U.S. Large Cap Value Investment Commentary As of April 30, 2012
Cohen & Steers
May 18, 2012
U.S. Large Cap Value
As of April 30, 2012
We would like to share with you our review and outlook for the U.S. large cap value market as of April 30, 2012. For the month, the Russell 1000 Value Index had a total return of –1.0%, compared with a total return of –0.6% for the S&P 500 Index. For the year to date, the Russell 1000 Value Index had a total return of +10.0%, compared with +11.9% for the S&P 500 Index.
Equity markets had modest declines in April—a pullback we anticipated following several months of strong performance. Stocks underperformed fixed income instruments amid softer U.S. economic data and renewed concerns over Europe’s economic and sovereign debt challenges. Investors’ decreased appetite for risk was partly reflected in a decline in U.S. Treasury yields, which fell to 1.9% from 2.2% over the course of the month.
Materials stocks (which had a total return of –2.7% in the Russell 1000 Value Index) saw the largest decline as investors rotated away from more economically sensitive companies. Energy companies (–2.6%) were a close second. For months, stock prices have tracked the price of oil, which spiked over concerns about Iran, but recently slipped as high prices, slower global growth and geopolitical shifts dampened demand. Financial institutions also lagged (–2.4%) despite good first-quarter operating reports. Banks saw improvements in their capital markets and mortgage businesses, but revenue growth continued to be weak and net interest margins remained under pressure.
The telecommunications services group (+5.3%) was the index’s best performer, reflecting strength in AT&T, the sector’s largest weight, which reported good results across every segment. Verizon also had good share-price performance, although its earnings were mostly in line with expectations. Utilities stocks (+2.0%), traditionally perceived as defensive, outperformed the broader market after trailing for several months. Sempra Energy had a solid gain after announcing plans to develop a liquid natural gas (LNG) export facility and explore plans to launch a master limited partnership for its midstream and LNG assets.
The consumer discretionary sector (–0.6%) outperformed. Home improvement stocks such as Home Depot advanced, as did diversified retailer Ross Stores, which continued to deliver sales growth well above expectations. Within consumer staples (–1.1%), tobacco stocks, which are considered to be relatively defensive, did well.
Most earnings reports from health care companies (–0.7%) were in line, with the exception of the health insurance industry, where Humana and Aetna reported weaker-than-expected results and sparked a selloff in the group. Abbott Laboratories and Covidien both exceeded expectations and had positive performance.
We believe the economic expansion is likely to continue, but at a pace that is modest both in absolute terms and relative to previous recoveries. Many stocks are still attractively valued, in our view, and we believe they have the potential to advance in the coming months. At the same time we are watchful of global economic developments, particularly in Europe and the Middle East. We also recognize that a winding down of monetary stimulus (such as the Federal Reserve’s Operation Twist program) could create headwinds.
Broadly speaking, we expect to see additional increases in the number of dividend payers; Apple has opened the door for other technology companies, a sector that has historically had a relatively low proportion of dividend-paying companies. We are also seeing solid dividend increases among industrials companies.
Our view on financial companies is balanced. On one hand, revenue growth is anemic, and low interest rates continue to put pressure on net interest margins. However, we believe that valuations are reasonable, capital positions have strengthened, credit is better and companies are starting to return capital to shareholders through dividends and buybacks.
(c) Cohen & Steers