2Q15

March 26, 2015ConsultivaQuarterly Commentary 2015

Download as PDF

Global financial markets endured a fitful quarter and finished with a lack of meaningfully positive performances. Global equities posted slight gains across most regions with international small caps being the big winners, at an advance of nearly 5%. Fixed income results were generally modestly negative, with the exception of longer duration bonds dropping sharply. Commodities produced the strongest performance in the capital markets as both energy and agricultural contracts rose sharply and more than offset minor weakness in industrial and precious metals.

In the final weeks of the quarter, and into the first few days of July, investor focus was clearly directed away from domestic issues and settled firmly elsewhere; largely on China, Greece and Puerto Rico.

China’s equity market had been soaring, up about 100% in 12 months through mid-June. Then the wheels came off and, despite a number of attempts by the Chinese government and central bank, equities dropped 30% by early July. On Monday July 6, a massive capital infusion from the government, central bank, sovereign wealth fund, and numerous brokerage houses managed to turn the tide of selling; however, volatility remained very high. July 6^th trading range was nearly 9% trough to peak on the Shanghai Composite; fluctuations of that magnitude have not been experienced on U.S. exchanges since the depth of the Great Financial Crisis in the fall of 2008.

Greece further contributed to the global turbulence, as the country missed its interest payment due to the IMF due on June 30^th. Capital controls have been instituted and Greek banks have been shuttered with customers limited to 60€ per day in ATM withdrawals. The decision to accept the austerity terms demanded by the “troika” in order to continue emergency lending was put to a national vote over the weekend. Results from the “Greferendum” came back strongly opposed to further austerity. This, of course was reversed with the most recent accords between Greece and the Eurozone. While direct exposure to the Greek tragedy appears fairly well contained, there remains real risk of contagion, or moral hazard, related to larger yet still heavily indebted southern European countries.

Puerto Rico honored its municipal debt payments on July 1^st. The island’s municipal bonds had been repeatedly downgraded in the first half of 2015 and a default was feared after the island’s governor stated bluntly “the debt is not payable”, in reference to Puerto Rico’s $70 billion in outstanding municipal bonds. While the July 1^st payment was made, the future is unknown, as the U.S. territory cannot legally seek bankruptcy protection like some other high profile municipalities such as Detroit MI (2013) or Stockton CA (2012). In recent years, the higher yields associated with Puerto Rico’s municipal bonds have attracted some investors.

Not all was gloomy on the macroeconomic stage, however. In early June, Iceland announced plans to lift the capital controls imposed in response to the collapse of its banking system in 2008. Japan’s situation also appears to be improving as 1Q15 GDP growth was revised higher to a 3.9% annualized rate, well ahead of the 2.7% forecast.

The U.S. economy continued to muddle along in the 2^nd quarter. 1Q15 GDP was revised sharply lower (-0.7%) in late-May before being pushed closer to flat (-0.2%) in the June revision. With a weak start to the year, held back by harsh weather in much of the country and West Coast port delays, the Fed’s estimate for 2015 GDP growth has been trimmed back to 1.8-2.0% from an estimate of 2.3-2.7% as of the March meeting and 2.5-3.0% as of last December. The Fed also remains focused on the labor market as a measure to judge the fitness of the economy to digest an increase to short-term interest rate policy. Unemployment fell from 5.5% to 5.3% by the end of June; however, much of the improvement was the result of discouraged workers exiting the labor force. The labor force participation rate, a key metric in Fed monitoring, fell to a 38-year low of 62.6% at the end of June. Wage growth, which had shown signs of positive momentum earlier in the year, was flat in June and rose just 2% year-over-year in nominal terms. With inflation running in the 1.7% range over the same time period, wages in real terms are essentially flat.

With U.S. economic growth still fairly modest, the timing and pace of the Fed’s move away from zero interest rate policy (“ZIRP”) is the subject of much conjecture. As of the June Fed meeting, just 2 of 17 Fed policymakers expected rates to remain at the current range of 0-0.25% through the end of the 2015. In addition to continuing ZIRP, the Fed also remains expansionary in other areas. Although “QE” officially ended in the fall of 2014, the Fed continues to maintain the size of its balance sheet, currently about $4.5 trillion or 25% of U.S. GDP, by reinvesting the $65 billion of principal and interest generated by its bond portfolio every month.

