Thank you all for hanging in through a fairly volatile year. With our collective long term time horizon, we continue to try to help clients calibrate their expectations so that the gyrations during a year such as 2015 are not unexpected. Outside the financial markets, surprises during 2015 include such events as the first Triple Crown winner in 37 years, the horrific Paris terrorist attack, and the first NBA championship for the Golden State Warriors in 40 years.
Finishing up 2015, stock prices worldwide rose in the last quarter with increases ranging from strong (+6.27%1 for US companies) to modest (+0.66%2 for Emerging Market companies). Bond prices absorbed the first and much anticipated Federal Funds rate hike since 2006 and came close to breaking even. As we write, the New Year has brought in more volatility courtesy of a slowing economy and currency weakness in China.
Volatility undoubtedly attracts media attention. There will certainly be sensational headlines to promote fear and increase ratings, so there are some things we would like to point out.
1) The US is not the world’s only stock market. To be prudent, we diversify our portfolios. Some of our asset classes (Emerging Markets in particular) have dropped more than 20% in value in the last year. If the US market continues to weaken (no predictions here), we expect diversification in global stocks and bonds to work in our favor.
2) Most discussions of market movements seem to exclude dividends. Dividends are an important part of returns, whether they are reinvested or taken in cash. In our portfolios we use dividend distributions (approximately 2% for US stocks) to provide cash for rebalancing. When cash accumulates in your accounts (as in December from year end distributions), we use that cash to rebalance risk and buy into whatever asset class has become relatively cheaper.
In retrospect, not much seemed to be behaving as usual in 2015: Small Capitalization Stocks did not deliver their historical premium over Large Cap Stocks, diversification into Emerging Markets was extremely unprofitable and Value (cheaper stocks) lagged more expensive Growth as an investment style. Value investing is in a slump. As evidence of that, look no further than the experience of one of its most famous practitioners, Warren Buffett, who saw a decline of 12% in the value of his flagship Berkshire Hathaway during 2015. There is compelling evidence that Value investing pays off over longer periods of time and we understand there are times when it doesn’t feel that way.
That doesn’t make it a bad time to be invested. Often the best times to invest are when it feels the worst. The low single digit losses we experienced for 2015 are reminiscent of what happened in 2011, which turned out to be a pause in an extended rising market.
Our view is that we continue to be in an economic recovery that is largely disbelieved. Our economy is at or above record new car sales, mortgage rates remain low as home loans become increasingly obtainable. Oil prices dropped another 45% last year which benefits consumers and manufacturers alike. The unemployment rate has been pared in half to 5% and the Fed judged the economy healthy enough to bear a reversal in interest rate policy.
There are no magic bullet investment strategies we are aware of. Believe us when we tell you that we field many calls from firms claiming to have just what we need. We are confident that we can be successful by continuing to implement our investment plans in a timely and consistent manner. Please be in touch if you would like to discuss your portfolio or any questions with us.
In MFA news: We are pleased to announce that Dave was unanimously elected to serve as Chairman of the Board of the Marin County Employee Retirement Association. This is a nine member board that oversees the $2 Billion pension fund for the benefit of 5,500 current and retired county employees. Dave’s term ends in October 2016 and we would like to thank Christine (11 years with MFA) for helping make this commitment work. Speaking of tenure, in early February Susan celebrates her 5th anniversary skillfully assisting clients at MFA. Also, we would like to congratulate Tim’s daughter, Colleen, on her graduation (Magna Cum Laude) from his alma mater, Villanova University, and the start of her career as an operating room nurse at Georgetown University Hospital.
