Kai W. Hong, CFA
Managing Director & Chief Investment Strategist

The month of July was thirty days of relative calm in the markets punctuated by a sharp selloff on the last day.  Economic data was generally positive, but deflation once again became a concern in Europe along with the realization that the ECB will likely have to stay accommodating for much longer than their UK and US peers.  By August, the tragic downing of a Malaysian Airlines flight over Ukraine, Argentina’s default, and the rescue of Portuguese bank Banco Espirito Santo raised investor anxiety.  Economic news turned weak with the US unemployment rate edging up slightly and data disappointing in both China and Europe.  However, as in many recent rallies, central bank accommodation fueled a mid-month recovery as the ECB moved closer to quantitative easing and central bankers worldwide generally affirmed the appropriateness of easy monetary policy given current economic conditions.  By mid-September, concerns regarding global growth, voiced most notably by the IMF, served to highlight the limits of monetary policy and a meaningful market sell-off closed out the quarter.

The US broad market Russell 3000 Index finished the quarter essentially flat at +0.0%.  US small cap stocks were significantly worse with the Russell 2000 Index returning -7.4%, bringing the underperformance of small cap versus large cap to over 15% in the past 12 months!  Outside of the US, developed markets were generally negative with the MSCI World ex USA returning -5.7%.  Emerging market stocks held up slightly better, finishing the quarter at -3.5%.

Following a difficult first half of the year, active manager performance was generally positive as the incremental return of volatility along with broader sector performance spreads provided opportunities for differential results.  That said, while overall market volatility did increase (particularly towards the end of September), cross-sectional volatility remained at the lower end of historical ranges.  On a factor basis, small size was significantly negative, value and momentum were somewhat negative, and quality and stability were positive.  From a manager style perspective, core managers performed well as did value managers with a more relative value bias.  Growth managers had mixed results.