Q2 2023 Performance Blog

Key Takeaways 

• The second quarter saw substantial global equity growth, marked by the US and international markets entering technical bull territory. 
• Large-cap growth stocks excelled, driven by a handful of US mega-cap tech companies, which greatly benefited from the ongoing artificial intelligence boom. 

• Markets priced out rate cuts by year-end, leading to an overall upward shift in the Treasury yield curve. 
• New Frontier's ETF portfolios achieved positive returns across the board in Q2. 

Market Performance ​ 

During the second quarter the US market entered a technical bull market, with the S&P 500 rising more than 20% from its October low, as shown in the white line on the chart. Within the quarter itself, the S&P 500 gained 8.7%. The rally was largely driven by a handful of US mega-cap tech companies, which greatly benefited from the ongoing artificial intelligence boom. Notably, the Fang+ index, represented by the orange line on the chart, consisting of ten equal-weighted tech companies, including Apple, NVIDIA, and Google, saw remarkable growth of 74% since October and 25% within this quarter alone. 

Beyond the headlines, the bull market extended beyond the US. The ACWI ex-US, ACWI ex-US large value, and ACWI ex-US large growth lines on the chart equally impressive gains of over 20% since October. Unlike the narrow leadership in the US rally, international markets experienced a broader-based rally, with both value and growth stocks participating.

A Global Rally: A Tale of Two Rallies

Source: Bloomberg

Beyond the stock market rally, U.S. labor market remained resilient, and the Fed signaled more rate hikes this year after maintaining steady rates in the June meeting. As a result, market expectations shifted from anticipating rate cuts by year-end to pricing in one to two more hikes later in the year. 

Consequently, the whole U.S. Treasury yield curve shifted upwards, compared to Q1. The 2-year Treasury yield experienced the largest increase of 80 basis points, reaching almost 4.9%. However, relative to the yield curve from the end of last year (represented by the blue line on the chart below), only the very short end of the yield curve saw a significant rise reflecting the short-term interest rate increases. The long end of the curve remained relatively stable, suggesting no meaningful changes in long-term inflation expectation and economic growth prospects since last year. 

U.S. Treasury Yield Curve Shifted Upward

Source: U.S. Department of Treasury

Asset Class Performance

Fixed Income:  

Bonds had a relatively flat or negative quarter following a strong recovery earlier in the year. The US Agg bonds lost 0.94% but remained positive year-to-date. Long Treasury bonds, which were the best performing bonds in the first quarter, had the biggest decline of 2.4% this quarter, though still up 4.7% year-to-date. 

Duration underperformed during this period, but credit helped offset losses. Notably, the top-performing assets included the ultra-short Treasury Floating Rate Bond ETF, up 1.3%, and short-term high yield ETF and Emerging Market bond ETF, both up 1.5%. We added a convertible bond ETF to our Multi-Asset Income portfolios late last year to diversify risk and counterbalance the natural bias towards dividend and value in the portfolios. With 40% of the ETF’s underlying equities in the technology sector, convertible bonds have benefited from tech stock appreciation, resulting in a gain of 5.5% this quarter and 10.5% this year.

Source: Bloomberg. All ETFs are total return in US dollars. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTTURE RESULTS. Data as of 30 June 2023

Equities:  

Global equities had a positive quarter, with a 6.3% gain, contributing to an impressive 14% growth year-to-date. Growth stocks outperformed value stocks, and large-cap stocks performed better than small-cap ones. High dividends underperformed the broader markets, and the US market outperformed international markets. 

Notably, large-cap growth stocks delivered the best performance for both the quarter and the year, offering a remarkable return of around 30% year-to-date, offsetting the losses incurred in 2022. The sharp rotation between value and growth highlights the importance of diversified exposure in portfolios. 

In contrast to US markets, International markets rose more broadly, though to a lesser degree. Europe posted a modest gain of 2.8% among Eurozone's recession and the European Central Bank's eighth consecutive interest rate hike in June to bring down sticky inflation. Asia-Pacific equities returned 2.9%, largely helped by Japanese shares, while Emerging Market equities, pulled back by China’s weaker-than-expected recovery, were up 2%. 

Alternative exposures to Gold and international REITs detracted from the overall portfolio performance during the quarter. 

Source: Bloomberg. All ETFs are total return in US dollars. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTTURE RESULTS. Data as of 30 June 2023

Portfolio Performance 

All New Frontier’s ETF portfolios delivered positive returns in Q2. The table below shows net-of-fees performance for Global Core, Tax-Sensitive and Multi-Asset Income ETF portfolios over multiple time periods.  

For Global Core and Tax-Sensitive portfolios, the positive performance was largely driven by the equity exposure, particularly by large-cap growth stocks.  

In our portfolio approach, we view value/growth not merely as factors seeking premiums, but as risk exposure that segments the US equity market into large value/growth and small value/growth categories. These segments exhibit different risk-return characteristics. For instance, large-cap value is less risky than large-cap growth, small-cap value, and small-cap growth, as indicated by long-term historical standard deviation. Consequently, when optimizing the portfolios along the efficient frontier, aggressive portfolios may have proportionately more growth. While our global aggressive portfolios do not outweigh large-cap growth, they emphasize overall growth, combining both large and small. On the other hand, conservative portfolios can allocate more to large value stocks. The balanced 60/40 portfolios maintain a more even exposure to value and growth. This strategic approach allows portfolios to perform in line with their target risk, preserve investment value across various market environments, and mitigate fluctuations during reversals. 

Despite dividend-focused equities lagging in the broad equity markets and turning negative, our Multi-Asset Income portfolios still performed positively. Our portfolios benefited from diversified exposure to a wide range of high-dividend funds across various markets. Currently, the yields provided by our portfolios are approximately 5%.

Conclusion 

Forward-looking expected returns for both stocks and bonds are positive for investors. In fixed income positive real yields at all maturities, particularly very short duration, are good for investors. The higher current yields both imply higher forward looking returns, as well as an income cushion for price volatility. For stocks, AI enthusiasm poses a potential risk for a handful of highly valued stocks, but also a potential for further growth, as its productivity enhancements spread throughout the global economy. However, uncertainty around inflation, recession, and the Federal Reserve policy means that volatility is likely to persist. While risks are unavoidable and frequently unforecastable, using a disciplined investment process to maintain optimally risk-controlled diversified portfolios provides a more reliable way for investors to navigate the market.