Inflation remains quite low, even when the deflationary impacts of the drop in energy prices are removed. Core CPI (excludes food and energy) for the 12 months ended in June was +1.8% while Headline CPI was 0.1% due to the impact of sharply falling energy prices in the latter half of 2014. The dramatic deflation in Energy is masking notable inflation elsewhere, particularly in Health Care and Housing, where prices are rising at nearly twice the rate of inflation.

Although general economic growth and labor markets are somewhat weak, U.S. corporations are in very good shape and balance sheets continue to strengthen. Cash on balance sheets is at a 25-year high (12% of corporate assets) while debt-to-equity ratios sit at 25-year lows. Profit margins have slipped slightly from their highs late last year but remain elevated relative to long term averages. These strong balance sheets and profit margins, coupled with very low interest rates, appear to support equity valuations currently at a slight premium to long term averages.

Global financial markets struggled in the 2^nd quarter of 2015 and produced very few pockets of meaningfully positive results. US equities were mixed with large and small caps holding on to small gains, while midcaps suffered losses of 1-2%. Only mega caps and microcaps provided any substantial positive performance. The 10 economic sectors in the S&P 500 were evenly split between winners and losers; Financials and Health Care topped the positive list while Industrials and Utilities were down sharply. Foreign equities performed similar to domestic, with both developed and emerging markets up less than 1%. Developed small caps were the only equity sub-group to provide a return near 5%.

Source: Callan Associates Inc.

Results were worse in fixed income markets, as high yield was the only area to preserve capital during the quarter. Most indices showed modest declines in the quarter; however, long duration was hit particularly hard as rates rose around the globe. The 10-year US Treasury yield spiked as high as 2.5% in mid-June before settling back to 2.35% at quarter-end, nearly 40bps above the level at the end of March. The 30-year rose nearly 60bps to close at 3.11%.

Commodities produced the strongest performance in the capital markets as both energy and agricultural contracts rose sharply and offset minor weakness in industrial and precious metals. Yield sensitive equities were hit hard with the rising interest rate environment and fears that the Federal Reserve will being pushing policy rates higher. REITs, MLPs, and Utilities all sold off sharply and suffered declines similar to long duration bonds.

Dividend Payments

S&P Dow Jones Indices reported that indicated dividend net increases (increases less decreases) rose $12.5 billion during the second quarter of 2015 for U.S. domestic common stocks, a deceleration from the $12.6 billion increase registered during the second quarter of 2014. The dollar amount decline equates to a 0.6% year-over-year slowdown in dividend increases. For the 12 months ending June 2015, dividend net increases fell 10.2% to $49.5 billion compared to an increase of $55.1 billion for the corresponding period.

“Energy continues to be the weak point for dividends, as they represented 45% of all dividend cuts during the quarter, with Trusts and L.P.’s becoming very volatile and inconsistent in their payments,” says Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices.

With the large-cap S&P 500®, 421 issues (83.9%) currently pay a dividend. All 30 members of the Dow Jones Industrial Average® pay a dividend.

Silverblatt found that 70.5% and 54.2% of issues within the S&P MidCap 400 and S&P SmallCap 600, respectively, pay dividends.

Yields at the index level continued to vary greatly, with large-caps at 2.09%, mid-caps at 1.54% and small-caps at 1.34%. For paying issues, the yields across market-size classifications continue to be compatible, with large-caps coming in at 2.45%, mid-caps at 2.18% and small-caps at 2.26%.

Dividend growth continues, but the rate of growth has declined in 2015. At the half-way mark for 2015, the dividend picture is still very positive, as increases remain strong, with another record of actual cash payments expected.

“Given the current declared policies, it would take a catastrophic event (or government action) for 2015 not to be a record year. The question at this point is will we extend the four-year run of double-digit growth in actual payments. The answer appears to be that we will be very close to that mark, and while the actual rate is relevant to the official record, it is a nice neighborhood to be in,” adds Silverblatt.

