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The 2013 4th Quarter and Year-End Review

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In the fourth quarter of 2013, risk was rewarded for all classes of equities except REITs, and fixed income remained essentially flat. Once again, there was a lot of discussion surrounding future Fed policy, particularly as it relates to the eventual tapering down of the Fed’s program of bond buying known as Quantitative Easing. On December 18th, the Fed announced a $10 billion reduction in the monthly bond purchase level from $85 billion to $75 billion starting in January. The S&P 500 Index responded with a nearly 2% gain, implying that the market fully expected tapering to begin. Perhaps the biggest market-related story was the government shutdown (and potential failure to raise the debt ceiling limit) that began on midnight of September 30th and lasted through October 16th, but as we noted in this article, the market essentially shrugged it off. The market also appeared to shrug off the disastrous launch of Obamacare.

On the international front, the biggest story of the fourth quarter was the announcement of the Iran nuclear accord. As of today (January 2nd) the details surrounding its implementation have not been finalized, and the sanctions on Iran remain in place.

Domestic Equities
Once again, the news for U.S. equities is good. As the two tables below show, it was a good quarter and continues to be a good year, particularly for small cap and value equities. For the S&P 500 Index (large blend), 2013 was the best year since 1997, and for IFA’s all equity Index Portfolio 100, it was the best year since 2009.

 

The table below shows how the IFA weightings of the domestic asset classes in its portfolios have compared to the overall U.S. market for the quarter and year-to-date.

 

International (Developed) Equities
Despite all the continuing tension on the international scene (i.e., Syria, Iran, North Korea, and tensions between China and Japan) the fourth quarter was quite strong for international developed equities, particularly small cap and value.

 

The table below shows the overall returns for the international blends used in the IFA portfolios:

 

Emerging Markets Equities
Although they did not do nearly as well as international developed, emerging markets equities were positive in the fourth quarter, but they remain negative on a year-to-date basis.

 

For the mixture of emerging markets indexes used in the majority of IFA's Index Portfolios, the 4Q/2013 return was 1.46% and the 2013 return was -2.66%.

Real Estate

 

This index is a blend of domestic and international real estate investment trusts (REITs). Domestic REITs were down 1.03% for the quarter, while international REITs were down 0.61%. On a year-to-date basis, domestic REITs were up 1.39% while international REITs were up 2.27%.

 

Fixed Income
Interest rates increased slightly during the fourth quarter, particularly for higher maturities. Essentially, the yield curve steepened. Thus, the two higher-duration bond funds of the four that IFA uses had a slight drop in the fourth quarter and remain negative for 2013.

 

Once again, we will mention that interest rates are still at very low levels relative to their historical averages. For the mixture of fixed income indexes used in the majority of IFA's Index Portfolios, the 4Q/2013 return was 0.02% and the 2013 return was -0.02%.

IFA Index Portfolios
Putting it all together, the 2013 returns for the IFA Index Portfolios are shown below, net of IFA’s 0.90% annual advisory fee.