The 4th Quarter of 2015 in Review

Wednesday, January 20, 2016 5,256 views

The best way we can describe the 4th Quarter, overall, is a great end to somewhat of an abysmal year. Stocks delivered positive results in the United States, International/Developed, and Emerging Markets. Global Real Estate and Foreign Bonds also posted positive results, while US Bonds posting slightly negative results. Significant global events included the downgrading of the global economic outlook by the International Monetary Fund (IMF), the formal adoption of an Iranian nuclear deal, the spot price for Gold reached a 6-year low, the price for crude oil reached a seven-year low, a massive sell-off of high yield debt, and the Federal Reserve officially raised the Federal Funds Rate by 0.25%. For 2015, as a whole, the S&P 500 recorded its worst performance since 2008, finishing just slightly up.

As we move into 2016, it is important to remind investors that experiencing disappointing results like we did in 2015 does not warrant a reexamination of our investment strategy. Taking risk means that these types of years should come to no surprise. Concerns around the world such as terrorism, a potential slow-down in global economic growth, and natural disasters will continue until the end of time. These concerns are nothing new that our world hasn’t faced before. It may seem like these kinds of threats are louder than ever. Nonetheless, we must not succumb to short-term emotional reactions to the degradation of our long-term goals. Fortunately, the market acts as our ally to ensure that prices are reflecting the global sentiment about these same threats and setting the demanded return on capital accordingly.

Domestic Equities

For the different size and styles of domestic equities, the quarterly returns ranged from 2.01% for small cap value stocks to 7.04% for large blend stocks. For 2015 as a whole, growth beat value across the board with small cap growth as the top performing asset class.  

For the blend of domestic equity indexes used in the IFA Index Portfolios, the quarterly return was 3.76% for Q4 and -3.21% for 2015 as a whole. This lagged the US market as a whole, which delivered 6.27% in Q4 and 0.48% for the year.

International (Developed) Equities

On the international front, equities from our developed counterparts outside of the US had a positive 4th quarter and slightly negative results for 2015 in its entirety, although international small cap stocks were the best performing asset class of 2015. The strengthening of the US dollar made things worse of international results. For the quarter, results ranged from 2.85% for international large cap value stocks to 5.28% for international small cap stocks. For the entire year, results ranged from -6.31% for international large cap stocks to 5.91% for international small cap stocks.

Returns by country in Q4 ranged from -5.08% (Canada) to 20.69% (New Zealand). Top performing countries included New Zealand (20.69%), Belgium (12.72%), Australia (10.21%), Finland (9.61%), and Japan (9.27%). The worst performing countries included Canada (-5.08%), Spain (-1.96%), Italy (-0.91%), Norway (-0.68%), and the United Kingdom (0.97%).

For the blend of international indexes used in the IFA Index Portfolios, the quarterly return was 4.05% and 1.20% for 2015 as a whole. This outperformed the international developed market as a whole, as measured by the MSCI World ex US Index, for both Q4 and 2015, which delivered 3.91% and -2.60%, respectively.

Emerging Markets

The Emerging Markets had a very difficult quarter and 2015. For Q4, the returns ranged from -1.01% for emerging markets value stocks to 2.41% for emerging markets small cap stocks. For 2015, returns ranged from -18.77% for emerging market value stocks to -8.70% for emerging market small cap stocks.

Returns by country in Q4 ranged from -15.31% (Greece) to 20.03% (Indonesia). Top performing countries included Indonesia (20.03%), Hungary (10.60%), Malaysia (8.34%), China (4.84%), and Korea (4.18%). Worst performing countries included Greece (-15.31%), UAE (-12.37%), Poland (-12.37%), South Africa (-10.82%), and Qatar (-10.38%).

For the blend of emerging markets indexes used in the IFA Index Portfolios, the quarterly return was 0.47% and the 2015 return was -13.99%. Our blend outperformed the Emerging Market as a whole, as measured by the MSCI Emerging Markets Index, which delivered -14.92% in 2015.

Real Estate

Global real estate securities delivered strong results in Q4. Domestic REITs led the way, delivering 7.54%, while its international counterpart delivered 1.86%. Real Estate ended slightly positive for 2015.

Fixed Income

Interest rates across the US income markets increased in Q4. Overall, the yield curve slightly flattened given the large increase in short term rates versus a more modest increase on the later part of the curve. 5-year US Treasuries tacked on 39 basis points (0.39%) while 30-year US Treasuries experienced a 14 basis point increase (0.14%). The four fixed income funds used by IFA experienced negative returns that ranged from -0.72% for short term US government bonds to -0.14% for one year fixed income. For 2015 as a whole, we saw positive results across all 4 funds, which correlated with duration. Returns ranged from 0.31% for one-year fixed income to 1.45% for five-year global bonds.

For the blend of fixed income used in the IFA Index Portfolios, the quarterly return was -0.44% and the 2015 return was 0.77%, which finished ahead of the Barclays US Aggregate Bond Index (0.55%).

IFA Index Portfolios

Putting it all together, the returns of the IFA Index Portfolios are shown below net of one quarter’s worth of IFA’s maximum annual 0.90% advisory fee for the quarterly numbers and the full 0.90% for the 2014 numbers.

As we mentioned before, although 2015 was not a great year in terms of performance, we shouldn’t be especially surprised by these results. Looking at the past 88 years of market history, these types of performances fall into the bottom 21% of all observations. From a statistical perspective it means that, assuming randomness, we expect to see a similar result once every five years.


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