U.S. Home Prices

Data through April 2015, released by the S&P Dow Jones Indices for its S&P/ Case-Shiller[1] Home Price Indices, shows that home prices continued their rise across the country over the last 12 months.

Year-over-Year

Both Composites and the National index showed slightly lower year-over-year gains compared to last month. The 10-City Composite gained 4.6% year-over-year, while the 20-City Composite gained 4.9% year-over-year. The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a 4.2% annual gain in April 2015 versus a 4.3% increase in March 2015.

Denver and San Francisco reported the highest year-over-year gains, with price increases of 10.3% and 10.0%, respectively, over the last 12 months. Dallas reported an 8.8% year-over-year gain to round out the top three cities. Nine cities reported faster price increases in the year ended April 2015 over the year ended March 2015. Las Vegas prices rose 6.3% in the year to April versus 5.7% in the year to March 2015. In 11 cities, however, the rate of annual price gains slowed. Boston home prices were up 1.8% in the 12 months ending in April compared to a 4.6% gain in the 12 months ending in March 2015.

Analysis

“Home prices continue to rise across the country, but the pace is not accelerating,” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Moreover, consumer expectations are consistent with the current pace of price increases. A recent national survey published by the New York Fed showed the average expected price increase among both owners and renters is 4.1%. Both the current rate of home price increases and the consumers’ expectations are a bit lower than the long term annual price change of 4.9% since 1975. These figures, however, do not adjust for inflation. The real, or inflation adjusted, price change since 1975 is one percent per year. Given the current inflation rate of under two percent, real home prices today are rising more quickly than is typical. The three out of five consumers in the survey who see home ownership as a good or somewhat good investment may be thinking in real terms.

The chart below depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.2% annual gain in April 2015. The 10- and 20-City Composites reported year-over-year increases of 4.6% and 4.9%.

The chart below shows the index levels for the U.S. National, 10-City and 20-City Composite Indices. As of April 2015, average home prices for the MSAs within the 10-City and 20-City Composites are back to their autumn 2004 levels. Measured from their June/July 2006 peaks, the peak-to-current decline for both Composites is approximately 14-16%. Since the March 2012 lows, the 10-City and 20-City Composites have recovered 31.0% and 32.0%.

Despite establishing all-time record highs in mid-June, U.S. equity indices produced very little in the way of actual gains in the 2nd quarter. The S&P 500 rose just 30 basis points in the quarter. Both the S&P 500 and Russell 2000 set multiple closing records through the quarter before slipping back in the closing weeks; however, perhaps the most impressive hurdle was surpassed on April 23, when the NASDAQ finally eclipsed its all-time high from way back in March 2000. Foreign equities performed similar to domestic, with both developed and emerging markets up less than 1%. Developed small caps bucked the trend and were the only equity sub-group to provide a return near 5%.

U.S. Equity

In the U.S., the extremes of the capitalization spectrum performed best, as mega caps and microcaps were the only broad areas to return more than 1% (Russell Top 50: +1.5%, Russell Microcap: +2.8%). Large and small caps managed fractional gains (Russell 1000: +0.1%, Russell 2000: +0.4%), while midcaps suffered declines for the quarter (Russell Midcap: -1.5%). Growth outperformed value in both mid and small caps (RMG: -1.1%, RMV: -2.0%, R2G: +2.0%, R2V: -1.2%) due in part to a substantial drop in REITs which are more heavily represented in the value indices. Value just edged growth in large caps (Russell Top 200 Growth: +0.7%, Value: +1.0%).

Source: Callan Associates Inc.

Quality Sectors

The S&P Quality indices both fell during the quarter and served to highlight a somewhat confusing construction methodology. The S&P 500 HQ and LQ indices are not capitalization weighted and exhibit a distinct midcap bias when compared to the broad S&P 500. High quality slightly underperformed low quality; however, both widely underperformed the broad S&P as midcaps were weak in the quarter (S&P HQ: -1.3%, LQ: -1.2%).

