market commentary period ending 9.30.14 | q3 ’14...market review period ending 9.30.14 | q3 ’14...

Period Ending 9.30.14 | Q3 ’14market commentary

A Little Divergence Creeps InEric J. FreedmanCAPTRUST Chief Investment Offi cer

now, their weakness signals growth concerns outside of the U.S. Second, while U.S. interest rates were relatively fl at in the third quarter, European interest rates continued their descent. With bond yields in some of Europe’s largest economies hitting all-time lows, investors associated these sharp declines with lower prospective growth.

What will investors need to consider in 2014’s fi nal quarter? Diversifi cation with an emphasis on quality will likely be an investor’s ally in this uncertain global environment. We continue to see the glass half full with respect to the global economy’s forward prospects, but with the U.S. ending its pro-growth policies and potentially moving to more restrictive ones as early as this winter, investors should keep abreast of global dynamics. While the U.S. economy still has some underlying momentum, without economic relief from China, Japan, and eventually Europe, the U.S. will not be able to carry the global economy alone. Again, we remain optimistic about the current investment landscape, but we do not expect returns to happen in a straight line.

Following the fi rst half of 2014’s rather uniform march higher across major asset classes, the third quarter witnessed several asset classes decouple from early year momentum.

The U.S. stock and bond markets delivered positive total returns in the year’s third quarter, with the U.S. stock-focused S&P 500 up 1.1 percent and the Barclays Capital Aggregate Bond Index eking out a 0.2 percent gain. Other major and sub-asset categories did not fare as well. U.S. small-cap stocks fell over 7 percent, international developed stocks (as measured by the MSCI EAFE Index) fell almost 6 percent, and emerging market stocks reversed their course, falling 3.4 percent in the third quarter. Real estate cooled off following a torrid start to 2014, losing 2.5 percent for the quarter, although the asset class is up 13.4 percent for 2014. Commodities continued their downward move, dropping nearly 12 percent on the quarter and 5.6 percent for all of 2014 through the end of September.

Central bank activity remains the key driver across the global capital markets, and this quarter’s mixed performance refl ects a world with highly varied central bank policies across major economies. In the U.S. and the United Kingdom, policy makers are moving away

from programs such as open-market bond purchases designed to lower interest rates and promote growth. Meanwhile, Japan is trying to overcome years of economic stagnation, stubbornly low prices, and defl ation, while Europe is showing symptoms of similar problems. To combat these issues, their central banks are adopting pro-growth policies, including asset-purchase programs, and signaling to market participants that interest rates will stay low for the foreseeable future, while their American and U.K. counterparts have indicated interest rates could move higher in coming quarters.

With a mixed growth and policy picture, investors faced uncertain developments that accelerated adverse reactions through the third quarter. First, the U.S. dollar rose considerably relative to some of its major trading partners, including the pound, yen, and the euro. As noted, this had a negative impact on commodity prices, which are quoted globally in dollars and, therefore, become more expensive to foreign buyers as their currency depreciates relative to the dollar. While lower commodity prices could benefi t consumers in the medium term, for

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S&P 500 Large-Cap Stocks (R1000)

Small-Cap Stocks (R2000)

International Equities (MSCI EAFE)

Fixed Income(BC Aggregate)

0.17%

Major Asset Class Returns, 3rd Quarter 2014

-4.41%

-0.99%

7.97%8.34%

0.65%

-7.36%

1.13%

-5.83%

-2%

4.10%

Q3 ’14 YTD 2014

8%

-4%

-6%

-8%

-10%

0%

Period Ending 9.30.14 | Q3 ’14market review

• Developed and emerging international equity gauges had negative performance in U.S. dollar terms in the third quarter, with the former down 5.8% and the latter down 3.4%. The developed equity-focused MSCI EAFE Index has been higher 17 out of the last 22 quarters, while the MSCI Emerging Markets Index has been higher 15 out of the last 22.

• Dollar strength hurt international equity indexes, with the euro, yen, rupee, real, and ruble all posting losses against the greenback. U.S. growth expectations and anticipated higher interest rates in the U.S. relative to major trading peers drove this development.

• Emerging markets did see some countries post positive returns in their equity markets before translating them back to dollars; India, China, and Brazil all saw their domestic stock markets higher in Q3 and all three are positive this year.

