3rd Quarter 2015 Summary Commentary

On October 16, 2015

Summary Overview

  • Standard & Poor’s 500 was down 6.44% during the quarter and down 0.61% over the past 12 months.
  • MSCI AC World ex US (international stocks) underperformed US stocks in the quarter by falling 12.10% and is down 11.78% over the past 12 months.
  • MSCI Emerging Markets Equities declined 18.53% for the quarter and dropped 21.21% over the past 12 months.
  • Barclays US Aggregate Bond outperformed stocks by being up 1.23% during the quarter.  The index rose 2.94% over the past 12 months.
  • Rogers International Commodities declined 16.04% for the quarter and was down 30.15% over the past 12 months.
  • Gold outperformed the broad commodity market with a 4.66% decline in the quarter.  It had declined 8.00% over the past 12 months.

iSectors Allocation Model Commentary

iSectors Post-MPT Allocations

  • The Post-MPT Allocations had mixed performance compared to their respective benchmarks in the quarter. The Post-MPT Growth Allocation’s performance nearly matched the S&P 500 with a 6.76% loss while the Post-MPT Moderate Allocation underperformed it benchmark by falling 5.63% for the quarter.
  • Over the past 12 months, Post-MPT Growth was down 2.31% and Post-MPT Moderate declined by 1.39%. Both have underperformed their benchmarks, the S&P 500 and 60/40 stock/bond indices, respectively, over that past 12 months. (60/40 = 60% S&P 500 + 40% Barclays US Aggregate Bond Index.)
  • With more than ten years of real-time performance, Post-MPT Growth has outperformed the S&P 500 by over 200 basis points annually since its 2005 inception with less drawdown. Historically, as market gains moderate, Post-MPT Growth has outperformed equities due to the model’s ability to change its exposure within a universe of low correlated asset classes and flexibility to own more conservative asset classes when market conditions are unfavorable.
  • During the quarter, Post-MPT Growth and Moderate were positively impacted by their Treasury bonds holdings. Health Care and Financials contributed negatively to both models’ performance last quarter.
  • Both models have become more conservative over the past three months. Post-MPT Growth has become almost completely deleveraged. Long-term Treasury Bonds have become the largest position in both models. Post-MPT Moderate has added a meaningful gold stock position.  Equity positions have declined significantly in both models.  Post-MPT Growth is now allocated mostly to Technology and Financials and currently has only a minimal allocation to Health Care.  Post-MPT Moderate is currently only allocated mostly to Financials with minimal allocations to the Health Care & Energy sectors.

iSectors Liquid Alternatives Allocation

  • The Liquid Alternatives Allocation fell 7.02% for the quarter and was down 8.63% over the past 12 months.
  • The portfolio’s sector allocations to energy and globally listed private equity contributed the most to the negative returns while hedged strategies and real estate helped performance during the quarter.
  • The Liquid Alternatives Allocation continues to outperform its hedge fund benchmark over the last 5 years.

iSectors Endowment Allocation

  • The Endowment Allocation lost 7.51% during the quarter and 7.29% during the past 12 months.
  • Since Liquid Alternatives comprises 60% of the Endowment model, energy and globally listed private equity contributed significantly to the negative performance. Emerging market holdings also hurt quarterly returns. As in the Liquid Alternatives Allocation, hedged strategies and real estate helped the Allocation’s returns.
  • The Endowment Allocation, with over 50 security holdings, can serve as a broadly diversified, long-term core holding for clients with a moderate risk tolerance.

iSectors Global Allocation

  • Quarterly returns for the Global Allocation ranged from -2.09% for Global Fixed Income to -7.96% for Global Equity.
  • International funds, both developed and emerging markets, were the worst performing sectors in the quarter for the Global Equity Allocation.
  • The Global Fixed Income Allocation was hurt by emerging markets fixed income holdings while being helped by US dollar bonds issued by foreign governments.
  • The Global Allocations are a series of diversified, risk-based models, with a fundamentally weighted, equity dividend focus that can serve as an ideal core-menu of default investment options for a 401(k) plan.

iSectors Domestic Equity Allocation

  • The Domestic Equity Allocation was down 4.78% for the quarter, outperforming the S&P 500.
  • Mid and small cap growth contributed negative performance while large cap dividend funds outperformed during the quarter.
  • Companies with long histories of consistently increasing dividend payments and less volatile stock prices should receive demand by investors in these uncertain times. The fundamentally weighted, Domestic Equity Allocation focuses on these types of investments.

iSectors Inflation Protection Allocation and iSectors Precious Metals Allocation

  • Both allocations suffered downdrafts in the third quarter. The Inflation Protection Allocation lost 7.93% while the Precious Metals Allocation dropped 8.10% during the quarter.  For the past 12 months, Inflation Protection was down 14.05% while Precious Metals declined 14.52%.  Both outperformed the Rogers Commodity Index benchmark during the past 12 months.
  • The Precious Metals’ physical platinum and palladium weightings were the primary contributors to its quarterly decline. Inflation Protection was hurt by its broad commodity and energy sector exposures but was helped by its real estate holdings.
  • Although the drop in energy prices will delay the onset of inflation, easy money policies currently being promoted by the Federal and Central Banks around the world will have serious long-term inflation effects on our economy. We believe inflation and higher interest rates will be the greatest risk factors investors will face over the next 20 years.  Investors would be wise to place a portion of their portfolios in inflation-protected assets, particularly precious metals, to hedge against the possibility of inflation, especially at their currently depressed security prices.

iSectors Capital Preservation Allocation

  • The Capital Preservation Allocation was down 0.93% for the quarter and down 1.67% over the past 12 months.  The model has outperformed the Barclays 1-3 Year Government Bond benchmark over the past 5 years.
  • The Capital Preservation Allocation has a yield of 2.2% with an effective duration of 1.1 years and an average investment grade rating.
  • The Capital Preservation Allocation offers a cash alternative with the potential for enhanced returns while maintaining liquidity in the current low interest rate environment.

iSectors Tactical Global Balanced Allocation

  • The Tactical Global Balanced Allocation declined 1.93% during the quarter.
  • Developed market international stocks were the major contributor to the negative performance in the quarter.
  • The Allocation is currently 100% invested in cash equivalents.

 All model returns presented gross of fees.  Index comparisons provided for information purposes. You cannot invest directly in an index.

This commentary is not complete without our disclosure.

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