2015 Financial Markets, Mutual Funds, and ETFs Review

As 2015 comes to a close one would think it was a rather quiet year in the financial markets as stocks and bonds gained less than 1.0% for the year. In reality it was quite a volatile year as commodities continued to plummet led by a plunge in oil prices thanks to a significant over supply. The long-awaited stock market correction finally came in August, with the S&P 500 declining (12.5%) from its earlier high to its low point. It was the market’s first correction since 2011. This time around the blame fell on slowing growth in emerging markets and fears in anticipation of the Federal Reserve’s first interest-rate hike in almost 10 years. Stocks have rebounded since then, but as you can see from the results the returns things turned out a lot better than investors anticipated this summer even as the FED finally took action to increase short-term interest rates in December.

The winner this year has been Large Cap Growth stocks which finished up 5.7% thanks to the Technology Sector. On the other hand, Small Cap Value stocks dropped (7.5%) as style had an even larger impact on results than market cap. While developed country international stocks have fallen (3.0%) this year, it is Emerging Markets equities that have taken the biggest hit, falling almost (15.0%).

Investment Returns as of December 2015

Investment Returns as of December 2015

Rising interest rates in 2015 meant that duration had a larger impact on bond returns than it has in years. Wells Fargo Short-Term Hi Yield Bond (SSTHX) was up 2.1% while Fidelity Inflation-Protected Bond (FINPX) fell (2.2%). The rising dollar had an even larger impact on International Bonds as Dreyfus International Bond (DIBAX) fell (6.8%) Payden Global Fixed Income (PYGFX), which is hedged against the dollar, rose 1.5%. Interestingly Emerging Markets Bonds rebounded in spite of the rising dollar from a difficult 2014 as Fidelity New Markets Income (FNMIX) was up about the same as domestic bonds with a gain of 0.2%.

While some of the new equity funds that made it on our favorites list for the coming year were strong performers in 2015, some of the better ones that stayed on board were Parnassus Core Equity (PRBLX) and Congress Mid Cap Growth (CMIDX) which both lost less than (1.0%). The big winner was a closed fund, Brown Capital Small Company (BCSIX), which gained 8.8%. Market Cap had the opposite impact overseas as Fidelity International Growth (FIGFX) gained 3.9% while Wasatch International Opportunities (WAIOX) rose 9.5%. It may not look it, but Driehaus Emerging Markets Small Cap Growth (DRESX) was one of the better performing Emerging Markets fund with a fall of ‘only’ (10.2%). Outside of traditional stocks and bonds a couple of the better performers were AMG Managers Real Estate Securities (MRESX) which gained 5.3% while Boston Partners Global Long/Short (BGRSX) added 6.3%.

As was the case for mutual funds lower duration and emerging markets were the better performing ETS as iShares 3-7 Year Treasury Bond (IEI) gained 1.6% while PowerShares Emerging Markets Sovereign Debt (PCY) gained 2.3%. It was growth all the way for domestic equities with PowerShares Nasdaq 100 (QQQ) gaining 9.5%, iShares S&P Mid Cap 400 Growth (IJK) adding 1.9%, and iShares S&P Small Cap 600 Growth (IJT) rising 2.7%.

Outside of the US, the best stock market ETF on our list was iShares MSCI Japan (EWJ) which picked up 9.2%. A couple of the new strategies that we added to our Favorite ETF list had strong years, in particular WisdomTree International Hedged Quality Dividend Growth (IHDG) which gained 11.8% with a lot of help from its hedge against the US dollar. Another strong performer was iShares MSCI EAFE Small Cap (SCZ) which picked up 9.1%. Our best sector ETF was SPDR S&P Biotech (XBI) which gained 13.6% while anything related to commodities was down at least double digits. A bet on rising dollar using PowerShares DB US Dollar Bullish (UUP) paid off with a 7.0% rise this year. And finally and ETF that seems to have a handle on Long/Short equity has rise from the pack as First Trust Long/Short Equity (FTLS) gained 4.7%.

Asset Allocation for 2016

We are approaching 2016 as if we were starting from scratch. You will find that there are changes to the Asset Allocations, the Favorite Mutual Funds list, the Favorite ETFs list, along with our model portfolios. Of note, we have made a slight increase to our equity allocations and redistributed our fixed income allocations. The changes to our lists of favorites are numerous, so let’s just say that we have moved towards managers with a more conservative process as we move into the uncharted territory of interest rates rising from zero. While we would be comfortable investing in all of the mutual funds on our favorites list, many of the ETFs on that favorites list are there just to get a feel for state of financial markets and not for long term investing.

Asset Allocation 2016

If you need more information about which funds to include in these allocations, check our Favorite Mutual Funds list, Favorite ETFs, or Model Investment Portfolios.