Source: Callan Associates Inc.

Low quality outpaced higher quality stocks in the large and small cap growth sectors during the quarter.

Economic Sectors

The 10 economic sectors within the S&P 500 were evenly split between winners and losers; Health Care (+2.8%) and Consumer Discretionary (+1.9%) topped the positive list while Industrials (-2.2%) and Utilities (-5.8%) were down sharply.

Source: Thomson Reuters

Non-U.S. Equity

Developed foreign equities performed generally in line with domestic indices in U.S. dollar terms; however, positive currency impacts from the strengthening euro and pound masked weakness in local currency equity returns (MSCI EAFE Local: -1.8%, EAFE U.S.$: +0.6%). Growth outperformed value overseas (EAFE Growth: +1.0%, Value: +0.2%) and foreign small caps outperformed all other major equity groups (EAFE SC: +4.3%). Emerging market equities also delivered fractionally positive results that just eclipsed developed market performance (MSCI EM Local: +0.8%, EM U.S.$: +0.8%).

Source: Callan Associates Inc., Dow Jones

On a country specific basis, Irish equities generated the strongest returns among developed nations, with a bit of help from a nearly 4% advance in the euro, (MSCI Ireland U.S.$: +8.5%) while New Zealand equities fell sharply due primarily to a 10% currency headwind (MSCI New Zealand U.S.$: -13.1%). Among emerging countries, Hungary performed best (MSCI Hungary: +11.0%) while Indonesia’s market struggled (MSCI Indonesia -13.8%).

U.S. Fixed

Interest rates rose in the 2^nd quarter and the yield curve steepened. Mixed economic data on the back of a weak 1st quarter kept the Fed on hold; however, rising rates overseas put pressure on yields in the U.S. The yield on the 10-year German bund jumped from a record low of 0.05% in mid-April to 0.76% as of quarter-end, as Europe’s economic picture brightened and inflation returned to the euro zone. Both are indications that the ECB’s quantitative easing programs were reaping rewards. In the U.S., the 30-year Treasury yield climbed roughly 60 bps during the quarter, resulting in a 0.4% loss for the long bond. The yield on the 10-year Treasury rose 40 bps, closing at 2.35%, and the note posted a -3.0% return. Two-year Treasury rates increased a modest 8 bps and eked out a 0.1% quarterly advance.

Source: US Department of the Treasury

Source: US Department of the Treasury, Bloomberg

The Barclays U.S. Aggregate Index fell 1.7% in the 2^nd quarter, erasing all of its 1^st quarter gains. The benchmark is off 0.1% for the first half of the year. Within the Aggregate Index, corporates underperformed like-duration U.S. Treasuries by 90 bps as spreads widened. Issuance remained robust and rising rates, worries over Greece and poor liquidity also weighed on the sector. Mortgages performed in line with Treasuries for the quarter. TIPS outperformed nominal Treasuries as inflation expectations rose roughly 10 bps over the quarter. The Barclays TIPS Index fell 1.1% for the quarter. High yield was a lonely “bright” spot in the fixed income markets with a flat return for the quarter as the sector’s yield advantage offset the negative effects of spread widening and higher rates.

Source: Callan Associates Inc.

Municipal debt outperformed U.S. Treasuries in the 2nd quarter (Barclays 1-10 Muni: -0.5%), though the sector was not immune to rising Treasury yields. Tax-exempt mutual funds saw outflows of more than $3 billion during the quarter with over $1 billion occurring in the final week of quarter on the back of unsettling remarks from the Governor of Puerto Rico. Also hitting headlines during the quarter was Moody’s surprise downgrade of Chicago to below-investment-grade status. S&P, however, has a different opinion and continues to rate the city A-.

Other US Fixed Income

Source: Callan Associates Inc.

Non-U.S. Fixed

Interest rates in developed markets rose during the quarter from record low levels, in many cases. With the exception of the United Kingdom (+2.2%) and Sweden (+0.3%), unhedged returns in developed markets were negative in U.S. dollar terms. On a hedged basis, all developed markets delivered negative returns, as the U.S. dollar lost ground versus most developed markets currencies. Interest rate increases were spurred by brighter news in Europe, as both hiring and private sector growth approached 4-year highs and, in May, a hint of inflation (0.2% month-over-month in May) in Europe provided evidence that the European Central Bank’s asset purchase program was working.

