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Brian Herscovici, CFA Chief Investment Officer, USAA Managed Portfolios




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The third quarter continued the trend of challenging records in both equity and fixed income. The US 10-year yield fell to 1.46% during the quarter, just shy of its all-time low (1.36% on July 2016). The 30-year bond fell below 2% for the first time in history, ending the quarter at 2.11%. In equity markets, the S&P 500 made a new record but retreated since then for a return of 1.8%. Non-US equities fell for the quarter due to growth concerns and a currency crisis in Argentina. EM experienced a 10% drop during the quarter but rallied back to a loss of only -4.2%. Gold was a big winner, regaining some of its safe haven status, generating a gain of 4% over the quarter and is up almost 15% year to date.


Despite the noise on your social media account, 2019 has been a positive experience for most retirement accounts. The world is indeed experiencing a slowdown in growth — even European stalwart German manufacturing contracted — but equities and fixed income have enjoyed strong returns. Why the disconnect? For one, central banks around the world continue unconventional experiments such as cutting rates into negative territory. There is currently $15 trillion in global government bonds trading at negative yields, including most bonds in Japan and Europe. For the first time ever, the US has the highest paying government bonds in the developed world. While the US economy is also experiencing a slowdown, GDP growth is holding strong near its long-term trend of 2.0%.

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While US rates remain positive, they have moved down significantly this year creating an inversion where short-term bonds are yielding more than long term bonds. This inversion of the yield curve has increased concerns that a US recession could be coming soon. It is true that every recession has been preceded by a yield curve inversion, however, not every inversion has led to a recession. While we do not see a recession in the next 12 months, we agree with Federal Reserve Chairman Jerome Powell that risks are elevated, warranting the Feds recent “mid-cycle adjustment” to the fed funds target rate.

Trade disputes and geopolitics (Brexit, Iran, and Hong Kong protests) are two wildcards that could either send the world economy into a downward spiral or let the expansion extend even longer. The US is currently experiencing the longest expansion in history, but it is flying at a very low level. Global financial markets are on fragile ground due to (1) stocks and bonds trading at elevated levels, and (2) policy makers being low on ammunition to offset slowing growth. The good news is that when a global recession does not include the US, the downdraft tends to be shallow and short lived.

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We expect the next 12 months to be noisy for investors and require patience to adhere to their long-term strategy. In addition to geopolitical risks and trade issues, the new impeachment inquiry will add to the symphony of rhetoric facing the markets. We view the impeachment inquiry as political, not economic, news at the moment but we will continue to monitor the situation. Other economic news that will make an impact include the USMCA (revised NAFTA) agreement and ongoing trade discussions with many other countries. All of these trade issues, including China, are causing uncertainty and impacting CEO confidence causing a barrier to business activity. The current administration is facing an election year which will be much more difficult if the economy is weak due to investor-perceived self-inflicted affairs. China and others may be willing to hold out for the chance of getting an easier trade partner, but it is not clear that a Democratic Party majority would help or hurt protectionism regulations. China may also be eager to improve on the slowest GDP growth they have seen in 50 years. All this suggests a resolution on trade deals may be the path of least resistance around the world.

Given the risks and trade-offs discussed above, we are optimistic over the long term. The manufacturing industries have been contracting but we believe that trend should soon bottom due to low inventory levels. Companies have been running down stockpiles but that cannot last forever. Eventually, companies will need to replenish inventories providing a much-needed boost to manufacturing. Further, while the manufacturing sectors have been pulling down the economy, the service sector has been resilient in the US and abroad. Services makes up the majority of the economy in the developed world and have been growing in emerging economies.

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When global growth does find a bottom, we could see an oldie but goodie return to our portfolios — the outperformance of value stocks. With the scarcity of growth as the “new normal,” investors have been willing to pay a premium for growth stocks causing an extreme valuation gap between growth and value stocks. We would expect that gap to close as we move forward and gain clarity on the issues highlighted above. Non-US markets, especially emerging economies, are trading at attractive valuations which will benefit from improved trade and a softer USD dollar. The US dollar is a countercyclical currency; when global growth expands, the US dollar falls relative to global currencies. In the US, value did make a small come back during the month of September, but it is still too early to tell if this trend will continue.


