3Q15

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The 3rd quarter of 2015 was marked by heightened volatility spurred by growing concerns over slowing global economic growth. Sharp declines in commodity prices and uncertainty over the magnitude and pace of China’s slowdown and the resultant effect on other markets were central points of worry. Emerging markets equities and currencies were especially hard hit. Also, investors remained keenly focused on statements from the Fed in attempts to gauge the timing of the widely anticipated first hike in interest rates since 2006, but the quarter ended with no action.

In what now seems like a distant memory, Greece narrowly averted a “Grexit” and was granted its third bailout in five years to allow the country to remain in the European Monetary Union. The survival of the Syriza-led government, along with promises for tough reforms for taxes, pensions and early retirement, were welcomed by the markets following the imposition of capital controls in the country. However, Greece was quickly forgotten as concerns over China mounted. Questions as to whether the slowdown in China, the world’s second largest economy, would derail the recovery in the US and Europe took center stage.

China’s stock market swoon (-14.3% in July) and the resulting intervention by the government took investors by surprise. The People’s Bank of China (PBOC) further shocked markets by devaluing the yuan by roughly 3%. Since 2005, China’s currency had appreciated 33% against the US dollar and this devaluation marked the largest single drop in 20 years. The PBOC claimed the devaluation was in sync with its effort to move towards a more market-oriented economy, a claim that was viewed with suspicion by some who suspected it was more of an effort to prop up the economy. China woes were exacerbated in August. Following its announcement that manufacturing activity had slowed to a 6-year low, “Black Monday” (August 24th) ended with the Shanghai Composite Index down 8%, wiping out hundreds of billions of dollars in market capitalization and posting its largest one-day loss since 2007. The Dow suffered a historic 1000+ points plunge before recovering to close the day at -588 (-3.6%), an 18-month low. Oil sank to $39 per barrel, the lowest since 2009, and the 10-year US Treasury slipped below 2% intra-day. The VIX, a measure of stock market volatility and also known as Wall Street’s “fear gauge,” surged 63% to 53 on August 24th, a level not seen since early 2009 in the midst of the financial crisis. On August 25th, the Chinese central bank cut interest rates for the fifth time since November and lowered the amount of deposits banks are required to hold in reserve.

The S&P 500 Index suffered its worst quarterly performance in four years as a result of August’s market selloff, slumping 6.4% for the quarter. Yields were also volatile during the quarter; the 10-year US Treasury traded in a 56 bps range from 1.90% to 2.46% before ending the quarter at 2.06%. Oil prices followed the same pattern, dropping to $39/barrel (WTI Crude) on Black Monday for the first time since 2009. The commodity closed the quarter at $45/barrel, down 27% from June 30.

In the US, the economic picture continued to improve with 2nd quarter GDP revised up to 3.9%, helped by robust consumer spending and construction. This revision exceeded expectations and was up sharply from the initial estimate of 2.3%. Unemployment fell to 5.1%, its lowest level since 2008. The Conference Board’s Consumer Confidence Index unexpectedly rose 1.7% in September, the second highest of the current economic expansion. Real average hourly earnings were up 0.5% in August (2.0% y/y), slightly ahead of expectations, though still subdued. However, payroll gains have moderated. Through August, payrolls have gained an average 212,000 per month in 2015, below the 260,000 averaged during all of last year. Inflation remained tepid; headline CPI in August was up just 0.2% y/y and Core CPI climbed 1.8% y/y.

In a 9:1 vote, the Fed decided to keep its 0% to .25% range for the federal funds rate at its September meeting, citing global macroeconomic concerns and below-target inflation. Chief among the Fed’s concerns were the slowdown in China and its effects on global growth. However, Chair Yellen said in a late September speech that the first increase will still likely be “later this year.” As of quarter-end, markets were pricing a nearly 50% probability of a rate increase by year end. (Note: this was prior to the worrying labor market report that was released on October 2). The Fed meets in October and December and will weigh evidence and entertain rate hikes at each of those meetings.

Outside of the US, which remains a bright spot in the global economy, the sputtering recovery in Europe lost some momentum as the global economic picture soured. A slump in oil prices pushed euro zone inflation below zero in September. Prices fell across the currency bloc by 0.1% y/y in September but core inflation remained unchanged at 0.9%. Unemployment in the region continued to be stubbornly high at 11%. ECB President Mario Draghi stated that while the sluggish recovery is a concern, no additional stimulus beyond the €60bn a month program is being considered at this time. However, he also said they were prepared to take additional measures if the situation deteriorates.

