We started Auour almost ten years ago with the desire to invest people’s hard-earned savings in a way to mitigate market downturns without sacrificing the market’s potential during the good times. It is a challenging objective. Our means of outperforming is to lose less in bad markets—though great over the long term; it feels like a shallow victory when going through an economic storm. Let’s move right to the conclusion; we continue to be defensively positioned, with all strategies holding at least a third of their value in cash and cash-like securities as we wait for better opportunities.
Investment markets worldwide continued their negative momentum in the third quarter, making 2022 one of the worst years on record in equities and fixed income alike. Inflation continues to be the focal point for investors as the Federal Reserve Board has clearly stated that their only objective now is to tame inflation through higher interest rates and the draining of excess liquidity. Many are asking if the U.S. is in a recession. The markets are starting to assume a recession, but the economic data suggests we have not yet entered one. We must remember that markets typically hit their lows before the worst pain is felt, as investment markets are forward-looking and will discount before we feel it in the economy.
As measured by the MSCI All Country World Index, the global equity market declined 7.2% for the quarter. Adding in the loss from the first half results in a 25.7% decline for the world equity markets in the first nine months of 2022. Auour equity strategies outperformed their benchmarks, falling 5% in the quarter and 19% for the year through September.
Growth companies across developed markets continued their decline yet outperformed modestly value during the quarter. While growth companies fell 3.5%, value experienced a 5.6% decline in the third quarter as recession concerns rippled throughout all aspects of the economy. Though the dispersion in returns between value and growth companies year-to-date has narrowed a bit, the underperformance of growth companies is expected to continue as investors look for more near-term certainty that value companies provide versus the long-term opportunity that many growth companies look to promise.
Smaller companies suffered a bit less in the third quarter, falling 2.1%. We would love to say this is a positive sign for future returns, but at this time, it seems a bit like a consolidation of past losses rather than a change in trend. Other riskier equity categories continued to produce declines. Emerging markets declined 13% in the quarter, culminating in a loss of almost a third of their value over the past nine months.
Fixed-income markets also continued declining, falling 6.9% as market participants digested higher-for-longer inflation expectations and the increasingly hawkish tone from the U.S. central bank. Investors have grown accustomed to having fixed income stabilize a portfolio when equities weaken, but this year has been different. Fixed income dropped 20% in the year’s first nine months, adding insult to injury felt from equity allocations.
There were no places within the fixed-income markets to hide from price compression, as the impact was felt across the entire yield curve and every credit category. Staying the course with our defensive positioning in lower-duration instruments paid off and helped to dampen the decline. Auour fixed income strategy performed relatively well in the quarter, falling 3.3% compared to its benchmark falling 6.9%. Through September, Auour has experienced an 11% loss in fixed-income relative to the market’s 20% decline.
The concerns we have shared over the past two years continue to reveal themselves in the investment markets. Though we have focused most of our conversations on our concerns, it is imperative to remember that markets can quickly discount the negatives. Historically, as fear of continued declines grabs headlines, it is at these times that long-term investment opportunities present themselves. We need to remember that economic storms pass and bring about clearer skies. Our high cash levels allow us to weather the storm and look for opportunities as the skies brighten.