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Third Quarter 2016

DEAR CLIENTS & FRIENDS;


The Wisco-managed portfolios had a good third quarter producing positive returns across the risk spectrum.
Our lower risk portfolios (Conservative & Balanced) experienced low-single digit gains this period while our
higher-risk portfolios (Growth & Aggressive) posted mid-single digit growth. Performance was driven by
gains in the U.S. and International stock markets, as our fixed income allocations were flat and commodity
exposures declined.
In the face of an election year as well as anticipated Fed interest rate hikes, the U.S. stock market has
remained resilient, rising 4% in the third quarter and 7% year-to-date. Global stock markets, in aggregate,
also posted exceptionally strong results, rising 7% in the period, marking the largest quarterly gain in three
years. Many global economies appear to be benefiting from continued monetary easing programs.
Fixed income markets were essentially flat in the quarter. The Fed Funds rate remained unchanged this period
while the 10-year treasury yield inched upward from 1.5% at the beginning of the quarter to 1.6% at the end.
Although fixed income was not much of a contributor to performance this quarter, the Barclays Capital U.S.
Aggregate Bond Index is still having an excellent year with a 5% increase year-to-date.
Commodity prices were lower across the board. The Dow Jones-UBS Commodity index posted a 5% decline this
quarter, led by declines in agricultural-based commodities, along with modest declines in oil and gold prices.
Back at the office, we recently formed a partnership with Davis Life & Annuity to assist with life insurance
strategies. We are available anytime if you would like to discuss your current life insurance strategy to make
sure your goals are met and that you are adequately protected. There is no cost to have a policy reviewed by
Davis Life. In addition, if you would like to learn more about life insurance and how it can address many of your
needs, please join us for a happy hour workshop on November 11.
At Wisco, we believe our approach of designing well-diversified, low-cost investment portfolios is the best way
to produce favorable results over time. We would like to thank you for the opportunity to work with you as your
investment adviser. We appreciate your business!

Sincerely,

The Wisco Team

Investment Advisors:

Stephen Share sshare@wiscoinvest.com Greg Schroeder gschroeder@wiscoinvest.com

Third Quarter 2016

Wisco Investment Management


Wisco-managed portfolios are constructed using five asset classes; Domestic Equity, International Equity,
Domestic Fixed Income, Alternative Investments and Cash. Our current managed portfolio asset class
allocations are as follows:

WISCO MODEL PORTFOLIOS


Conservative

Balanced

Balanced Growth

Growth

Aggressive

Domestic Equity
28%
35%
40%
47%
64%
International Equity
8%
13%
19%
24%
28%
Domestic Fixed Income
50%
38%
28%
17%
0%
Alternative Investments
7%
9%
10%
10%
7%
Money Market 8% 6% 4% 2% 1%
Total
100% 100% 100% 100% 100%
Target Volatility* 6% 8% 10% 12% 14%
*Target Volatility is our estimate for the annual standard deviation of portfolio returns.
Source: Wisco Investment Management LLC

Third Quarter 2016 Market Review


DOMESTIC EQUITY
35%

33%

30%
25%
20%
15%

16%

13%

10%

8%

5%

6%
1%

0%

0%
-5%

3% 4%

-7%
3Q16

2Q16

1Q16

4Q15

3Q15

YTD16

2015

2014

2013

2012

-10%

Quarterly Returns

Source: Dow Jones U.S. Broad Stock Market Index and Wisco.

The domestic equity market returned 4% in 3Q16,


despite declining corporate earnings and lackluster
economic growth. The S&P 500 reached an all-time
high August 15th of 2193 before tailing off to close
the quarter at 2168. This was the first quarter since
2Q15 that the market reached new highs. GDP
in 2Q16 increased just 1.1%, while the S&P 500s
earnings decreased approximately 2.2% compared
to 2Q15. Poor results from energy companies (EPS
down 85% y/y) was the main culprit of the earnings

decline, while softness in capital-intensive sectors


continue to be a drag on GDP. That said, easier
earnings comparison especially in the energy sector
along with a moderation in the dollars strength
could be a tailwind for corporate earnings for the
rest of this year and into 2017. Going forward, we
feel single digit earnings growth is possible in 4Q16
and 2017, as interest rates are likely to stay low and
income growth could help consumer spending.
Long term we continue to be optimistic about
the domestic equity market. That said, we dont
see a lot of upside in the domestic stock market
for the balance of 2016. Uncertainty surrounding
the November election along with mediocre
growth potential could keep the market in check.
Furthermore, the S&P 500 is trading at a P/E of
18.8x 2016 consensus operating earnings which
seems fully valued at least until we get better
growth. Wisco did modestly reduce our domestic
equity exposure in all of our client portfolios
because of our near term concerns. However,
should the markets valuation or fundamentals
improve we would look to increase these positions
in 2017.