Elsewhere, news was equally uninspiring. A victim of falling oil prices, Canada officially entered a recession. Its economy expanded in June but shrank 0.5% (annualized) in the second quarter of 2015 after falling 0.8% in the first quarter. Also suffering from falling oil prices, Norway cut its main interest rate for the second time in four months. Japan’s recovery remained fragile; factory output unexpectedly fell in July and its economy shrank an annualized 1.2% in the second quarter.

Emerging markets were exceptionally hard hit. Capital outflows over the past year have been massive and currencies have weakened significantly. Worries over a Fed hike and slowing growth from these post-crisis “darlings” have fueled concerns. China’s slowdown and a sharp correction in commodity prices have contributed to the slowdown. The most recent IMF forecast for 2016 growth was revised down to roughly 4%, the fifth consecutive annual drop. In late September, India cut interest rates for the fourth time this year to shore up its economy. Brazil has seen its currency plunge by roughly 40% versus the US dollar over the past year, and Russia, which has also seen its currency depreciate 40% versus the dollar, remains mired in recession. Turkey, facing political challenges, escalating violence and a troubled economic outlook, saw its currency sink to a record low versus the dollar in September.

The 3rd quarter of 2015 was marked by heightened volatility spurred by growing concerns over slowing global economic growth. Sharp declines in commodity prices and uncertainty over the magnitude and pace of China’s slowdown and the resulting effect on other markets were central points of worry. Emerging markets equities and currencies were especially hard hit. Also, investors remained keenly focused on statements from the Fed in attempts to gauge the timing of the widely anticipated first hike in interest rates since 2006, but the quarter ended with no action.

Source: Callan Associates Inc.

Dividend Payments

S&P Dow Jones Indices reported that indicated net dividend increases (increases less decreases) rose $10.0 billion during the third quarter of 2015 for U.S. domestic common stocks, a deceleration from the $12.3 billion increase registered during the third quarter of 2014. The dollar amount decline equates to a 19.1% year-over-year slowdown in dividend increases. For the 12 months ending September 2015, dividend net increases fell 15.1% to $49.1 billion compared to an increase of $55.5 billion for the corresponding period.

“Energy issues continue to be the weak point for dividends, as commodity prices, particularly oil, remain at low levels, pressuring cash flow used for dividend payments,” says Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices.

Within the large-cap S&P 500®, 423 issues (83.8%) currently pay a dividend. All 30 members of the Dow Jones Industrial Average® pay a dividend.

Silverblatt found that 70.5% of the issues within the S&P MidCap 400 pay a cash dividend, up from 67.5% at the end of Q3 2014. Within the S&P SmallCap 600, 53.9% of the issues pay, up from 51.2% which paid a year ago.

Yields at the index level continued to vary greatly, with large-caps at 2.29%, mid-caps at 1.74% and small-caps at 1.54%. For paying issues, the yields across market-size classifications continue to be compatible, with large-caps coming in at 2.67%, mid-caps at 2.45% and small-caps at 2.51%.

“Based on the current dividend polices and declarations, 2015 will easily set another record year for cash dividend payments, with a nice increase over last year,” notes Silverblatt. “However, growth rates for dividends have declined again. Energy issues still dominate the declines, but dividend cuts have now moved beyond Limited Partnerships and commodity based royalty associated issues into unrelated areas. At this point in time the four-year run of double-digit dividend payment gains appears to be in jeopardy. Dividend payment growth has slowed, and investors need to pay attention to the underlying drivers.”

U.S. Home Prices

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

Year-over-Year

The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a slightly higher year-over-year gain with a 4.7% annual increase in July 2015 versus a 4.5% increase in June 2015. The 10-City Composite was virtually unchanged from last month, rising 4.5% year-over-year. The 20-City Composite had higher year-over-year gains, with an increase of 5.0%.

San Francisco, Denver and Dallas reported the highest year-over-year gains among the 20 cities with price increases of 10.4%, 10.3%, and 8.7%, respectively. Fourteen cities reported greater price increases in the year ending July 2015 over the year ending June 2015. San Francisco and Denver are the only cities with a double digit increase, and Phoenix had the longest streak of year-over-year increases. Phoenix reported an increase of 4.6% in July 2015, the eighth consecutive year-over-year increase. Boston posted a 4.3% annual increase, up from 3.2% in June 2015; this is the biggest jump in year-over-year gains this month.

