Quarterly Updates
Q4 2016 Race to the Finish
As we end 2016 and look to 2017 we reflect on the events that passed to help give us some perspective into the future. The year 2016 was filled with many surprises. We can truly say we are headed into unknown territory, particularly on the political front. Markets are running on hope and optimism and in order for the second longest bull market since 1928 to keep going, a number of issues need to materialize. We see 2017 themes revolving around Eurozone elections, corporate earnings, Fed action, currency fluctuations, President-elect Trump's incoming administration and Congressional fiscal policy implementation.
Because of a strong fourth quarter, we saw the Dow Jones Industrial Average finish the year with a +16.50% return. The S&P 500, including dividends, ended the year up +11.96%. The NASDAQ 100 was up +7.26% for the year and the Russell 2000 finished the year up +21.31%. Mid Cap and Small Cap Indexes led the charge along with Financials which were up +19.00%. The value segment rallied through year-end due to the Financial, Energy and Industrial sectors outperforming on the outlook for economic growth. The Russell 1000 Growth Index was up a respectable +7.08% but underperformed the Russell 1000 Value Index which had a return of +17.34% for the year. Economic data improved over the quarter and the Fed raised rates by 25 bps in December while indicating a more hawkish stance looking into 2017. On the employment front October generated 156,000 in job gains, November came in at 161,000 jobs and December came in at 178,000 with the unemployment rate falling to 4.6%. The US dollar strengthened versus many of its counterparts mainly due to the pro-growth agenda promised by Trump.
Across the pond the performance of some of the major indices failed to keep up with the U.S. The MSCI EAFE index was up +1.00% for the year and the MSCI Europe Index returned -0.40%. Emerging markets sold off a bit in the fourth quarter as a strong USD hurt the region post-election. Emerging Markets as a whole had a respectable return +11.19% for the year reversing the downtrend set in the previous few years.
Regarding fixed income, treasury yields rose as the risk-on trade took hold post-election. The 10-year yield in the U.S. climbed to 2.45% after a mid-year plunge to the 1.35% level. Most global sovereign bonds saw yields rise in line with the U.S. which provided small relief for savers. High-yield fixed income performed well with the Bank of America Merrill Lynch U.S. High Yield Master Index returning +1.88% for the quarter and posting +17.49% for the year. Emerging markets fixed income sold off in the fourth quarter on the back of US dollar strength but remained a bright spot for the entire year.
2017 ASSET ALLOCATION UPDATE
The Trust Investment Committee (TIC) met in November to update and implement asset allocations for 2017 and beyond. While the proposals of the new administration offer potential for economic growth, we are well aware that politics can get in the way causing disappointing results. Either way, we believe we are prepared for both scenarios in our equity and fixed income allocations.
Within equities we have lowered our international equity weight in order to avoid any fallout from populist election outcomes in the Eurozone region in 2017. International valuations, however, are favorable and trading at a sizeable discount to the U.S. We still believe international exposure is warranted given the diversification benefits it brings over the long-term but we prefer a U.S. bias until more clarity surfaces on the European political front. With the proceeds from the international reduction, we elected to add to our positions in small and mid-cap equities. These areas will benefit from friendlier corporate tax policy and also have a majority of their earnings derived in the U.S. thus insulating them from tariff threats and dollar strength. We have retained our value tilt as opposed to growth because most of the pro-growth sectors lie in the value arena.
Within fixed income we believe interest rates will have an upward bias in 2017. However, the pattern of future Fed Funds increases and general yield curve shifting is unknown. We adjusted our allocation to have a slightly lower duration in the fixed income model. To fund this adjustment we reduced our intermediate government/credit sector which served us well in 2016. Similar to our equity allocation, we remain confident that our multi-sector bond approach provides a competitive yield and global diversification.
Several of our managers below participated in the Q4 rally and significantly outperformed their benchmarks. We continue to remain focused on finding high quality managers with strong long-term risk-adjusted returns in each asset class we allocate capital to.
| Manager | * Q4 2016 Return | Benchmark |
| DFA Small Cap Core | +11.49% | +8.83% Russell 2000 TR |
| AB Discovery Value Fund | +10.07% | +9.34% Russell 2500 Value |
| Oakmark Fund | +8.29% | +6.68% Russell 1000 Value |
| Congress Mid Cap Growth | +4.78% | +0.46% Russell MC Growth |
| Alta Large Cap Quality Growth | +2.36% | +1.01% Russell 1000 Growth |
| AB Long/Short Equity Fund | +2.23% | +0.41% Morningstar M/N Asset |
*Returns are expressed as composite returns. Results may vary. Past performance is no guarantee of future returns
We look forward to speaking with all of you regarding our views and the performance of your respective portfolios. For additional information or questions please contact Mason Williams, Chief Investment Officer, at 786-497-1214 or Gerardo Rodriguez, Investment Officer, at 786-292-0310.