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June 04, 2020

Active International Allocation Commentary - April 2020

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Active International Allocation Commentary - April 2020

Active International Allocation Commentary - April 2020

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June 04, 2020


Portfolio Commentary – April 2020

The month of April was a paradox. Unprecedented declines in employment and production reached near or below levels last seen in the Great Depression, while equity markets, consoled by massive government interventions and fueled by liquidity, snapped back sharply.

  • In April the MSCI All Country World Index gained nearly +8%. U.S. equities returned +13%, their strongest monthly performance since 1987, bringing the YTD loss to roughly -10%, a significant rebound from the recent market low of -36% (March 23rd).

  • The April MSCI regional/country returns were: U.S. +13%, Pacific ex Japan +12%, Emerging Markets +9%, Europe +6% and Japan +5%. MSCI All Country World Index sector returns were: discretionary +17%, energy +16%, materials and technology +14%, communication services and health care +12%, real estate +9%, industrials +8%, financials +7%, staples +6%, and utilities +3%.

  • A notable feature in April was the weakness of the U.S. dollar (USD) versus the commodity currencies such as the Aussie and Canadian dollars, +7% and +3%, respectively. Major currency moves relative to the USD were muted: the euro and Swiss franc were flat and Japanese yen +1%.

For the month the MSIF Active International Allocation Portfolio (AIA) gained +7.52%, in line with its MSCI All Country World ex USA Index benchmark return of +7.58%.

  • The portfolio benefited from overweights to gold stocks and technology, positioning in communication services, an underweight in utilities, and underweights and positioning in both Japan and financials.

  • Performance was held back by the overweight to and positioning in staples, positioning in technology, an overweight to Germany, an underweight to Emerging Markets and our cash position.

  • YTD (through April 30) the AIA portfolio is down -15.8%, but +1.8% ahead of its benchmark, the MSCI All Country World ex USA Index, which returned -17.6%.

Portfolio Positioning

We did not make any significant changes to the portfolio in April, short of increasing our cash level by trimming stocks that had appreciated above our estimates of fair value. The portfolio is more than 95% invested in our barbell strategy. We think that our focus on holding quality, stable investments and more cyclical opportunities is a prudent approach in the current market regime. The ballast portion of the portfolio should provide some stability in turbulent markets and the cyclical component should give flexibility in rising markets.

From a country perspective, our base case is that nations are able to provide the most fiscal and monetary support (e.g. US, UK, core EU) are likely to be the safest ports in the storm. For now, these countries have the best tools to address the health and economic consequences of this crisis, and (for now) markets are giving them a pass to pursue debt monetization, although at some point we expect that this will become a point of stress. In the near term each country’s recovery will largely be based on how and when they end social distancing.

Japan, a portfolio underweight, has pioneered the use of Zero Interest Rate and Quantitative Easing policies, and has been practicing implicit Modern Monetary Theory for over a decade. It is our view that Japan likely reaches the limits of this debt monetization policy approach first, although high social and political cohesion may allow it to go farther along this path than Europe, due to higher friction and rising populism (as well as inability to mutualize the debt burdens of different states - see recent German Constitutional Court ruling).

We think that various Developed Market (DM) countries will continue to respond to this health crisis by providing fresh monetary and fiscal stimulus as the need arises, limited by inflationary dynamics, which for now look to be contained. We also expect that these countries will start to influence capital allocation decisions more, as can be seen with the case of Japan, which has recently begun incentivizing companies to move production back onshore as a measure to support the domestic economy.

Market Review and Outlook

Markets are currently looking through the trough of this shock and finding comfort in the fact that the economic data is backward-looking and does not inform strength of the economic upturn and in the monumental government actions taken to support the economy and markets. The recent rebound and stability in oil markets had also calmed investors. However, while we think the global monetary and fiscal response has been positive, a number of things keep us cautious.

  • We expect that after recovering more than +30% off the March 23 low, global equities are likely to consolidate as second-round effects of the economic contraction become evident and the shape of the economic recovery becomes clearer. This means that consensus may be disappointed if the view of a V-shaped recovery doesn’t materialize.

  • During 1Q earnings announcements, many companies removed guidance for the balance of 2020 which clouds the outlook for corporate earnings and makes forward valuations difficult to discern.

