Market Update and Model Portfolio Reviews 12/31/2017
For the month of December, investment grade domestic bonds were up .46% and 3.54% for the year, while large cap domestic equities continued their strong bull run up 1.11% and finished out the year up 21.83%. The Information Technology sector led the way for 2017 up 38.83%. The Information Technology sector now accounts for almost a quarter of the market capitalization of the S&P 500. If you backed out the Information Technology sector total returns, the S&P 500 Total Return Index would have been up 13.51% vs the 21.83%. Put differently, over 1/3rd of the total return of the S&P 500 came from the IT sector for 2017. The United States still accounts for just over half of the global equity market capitalization as of 12/29/2017 using the S&P Global Broad Market Index (BMI) values. Around the world was a global lift across assets. Developed and emerging market ex U.S. large and mid cap stocks were up 27.5% (1). As we will mention below, it was a good year to have most international exposures unhedged relative to the U.S. dollar.
Month over month, all eight model portfolios yielded positive results net of fees, while half of the portfolios outperformed their benchmarks when accounting for fees. Over the year, the portfolios performed inline with our expectations in a bull market environment. For the year, our best performing allocation was to developed large cap international equities outperforming domestic large capitalization equities. The allocation to unhedged UK equities played out well as the dollar fell relative to the pound (as well as on a global trade weighted basis), helping unhedged UK equities allocation up for the year 21.5%. Our emerging market sovereign debt unhedged exposure finished the year up 13.8% while our the hedged sovereign debt finished up 9.7% for the year. From an asset allocation standpoint there were no negative returning asset allocations. Within the allocations on a security by security basis there were negative returns. For example, our asset allocation to domestic mid cap equities was up over 18% on the year, while an example of an individual security within the asset allocation was down almost 32% on the year (Apache Corp - symbol APA). Our worst performing allocation was flat (0%) on the year when accounting for fees in the GNMA mortgage backed securities allocation. It was hard to do wrong for the year of 2017 from a general asset allocation standpoint. We maintain a philosophy that we can afford to be wrong and give up upside vs the expense of being wrong on the downside. The philosophy is to afford ourselves the opportunity to be wrong on the upside of the market for approximately three years with a recession taking place during that period. A 50% loss requires a 100% return, where as a 25% loss requires a 33.3% return to get you back to your original investment. That difference of returns for the two examples is over a 66% return. There is no perfect formula to capture this philosophy in our strategy, but we are happy to give up some upside for a few years if that means we can avoid making up a dramatic loss. If we are wrong for an extended period of time, than the cost of upside forgone will inevitably outweigh the benefits of being defensive. We believe that a three year window with a recession will help this philosophy outperform over a full market cycle.
DISCLOSURE (Click links for sources. If in print, sources available upon request). See “Model Disclosure” page for important disclosures and information – Period Measured 12/30/2016 – 12/31/2017. Model Performance presented net of highest advisory fee and trading costs. 1. Using the FTSE All-World Ex US Index
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Alternative Capitalis, LLC is a registered investment adviser. Information presented herein is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Model Performance Disclosure: The performance shown represents only the results of Alternative Capitalis, LLC’s model portfolios for the relevant time period and do not represent the results of actual trading of investor assets. Model portfolio performance is the result of the application of the Alternative Capitalis, LLC’s proprietary investment process. Model performance has inherent limitations. The results are theoretical and do not reflect any investor’s actual experience with owning, trading or managing an actual investment account. Thus, the performance shown does not reflect the impact that material economic and market factors had or might have had on decision making if actual investor money had been managed. Model portfolio performance is shown net of the model advisory fee of 1%, the highest fee charged by Alternative Capitalis, LLC and sample trading costs based on our Custodian’s, TD Ameritrade Institutional, trading costs. Performance does not reflect the deduction of other fees or expenses, including but not limited to brokerage fees, custodial fees and fees and expenses charged by mutual funds and other investment companies. Performance results shown include the reinvestment of dividends and interest on cash balances where applicable. The data used to calculate the model performance was obtained from sources deemed reliable and then organized and presented by Alternative Capitalis, LLC. The performance calculations have not been audited by any third party. Actual performance of client portfolios may differ materially due to the timing related to additional client deposits or withdrawals and the actual deployment and investment of a client portfolio, the reinvestment of dividends, the length of time various positions are held, the client’s objectives and restrictions, and fees and expenses incurred by any specific individual portfolio. The performance calculations are based on a hypothetical investment of $100,000 for both the model and benchmarks presented. Benchmarks: The Ultra Aggressive Risk Off performance results shown are compared to the performance of the performance of a blended ETF (exchange-traded-fund) portfolio comprised of the following two ETF’s symbols, SPY & AGG, are described below. The ETF symbol SPY (SPDR® S&P 500® ETF Trust) which seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the "Index"). Visit https://us.spdrs.com/en/etf/spdr-sp-500-etf-SPY for more information about the ETF. The S&P 500® Index results do not reflect fees and expenses and you typically cannot invest in an index. The ETF symbol AGG (iShares Core U.S. Aggregate Bond ETF). The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market. (the "Index"). Visit https://www.ishares.com/us/products/239458/ishares-core-total-us-bond-market-etf for more information about the ETF. The index composed of the total U.S. investment-grade bond market results do not reflect fees and expenses and you typically cannot invest in an index. The benchmark is blended representing a weighting of ninety (90%) percent to SPY and ten (10%) to AGG. Unless otherwise indicated, the benchmarks are not rebalanced to maintain their original weighting. Instead, they are comprised of the starting allocation and will shift given the prevailing market environment over the period measured. Return Comparison: Explanation of why benchmark was chosen. To benchmark the results, the ETF (exchange-traded-fund) symbol SPY (SPDR® S&P 500® ETF Trust) which seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the "Index"). The S&P 500 was chosen as it is generally well recognized as an indicator or representation of the stock market in general and includes a cross section of equity holdings. In addition, the ETF symbol AGG was chosen as a benchmark. The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of an index composed of the total U.S. investment-grade bond market. The total U.S. investment-grade bond market was chosen as it is generally well recognized as an indicator or representation of the bond market in general and includes a cross section of debt holdings. For each respective model benchmark the performance measurement weightings are as follows to SPY & AGG: 20/80, 30/70, 40/60, 50/50, 60/40, 70/30, 80/20, 90/10 respectively for Ultra Conservative, Conservative, Moderate, Balanced, Growth & Income, Growth, Aggressive, Ultra Aggressive.
The results do not represent actual trading and actual results may significantly differ from the theoretical results presented.