INTERNATIONAL EQUITY
20%
15%

17%

DOMESTIC FIXED INCOME

10%

3%

0%

4%

Quarterly Returns

3%

3%

2%

-1%

-1%

-12%

-2%

3Q16

2Q16

1Q16

4Q15

3Q15

YTD16

2015

2014

Much like the United States, Euro area GDP hasnt


been all that impressive growing at a 1.2% clip.
However, while the U.S. has ended its quantitative
easing, the ECB continues to aggressively purchase
bonds. We think this will be a positive for European
equities. Emerging markets should also benefit from
this global easy money trend. Finally, international
markets generally continue to trade at a significant
discount to the domestic stock market suggesting
more upside oversees. Wisco continues to hold
international equities in all portfolios, because we
feel it is an important assets class in a diversified
portfolio and it could produce better returns than
the domestic market.

2013

For the first time in 5 quarters, international


equities outperformed domestic equities, with
the MSCI All World Index posting a 7% return. In
Europe, Austria (up 16%), Germany (up 10%) and
Spain (up 9%) were among the top performers.
In Asia, the Nikkei 225 (up 8%) and the Shanghai
composite (up 2%) both had positive results. In
addition, Hong Kongs Hang Sang index increased
13%. The FTSE Emerging Market Index increased
8% in the quarter. Brazil had another strong quarter
with Ibovespa up 13% this quarter, the index is up
35% year-to date.

-2%
2012

3Q16

2Q16

1Q16

4Q15

3Q15

YTD16

2015

2014

2013

2012

Source: MSCI ACWI ex USA and Wisco

-3%

0%

0%

0%

-15%

2%

1%

1%

-6%

-10%

6%

5%
3%

0% 0%

-3%

-5%

6%

6%

7%

7%

5%

-20%

7%

Quarterly Returns

14%

Source: Barclays Capital U.S. Aggregate Bond Index and Wisco.

Fixed income had positive results in 3Q16 with


Barclays Capital U.S. Aggregate Bond Index
increasing 0.4%. TIPS, Investment Grade Bonds,
and Zero Duration all returned around 1% in the
quarter, while High Yield Bonds increased almost
4%. The 10-year treasury yield started the quarter
at 1.49% and ended 3Q16 at 1.61%, yields drifted
higher as investors started to price in some modest
Fed tightening. The Federal Reserve suggested
that they are getting close to another interest rate
increase, however they did not increase rates in
the quarter. We think the Fed will probably increase
rates just once in 2016 and will continue to go
slow in 2017.
Inflation is benign and growth is slow. With these
conditions, we feel that despite a low absolute level
of interest rates, fixed income should continue to
produce positive returns for the balance of 2016
and could even produce low single digit returns in
2017. Therefore, we continue to hold Fixed Income
securities in all but our most aggressive portfolios.
We also feel government bonds, investment grade
corporate bonds and short duration bonds could
perform better than inflation protect bonds, high
yield bonds or long duration bonds.

ALTERNATIVE INVESTMENTS
The Dow Jones-UBS Commodity Index decreased
5% in the quarter. In agriculture, grain prices
dropped in the face of what appears to have been
favorable growing conditions in the United States.
Corn prices declined 6%1, while Soybean prices
decreased 19%1. Going forward, we feel it makes
sense to be investing in grains given how depressed
prices are when compared to their 2008 levels.
After a strong first half of the year, Gold prices
declined 1%2. Silver prices continued to gain
ground increasing 2%3 in the quarter, the metal
is up 38%3 so far in 2016. Finally, Crude Oil prices
decreased 1%4 in 3Q16, as the oil market has
started to trade in a tighter $40 to $50/barrel range
over the last quarter. Since the start of 2015, Crude
Oil is down 11%4.
We continue to believe alternative investments are
an important component in a broadly diversified

portfolio. Therefore, we have positions in a gold


fund and a grain fund in almost all our portfolios.
Gold generally performs well in periods of
geopolitical uncertainty and given the upcoming
election in the United States, we feel this could
be an environment where gold performs well.
Meanwhile, grain prices continue to be very
depressed relative to history which suggests to
us it might not take much to move prices higher.

MONEY MARKET
Wisco keeps a modest money market allocation
in all of our portfolios. The current yield of the
Schwab Money Market is 0%. Low Federal Funds
rates have held down short-term yields. Should the
Federal Reserve increase short-term interest rates
this return could turn positive, however, we continue
to believe Money Market yields will stay low for an
extended period of time.

1. Return calculation based on the near future contract as quoted in the Wall Street Journal.
2. Return calculation uses ETFS Physical Swiss Gold Shares (SGOL) as a proxy for gold.
3. Return calculation uses iShares Silver Trust ETF (SLV) as a proxy for silver.
4. Return calculation uses Cushing, OK WTI spot price FOB as a proxy for oil.

Wisco Investment Management LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend
to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve
risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser, tax professional, or attorney before
implementing any strategy or recommendation discussed herein.

402 Gammon Place, Suite 380 Madison, WI 53719 Office 608.442.5507 Fax 608.237.2206

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