  • Additionally, it is likely that there will be added solvency issues in consumer dependent industries such as retail and travel/tourism which could have knock-on effects to employment, demand and banks/lenders.

  • From a geopolitical perspective the recent ratcheting up of tensions between the U.S. and China is also disconcerting and an overall detriment to confidence.

We see this as an environment where the strong get stronger, and those that have been hanging on by just a thread, will likely have to go through a washout. As we have said in previous commentaries, we continue to avoid market segments that we see as most exposed when the tide goes out.

  • We have overweighted countries (France, Germany and the Netherlands) who we view as better positioned to benefit from themes related to e-commerce, working-from-home, server demand and gaming.

  • In the last several months, we have added economically-sensitive positions we think could be the industry survivors in travel, airline manufacturing, memory and other semiconductors, as well as in select staples that are exposed to emerging markets consumer growth themes.

The pandemic could result in secular changes to many economies and industries and accelerate de-globalization. These outcomes would significantly alter and likely shorten supply chains and bring production onshore. For DM, the service sector is likely to shrink as a percentage of the economy and policy decisions could pivot to more overt support of manufacturing and industrial sectors as engines of economic growth and employment. We are thinking about these longer-term consequences and their investment implications, and will keep you updated as our analysis evolves.


Performance (%) as of April 30, 2020

MISF Active International Allocation Portfolio – Class I Shares 7.52 -15.76 -8.02 -0.17 -0.55 2.99 5.05
MSCI All Country World ex USA Index 7.58 -17.55 -11.51 -0.25 -0.17 2.89 5.05
Blended Index 7.58 -17.55 -11.51 -0.25 0.07 3.367 4.87
MSCI EAFE Index 6.46 -17.84 -11.34 -0.58 -0.17 3.55 4.83

* The inception date of the MSIF Active International Allocation Portfolio is January 17, 1992


 Performance (%) as of March 31, 2020

MISF Active International Allocation Portfolio – Class I Shares -21.66 -21.66 -12.84 -1.64 -1.32 2.04 4.80
MSCI All Country World ex USA Index -23.36 -23.36 -15.57 -1.96 -0.64 2.05 4.79
Blended Index -23.36 -23.36 -15.57 -01.96 0.59 2.73 4.61
MSCI EAFE Index -22.83 -22.83 -14.38 -1.82 -0.62 2.72 4.61

* The inception date of the MSIF Active International Allocation Portfolio is January 17, 1992


Performance data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month end performance figures, please visit Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost.

The gross expense ratio is 0.97% for Class I shares and the net expense ratio is 0.90%. Where the net expense ratio is lower than the gross expense ratio, certain fees have been waived and/or expenses reimbursed. These waivers and/or reimbursements will continue for at least one year from the date of the applicable fund's current prospectus (unless otherwise noted in the applicable prospectus) or until such time as the fund's Board of Directors acts to discontinue all or a portion of such waivers and/or reimbursements. Absent such waivers and/or reimbursements, returns would have been lower. Expenses are based on the fund's current prospectus. The minimum initial investment is $5,000,000. Returns are net of fees and assume the reinvestment of all dividends and income. They are compared to an unmanaged market index. Returns for less than one year are cumulative (not annualized). Performance for one year or more is based on average annual total returns. The returns are reported for Class I shares. Performance for other share classes will vary.

Effective December 30, 2016, the benchmark index for the MSIF Active International Allocation Portfolio changed from Morgan Stanley Capital International (MSCI) EAFE (Europe, Australasia, and Far East) Index to the MSCI All Country World ex USA Index. Blended Index performance shown is calculated using the MSCI EAFE Index from inception through 12/30/2016 and the MSCI All Country World ex USA Index thereafter.



There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Privately placed and restricted securities may be subject to resale restrictions as well as a lack of publicly available information, which will increase their illiquidity and could adversely affect the ability to value and sell them (liquidity risk).

Head of Macroeconomic Research, Global Emerging Markets Team
Active International Allocation Team Global Emerging Markets Team
Executive Director
Active International Allocation Team


The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

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The MSCI All Country World Index is a free float adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. The MSCI All Country World ex USA Index is a free float adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets, excluding the United States.

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