In contrast to last year, so far this year all major asset classes have performed well. Developed market equities, bonds, emerging market (EM) equities and EM bonds, and commodities are all up year to date in the range of 4%-8%. Globally diversified portfolios should continue to fare well in this environment and the global asset allocation team continues to recommend modestly overweighting equities over bonds with a neutral allocation to commodities.
We upgraded U.S. stocks from an underweight to a neutral position. U.S. equity valuations relative to other countries are looking a little rich but not enough to remain an underweight at this point. Within U.S. we upgraded small-cap stocks from an underweight to a neutral position. Small-cap stocks sold off sharply in the first few months of the year and were down nearly 10%. Going forward, we expect small caps to perform in line with large caps. The U.S. economy shrank more than expected in the first quarter but incoming data in the second quarter points to a rebound in growth. Earnings in the first quarter also came in ahead of expectations and rose almost 6% compared to last year. We continue to recommend a neutral stance on overall EM equities. However, we find selective opportunities within EM and we prefer emerging Asia and have upgraded EMEA.
In addition, we downgraded Treasuries further from an underweight to a maximum underweight position. We expect stronger growth ahead to drive bond yields higher and the recent rally in bonds have provided an opportunity to further reduce duration and reduce exposure to government bonds. In addition, investor positioning in Treasuries is no longer at extremes, reducing the risk of a short covering rally. We also upgraded securitized bonds from a max underweight to moderate underweight.
Source: Columbia Management Investment Advisers, LLC. The chart reflects the views of the Global Asset Allocation team as of June 17, 2014. Asset classes are ranked from 1 (overweight) to 5 (underweight), with 3 representing a neutral allocation.