Germany returned -4.8% for the quarter in local terms and was down 1.0% in U.S. dollar terms. Italy and Spain were especially hard-hit on worries over contagion from a potential Greek exit. Both countries posted returns of roughly -6% for the quarter, in local currency terms. The U.S. dollar depreciated nearly 4% versus the euro, but was modestly stronger versus the yen. For the quarter, the Barclays Global Aggregate ex-U.S. Index (unhedged) returned -0.8% with the hedged version down 2.7%.

Source: Callan Associates Inc.

Emerging markets debt posted subdued returns in the 2nd quarter, though there was a wide range of results among constituents. The U.S. dollar-denominated JPM EMBI+ Index fell -0.9%. Country returns were punctuated by a huge advance in Ukraine (+36%) and a sharp decline in Greece, which missed its $1.7 billion payment to the IMF on June 30 and saw trading on its bonds halted. In spite of the halt, indications from dealers estimated 2-year Greek debt yields at about 50% and 10-year debt at nearly 20%. As of quarter-end, the situation in Greece remained fluid with a high degree of uncertainty as to whether an agreement with creditors could be reached and, ultimately, whether Greece would remain a part of the European Monetary Union.

Puerto Rico

On June 29^th, the Governor of Puerto Rico, the Honorable Alejandro Garcia Padilla, said that the debt of the Commonwealth of Puerto Rico is “unpayable”. This statement triggered a massive sell-off in Puerto Rico securities, encompassing all PR issuers and the common shares of local banks. Bond prices plummeted over 10 points in the subsequent trading days. Markets are attentive to further government pronouncements, especially relative to plans for government restructuring and consequent reaction from creditors.

Commodities produced the strongest performance in the capital markets as both energy (+11%) and agricultural (+8%) contracts rose sharply and offset minor weakness in industrial (-5%) and precious metals (-3%). Yield sensitive equities were hit hard with the rising interest rate environment and fears that the Federal Reserve will be pushing policy rates higher. REITs (NAREIT Equity: -10.0%), MLPs (Alerian MLP: -6.1%), and Utilities (S&P Utilities: -5.8%) all sold off sharply and suffered declines similar to longer duration bonds. Early indications of broad hedge fund performance show fractional declines in the 2nd quarter; ahead of broad fixed income yet trailing broad equity performance.

Source: Callan Associates Inc.

US Real Estate

The U.S. REIT market (as measured by the FTSE NAREIT Equity REITs Index) posted a negative return of 10.0% for the quarter, performing below both the S&P 500 and Barclays Aggregate Bond Index by 10.3% and 8.3%, respectively.

Source: FTSE™, NAREIT®.

The average U.S. REIT dividend yield at quarter-end stood at 3.99%, as compared to 2.09% and 3.09% for the S&P 500 and Barclays Aggregate Bond Index, respectively.

All sectors achieved negative results during the quarter. Health Care and Retail-Free Standing were the weakest sectors at -15.1% and 14.3% respectively. Manufactured homes and Self-storage were the best performers (-4.8% and -5.0% respectively).

Source: FTSE™, NAREIT®.

Other Real Estate

Source: Callan Associates Inc. EPRA: European Public Real Estate Association (Non-US Real Estate)

Commodities

Source: Callan Associates Inc.

