Wisco Newsletter Q415
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Transcript of Wisco Newsletter Q415
7/25/2019 Wisco Newsletter Q415
http://slidepdf.com/reader/full/wisco-newsletter-q415 1/4
Investment Advisors: Stephen Share [email protected] Greg Schroeder [email protected]
Fourth Quarter 2015
DEAR CLIENTS & FRIENDS;
Both the domestic and international equity markets performed better in the fourth quarter, rising 6% and 3%
respectively, recovering some of the losses experienced in the rst three quarters of the year. However, the
equity markets failed to return to positive territory for the full year, as the domestic equity market ended 2015
more or less at while international equities, in aggregate, nished the year down mid-single digits.
Fixed income markets were down modestly in the fourth quarter with the Barclays aggregate bond indexdeclining 1%. Although anticipated for some time, the Federal Reserve raised its short-term borrowing rate in
December (the rst hike in nearly 10-years), indicating its belief that the U.S. economy has nally stabilized
following the nancial crisis of 2008. Correspondingly, the 10-year U.S. treasury rate increased from 2.1% at
the beginning of the quarter to 2.3% at year end.
Commodity markets also fared poorly in the fourth quarter with the Dow Jones-UBS commodity index falling
13%. Agricultural and medal prices were both down across the board (i.e., corn and gold prices were down 7%
and 5%) while crude oil prices plummeted another 19% this period.
As a reminder, our policy is to rebalance client portfolios on a semi-annual basis (in January & July). This allows
us to realign the positioning of your portfolio with our current market expectations. To that end, we recently
completed our January 2016 realignment decisions and will be rebalancing portfolios over the course of thenext few weeks.
We would also like to remind you that this is often a good time of year to meet with us to discuss recent
portfolio performance as well as to review your current investment objectives, risk tolerance and nancial
goals for 2016. Please don’t hesitate to give us a call to schedule a meeting. In addition, this is also a good
time to make sure that all of your personal information is current in our database, such as your communication
preferences, IRA distribution dates, beneciaries, etc. Lastly, remember that the 2015 IRA contribution deadline
is right around the corner (tax day) so let us know if we can help.
At Wisco, we believe our approach of designing well-
diversied, low-cost investment portfolios is the
best way to produce favorable results over time.
We would like to thank you for providing us
with the opportunity to work with you as your
investment adviser. We appreciate your
business!
Sincerely,
The Wisco Team
7/25/2019 Wisco Newsletter Q415
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The domestic equity market increased 6% in
the quarter recovering much although not all of
3Q15’s loss. For the year, equities posted a modest
increase, with large cap stocks (+1%) outperforming
mid-cap stocks (0%) and small-cap stocks (-4%).
The S&P 500 closed the quarter at 2044, off the
all-time high of 2135 reached May 20th. S&P 500
3Q15 earnings were essentially at compared to
3Q14, and 3Q15 GDP posted a 2.0% gain. Once
again, a strong dollar and poor earnings from Energy
companies were a substantial headwind to corporate
earnings. Going forward, we feel 2016 corporate
earnings could grow in the mid-single digit range
while GDP is likely to grow in the low single digits.
In 2016, the headwinds from low Energy earnings
and a strong dollar will likely dissipate, while a
stronger economy and better consumer spending
could drive earnings higher. These earnings’
tailwinds could be partially offset by the Federal
Reserve modestly increasing short term interest
rates throughout 2016.
Despite investor concerns, we feel there arereasons to be optimistic about the domestic equity
market. The S&P 500 is trading at a P/E of 16x 2016
consensus operating earnings which seems like a
reasonable valuation especially if earnings can grow
in the mid-single digits in 2016. Therefore, we remain
constructive on the domestic stock market and feel
positive returns are again possible in 2016. With
that in mind, Wisco continues to have signicant
domestic equity exposures in all our client portfolios.
Fourth Quarter 2015 Market Review
Wisco Investment Management
Wisco model portfolios are constructed using ve different asset classes; Domestic Equity, International Equity,
Domestic Fixed Income, Alternative Investments and Cash. Our current model portfolio asset class allocationsare as follows:
Fourth Quarter 2015
WISCO MODEL PORTFOLIOS
Conservative Balanced Balanced Growth Growth Aggressive
Domestic Equity 29% 38% 43% 50% 65%
International Equity 7% 12% 19% 24% 29%
Domestic Fixed Income 50% 39% 29% 18% 0%
Alternative Investments 5% 5% 5% 5% 5%
Money Market 8% 6% 4% 2% 1%
Total 100% 100% 100% 100% 100%
Target Volatility* 6% 8% 10% 12% 14%
*Target Volatility is our estimate for the annual standard deviation of portfolio returns.
Source: Wisco Investment Management LLC
Source: Dow Jones U.S. Broad Stock Market Index and Wisco.
DOMESTIC EQUITY
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10% 4 Q1 5
3 Q1 5
2 Q1 5
1 Q1
5
4 Q1 4
2 0 1
5
2 0 1
4
2 0 1
3
2 0 1
2
2 0 1
1
Quarterly Returns13%
33%
0%1%
16%
5%
-7%
6%
2%0%
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International equity also recovered in 4Q15
increasing 3%. For the year, international equity
declined 6%, with the developed market (-3%)
performing much better than emerging markets
(-16%). In Europe, the STOXX 50 increased 2%
in 4Q15. The Euro area GDP continues to post
modest yet positive results with GDP up 1.6% in
3Q15. Germany (+8%), Belgium (+8%) and Hungary
(+10%) were among the strongest performers in
4Q15, while Poland (-8%) lagged. In Asia, the Nikkei
225 increased 9% and the Shanghai composite
(+13%) recovered from a tough 3Q15. The FTSE
Emerging Market Index was down 1% in 4Q15 anddeclined 16% for the year.