Tactical Positioning in USAA Managed Portfolios at the end of the third quarter was unchanged from the prior quarter — we are maintaining a cautious stance over the short term, with an overweight to fixed income and an underweight to equity. Within fixed income, we emphasize higher quality bonds with a neutral stance to duration. We maintained our tactical allocation, and added to our strategic allocation, in emerging market debt, specifically high-rated EM government debt, which we believe offers extra yield without stepping down in quality. In equity, we believe US large caps reflect the relative stability of US personal consumption which makes up 70% of U.S. GDP and where consumer confidence remains consistently strong.

As always, our guidance to members is to remain focused on the long-term investment plan that you have put so much thought into. For USAA Managed Portfolio members who may be uneasy about market risk in general or have concerns about current asset-class allocations, we suggest consulting with a USAA advisor.


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Investment Philosophy
We believe in constructing global, actively-managed portfolios that aim to capitalize on market opportunities utilizing multiple asset classes, institutional managers, and investment factors including value, momentum, and corporate credit. We adhere to our disciplined research and portfolio construction process, even if it causes us to deviate from the crowd.

What We Do

  • Build broadly diversified model portfolios to help you achieve your financial goals
  • Set long-term allocations to help reduce risk and volatility along with a short-term allocation to maximize timely opportunities
  • Monitor how investments and managers complement each other
  • Rebalance to keep risk in-line
  • Employ tax minimization strategies when warranted

We continually focus on global markets, economies and the geopolitical environment so you can focus on your life goals.


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Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income. Past performance is no guarantee of future results.

Asset allocation does not protect against a loss or guarantee that an investor’s goal will be met.

Fixed income securities are subject to price volatility and a number of risks, including interest rate risk. Interest rates and bond prices move in opposite directions so that as interest rates rise, bond prices usually fall and vice versa. Interest rates are currently at historically low levels. Fixed income securities also carry other risks, such as inflation risk, liquidity risk, call risk, and credit and default risks. Lower-quality fixed income securities involve greater risk of default or price changes. Securities of non-U.S. issuers generally involve greater risks than U.S. investments and can decline significantly in response to adverse issuer, political, regulatory, market and economic risks. Fixed income securities sold or redeemed prior to maturity may be subject to loss. • Investments in foreign securities are subject to additional and more diverse risks, including but not limited to currency fluctuations, market illiquidity, and political and economic instability. Foreign investing may result in more rapid and extreme changes in value than investments made exclusively in the securities of U.S. companies. There may be less publicly available information relating to foreign companies than those in the U.S. Foreign securities may also be subject to foreign taxes. Investments made in emerging market countries may be particularly volatile. Economies of emerging market countries are generally less diverse and mature than more developed countries and may have less stable political systems.

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. • The MSCI EAFE Index covers 21 developed markets outside of North America: Europe, Australasia and the Far East. It aims to include in its international indices 85% of the free float-adjusted market capitalization in each industry group within each country. • The MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the U.S. equity market. The index covers approximately 85% of the free float-adjusted market capitalization in the U.S. • The MSCI World ex USA Index measure large- and mid-cap stock performance in 22 developed markets (U.S. excluded). The index covers approximately 85% of the free float-adjusted market capitalization in each country. • The Bloomberg Barclays U.S. Municipal Index covers the U.S. dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds. • The Bloomberg Barclays US Corporate High Yield Bond Index measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. • The Standard & Poor’s 500 Index is an unmanaged index of 500 stocks representing the large cap segment of the market, covering 75% of the U.S. equities market. • The S&P SmallCap 600 Index measures the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable. • The Russell 2000 Index is an unmanaged index that consists of the 2,000 smallest companies in the Russell 3000 Index. It is a widely recognized small cap index. • The Bloomberg Barclays U.S. Aggregate Bond Index is a widely recognized index used to track the performance of investment grade bonds in the U.S. • The Bloomberg Barclays U.S. Credit Index measures the performance of the investment- grade, taxable corporate and government-related bond market. It is composed of the Bloomberg Barclays U.S. Corporate Index and a non-corporate component that includes non-U.S. agency, sovereign, supranational and local authority bonds. • The JP Morgan Emerging Markets Bond Index Plus (EMBI+) tracks total returns for foreign currency-denominated, fixed-income securities issued in emerging markets.

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