Analysis

“Prices of existing homes and housing overall are seeing strong growth and contributing to recent solid growth for the economy,” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The S&P/Case Shiller National Home Price Index has risen at a 4% or higher annual rate since September 2012, well ahead of inflation. Most of the strength is focused on states west of the Mississippi. The three cities with the largest cumulative price increases since January 2000 are all in California: Los Angeles (138%), San Francisco (116%) and San Diego (115%). The two smallest gains since January 2000 are Detroit (3%) and Cleveland (10%). The Sunbelt cities – Miami, Tampa, Phoenix and Las Vegas – which were the poster children of the housing boom have yet to make new all-time highs.

“The economy grew at a 3.9% real annual rate in the second quarter of 2015 with housing making a major contribution. Residential investment grew at annual real rates of 9-10% in the last three quarters (2014:4^th quarter, 2015:1^st – 2^nd quarters), far faster than total GDP. Further, expenditures on furniture and household equipment, a sector that depends on home sales and housing construction, also surpassed total GDP growth rates. Other positive indicators of current and expected future housing activity include gains in sales of new and existing housing and the National Association of Home Builders sentiment index. An interest rate increase by the Federal Reserve, now expected in December by many analysts, is not likely to derail the strong housing performance.”

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 4.7% annual gain in July 2015. The 10- and 20-City Composites reported year-over-year increases of 4.5% and 5.0%.

The chart below shows the index levels for the U.S. National, 10-City and 20-City Composite Indices. As of July 2015, average home prices for the MSAs within the 10-City and 20-City Composites are back to their winter 2005 levels. Measured from their June/July 2006 peaks, the peak-to-current decline for both Composites is approximately 11-13%. Since the March 2012 lows, the 10-City and 20-City Composites have recovered 34.4% and 35.7%.

U.S. Equity

The S&P 500 Index (-6.4%) suffered its worst quarterly performance in four years as a result of August’s China-led market selloff. Following a “flight to quality” in the quarter, Mega Caps (-2.5%) outperformed Microcaps (-13.8%). While the impact of style across all market capitalizations paled in comparison to sector, quality and capitalization factors as exhibited by the relatively tight spread in performance between the Russell 3000 Growth (-5.9%) and Value (-8.6%) indices, it was nonetheless meaningful. On a capitalization basis, style performance was a mixed bag. Large cap growth outperformed large cap value by 3.1% (Russell 1000 Growth: -5.3%; Russell 1000 Value: -8.4%) while small cap value outperformed small cap growth by 2.4% (Russell 2000 Value: -10.7%; Russell 2000 Growth: -13.1%). No style differentials were noted in mid cap as both the Russell Midcap Value and Midcap Growth lost 8% for the quarter.

Source: Callan Associates Inc.

Quality Sectors

Following the defensive theme in the quarter, the S&P 500 High Quality Index (-3.6%) outperformed its Low Quality counterpart (-10.0%).

Source: Callan Associates Inc.

High quality outpaced lower quality stocks across capitalization and style sectors during the quarter.

Economic Sectors

Consistent with the “risk off” sentiment evident in the 3rd quarter, defensive sectors within the S&P 500 Index fared best. Utilities (+5.4%) and Consumer Staples (-0.2%) were the top performers. The typically defensive Health Care (-10.7%) sector proved the exception as Democratic presidential front runner Hillary Clinton sent the sector reeling by unveiling plans to make prescription drugs more affordable. Commodity price sensitive sectors such as Basic Materials (-16.9%) and Energy (-17.4%) were the hardest hit in an environment of slowing global growth converging with falling commodity prices.

Source: Standard & Poor’s; Callan Associates Inc.

Non-U.S. Equity

Outside the US, major developed markets Japan (-11.8%) and the United Kingdom (-10%) performed in line with the broad international equity benchmarks, MSCI ACWI ex US (-12.1%) and EAFE (-10.2%). International Small Cap (-6.8%) was somewhat of an anomaly, posting a return well above other typically less volatile areas of the international markets. Energy, as a mere 2% of the Index, contributed positively to its relative outperformance.

Source: Callan Associates Inc., Dow Jones

Emerging equity markets were the most severely impacted by slowing growth, falling commodity prices and capital outflows as the MSCI Emerging Markets Index declined 17.8%. Besides China’s decline of 22.7%, Brazil (-33.6%) continued to be a laggard while India (-6.7%) continued to be at the top end of the pack. From an attribution standpoint, the direct impact of falling commodities prices on emerging equity markets has greatly moderated as commodity sectors have become an ever diminished component of the broad emerging market indices. Entering the second quarter the Energy and Materials sectors combined to represent 15% of the MSCI Emerging Markets Index whereas seven years ago they represented 37% of the Index.

