PerceptionversusReality

When asset valuations are extended well beyond historical norms, as they are today, some
investmentmanagerselecttotakeamoredefensiveandcautiousposturethantheconsensus.
InBubblesandElevators,wediscussedhowbehavioralinstinctstofollowtheherddominate
humannature,butfightingthoseinstinctsisnecessarytolimitexposureto,oravoidentirely,
market situations that pose abnormally high risks. Rational judgement, not emotion, should
guide investment decisions, and investment professionals need to effectively impart this
rationaletoclients.Asifthistaskisnothardenough,itisfrequentlymademorechallengingwhen
their clients perspective on market returns is not supported by the facts. At such times, it is
incumbentuponthemanagertohelpclientsunderstandreality.

Currently,withequitymarketssustainednearalltimehighs,thereisacommonperceptionthat
theequitymarketisrunning.Asaresult,manyinvestorsharborconcernofgettingleftbehind.
The reality is that equity markets are not surging, or running, and have actually been
consolidatingforalmosttwoyears.

Perception

Human perception is based on an incredible amount of sensory information. Some of our

perceptionmaybebasedonfactbutquiteoftenitismoreheavilyinfluencedbytheopinionsof
otherpeoplefriends,strangers,themedia,andthesocalledexperts.

Currently, many investors have a perception that the equity markets are exhibiting powerful
momentumhigherandgeneratingaboveaveragereturns.Forinvestorswhoaretakingamore
conservativestancetowardsequities,thisperceptionmaycreatediscomfortanddissatisfaction.
Suchinvestorstendtobelievethattheirportfoliostrategyiscausingthemtounderperformthe
equityindicesandtheportfoliosoftheirfriendsandneighbors.Markingtimeandavoidingrisk,
intheirminds,iscomingatgreatopportunitycost.

Thisperceptionofrecentrobustmarketreturnsisnotonlybasedonhowothersdescribethe
markets, but is also likely based on the bullish market trend that started in the wake of the
financialcrisis.Thegraphbelowshowsthetremendousgainsachievedsince2009andacursory
glancesupportstheperceptionthatthebullisstillrunningstrong.

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S&P5002009toCurrent

2,300

2,100

1,900

1,700

1,500

1,300

1,100

900

700

500
2009

2010

2011

2012

2013

2014

2015

2016

DataCourtesy:Bloomberg

Reality

Thestockmarkethascertainlypostedimpressivereturnssince2009,butforthebetterpartof
the last two years it has consolidated. Although near alltime highs, the S&P 500, has only
generateda2.13%annualizedreturnsincetheendof2014.

S&P5002015toCurrent

2,250
2,200
2,150
2,100
2,050
2,000
1,950
1,900
1,850
1,800
01/2015

04/2015

07/2015

10/2015

01/2016

04/2016

07/2016

10/2016

DataCourtesy:Bloomberg

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Whilepositive,thatreturniswellbelowhistoricalaveragesandwasaccompaniedbytwogut
wrenchingdownturns.Oneshouldalsoappreciatethatsuchameagerreturncouldhaveeasily
beenearnedbytakingafarlessriskyposition.AsimpleportfolioconsistingofU.S.Treasurybonds
andcashwouldhaveearnedasimilarreturnwhiletakingasmallfractionoftherisk.

Technically speaking, the longerterm bullish trend in equities is still intact, but terms like
consolidatingormeanderingaremuchmoreappropriatedescriptorsofthecurrenttrend.For
thosesittingonthesocalledsidelines,takesolaceinreality.Whatyoumissedweresubpar
returnsandtwo10%declines.

Thetotalreturnsofwelldiversifiedandwellrunmajorpensionfundsandendowmentsprovide
furtherinsightintothecurrentdivergencebetweenperceptionandreality.TheTrustUniversal
ComparisonService(TUCS)indexfromWilshiretrackstheperformanceofmajorendowmentsin
the U.S. and reports quarterly on $3.6 trillion in assets covering 1,300 plans. As reported in
August, the index through fiscal year June 30, 2016 lost a median 0.74%, marking the worst
annualdeclinesince2009.Thetroublingperformanceof2016followsameager2.8%returnin
2015,markingtwoconsecutiveyearsendowmentshavefailedtoachievetheirtargetreturns.As
conveyedbymostfundmanagers,theoutlookisequallypoorgivencurrentvaluationsonmajor
assetclassesandcomparativehedgefundperformance.Thesefundsarerunbysomeofthebest
andbrightestinvestmentmanagersintheworld.Theirreturnsspeakvolumestothechallenges
ofgeneratingreturnsoverthelasttwoyears.

Summary

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M.C.EschersfamouspaintingAscendingandDescending,shownabove,andrecentmarket
trendshavealotincommon.Theybothportrayalotofupanddownmovementandwhatmany
mayperceivetobetrends.However,whenstudiedclosely,theybothshowlittletonoabsolute
changeindirection.

Combattingperceptiondrivennarrativesandconveyingrealitytoyourclientsisvital,especially
inmarketssuchastodaythatposesignificantrisks.Frequentlyadoseortwoofrealitycanhelp
clientsdiminishthebehavioralpressureoftakinganalternativestanceandmoreimportantly
helpthemsticktotheirlongtermplanandachievetheirfinancialgoals.AlthoughtheFederal
Reservedependsonmanagersthrowinginthetowelandchasingreturns,yourclientswealth
dependsonyourunemotionaldecisionmakingandclearcommunication.

720Globalisaninvestmentconsultant,specializinginmacroeconomicresearch,valuations,asset
allocation,andriskmanagement.Ourobjectiveistoprovideprofessionalinvestmentmanagers
withuniqueandrelevantinformationthatcanbeincorporatedintotheirinvestmentprocessto
enhanceperformanceandmarketing.Weassistourclientsindifferentiatingthemselvesfromthe
crowdwithafocusonvalue,performanceandaclear,lucidassessmentofglobalmarketand
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