• U.S. stocks had a mixed third quarter, with large-cap stocks up 1.1% but mid- and small-cap stocks down 1.7% and 7.4%, respectively, for the quarter, bringing year-to-date returns for large caps to just over 8%. Value stocks have outperformed growth stocks so far this year, except among small caps.

• All ten of the large-cap-centric S&P 500 sectors are positive for the year through the third quarter. However, third-quarter returns refl ected some divergence. Energy fell over 8% after rallying in the second quarter, and utilities fell by 4%. Healthcare (+5.5%) and technology (+4.8%) led winners.

• Since the S&P 500 has not had an intra-year decline greater than 10% during the last three years (despite average intra-year drops of over 14% since 1980), many investors are anticipating a pullback at some point.

U.S. EQUITIES

INTERNATIONAL EQUITIES

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Market Performance, 3rd Quarter 2014

Q3 ’14 2014


Q3 ’14 2014

Large Value (R1000 Value) -0.19% 8.07%

Large Blend (S&P 500) 1.13% 8.34%

Large Growth (R1000 Growth) 1.49% 7.89%

Mid Value (Russell Mid Cap) -2.65% 8.20%

Mid Blend (Russell Mid Cap) -1.66% 6.87%

Mid Growth (Russell Mid Cap) -0.73% 5.73%

Small Value (R2000 Value) -8.58% -4.74%

Small Blend (R2000 Blend) -7.36% -4.41%

Small Growth (R2000 Growth) -6.13% -4.05%

International Equities (MSCI EAFE) -5.83% -0.99%

Pacifi c Stocks (MSCI Pacifi c Ex-Japan) -5.88% 1.16%

European Stocks (MSCI Europe Ex-UK) -7.41% -1.57%

Japanese Stocks (MSCI Japan) -2.19% -1.36%

UK Stocks (MSCI UK) -6.05% -1.17%

Emerging Markets (MSCI EME) -3.36% 2.75%


• The Barclays U.S. Aggregate Bond Index rose 0.2% in the third quarter following a 2% gain in the year’s second quarter. Bonds have rallied after registering a -2% return for 2013, the bond market’s fi rst negative return in 13 years.

• Within the broad bond market, historically riskier parts of the bond market fell in the quarter, with emerging markets falling by 0.6% and high yield by -1.87%. Treasurys were in line with the Barclays Index and have registered a positive 3.1% return this year. Infl ation-linked bonds fell 2%.

• Research fi rm ICI’s weekly mutual fund fl ow data indicates that as of early October, investors have placed over $127 billion into bond funds despite several predictions that investors would likely migrate out of bonds this year.

• Hedge fund strategies have posted positive returns thus far in 2014, with the HFRI Fund Weighted Composite Index rising 3.1 %, led by relative value strategies.

• Global macro, long a challenged sub-strategy, produced a positive 2.1% return in the third quarter after a 0.1% 2013 return. Divergent central bank policies (some pro-growth, others more restrictive in light of infl ationary concerns) have created a challenging macroeconomic backdrop for investment managers following this strategy.

Equity hedged strategies have returned just over 1.9% through the end of September, a material shortfall relative to global equities.

• Research fi rm Prequin highlights that private equity fundraising slowed in the third quarter, with quarterly fundraising falling to half of the second quarter’s levels and 31% lower than this time last year, with some concerns emerging on valuation and less favorable deal terms.

FIXED INCOME

HEDGE FUNDS

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Q3 ’14 2014


Q3 ’14 2014

Broad Market (Barclays Capital U.S. Aggregate) 0.17% 4.10%

Barclays Capital U.S. Treasurys 0.34% 3.06%

Barclays Capital Mortgage Backed Securities 0.18% 4.22%

Barclays Capital Municipals 1.49% 7.58%

Barclays Capital Intermediate Corporates -0.14% 3.47%

Barclays Capital High Yield -1.87% 3.49%

HFRI Fund Weighted Composite Index -0.09% 3.07%

HFRI Equity Hedge Index -1.28% 1.92%

HFRI Relative Value Index 0.13% 4.94%

HFRI Fund of Funds Composite Index 0.26% 2.38%

HFRI Fund of Funds Conservative Index 0.07% 2.69%


• Public real estate, as measured by the MSCI U.S. REIT Index, fell over 3.1% in the third quarter yet remain up over 14% for the year-to-date period. REITs have outperformed U.S. equities in 7 of the last 14 quarters.

