After a strong finish to 2022, equity markets in the opening three months of a new year continued to deliver fairly healthy results — especially for investors who remained broadly diversified across global markets and asset classes.

In terms of short-term market sentiment, traders and futures markets were impacted by the failure in early March of Silicon Valley Bank — a California-based lender with heavy exposure to risky venture capital and private equity entrepreneurs. Still, a notable drop in domestic crude oil prices and a smaller interest rate hike by the Fed fueled sentiment of a less-hawkish stance by U.S. policymakers.

Perhaps one of the biggest stories for investors during the opening three months of 2023 was that U.S. small caps lagged large caps and domestic value stocks underperformed growth. Of course, our funds selection and asset-allocation processes are steeped in the academic research by Nobel laureates such as Eugene Fama and Harry Markowitz, the father of Modern Portfolio Theory. As a result, IFA Index Portfolios are tilted to known factors driving higher expected returns like value, size and profitability.

Another key takeaway for our investment committee from studies by leading market researchers: Patience is a virtue. The graphic below illustrates such a point. You can choose different asset classes — from small value to large growth — and compare the percentage of time one has beaten the other through different rolling periods. No matter what timeframe is selected, whether it's 95-plus years or shorter, notice how longer holding periods translated into greater premiums for those who favored small caps and value-styled stocks.

Domestic Equities

The IFA blended index for U.S. large-cap stocks kept pace in the first quarter with the end of 2022 by gaining nearly 7.50%. Meanwhile, its sister domestic index of large-cap value stocks slowed in Q1 from its previous pace, although it still returned almost 0.50%. Also worth noting: While U.S. small-cap value stocks posted flat-to-negative returns, the blended IFA U.S. Small Company Index finished with a healthy 3%-plus return in the opening quarter of 2023. (By blended, we're referring to these indexes representing a mix of value- and growth-styled stocks.) 

International (Developed) Equities

In Q1, IFA index returns from developed international stock markets landed on positive ground with single-digit percentage gains. Although the quarter marked a slowdown from the end of 2023, IFA's index for international developed value stocks still produced a better than 6% gain. At the same time, staying diversified across styles proved beneficial for our clients as the IFA International Small Cap Value Index outperformed its sister blended international small-cap index by a slight amount (6.53% vs. 6.38%).

Real Estate Equities

In Q1, global diversification in publicly traded real estate stocks proved beneficial. By estimates of major index results reviewed by Dimensional Fund Advisors, U.S.-based real estate investment trusts (REITs) produced on average a gain of 2.77%. By contrast, an international index of real estate stocks tracked by DFA generated negative returns in the first quarter. Since domestic REITs dominate the global marketplace, the IFA Global REIT Index — which includes both U.S. and international real estate stocks — had a total return of 0.93% in Q1. That reversed the previous quarter's results when international real estate stocks held up better than those in the U.S.

Emerging Markets Equities

Just like in developed foreign markets, emerging markets stocks posted single-digit percentage gains in Q1. The large-cap blended IFA Emerging Markets Index led the way by gaining 5.27% in the quarter. Its sister index capturing developing market small-cap stocks of all styles finished up by 4.56%. The worst performer came on the larger-cap oriented IFA Emerging Markets Value Index, which returned 3.74%. All three benchmarks slowed from the previous quarter's 10%-plus overall performance.    

Fixed-Income

In the first quarter, the 30-year U.S. Treasury rate decreased by 0.21% to 3.67%. Meanwhile, the 10-year U.S. Treasury rate fell by 0.31% to 3.48% while the five-year U.S. Treasury rate decreased by 0.34% to 3.60%. 

In a period of declining rates, IFA's fixed-income indexes — which cover higher-quality and lower-termed investment-grade bonds — managed to produce positive results in the first quarter. During a period in which yield curves remained inverted, the most noticeable movement still took place in the IFA Five-Year Global Fixed Income Index, which returned a robust 1.42%. Following closely behind in terms of a strong Q1 performance was the IFA Two-Year Global Fixed Income Index's 1.26% return. The IFA One-Year Fixed Income Index and the IFA Short-Term Government Index each rose 1.18%.

IFA Index Portfolios

With stocks and bonds both gaining ground, IFA Index Portfolios finished 2023's opening quarter with positive results. As might be expected, portfolios with heavier weightings to stocks did particuarly well in Q1. For example, notice in the chart below how IFA Index Portfolio 100 (100% stocks) returned 3.12%. At the other end of the spectrum, the bond-heavy IFA Index Portfolio 10 (10% stocks and 90% bonds) also landed in positive territory with a return of 1.24%. (All of the returns of the IFA Index Portfolios shown below are net of the maximum annual 0.90% advisory fee through March 31, 2023.) 

Each quarter, we monitor our recommended funds for clients. As part of that process, we've developed a rating system. For a summary of those results, please feel free to check IFA's Performance Monitoring Report (PMR). 

The wealth of IFA's educational materials are available for Apple iOS and Android devices via the IFA App. This free App is available to download from both the Apple App Store and the Google Play Store for Android.

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Performance results for actual clients that invested in accordance with the IFA Index Portfolio Models will vary from the backtested performance due to the use of funds for implementation that differ from those in the index data, market conditions, investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA's advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower advisory fees, varying custodian fees, and/or the timing of fee deductions.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/