperform developed international equities. Despite the volatility, these markets have far superior growth dynamics at better relative valuations.
Director of research, Forbes Family Trust and LGL Partners
At the close of the first quarter of 2018, we observed that first-quarter events for master limited partnerships (MLPs) – for example, the unexpected decision from the Federal Energy Regulatory Commission to eliminate income tax recapture for certain issuers – presented a great buying opportunity. We implemented a tactical overweight in the second quarter. MLPs were up nearly 13% over that period.
We also observed the pick-up in volatility across asset classes and the move toward normalized central bank policy. We thought these developments would be good for hedge funds and systematic traders. On average, hedge funds were only up around 1% through to the end of the second quarter, behind expectations. We are still constructive on certain strategies though.
For the remainder of 2018, we are underweight general high yield fixed income. With rising rates providing a headwind and spreads around 360 (several percentage points below their longer-run average), the broad high yield category may underperform. That said, there is still value in some areas of distressed bonds.
Director of research and investment strategy, ALPS Advisors
Coming into 2018, I thought that energy prices would rebound. This thesis was based on a combination of consistent demand projections and an unwillingness among global exporters to increase supply meaningfully. Oil prices are up nearly 25% year-to-date, and energy has been the third best-performing sector of the market, trailing only the red-hot consumer discretionary and technology sectors.
At the start of the year, I thought that global markets would outperform the US. Global markets were starting to gain earnings and GDP momentum, and they stood to benefit too from a valuation discount relative to their US counterparts. This thesis has been incorrect so far in 2018, as US corporate earnings and the dollar continue to surprise to the upside. Investors have largely shrugged off political risk and the potential impact of a trade war too.
For the remainder of 2018, I see continued strength in the commodity sector. Inflation continues to make its way through the financial system, and the supply/demand imbalance remains favorable for most commodities. A strong dollar and a negative response in China to the ongoing trade war have held commodities in check in the short term. As long as these headwinds abate even slightly, commodities should be poised to move much higher over the rest of 2018.
Executive director, Oppenheimer
Coming into the year, we made a dynamic allocation trade across a number of our portfolios to increase exposure to US small-cap equities. While valuations were relatively expensive across all market cap segments, we believed small-cap companies were poised to benefit the most from corporate tax reforms and a stronger dollar. This has proved to be accretive to performance, as the Russell 2000 has outperformed the Russell 1000 by 481 basis points year-to-date through June 30, 2018.
So far, we have been incorrect in our belief that large-cap value would outperform growth in the US due to more attractive valuations and economic tailwinds for the financials and energy sectors. Unfortunately, while energy proved to be a strong performer in the second quarter, growth was propelled by a continued rally in information technology and consumer discretionary stocks.
After a very strong start to the year, we believe the dollar is poised to stabilize, relieving pressure on emerging markets. While there are certainly troubled spots to steer clear of, we believe broad regional fundamentals remain intact. What’s more, the pace of earnings growth among emerging market companies is still expected to outpace developed markets over the coming years.