• Valuation and interest rate sensitivity are two REIT return drivers, and modest valuation relative to historical trend and relatively tame interest rates have provided a solid underlying bid to REITs.

• Domestic commercial mortgage backed security (CMBS) issuance, a gauge of property market deal volume, has not returned to frothy levels witnessed in 2006 and 2007 but is still showing signs of health following the credit crisis. It is notable that the third quarter witnessed about half of the issuance seen in the fi rst two quarters, a development worth watching.

• The Bloomberg Commodity Index (formerly the Dow Jones UBS Commodity Index) fell 11.8% in the third quarter and is down 5.6% for the full year, putting the index in danger of falling four straight calendar years.

• At the sub-index level, energy fell over 11% and gold dropped 9%. Agriculture also suff ered, a continuation from last quarter.

• Some of the more economically-sensitive subsectors demonstrated persistent weakness, but all eyes remain on developments within the energy market (with emerging energy powerhouse U.S. disrupting existing players) as well as developments with the dollar, with a rising greenback making commodities more expensive for non-dollar-based buyers.

COMMODITIES

REAL ESTATE

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Q3 ’14 2014


Q3 ’14 2014

Bloomberg Commodity Index -11.83% -5.59%

S&P GSCI Commodity Index -12.46% -7.46%

Gold (Spot, $/oz) -8.98% 0.21%

Natural Gas (U.S. Spot Henry Hub) -6.29% -4.73%

Crude Oil (U.S. Spot, WTI Cushing) -13.49% -7.38%

MSCI U.S. REIT Index -3.11% 14.03%

Wilshire REIT Index -3.07% 14.46%

Period Ending 9.30.14 | Q3 ’14asset class returns

The information contained in the report is from sources believed to be reliable, but not warranted by CAPTRUST Financial Advisors to be accurate or complete.

Small-Cap Value Stocks (Russell 2000 Value)

Small-Cap Growth Stocks (Russell 2000 Growth)

Large-Cap Growth Stocks (Russell 1000 Growth)

Large-Cap Value Stocks (Russell 1000 Value)

Mid-Cap Growth Stocks (Russell Mid-Cap Growth Index)

Mid-Cap Value Stocks (Russell Mid-Cap Value Index)

International Equities (EAFE)

Fixed Income (Barclay’s Capital US Intermediate Govt./Credit)

Cash (Merrill Lynch 3-Month Treasury Bill)