S&P Goldman Sachs Commodity Index (“GSCI”)

Commodities (+8.7%) posted positive returns for the first time since the second quarter of 2014. This rally was largely driven by the strength in energy (+13.0%), especially the oil complex. Both West Texas Intermediate (WTI) crude oil (+18.1%) and Brent oil (+10.6%) benefitted from the recovery, boosted by signals of slowing US production growth, following North American producers’ aggressive 2015 capital-spending budget cuts. Robust demand also continued throughout the first half. In particular, gasoline (+18.3%) experienced its highest level of demand growth in over a decade. In natural gas (+2.5%), flattening US production and record-setting June power demand eased concerns about storage congestion through the end of the storage-injection season in October. Agriculture and livestock (+5.8%) rose, driven by late-quarter gains across the grains complex. Wheat (+16.6%), soybeans (+9.2%), and corn (+7.8%) rallied on concerns that rainy weather would affect yield prospects across these commodities. Within precious metals (-1.7%), gold (-.1%) and silver (-6.6%) fell as the US dollar continued to appreciate toward the end of the quarter. The continued strength of the US dollar has offset gold’s ability to serve as a safe haven asset in the face of economic instability. Industrial metals (-5.5%) experienced broad weakness over the quarter, as aluminum (-7.6%) output rose to record levels in China, copper (-4.8%) saw lower Chinese import demand, and nickel (-3.6%) pulled back at the end of the quarter to reach a six-year low and send most producers into the red.

Source: S&P

Hedging Strategies and Hedge Funds

Hedge funds posted declines in June as Chinese equities fell sharply and uncertainty over the outcome of the Greece referendum contributed to losses in quantitative, trend-following, Macro CTA (Commodity Trading Advisers) strategies, according to data released by HFR (Hedge Fund Research). The HFRI Fund Weighted Composite Index declined -1.3 percent in June, the worst monthly decline since June 2013, paring gains for 1H15 to +2.4 percent. Despite the June decline, the 1H15 HFRI gain still outperformed U.S. equities as measured by the S&P 500 by over 200 basis points.

Source: Callan Associates Inc.

Macro hedge fund strategies led declines for the month, with losses across equity and currency exposures contributing to a decline of -2.4% for the HFRI Macro Index, the worst monthly performance since July 2008. The declines for Macro strategies represent a reversal from recent strength in Macro & CTA strategies, which led all strategies in 2014 and over the trailing 12-month period, with gains of +5.6 percent and +7.4 percent, respectively; the June decline brings performance for 2015 for Macro strategies to a decline of -0.4 percent.

The HFRI Equity Hedge Index declined by -0.8 percent for the month, paring the strong 1H15 gain for the Index to +4.1 percent, with declines led by Growth and Chinese exposures. The HFRI China Index posted a decline of -3.5 percent for the month, paring the 1H15 gain for the Index to +18.9 percent. Similarly, Fundamental Growth strategies also contributed to June declines, with the HFRI EH: Fundamental Growth Index falling -1.3 percent, paring 1H15 gains to +4.4 percent. Partially offsetting these, the HFRI EH: Technology/Healthcare Index gained +0.4 percent for June; the Index leads all sub-strategies for 2015 with a gain of +8.3 percent. The HFRI: EH: Short Bias Indices posted a narrow gain of +0.3 percent for the month, while the HFRI Emerging Markets Index fell -1.7 percent.

Event Driven strategies also declined in June, with the HFRI Event Driven Index falling -0.8 percent; for the first half of 2015, the Index has gained +3.1 percent. June ED losses were led by HFRI ED: Distressed and HFRI ED: Activist Indices, which declined -1.5 and -1.1 percent, respectively, for the month. Through June 30,, ED sub-strategy performance was led by Activist funds, which gained +5.6 percent.

Relative Value Arbitrage strategies fell for the month as bond yields increased and deal spreads widened, with the HFRI Relative Value Arbitrage Index declining -1.0%, bringing year-to-date performance to +2.2 percent. Credit Multi-Strategies led June RV sub-strategy declines with the HFRI RV: Multi-Strategy Index falling -1.7 percent. Partially offsetting June losses, the HFRI RV: Asset Backed Index posted a gain of +0.3 percent. Year-to-date, RV sub-strategy performance was led by Volatility strategies, with the HFRI RV: Volatility Index gaining +4.8 percent, despite a decline of -0.7 percent for June.

