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

The year started with alternating periods of rally and reversal as the markets struggled for direction.  Strong returns in the prior quarter left valuations at less attractive levels and mixed economic data left plenty of ammo for both bulls and bears to act upon.  By February, the price of oil stabilized, and things were generally more sanguine on the macro front.  Although US GDP growth for Q4 2014 fell short of expectations, growth for the overall year was still the highest in four years.  A surge of M&A activity in the pharmaceuticals space also helped to stoke investor sentiment, and February turned out to be an exceptionally strong month for most equity markets.  Despite the inception of QE by the ECB, volatility returned in March as mixed economic data was perceived as either good (decreasing the likelihood of a Fed rate hike) or bad (slower long-term growth less supportive of robust valuations) for the markets.

The US broad market Russell 3000 Index finished the quarter up +1.8%.  US small cap stocks continued their recovery from the underperformance of early 2014 with the Russell 2000 Index returning +4.3%.  Outside of the US, developed markets showed good strength with the MSCI World ex USA Index returning +3.8% while emerging market stocks as represented by the MSCI EM Index were slightly weaker at +2.2%.

Performance for active managers was generally negative during the quarter.  Despite some meaningful moves up and down, overall market volatility continued to remain low.  On a factor basis, smaller size and non-US exposure were beneficial while value and stability were significant negatives.  Quality and momentum were incrementally positive at different points in the quarter.  The strength of Health Care aside, sector spreads were below average.  From a manager style perspective, value and core managers held up better in small cap while growth managers did better in large cap.