U.S. Fixed

As mentioned, a “risk off” sentiment prevailed in the 3rd quarter as worries over the slowdown in China and falling commodity prices mounted. In this environment, bonds served its “flight to quality” role. While fixed income markets experienced heightened volatility and the 10-year US Treasury traded in a relatively wide 56 bps range, it returned 2.9% for the quarter. The 10-year closed the quarter at 2.06%, nearly 30 bps lower than June 30.

Source: US Department of the Treasury

Source: US Department of the Treasury, Bloomberg

The Barclays Aggregate Index was up a more modest 1.2% for the quarter, as corporate bonds underperformed in the “risk-off” environment. For the quarter, corporates underperformed like-duration Treasuries by nearly 150 bps. High yield corporates suffered even more; the Barclays High Yield Index sank 4.9%. Ex-Energy, the High Yield Index was down 3.0%. The yield on the High Yield Index rose to 8% as bonds weakened and the sector was hit with more than $10 billion in outflows from open end mutual funds and more than $3 billion from ETFs. Bank loan mutual funds also saw outflows and the S&P/LSTA Index of bank loans lost a more muted 1.4%. TIPS were the other notable underperformers. These inflation-linked securities sharply underperformed nominal Treasuries as expectations for inflation over the next ten years shrank from 1.86% as of 6/30 to 1.41% as of September 30th. The Barclays TIPS Index returned -1.2% versus +1.8%for the US Treasury Index.

Source: Callan Associates Inc.

Municipal bonds, traditionally a relatively defensive fixed income sector, performed well in the 3rd quarter. The Barclays Municipal Bond Index returned 1.7% while the shorter duration Barclays 1-10 Year Blend was up 1.3%. The best performing sectors were Hospitals, Education, and Water & Sewer (all up 1.8%). The pre-refunded sector trailed with a 0.9% returns. Aside from a few isolated negative headlines (Puerto Rico, Illinois, New Jersey), credit quality remained high. According to a recent report published by Moody’s, the median credit quality of the 8,500 municipal bond credits it rates is Aa3. In broad terms, US Census Bureau data showed that fiscal conditions continued to improve with 2nd quarter 2015 tax revenues for the four largest state and local government tax categories up 6.9% year-over-year.

Other US Fixed Income

Source: Callan Associates Inc.

Non-U.S. Fixed

Developed sovereign bonds performed relatively well as interest rates fell on mounting concerns over a slowing global economy. The Barclays Global Aggregate Index returned 0.9%, in line with returns in the US bond market. Hedged in US dollars, the Index was up 1.3% primarily due to a modest appreciation in the yen versus the US dollar. On a country specific basis, energy-related currency weakness in Canada and Australia translated into weak returns on an unhedged basis (both down 6%). Italy was the best performer, up over 4% for the quarter on both a hedged and unhedged basis.

Source: Callan Associates Inc.

Emerging markets debt faced numerous headwinds in the 3rd quarter. Slowing demand from China, falling commodity prices, capital outflows, risk-off sentiment and worries over a Fed hike all contributed to poor 3rd quarter returns, particularly in EM currencies. Emerging markets will suffer a net outflow of capital this year for the first time since the 1980s and are expected to post their fifth consecutive year of slowing growth in 2016. The dollar-denominated JPM EMBI Global Diversified Index returned -1.7% while the local currency-denominated JPM GBI-EM Global Diversified sank 10.5%. The most notable underperformer was Brazil (Brazil EMBI Gl Div: -10%; Brazil GBI-EM Gl Div: -25%). Brazil is suffering from the sharp drop in oil prices, a bloated fiscal program, and political challenges. It was downgraded by S&P to junk status during the quarter and has seen its currency decline versus the US dollar by roughly 40% over the past year. Ukraine surged 50% following an agreement with creditors whereby bondholders would take a 20% haircut in return for a portion of future GDP growth, subject to a set formula. Among local currency bonds, pain was widespread. Brazil (-25%), Columbia (-18%), Indonesia (-14%), Malaysia (-15%), Russia (-13%) and Turkey (-15%) all suffered double digit declines for the quarter. The yield on the GBI-EM Global Diversified Index was 7% as of quarter-end, with Brazil at 15% and Russia and Turkey both over 10%.