2015 marked the six consecutive year in which
domestic equities outperformed international
equities. This has resulted in international stocks
trading at a signicant discount to domestic stocks.
Turning to fundamentals, Wisco feels the ECB’s
quantitative easing program and a strong U.S. dollar
could accelerate growth in the developed nations,
while low commodity prices could hinder growth
in emerging nations. Therefore, we are increasing
our exposure to International Equities focusing on
developed markets and avoiding emerging markets.
Fixed Income posted a modest decline in 4Q15,
with Barclays Capital U.S. Aggregate Bond
Index decreasing less than 1%. For 2015, the
Aggregate Bond Index was essentially at, yet still
outperformed TIPS (-2%), Investment Grade Bonds
(-1%) and High Yield Bonds (-3%). The 10-year
treasury yield started the quarter at 2.06% and
ended 4Q15 at 2.27%. This increase corresponded
with the Federal Reserve’s decision to increase
short term rates. For the year, the 10-year treasury
yield traded in a relatively narrow range opening
2015 at 2.17%, bottoming at 1.65% on January 30th,
and peaking at 2.49% on June 10th.
The Federal Reserve nally started its tightening
cycle in December and forecasted an additional
1.0% of rate increases in 2016. Wisco feels the Fed
may not be as aggressive as this forecast suggests
because ination is still low with few signs of
accelerating and dollar strength could slow growth.
With this backdrop, we think Fixed Income could
return low-to-mid single digits in 2016 with limited
downside. Therefore, we continue to hold Fixed
Income in all but our most aggressive portfolios and
prefer government securities and investment grade
corporate bonds to high yield bonds.
DOMESTIC FIXED INCOMEINTERNATIONAL EQUITY20%
15%
10%
5%
0%
-5%
-10%
-15%
-20% 4 Q1 5
3 Q1 5
2 Q1 5
1 Q1 5
4 Q1 4
2 0 1 5
2 0 1 4
2 0 1 3
2 0 1 2
2 0 1 1
Quarterly Returns
-3%
-6%
17%14%
0%4%
-12%-14%
-3%
Source: MSCI ACWI ex USA and Wisco
3%
10%
8%
6%
4%
2%
0%
-2%
-4% 4 Q1 5
3 Q1 5
2 Q1 5
1 Q1 5
4 Q1 4
2 0 1 5
2 0 1 4
2 0 1 3
2 0 1 2
2 0 1 1
Source: Barclays Capital U.S. Aggregate Bond Index and Wisco.
2%
Quarterly Returns
6%
8%
3%
-2%
-1%
-2%
1%
0%
1%
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Wisco Investment Management LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend
to make an offer or solicitation for the sale or purchase of any specic securities product, service, or investment strategy. Investments involve
risk and unless otherwise stated, are not guaranteed. Be sure to rst consult with a qualied nancial adviser, tax professional, or attorney before
implementing any strategy or recommendation discussed herein.
ALTERNATIVE INVESTMENTS
The Dow Jones-UBS Commodity Index declined 13%
in the quarter. In agriculture, Corn prices decreased7%1 and Soybean prices decreased 2%1, as the
strong dollar along with a soft overseas demand
hurt results. We think consistently low prices could
result in less acres planted this Spring in North
America and Russia. Gold and silver prices both
declined 5%2,3 in the quarter, as the strong dollar
continues to pressure commodity prices. Real
Estate Investment Trusts (REIT) increased 8%4 in
the quarter as investors looked to purchase income
producing assets. Finally, Crude Oil prices declined
19%5 in 4Q15, as domestic producers weren’t able
to cut production fast enough to avoid inventories
reaching near all-time high levels for December. For
the year, oil prices declined 32%.
Wisco continues to include Alternative Investments
in our model portfolios. For lower risk portfolios, we
are holding gold and prefer agricultural commodities
in more aggressive portfolios. Finally, we arestarting to invest in a crude oil fund for our most
aggressive client portfolios.
MONEY MARKET
Wisco keeps a modest money market allocation in
all of our portfolios. The current yield of the Schwab
Money Market is 0.01%. Low Federal Funds rates
have held down short-term yields. If the Federal
Reserve continues to increase rates in 2016, the
yield for money markets may modestly increase.
Nevertheless, we think short-term interest rates will
remain low for an extended period of time.
1. Return calculation based on the near future contract as quoted in the Wall Street Journal.
2. Return calculation uses ETFS Physical Swiss Gold Shares (SGOL) as a proxy for gold.
3. Return calculation uses iShares Silver Trust ETF (SLV) as a proxy for silver.
4. Return calculation uses Schwab U.S. REIT ETF (SCHH) as a proxy for Real Estate Investment Trusts.
5. Return calculation uses Cushing, OK WTI spot price FOB as a proxy for oil.
402 Gammon Place, Suite 380 • Madison, WI 53719 • Office 608.442.5507 • Fax 608.237.2206