Good afternoon and Happy New Year! Global markets have begun 2016 on a volatile note, so we thought it best to share a recap of our performance in 2015, our view on current market conditions, what those conditions mean, and our strategy moving forward.
HWG’s 2015 Composite Return was 11.2% versus the S&P500 return of 1.2%. Individual security selection and our FAR Investing approach are the primary reasons we achieved outperformance of stock and bond indices. Strong gains in Anacor Pharmaceuticals, Pharmacyclics, Skechers, Reynolds, HCA Holdings, Inc, and Netflix significantly added to portfolio returns. Further, our FAR investing approach allowed HWG to lock in portfolio gains on many positions before the market entered into a correction during the second half of 2015.
Market returns were not evenly distributed in 2015. From January through July, the S&P500 Index returned 2%, while both mid-cap and small-cap indices rose 3%. Over the same period, the average HWG client portfolio rose 21.7%. In contrast, during the last five months of 2015, the S&P500 Index declined -3%, while mid-cap and small-cap indices declined -7% and -6%, respectively. The average HWG client portfolio declined -8.5% over the same time period.
2015 market returns came in below expectations for a variety of reasons which include full equity valuations, lowered earnings estimates, historically low interest rates, a Fed that initiated a major tightening cycle, and slowing global economic growth.
As we enter 2016, equity markets continue to fall. The S&P500 is currently down -11% from the highs, while mid-cap and small-cap indices are down -18% and -17%, respectively. Further, commodity prices continue to plunge as a result of increased supply and weak demand.
The US economy continues to outperform other developed economies. Our financial institutions are in a much stronger position relative to our European counterparts and while consumer spending, which represents approximately 70% of the economy, is also strong. Although the Federal Reserve started raising interest rates this past December, rates remain at historical lows.
HWG does not stay fully invested during market downturns. There are times to make money and times not to lose money. In response to the economic and market turmoil, HWG sold securities to conserve client capital, thereby minimizing losses. Today, our average cash position is 55%. We are not afraid to raise cash because most HWG clients do not enjoy market volatility and will accept lower returns in a rising market in exchange for preserving capital during a correction. The equity positions we still hold include a concentrated position in dividend-paying stocks. This is a strategic allocation due to today’s low interest rate environment, as we believe dividend-paying stocks will continue to outperform both stock and bond indices.
Please remember that corrections are not always bad, especially when you have ample cash in your portfolio. Corrections are a natural part of the investment cycle. They give stock prices time to catch up to earnings. We are excited about the opportunities that will emerge from this correction and will be patient before re-entering.
In closing, we look forward to working with you in 2016. If you have any questions, please contact our offices as we always enjoy hearing your thoughts!
The Haven Wealth Group Team