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD 2014

Fixed Income

5.08%

Mid CapGrowth

-44.32%

International Equities

-43.06%

Small CapGrowth

-38.54%

Large CapValue

-36.85%

Large CapGrowth

-38.44%

Small CapValue

-28.92%

Cash

1.51%

Mid CapValue

-38.44%

Fixed Income

7.39%

Mid CapGrowth

11.43%


26.86%

Small CapValue

23.48%

Large CapValue

22.25%

Small CapGrowth

13.35%

Large CapGrowth

9.07%

Cash

5.08%

Fixed Income

4.08%

Large CapGrowth

37.21%

Small CapGrowth

34.47%

Small CapValue

20.58%

Fixed Income

5.24%


32.46%

Cash

0.21%

Small CapValue

14.02%

Fixed Income

8.96%

Cash

3.64%

Small CapGrowth

-9.23%

Large CapValue

-5.59%

Large CapGrowth

-20.42%


-21.21%

Fixed Income

9.84%

Cash

1.68%

Small CapValue

-11.42%


-15.66%

Large CapValue

-15.52%

Large CapGrowth

-27.88%

Small CapGrowth

-30.26%

Small CapGrowth

48.54%

Small CapValue

46.03%


39.17%

Large CapValue

30.03%

Large CapGrowth

29.75%

Fixed Income

4.31%

Cash

1.05%

Small CapValue

22.25%


20.70%

Large CapValue

16.49%

Small CapGrowth

14.31%

Large CapGrowth

6.30%

Fixed Income

3.04%

Cash

1.44%


14.02%

Large CapValue

7.05%

Small CapValue

4.71%

Small CapGrowth

4.15%

Large CapGrowth

5.26%

Cash

3.35%

Fixed Income

1.58%


11.63%

Small CapGrowth

7.05%

Large CapValue

-0.17%

Large CapGrowth

11.81%

Small CapValue

-9.78%

Cash

4.71%

Mid CapValue

34.21%

Mid CapGrowth

46.29%

Large CapValue

19.69%

Mid CapValue

38.07%

Mid CapGrowth

42.71%

Mid CapValue

2.33%

Mid CapGrowth

-20.15%

Mid CapValue

-9.64%

Mid CapGrowth

-27.41%

Mid CapValue

23.70%

Mid CapGrowth

15.48%

Mid CapValue

12.65%

Mid CapGrowth

12.10%

Mid CapValue

20.22%

Mid CapGrowth

10.66%

Mid CapValue

-1.42%

Large CapGrowth

16.71%

Small CapGrowth

29.09%

Small CapValue

24.50%

Fixed Income

5.89%


8.21%

Cash

0.13%

Mid CapValue

24.75%

Mid CapGrowth

26.38%

Large CapValue

15.51%

Large CapGrowth

2.64%

Small CapGrowth

-2.91%

Small CapValue

-5.50%

Fixed Income

7.84%


-11.73%

Cash

0.10%

Mid CapValue

-1.38%

Mid CapGrowth

-1.65%

Large CapValue

0.39%

Large CapGrowth

15.26%

Small CapGrowth

14.59%

Small CapValue

18.05%

Fixed Income

4.22%


17.90%

Cash

0.11%

Mid CapValue

18.51%

Mid CapGrowth

15.81%

Large CapValue

17.51%

Large CapGrowth

33.48%

Small CapGrowth

43.30%

Small CapValue

34.52%

Fixed Income

-2.02%


23.29%

Cash

0.07%

Mid CapValue

33.46%

Mid CapGrowth

35.74%

Large CapValue

32.53%

Small CapValue

-4.74%

Fixed Income

4.10%

Large CapValue

8.07%

Cash

0.03%


-0.99%

Large CapGrowth

7.89%

Small CapGrowth

-4.05%

Mid CapValue

8.20%

Mid CapGrowth

5.73%

Period Ending 9.30.14 | Q3 ’14index performance

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The opinions expressed in this report are subject to change without notice. This material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or to participate in any investment strategy. The performance data quoted represents past performance and does not guarantee future results. Index averages are provided for comparison purposes only. The information and statistics in this report are from sources believed to be reliable but are not guaranteed to be accurate or complete. CAPTRUST Financial Advisors is an investment adviser registered under the Investment Advisers Act of 1940 and a member FINRA/SIPC.

