Markets moved higher in May on low volumes and low volatility. Volatility, in fact, is lower than it has been since 2007, the end of what former US Federal Reserve Chairman Alan Greenspan called the Great Moderation.
More notable than the rise of equity markets has been the rally in credit markets. The 10-year US Treasury yield has declined from 3% to 2.5% this year, with commensurate moves in the bonds of core euro zone countries. The best returns, however, have come from periphery euro zone sovereigns: Portuguese government 10-year bonds have a total return of 22% YTD, with the yield to maturity dropping from over 6% to 3.6% in the past five months. Yields on sovereign bonds in Ireland, Italy, Greece, and Spain have had similar results this year. Perhaps PIIGS can fly!
As part of MSCI’s reclassification of the UAE and Qatar, both countries are no longer included in the FEM Index, significantly reducing the weight of the Gulf States region. Consequently, our portfolio has moved from an underweight position to being overweight the region relative to our benchmark.
While the portfolio’s positioning relative to the FEM Index has changed, nothing has changed in an absolute sense in our management of the portfolio. As bottom-up investors we focus on finding individual companies that meet our criteria for quality and growth across the frontier and small emerging markets universe, including countries that are not specifically in the FEM Index. Qatar and the UAE each now represent less than 1% of the MSCI Emerging Markets Index and qualify as small emerging markets, and our holdings there will become out-of-benchmark positions. We will continue to select the portfolio’s investments based upon companies’ fundamentals and the value of their shares relative to our estimates of fair values across our universe.
We build diversified portfolios of high-quality, growing companies identified through fundamental research.