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Investor Intelligence October 10, 2017

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Investor Intelligence
Newsletter


A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser)                                                      October 10, 2017

myrnaIA                                                                                                                                                                  Myrna Rivera, CIMA®

From the Executive Desk                                                                         Founder & Chief Executive Officer

After witnessing the damage suffered by families, businesses and communities across our Island I can only draw one conclusion: We shall reconstruct! Many of those that know me and know our firm have heard me talk about the power of investors to create impact through their investments. Over the past 10 years we have educated fiduciaries at different organizations on the meaning of socially responsible investments and their importance in generating positive change while earning market rate returns. One of the strategies most commonly used is targeting investments that will bring about economic development in selected regions and locations. Usually, this strategy is used by pension funds, public corporations, and insurance reserves, among others, that represent pools of collective public wealth. In an effort to generate risk-adjusted market rates-of-returns and to promote economic development in the City of New York, the New York Retirement System declared in their investment policy that they would make a minimum allocation of 2% of their portfolio towards Economically Targeted Investments (ETI). The New York City ETI program is designed to address market inefficiencies by providing capital or liquidity to underserved communities citywide. It has allowed New York to build affordable housing and support small business development in neighborhoods that were well under the financial industry’s radar. Those of you that have been there recently have probably seen a noticeable revitalization of several sections of the five boroughs. Now more than ever, investors in Puerto Rico need to make a similar commitment. We estimate that by dedicating just 1% of our collective wealth to ETI opportunities such as the Puerto Rico Fund for Growth or the Puerto Rico Community Foundation’s Community Investment Fund, there can be over $300 million available for investments that can lead to a reflourishing of native businesses and communities. Once we have dealt with this emergency adequately we will be ready to reconstruct.

Edmundo J. GarzaEdmundoIA

Economic Perspectives                                                                                                               President

The Brookings Institute has a very interesting project that has been tracking the global economic recovery over the past 10 years through the use of several composite indices. According to Brookings researchers, Eswar Pasad and Karim Foda, the world economy has settled into a “holding pattern”, with a broad-based recovery that is characterized by weak productivity and low investment growth. What they also call a “synchronized but sluggish recovery”. Both advanced and emerging market economies have maintained growth momentum, but policymakers seem reluctant to implement tougher reforms that could push economic growth into a higher pace. In the U.S. the recovery continues, albeit a still tepid pace of growth in GDP, industrial production and capacity utilization. Weak wage growth and muted inflationary pressures suggest a breakdown of the traditional relationship between labor market indicators and inflation. The Eurozone continues to deliver a combination of modest but steady growth and low inflation. Europe is finally in a position to normalize monetary and fiscal policies, but there is still substantial resistance to broad structural reforms and rising tensions in the centralization of policymaking. This has caused many euro members to constrain investment growth. A messy “Brexit” continues to be a concern for the U.K economy, which has remained mired in low growth due to heightened political and economic uncertainties. The Japanese economy is gradually consolidating its gains, but private consumption and investment remain weak, reflecting damp consumer and business confidence. China seems to have achieved slowing down their pace of growth as intended. Their major concern continues to be risks accumulating in their financial system, as much of the state’s credit has been allocated to state enterprises with low-productivity. India has lost some of its recent growth luster, as GDP recently slipped below 6% exposing underlying fragilities in the economy. Rather than relying on monetary and fiscal stimulus, the government will need to resuscitate private investment through economic policy reform. Overall, trade conflicts and geopolitical concerns remain a clear and present danger for the global economic recovery. World leaders should use the current breathing room to strengthen the resilience of their economies and policy frameworks before the next inevitable downturn.

 Indicators

(As of October 10, 2017)

United States:

CPI: 1.9% Chg. from yr. ago

Unemployment Rate: 4.2%

GDP: 3.1% Comp. Annual Rate of Chg. on 2017:Q2

Ind. Prod. Index: -0.9% change from previous month

Source: St. Louis Fed. Res. 

Eurozone:

CPI: 1.5% Chg. from yr. ago

Unemployment Rate: 9.1%

GDP: 0.6%, Comp. Annual Rate of Chg. on 2017:Q2

Ind. Prod. Index: 0.1% change from previous month

Source: Moody’s Analytics 

Japan:

CPI: 0.7% Chg. from yr. ago

Unemployment Rate: 2.8%

GDP: 0.6%, Comp. Annual Rate of Chg. on 2017:Q2

Ind. Prod. Index: 2.1% change from previous month

Source: Moody’s Analytics 

Puerto Rico (As of September 9):

CPI: -0.4% Chg. from yr. ago

Unemployment Rate: 9.8%

Payroll Employment: -0.9% Chg. from yr. ago

GDB Econ. Act. Index: -2.0% Chg. from yr. ago

Source: P.R. GDB 

EvangelineIAEvangeline Dávila, CIMA®

Market Update                                                                                         Chief Research & Investment Officer

Stocks:         U.S. equity markets moved higher in September. The S&P 500 gained +2.1%, pushing the 3rd quarter (Q3) and year-to-date (YTD) return to +4.5% and +14.2%, respectively. Meanwhile, the NASDAQ Composite posted slightly weaker returns of +1.1% but closed out a strong Q3 with a gain of +6.1%, improving its YTD performance to 21.7%. Small cap broadly outperformed large cap by 4.1% in September, as the Russell 2000 Index returned +6.2% versus +2.1% for the Russell 1000 Index. Non-U.S. equity markets were relatively mixed against domestic equities. The MSCI ACWI ex-U.S. Index increased by +1.9% in September, +6.2% for Q3, and is now up +21.1% year-to-date. International developed markets rallied behind continued improvement in the global economic landscape. The MSCI EAFE Index gained +2.5% in the September, +5.4% in Q3 and 20.0% YTD. 