INDICES Q3 ’14 YTD 2014 2013 2012 2011 2010 2009 1 YEAR 3 YEAR 5 YEAR 10 YEAR

MANAGER UNIVERSE Q3 ’14 YTD 2014 2013 2012 2011 2010 2009 1 YEAR 3 YEAR 5 YEAR 10 YEAR

S&P 500 1.13% 8.34% 32.39% 16.00% 2.11% 15.06% 26.46% 19.73% 22.99% 15.70% 8.11%Dow Jones Industrial Average 1.87% 4.60% 29.65% 10.24% 8.38% 14.06% 22.68% 15.29% 19.02% 14.85% 8.15%NASDAQ Composite 1.93% 7.59% 38.32% 15.91% -1.80% 16.91% 43.89% 19.14% 22.99% 16.18% 9.01%Russell 1000 0.65% 7.97% 33.11% 16.42% 1.50% 16.10% 28.43% 19.01% 23.23% 15.90% 8.46%Russell 1000 Growth 1.49% 7.89% 33.48% 15.26% 2.64% 16.71% 37.21% 19.15% 22.45% 16.50% 8.94%Russell 1000 Value -0.19% 8.07% 32.53% 17.51% 0.39% 15.51% 19.69% 18.89% 23.93% 15.26% 7.84%Russell Mid-Cap Index -1.66% 6.87% 34.76% 17.28% -1.55% 25.48% 40.48% 15.83% 23.79% 17.19% 10.34%Russell 2000 -7.36% -4.41% 38.82% 16.35% -4.18% 26.85% 27.17% 3.93% 21.26% 14.29% 8.19%Russell 2000 Growth -6.13% -4.05% 43.30% 14.59% -2.91% 29.09% 34.47% 3.79% 21.91% 15.51% 9.03%Russell 2000 Value -8.58% -4.74% 34.52% 18.05% -5.50% 24.50% 20.58% 4.13% 20.61% 13.02% 7.25%MSCI Europe, Australia, Far East -5.83% -0.99% 23.29% 17.90% -11.73% 8.21% 32.46% 4.70% 14.16% 7.04% 6.80%Wilshire REIT Index -3.07% 14.46% 1.86% 17.59% 9.24% 28.60% 28.60% 13.51% 16.53% 16.02% 8.34%Barclays Govt. Intermediate Bond 0.02% 1.56% -1.25% 1.73% 6.08% 4.98% -0.32% 1.14% 0.90% 2.50% 3.68%Barclays Corporate IG Bond -0.08% 5.60% -1.53% 9.82% 8.15% 9.00% 18.68% 6.77% 5.19% 6.41% 5.49%Barclays Aggregate Bond 0.17% 4.10% -2.02% 4.22% 7.84% 6.54% 5.93% 3.96% 2.43% 4.12% 4.62%Barclays Intermediate Govt./Credit -0.03% 2.22% -0.86% 3.89% 5.80% 5.89% 5.24% 2.20% 2.01% 3.42% 4.05%Barclays High Yield -1.87% 3.49% 7.44% 15.81% 4.98% 15.12% 58.21% 7.20% 11.09% 10.57% 8.33%90-Day U.S. Treasury 0.01% 0.03% 0.07% 0.11% 0.10% 0.13% 0.21% 0.05% 0.07% 0.10% 1.59%Consumer Price Index (Infl ation) 0.01% 2.28% 1.50% 1.74% 2.96% 1.50% 2.72% 1.80% 1.66% 1.99% 2.30%

Average Large-Cap Growth Fund 0.68% 5.41% 34.01% 15.29% -2.33% 15.75% 35.63% 16.28% 21.29% 14.66% 8.31%Average Large-Cap Blend Fund -0.07% 6.31% 31.55% 14.91% -0.89% 13.96% 28.24% 16.81% 21.54% 14.12% 7.58%Average Large-Cap Value Fund -0.54% 6.40% 31.28% 14.42% -0.61% 13.72% 24.24% 16.38% 21.45% 13.78% 7.36%Average Mid-Cap Blend Fund -3.30% 2.99% 34.61% 16.03% -3.31% 22.43% 36.04% 12.19% 21.90% 14.90% 8.75%Average Small-Cap Value Fund -7.13% -2.72% 36.10% 16.26% -5.04% 25.39% 33.30% 6.22% 21.07% 13.60% 8.13%Average Small-Cap Blend Fund -6.75% -3.24% 37.38% 15.25% -3.58% 25.41% 31.81% 5.65% 21.01% 14.22% 8.04%Average Small-Cap Growth Fund -5.82% -5.01% 41.04% 13.48% -3.59% 27.43% 35.91% 2.77% 20.07% 14.87% 8.77%Average Foreign Fund -5.56% -1.50% 18.95% 17.95% -13.98% 11.80% 35.92% 4.22% 12.81% 6.51% 6.74%Average Emerging Market Fund -3.47% 2.14% 0.02% 18.69% -19.75% 19.32% 72.75% 4.77% 8.03% 4.44% 9.84%Average Conservative Allocation -1.46% 3.37% 7.43% 9.52% 1.65% 9.98% 20.92% 6.51% 8.35% 7.20% 5.26%Average Moderate Allocation -1.28% 4.06% 16.60% 11.75% -0.12% 11.91% 24.29% 9.80% 13.25% 9.77% 6.40%Average Fixed Income Fund 0.00% 4.77% -0.99% 7.73% 6.36% 5.75% 17.86% 5.50% 4.47% 4.84% 4.41%Average High Yield Bond Fund -2.04% 2.71% 6.90% 14.64% 2.89% 14.30% 46.55% 6.00% 10.00% 9.42% 6.97%Average Real Estate Fund -3.01% 13.09% 1.65% 17.52% 7.61% 27.36% 30.57% 12.77% 15.84% 14.98% 7.69%Average Aggressive Growth Fund -1.35% 3.08% 28.86% 13.23% -5.38% 16.72% 35.79% 11.38% 17.69% 11.60% 7.18%

market commentary period ending 9.30.14 | q3 ’14...market review period ending 9.30.14 | q3 ’14...

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