Pendleton Street Advisors


insight & investment commentary


Investment Update: June 2016

Regarding Market Volatility

The government of the United Kingdom announced early Friday morning that its citizens had voted to leave the European Union. Our immediate concern is with communicating to you how this development affects client portfolios, and what we will be doing as a result of the volatility over the following days and possibly weeks.


Heading into the close, equity markets have responded negatively to news of the UK referendum vote, while bond markets have increased. As the chart left demonstrates, the effect on equities has been markedly different across geographies. Also of note, gold has increased by 4.6% so far today, primarily because it is seen as a good store of value in times of uncertainty. We expect heightened volatility to continue in the near-term, but there is also a possibility of reduced volatility if UK and EU policy-makers definitively communicate how they will lessen the impact of the UK’s exit from the EU on markets, specifically for financial institutions.


Leading up to this point, we have been raising cash across portfolios, most recently by selectively selling large cap equity positions.1 We also reduced exposure to emerging market bonds and stocks earlier in the year. As a result, portfolios went into today with a significant allocation to cash, which provided protection against this sharp and widely unexpected downturn. Because portfolios have higher levels of cash, we will be vigilantly pursuing opportunities that arise if investors continue to sell broadly and indiscriminately.

The chart to the right is an updated version of one we included in our most recent commentary. It illustrates our evaluation of where the S&P 500 index of US large cap stocks stands relative to our various measures of fair value. Even after today’s decline, it indicates that the broader market is above our estimated range of fair value. That said, we expect individual companies within the market to become more fairly and eventually under-valued as the market approaches a more reasonable valuation. Our approach will be to carefully initiate new or increase existing positions in selected segments of the markets as levels decline -5% to -10% from yesterday’s close. Beyond that, unless economic conditions, credit availability, and liquidity show signs of real and sustained deterioration, we will use additional cash to invest broadly across equity markets.

We do not take lightly the trust you place in us as advisors. Please let us know if you have any questions or concerns related to what we have outlined above.