Puerto Rico

Puerto Rico’s Representative Pedro Pierluisi, along with Melba Acosta, president of the Puerto Rico’s Government Development Bank, addressed lawmakers in Washington. The Puerto Rican officials argued that the Commonwealth should have access to Chapter 9 bankruptcy protection and asked lawmakers to consider additional funding for certain federal programs. Many lawmakers in Washington have different opinions about the fiscal situation in Puerto Rico. Senator Chuck Schumer, a Democrat, announced that he plans to urge the Judiciary Committee to hold hearings on the possibility of Chapter 9 protection. Senator Orrin Hatch, a Republican, expressed concern about providing additional funds to the Commonwealth and indicated that better financial disclosure from Puerto Rico is needed. Thus, it is likely that any action from Washington to aid Puerto Rico will take quite a bit of time to implement.

Weakness in commodity markets was reflected in the S&P GSCI decline of 19.3%. MLPs as measured by the Alerian index (-22.1%) were hit hard when concerns over excess supply and cost of capital coupled with a liquidity squeeze attributed to leveraged closed-end fund selling late in the quarter. REITs were strong performers, as the NAREIT posted a 2.0% return as declining long term interest rates and a delay by the Fed in raising short term rates buoyed the asset class.

Source: Callan Associates Inc.

US Real Estate

The U.S. REIT market (as measured by the FTSE NAREIT Equity REITs Index) posted a positive return of 2.0% for the quarter, performing above both the S&P 500 and Barclays Aggregate Bond Index by 8.4% and 0.8%, respectively.

Source: FTSE™, NAREIT®.

The average U.S. REIT dividend yield at quarter-end stood at 4.03%, as compared to 2.27% and 3.06% for the S&P 500 and Barclays Aggregate Bond Index, respectively.

Self-storage posted the strongest return (+16.1%) followed by Manufactured Homes (+11.0%) and Apartments (+6.7%) while Lodging/Resorts (-13.7%) Diversified (-2.7%) and Office (-1.2%) were the weakest sectors.

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 (-19.3%) fell for the fourth time in five quarters, with disappointing performance in all four commodity sectors. Within energy (-24.4%), crude oil (-26.6%) saw prices hit a six-year low in August, dropping below US$40/barrel on fears that US supply growth will continue while OPEC pumps near-record levels and Iran prepares to resume production. Mild-weather forecasts for the start of the heating season across the US pushed natural gas (-14.4%) prices down on worries of weaker demand. While the market was expecting weather to negatively impact natural gas consumption, inventory levels for the commodity continue to be above the trailing five-year average.

Decreased grain and cattle prices drove the drop in agriculture and livestock (-11.5%) for the quarter. Estimated crop yields for corn (-10.7%) and soybeans (-14.0%) were higher than expected after a rainy start to the North American growing season in June.

Industrial metals (-9.9%) continued to feel the effects of slowing growth in China and the strength of the US dollar, with aluminum (-7.8%), nickel (-13.4%), and zinc (-15.9%) hitting six-year price lows during the quarter. Copper (-10.2%) imports to China have declined by 8% year to date, largely because of reduced demand from the construction and transportation sectors. To date, China’s plans to increase investments in infrastructure projects have not resulted in greater industrial-metal demand.

Continued US-dollar strength and economic stability weighed on gold (-5.0%) prices, yet precious metals (-5.2%) ended the quarter as the strongest commodity sector on a relative basis.

Source: S&P

Hedging Strategies and Hedge Funds

Hedge funds declined for the fourth consecutive month in September, according to data released by Hedge Fund Research (HFR®). Global equities, commodities and high yield credit posted steep losses, while increased volatility sustained throughout the month. The broad-based HFRI Fund Weighted Composite Index® declined by -1.1% in September, the fourth consecutive monthly decline for the Index and the longest such sustained decline since the Financial Crisis in 2008. The performance drawdown of -5.0% since June brings the YTD Index performance through September to a decline of -1.5%, which still tops the S&P 500 by 400 basis points and the DJIA by over 700 bps.

Source: Callan Associates Inc.

September declines were led by equity and credit-sensitive Event Driven (ED) strategies, with the HFRI Event Driven Index posting a decline of -2.5%, led by exposure to positions in Glencore, Valeant and high yield credit. The HFRI ED Index has experienced a four-month performance drawdown of -7.0% since June, bringing YTD performance to a decline of -3.2%. Activist strategies were the weakest area of ED performance for the month, with the HFRI Activist Index falling -5.2%, dropping YTD performance to -4.7%.