“Increased financial market volatility and reversals of many of the performance trends from the first half of 2015 resulted in declines across many areas of hedge fund performance to conclude the month of June, with an increased focus on hedge fund exposure to and positioning in Chinese and Greek/European equities, Oil and Euro currency,” stated Kenneth J. Heinz, President of HFR. “While each of these remains an active and fluid financial market consideration in the short term, hedge fund performance across Equity, Event Driven and Arbitrage concluded the first half of 2015 with outperformance of US equities, highlighting an important performance inflection point. As recent macroeconomic uncertainty develops and evolves in coming months, hedge fund investors are likely to continue to benefit from sophisticated, non-directional and low beta exposures to many powerful, complex and diverse trends in the second half of the year. “

Private Equity

Twenty seven venture-backed initial public offerings (IPOs) raised $3.4 billion during the second quarter of 2015, a 59% increase, by number of offerings, from the first quarter of this year and more than double the level of dollars raised during the previous three-month period, according to the Exit Poll Report by Thomson Reuters and the National Venture Capital Association (NVCA). For the second quarter of 2015, 70 venture-backed M&A deals were reported, 14 of which had an aggregate deal value of $4.1 billion. Venture-backed M&A activity during the quarter fell to its lowest levels, by number of deals, since the first quarter of 2003 as disclosed deal value increased 86% compared to the first quarter of 2015.

“After moderating in the first quarter following a blistering pace in 2014, venture-backed IPO activity picked up some steam in the second quarter, delivering 27 high-growth companies to the public markets for investors to stake their claim to innovation economy,” said Bobby Franklin, President and CEO of NVCA. “As has been the case over the last several quarters, life sciences companies continue to lead the way, representing 70% of total public offerings for the quarter, with biotech companies alone accounting for 14 of the quarter’s venture-backed IPOs. On the heels of FitBit’s successful IPO, we will be watching to see if there is increased parity between the number of life sciences companies and technology companies making public offerings as the year progresses.”

Source: Thomson Reuters and the National Venture Capital Association (NVCA)

*Only accounts for deals with disclosed values.

**Includes all companies with at least one U.S. VC investor that trade on U.S. exchanges, regardless of domicile.

• IPO Activity

There were 27 venture-backed IPOs valued at $3.4 billion in the second quarter of 2015. By number of deals, quarterly volume increased 59% from the first quarter of this year and registered a triple-digit percentage increase, by dollars, compared to the previous quarter. Led by the biotechnology sectors, 19 of the 27 offerings during the quarter were life sciences IPOs, representing 70 percent of total listings in the second quarter.

• Mergers and Acquisitions

As of June 30th, 70 venture-backed M&A deals were reported for the second quarter of 2015, 14 of which had an aggregate deal value of $4.1 billion, the slowest quarter by overall number of deals since the first quarter of 2003. The information technology sector led the venture-backed M&A landscape with 54 of the 70 deals of the quarter and had a disclosed total dollar value of $2.5 billion. Within this sector, Computer Software and Services and Internet Specific deals accounted for the bulk of the targets with 34 and 13 transactions, respectively, across these sector subsets.

With significant uncertainty in a number of foreign countries and domestic growth expectations waning, risk and volatility appear to be on the upswing. Much anticipation rests on the timing and path of U.S. Fed interest rate policy and the subsequent impact on global financial markets.

With expectations of muted returns and higher volatility, we continue to recommend prudent asset allocation and risk assessment, based on future capital needs for plan sponsors, institutions and individual investors. We believe that due diligence reviews and an adherence to a well-developed investment policy remains the most prudent course for long-term investors.

Consultiva Internacional Inc. (“Consultiva”) has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. There also can be no guarantee that using this information will lead to any particular result. The above Conclusion reflects the judgment of the Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, or recommendation with respect to the purchase or sale of any financial investment/security, a recommendation of the services supplied by any money management organization, an investment advice or legal opinion. This is not a solicitation to become a client of Consultiva.

No content (including reports, ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (“Content”) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Consultiva. The Content shall not be used for any unlawful or unauthorized purposes. Consultiva, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively Consultiva Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. Consultiva Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. CONSULTIVA PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall Consultiva Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. Consultiva assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. Consultiva’s opinions and analyses do not address the suitability of any security. While Consultiva has obtained information from sources it believes to be reliable, Consultiva does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.