No one can deny the U.S. Equity markets had a fantastic 2013. The broad-based Russell 3000 was up 10.1% during the fourth quarter and 33.6% in 2013, its best year since 1995. However, optimists and pessimists disagree as to what drove the U.S. markets to all-time highs. Bulls point to an improving U.S. economy, an unemployment rate down to around 7%, a housing market on solid footing, strong corporate profits, and low inflation. Bears fretted about the sustainability of the rally and wondered just how much of the market’s performance was driven by five years of near-zero interest rates and three rounds of quantitative easing.
Some managers far outpaced the already robust market returns. On the large cap side, PSN Top Guns Lyrical Asset LAM-EQ (+17.5% for the quarter, +60.8% for the year), TIAA-CREF Large Cap Growth (+26.7% quarter, +54.3% year) and Mazama Select Growth (+12.6% quarter, +50.0% year) were standouts. Small cap strategies fared even better, with Essex Small/Microcap (+17.5% for the quarter, +66.3% for the year), Granahan Small Cap Focused Growth (+8.0% quarter, +65.2% year) and Horizon Small Cap (+13.0% quarter, +60.3% year) represented on PSN Top Guns Small Cap list.
While no one knows how an improving U.S. economy and an end to loose monetary policy will affect U.S. equity markets, their impact on other asset classes like bonds and emerging markets are already being felt. Most sectors of the bond market lost money in 2013, with longer duration and higher credit quality issues faring the worst. Although the Barclays U.S. Aggregate lost 2.0% in 2013, some managers, especially those with shorter durations, posted gains. PSN Top Guns Lord, Abbett & Co Short Duration (+2.2%), Hartford Short Duration (+1.7%), and Pioneer U.S. Core Fixed (+1.4%) managed gains in a rare down year for bonds.
Emerging markets had a rough year as many of the major developing economies suffered sluggish growth, falling currencies, inflationary pressures, and a collection of other problems. The MSCI Emerging Markets Index posted a 1.9% gain on the fourth quarter but lost 2.3% for the year. In spite of the negative conditions some PSN Top Guns managers pushing into the smaller, lesser-known frontier emerging markets did well in 2013. Morgan Stanley Frontier Emerging Markets (+35.2%), HSBC Global New Frontiers (+30.5%), and Aberdeen Asset Frontier Markets (+22.6%) far outpaced broad-based emerging market managers.
The picture in the developed, non-U.S. economies was much better than the emerging ones. The Eurozone had sluggish economic growth but strong market returns and Japanese markets had their best year in decades following their bold-but-controversial policies and reforms known as “Abe-nomics”. The MSCI EAFE was up 5.8% in the fourth quarter and 23.3% on the year. Nuveen Asset International ORD (+44.9%), HGK International Equity (+44.2%) and Financial Trust International Value (+43.1%) topped the universe of EAFE managers in 2013.
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