Investing in the Unpredictable
Doug Walters
As 2016 draws to a close, the Investment Team would like to take a moment to thank you for your confidence and memorialize an eventful year.
Dear Clients and Other Friends of Strategic,
Twelve months ago, few would have predicted an exit vote for Britain or a Donald Trump presidential victory. Fewer still would have predicted that, despite these enormous shocks, U.S. equities would end the year up double-digits! The rally is even more impressive when factoring in an interest rate rise in December and a notable increase in terrorist activity on western targets. When the bell rang at the New York Stock Exchange to close out trading for the year, the S&P 500 had produced a total return of 12% for the year.
Stop predicting and start investing
There is a lesson buried in the drama of 2016: the world is unpredictable. As much as we would like to believe we can predict the future, we cannot. As the presidential election proved, not only can we not predict what is going to happen in the next year, we cannot even predict what is going to happen tomorrow. This may feel disconcerting, but as investment professionals, it is our job to embrace our predictive shortcomings and design investment solutions to weather turbulence, and produce solid returns over the long run. We do not have to predict what the market is going to do in the short-term, we just need to diligently prepare for it.
Market timers get lucky or get burned
Numerous studies show the dangers of playing the short-term investment game. While there are always those that will claim success at timing market moves, science indicates this is luck not skill. As it turns out, the bulk of your lifetime investment returns are earned on just a handful of days. Being out of the market for one of these exceptional days can have a detrimental impact on your portfolio. For example, missing just the ten best trading days between 1995 and 2015 would have cut your ending investment value in half. Market volatility is inevitable. It is our job to ensure the emotions that accompany these fluctuations do not influence your investments.
Keep it simple
At Strategic, we are passionate about keeping it simple. We believe a relentless focus on Quality and Value, supported by the sophisticated analytical capability of our in-house investment team is the best way to protect and grow your capital. All too often in 2016 complexity failed. It is easy to pick on hedge funds given their high fees and notable underperformance in recent years, but they are ripe with examples this year. One notable hedge fund was fined this year for having spent $100 million in bribes to gain influence in Africa. Do you think they told their investors ahead of time that their money would be used for bribes? Sadly, that pales in comparison to Platinum Partners’ decade of 17% returns which turned out to be nothing more than a billion dollar Ponzi scheme. Investing is not easy, but it does not have to be complicated. Keep it simple and transparent.
S&P 500
2016 Total Return
Predicting the future is impossible, but analyzing investment drivers is not. We have developed a disciplined and repeatable investment process for building robust portfolios. Below we summarize some of the major events of 2016 that impacted portfolio investment performance.
2016 Highlights
Populist Uprising
The British exit vote and election of Donald Trump headlined a rising populist movement amongst developed countries. Equity markets took both events in stride.
Reflation
The new administration has raised expectations for further inflation, through higher fiscal spending and lower bureaucratic barriers. This is benefiting the Financial sector which is up 17% since the election.
U.S. Equities
The S&P 500 had a strong year posting a total return of 12%. Small Cap and Financials led the way. Our in-house core strategies, Equity Income and Strategic Growth also produced attractive, double-digit returns.
Small Cap and Gold
Early in the year we placed an overweight position on Small Cap equities and Gold. Small Caps ended the year as one of the best performers, thanks to the reflation expectations. We did not need to predict the reflation trade, we just needed to trust our analysis that showed Small Cap stocks were a good value.
Commodities
Oil recovered some as OPEC members were able to reach a production agreement. This provided a boost to the Energy sector.
International
Developed International stocks underperformed, as recovery is proving elusive, and the implications of Brexit weigh on Europe. However Emerging Markets was one of the best asset classes this year, posting high single-digit returns.
The Fed
The Federal Reserve raised rates in December for only the second time in over a decade. Expectations at the start of the year had been for three rate rises, not one.
Fixed Income
Bonds fell post-election, as expectations for rising interest rates grew. We were well positioned for this, having constructed relatively short maturity laddered portfolios where possible. As bonds mature we are able to reinvest in higher yielding securities.
The Team
We invested further in our Investment Team, with the addition of Mark Abdalla and Aleks Marchenko, both of whom come to us with advanced degrees in Economics/Finance and are candidates in the CFA program.
2017 is now upon us, and with it will come more unpredictable events. As clients of Strategic, you can rest easy knowing that your Investment Team is always busy preparing your portfolio for the inevitable uncertainty that each new day brings. On the most volatile days of the year is when we will earn our keep, providing a steady hand. We do the worrying, so that you are free to pursue your own passions.
On behalf of the entire Strategic team, I would like to thank you for entrusting your financial future to Strategic. We wish you a happy and successful New Year.
Sincerely,
About Strategic
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.
OverviewDisclosures
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