Bonds:         Fixed income markets mostly traded lower, as yields moved higher in September. The yield on the 10-Year Treasury Note began the month at 2.12%, and traded as low as 2.03% earlier in September, challenging market expectations. However, as markets began to give more credibility to central bank tightening, and the Fed announced its plan to begin unwinding its balance sheet, government bonds sold off and yields spiked, with the yield on the 10-Year Treasury Note closing the month at +2.33%, up 21 bps for September. The Bloomberg U.S. Aggregate Bond Index fell by -0.5% for the month, +0.8% for Q3, and is now up +3.1% YTD. Global bonds trailed in September but are still out ahead of domestic fixed income for the year. The Bloomberg Global Aggregate ex-U.S. Index lost -1.3% behind a stronger US dollar, +2.5% for Q3, and is now up +8.7% YTD, with a weaker US dollar fueling much of the year’s returns. Municipal bonds posted slight losses comparable to their taxable peers, losing -0.5%, +1.1% for Q3, and are now up +4.7% YTD. High yield fixed income performed better, in accordance with the “risk-on” sentiment that also has been visible within fixed income, as the Bloomberg U.S. Corporate High Yield CP Index increased by +0.9%, +2.0% for Q3 and is now up +7.0% YTD.

Alternatives: Commodities experienced mixed performance in September as oil surged to lead commodity gains, wheat and cattle also gained; metals declined led by platinum, hogs and natural gas also declined. The Bloomberg Commodity Index was basically flat (-0.1%) for the month, while the energy-driven GSCI was up +3.3% as energy prices rose. The public U.S. real estate market, FTSE-NAREIT Equity Index, was flat (0.0%) in September, while real estate in international developed markets was down -0.7%. Hedge strategies posted performance gains in September, the HFRI Fund Weighted Composite Index® (FWC) advanced +0.5% for the month, led by gains in Equity Hedge and Event-Driven strategies. This is the first time that the HFRI FWC has been positive in each of the first nine months of a calendar year since 2003. The HFRI Fund of Funds Index and HFRX Global Hedge Fund Index also showed positive returns in September at +0.4% and +0.6%, respectively.

(See the table below for returns from various periods)

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Ernesto2Ernesto Villarini Baquero, MBA

The Advisor’s Corner                                            Impact Investing Officer Investment Adviser

How much will our financial return be discounted by the impact investments in our portfolio? Over the past four years at Consultiva, we have heard this question over and over. We even expect it when we walk into board or committee meetings where members are new to our approach. It does not faze us, quite the contrary; we are eager to answer and show that institutions, both large and small, can deploy their investment dollars into strategies that are aligned with their mission without sacrificing their expected financial return. In an article for Alliance Magazine, Buzz Schmidt and Clara Miller of the F.B. Heron Foundation, went as far as to say that impact investing will become the only kind of investing done by mission based organizations in the near future. The “discount” question assumes that mission and finance are fundamentally at odds. In our view, this is a self-limiting approach that has been built up from a traditional view of investing for financial returns that make grants and charitable donations possible. Impact investing must not be viewed as a novel feature of an institution’s investment policy. Boards of mission-based organizations must view the uses of all of their capital as central to their work and that every dollar, both in operations and in investment portfolios, must count towards complying with the organization’s purpose while adhering to its philosophy. The F.B. Heron Foundation has gone as far as blending their grant making and their investing, establishing instead a single capital deployment operation that looks at a broad spectrum of opportunities ranging from grants to high risk private equity investments. Foundations and other grant making organizations in Puerto Rico should also consider this approach. At Consultiva we are ready to advise on the many options currently available to all.

What to Do?

Global markets exhibited a healthy growth trend during September. However, the ever changing macroeconomic environment, domestic policy stagnation, and U.S. - foreign relations continue to keep us watchful of developments and effects. We hope that world leaders take advantage of the breathing room in the economy to strengthen the financial resilience of their countries before the next inevitable downturn. Amid an uncertain scenario we continue to recommend prudent asset allocation and risk assessment, based on future capital needs, for plan sponsors, institutions and individual investors. Due diligence reviews and an adherence to a well-developed investment policy remain the most prudent course for long-term investors. Continued fiduciary education is paramount. 

DISCLAIMER:

Consultiva Internacional Inc. (Consultiva) is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training. Consultiva has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. Global and international investments may carry additional risks that are generally not associated with U.S. investments, such as currency fluctuations, political instability, economic conditions and varying accounting standards. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation.

 

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