Uncorrelated Macro strategies partially offset declines across many directional strategies in September, with the HFRI Macro Index advancing +0.4%, led by quantitative CTA strategies; the HFRI Macro: Systematic Diversified/CTA Index gained +1.4% for the month. CTAs benefitted from long fixed income exposure as yields sharply declined, while also benefitting from short exposure to commodities, including oil. The HFRI: Macro Active Trading Index gained +0.1% in September, while the Macro: Multi-Strategy Index posted a narrow decline of -0.4%. Led by declines in Latin America, the HFRI Emerging Markets Index fell -1.9% for the month, bringing YTD performance to -5.7%.

Equity Hedge (EH) strategies also posted losses for the month, as global equities declined sharply, resulting in the HFRI Equity Hedge Index falling by -1.7%. Exposure to the volatile biotechnology sector was only partially offset by gains in Equity Market Neutral and Short Bias strategies, as the HFRI EH: Technology/Healthcare Index declined -3.5%, while the HFRI Equity Market Neutral and HFRI Short Bias Indices gained +1.1% and +0.2%, respectively.

As high yield credit spreads widened, fixed income-based Relative Value Arbitrage (RVA) strategies posted declines for the month, with the HFRI Relative Value Index falling -1.0%. RVA sub-strategy declines were led by energy infrastructure partnerships (MLPs), as the HFRI Yield Alternative Index fell -6.1% in September. Partially offsetting these declines, the HFRI Volatility Index gained +2.4% for the month and leads all RVA sub-strategies YTD with a gain of +6.5%.

“Performance declines in September and recent months reflect expanding hedge fund outperformance of global equities as financial market volatility has increased and equity declines have accelerated,” stated Kenneth J. Heinz, President of HFR. “Hedge fund performance dispersion also recently expanded, with a combination of categorical strategy characteristics including net exposure, leverage, sector concentration and idiosyncratic positions contributing to large differentiation between the best and worst performing funds. Funds which have positioned for macroeconomic uncertainty and market volatility are expected to attract interest from investors looking to access alternative equity and credit exposures.”

Private Equity

Ninety venture-backed M&A deals were reported in the third quarter, 20 of which had an aggregate deal value of $5.1 billion, increasing 39% compared to the second quarter and marking the strongest quarter for M&A exits with disclosed value this year, according to the Exit Poll Report by Thomson Reuters and the National Venture Capital Association (NVCA). Thirteen venture-backed initial public offerings (IPOs) raised $1.7 billion during the third quarter of 2015, a 55% decrease, by number of offerings, from the second quarter of this year and 54% decline in total amount of dollars raised during the previous three-month period.

“While the number of companies making a public offering during the third quarter was down as a result of market volatility, M&A activity was robust, marking the strongest quarter by disclosed deal value this year. Of the thirteen companies that did make an IPO, more than two-thirds are currently trading above their offering price in the middle of a choppy market, a strong indicator of the quality of venture-backed IPOs,” said Bobby Franklin, President and CEO of NVCA. “In addition to market volatility weighing down IPOs, another recent and important trend that has impacted the venture-backed IPO market is the increased activity of both VCs and non-traditional investors making late-stage investments into private companies that might otherwise file for an IPO. While these so-called ‘private IPOs’ are weighing down the current IPO market, it also means the venture-backed IPO pipeline is deep and we are hopeful exit activity picks up steam in future quarters.”

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 13 venture-backed IPOs valued at $1.7 billion in the third quarter of 2015. By number of deals, quarterly volume decreased 55% from the second quarter of this year and registered a 54% decrease, by dollars, compared to the previous quarter.

Led by the biotechnology sectors, ten of the 12 offerings during the quarter were life sciences IPOs, representing more than three-quarters of the total listings in the third quarter. By location, 11 of the quarter’s 12 IPOs were from U.S.-based companies.

• Mergers and Acquisitions

As of September 30th, 90 venture-backed M&A deals were reported for the third quarter of 2015, 20 of which had an aggregate deal value of $5.1 billion, a 42% uptick compared to the overall number of deals reported during the second quarter of this year, and a 39% increase, by disclosed deal value.

The information technology sector led the venture-backed M&A landscape with 69 of the 90 deals of the quarter and had a disclosed total dollar value of $3.4 billion. Within this sector, Computer Software and Services and Internet Specific deals accounted for the bulk of the targets with 47 and 17 transactions, respectively, across these sector subsets.

Uncertainty as to the timing of an eventual interest rate hike in the US continues. Concerns over

China’s slowing growth and its impact on other economies have contributed to heightened volatility that has cast a pall on emerging markets equities and currencies.

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. . Continued fiduciary education is paramount.

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