Global Market Review
Our global portfolios performed strongly during the first quarter, consistent with our positioning for the ongoing global expansion. The first quarter was good to both equity and convertible markets around the globe, with broad market returns generally between 4% and 6%. In many cases, U.S. equities and convertibles offered returns slightly below their foreign counterparts, supporting the argument for the long-term benefits of maintaining international exposure in a portfolio. In the first quarter, convertibles' positive performance was in part a result of a narrowing of the gap between what we consider the asset class' undervaluation to their historical fair values as well as its tendency to track the upside performance of underlying equities. This was particularly true among our portfolios' allocations, as our focus has been on securities with greater equity sensitivity, in line with our overall outlook. Such positive results for convertibles once again distinguished them from their traditional fixed-income counterparts as many bond indexes endured negative returns for the quarter, particularly among investment-grade holdings.
The international equity markets had a solid first quarter. Among developed countries, Europe was the regional leader, followed by the Far East and North America. More specifically, the Nordic countries posted some of the highest returns, while France and Germany's bourses produced double-digit gains (not accounting for currency fluctuations). Emerging markets continued their solid run, besting the developed markets, with particular thanks to Emerging Asia and Latin America. While our portfolios do have participation within the more volatile realm of emerging markets, in some cases we have the opportunity to gain exposure via convertible securities rather than straight equities, demonstrating the benefits of flexible investment parameters.
Outlook/Positioning
It appears that Europe and Japan may have turned the corner in their economic recoveries and will be joining in on the global expansion. This is good news for international equity investors and also good news for the United States, as exports should increase and expansion opportunities should take hold. In addition, global merger and acquisition activity is strong, corporate balance sheets are improving and excess capacity appears to be declining. Indeed, M&A activity and private equity actions appear to be gaining acceptance around the globe, which we believe can spur greater growth as well. We feel that Japan and Europe both present ample opportunities, and are positioning assets to take advantage of the Japanese marketplace while keeping significant exposure in Europe and the United States. In addition, we have increased our exposure to more developing economies such as Greece and South Africa slightly. Continuing from the end of 2005, the largest sector allocations within the portfolio are still Financials, Information Technology, Industrials and Consumer Discretionary, although the absolute allocations in those sectors have changed slightly. Overall, we remain long-term bullish on the global growth story, and are strong believers in the importance of investing from a global viewpoint. Broad secular themes, including demographics, globalization, and the expansion of economic freedom continue to confirm our belief in the importance of maintaining global perspective in our pursuit of long-term wealth creation for our clients.