Q3 2021 Performance Review

Key Takeaways

• U.S. markets remain strong year-to-date as stock markets hit record highs more than 50 times this year before losing momentum in early September amid growing uncertainty over economic growth.
  
  
• U.S. equities returns within the portfolios were relatively muted this quarter with gains from large cap stocks partially balancing out losses from small caps. Developed markets were mixed while emerging markets were pulled down by China.
  
  
• Broadly flat returns were seen from fixed income with yields rising towards late September in response to the Fed signaling tapering offsetting the quarter’s prior gains.
  
  
• New Frontier portfolios were nearly flat or negative in Q3 with low-risk profiles outperforming the high-risk profiles on both an absolute and relative basis supported by TIPS and proportionately higher exposure to less risky equities.
  
  

Portfolio Performance

New Frontier Global Core Portfolio Performance

_{Performance as of 9/30/2021
*New Frontier performance is net of platform and strategist fee. No fees are deducted from benchmark returns.  
*Benchmark is comprised of MSCI ACWI IMI NR (stocks) and FTSE Treasury Bill 3 Month USD (bonds).  
See appendix for additional disclosures.   
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.} 

With year-to-date performance being positive and strong, growing uncertainty around global economic recovery turned Q3 performance to flat or negative. Fixed income returns were mixed but largely muted whereas equities performance contributed most to the picture where higher risk equities didn’t do well this quarter.   

The low-risk profiles (conservative portfolios) outperformed the high-risk profiles (aggressive portfolios) on both an absolute and relative basis. Conservative portfolios benefited from TIPS and U.S. high yield as well as proportionately higher exposure to U.S. minimum volatility stocks and Pacific markets from the equity side. For aggressive portfolios, exposure to emerging markets equities and U.S. small cap stocks weighed performance while large cap growth stocks, as the best performing equities, helped mitigate the loss. 

New Frontier Tax-Sensitive Portfolio Performance

 _{Performance as of 9/30/2021
*New Frontier performance is net of platform and strategist fee. No fees are deducted from benchmark returns.   
*Benchmark is comprised of Dow Jones Global Select Dividend TR USD (stocks) Bloomberg Barclays U.S. Aggregate Bond Index (bonds).  
†Yield information is provided by Morningstar for individual underlying assets. 
See appendix for additional disclosures.   
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.} 

Tax-Sensitive portfolios performed in line with Global Core portfolios. Our overweight allocations to growth stocks had little impact on performance as gains from U.S. large cap stocks were partially canceled out by losses from U.S. small cap stocks. On the fixed income side, municipal bonds slightly underperformed the broad bond markets due to the changes in yields.  

New Frontier Multi-Asset Income Performance

_{Performance as of 9/30/2021
*New Frontier performance is net of platform and strategist fee. No fees are deducted from benchmark returns.   
*Benchmark is comprised of Dow Jones Global Select Dividend TR USD (stocks) Bloomberg Barclays U.S. Aggregate Bond Index (bonds).  
†Yield information is provided by Morningstar for individual underlying assets. 
See appendix for additional disclosures.   
PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS.} 

Multi-Asset Income (MAI) portfolio performance tracked the benchmark returns this quarter, supported by a relatively overweight allocation to U.S. dividends that outperformed international dividends, along with positive returns added by global infrastructure stocks and U.S. REITs. Global infrastructure stocks were the best performing assets in the MAI portfolios, boosted by the economic reopening. The portfolios are providing a consistent and sustainable yield of 3 – 3.5%, roughly twice that of core U.S. aggregate bonds or broad global equities. 

Asset Class Performance

                                                    Fixed Income Performance 

_{Source: Bloomberg}

                                                                  Equity Performance

_{Source: Bloomberg} 

An Uneventful but Volatile Quarter for Bonds   

The yields reversal sent bond returns to flat this quarter. Long Treasurys ended the quarter only slightly positive, but had been the best performing bond for the majority of the quarter until the Fed signaled tapering was likely in November, and the 10-year yield climbed back up. TIPS took the lead, driven by strong demand this year with investors seeking protection against sticky inflation.  

Despite being fundamentally more volatile with higher default risk, high yield bonds realized less return volatility this quarter than investment grade corporate bonds and treasuries as they were less affected by changes in yields. Credit spreads narrowed further to their lowest levels in the last decade. 

The U.S. dollar rose to a one-year high, up 2% this quarter. The stories behind a stronger dollar were largely centered around relatively high yields in U.S. compared to other parts of the world and increased expectations for a more hawkish Fed in contrast to other central banks as well as some concerns over global economic growth slowdown. A stronger dollar weighed on returns of international treasuries and emerging markets bonds, both of which ended in negative territory. 

Equities Vacillating Between Concern and Optimism During the Quarter

Following the prior quarter’s upbeat note based on accelerating economic reopening, Q3 turned out to be a vacillating stage, where markets reset expectations amid concerns over inflation and supply-chain disruptions and cautious optimism for economic growth emerging from the pandemic. 

A rising yield in late September put downward pressure on equity valuations, especially for richly-valued growth stocks, but over the quarter U.S. large cap growth stocks remained the largest contributor to portfolio performance.   

Outside the US, pressure from inflation and supply shortages were being felt by international markets as well. Global ex-US equities were down 3% this quarter. Pacific equities markets were the only major region outside US that ended with a positive return. European markets were down more than 1%. Emerging markets were down 7%, largely pulled down by China. In fact, China was the biggest detractor from the performance for the quarter and year due to a broad-based regulatory crackdown from tech to entertainment, and growing concerns over its property markets. The rest of EM countries did relatively better, down only 2% this quarter. As a result, the China allocation in MSCI EM index is now down to 34% from 40% as of the end of last year.  

Asset Allocation Changes

With low absolute returns and little asset class dispersion, New Frontier did not rebalance this quarter. However, interest rate volatility and quantitative and qualitative risks from China have been incorporated into our investment process. 

China deserves special mention. Our updated risk estimate for China early this quarter reduced its optimal weight in our portfolios. In the instance a rebalance had taken place this quarter, we still would not have allocated more assets to China. Further note that as an aggressive asset, China will have proportionately lower weights in conservative portfolios. Given the uncertainty associated with new Chinese regulations, these lower weights are appropriate risk management. 

New Frontier has been closely monitoring capital market volatility and drifts from portfolio optimality on a nightly basis using our patented Michaud-Esch Rebalancing Test.