Overall, 2016 was a success for our client portfolios with the overall group of clients experiencing a total return over 10% net after cost*. Each client experience will vary due to timing of deposits and withdrawals as well as customizations.
There is an annual ritual for investors of examining predictions for the year ahead. In our experience, this exercise often begins with the wrong questions including where the year will end. No one actually knows at this point, if you do then please call us immediately! More importantly, what events are possible and even likely during the year ahead?
This year’s briefing begins with what I believe to be a more productive set of questions: “What would we do ‘IF’ . . .?”
We will set aside the national obsession with politics until the end of this briefing with the statement that markets move almost instantly, politics and policy tend to move at glacial speeds.
High Cash Flow
In February of 2016 the credit markets appeared to freeze as the shorter term US corporate high yield index, HYG, reached its deepest discount below par value since the crisis as reported by the Wall Street Journal in December of 2016.
Appreciation for most of the rest of 2016 generally produced attractive total returns and a large part of the global high yield bond market remains at relatively attractive discounts.
“IF” we reach our price targets on these holdings, we will sell to protect gains. If not, the current yield matches our total return objectives from interest and dividend payments.
Safety and Income
A large part of the municipal bond market and the US Treasury market remain at significant premiums to par value. The recent rate spike on the 30 year US Treasury bond, from 2.1% in July 2016 to 3.2% shortly after the election was disruptive to the fixed income markets.
“IF” the interest rates spike, then, we are likely to find attractive pricing on tax free municipal bonds and taxable bonds for the retirement accounts. At that point, we would increase our fixed maturity, more conservative holdings to our neutral 1/3 weighting.
In the meantime, the moderate risk, shorter duration floating rate loan funds provide attractive income, relative stability, and exit points to help control risk.
Growth with Income
Dividend companies would normally be about 1/3 of our holdings, but with the US equity market rally that took the Dow near 20,000 after the election, we have reduced our equity holdings in favor of the discounted high yield bond funds and floating rate loan funds.
Real estate holdings were substantially reduced in light of an increase in commercial mortgage backed securities default rates reported by Moody’s during the second half of 2016 from 4.6% to a 5.6% default rate reported during the 4th quarter by The Wall Street Journal.
“IF” the equity markets correct to more reasonable valuations and/or begin show attractive dividend growth, we have a target list of companies that we would like to add to the portfolio.
“IF” policy changes lead to increased energy output, then a correction in the energy sector could hand us bargains in infrastructure companies.
Government Policy and Politics
Investing is best accomplished through a politically neutral lens focused upon long term policy rather than party. Our common goals of freedom and prosperity are likely to be well served through deregulation and lower taxes in the 4 years ahead. Warren Buffet’s and Sir John Templeton’s writings usually carried a spirit of cautious optimism which we will echo in our 2017 forecast.
“Keep calm, carry on”
Great Britain’s Unofficial Wartime Slogan
“. . . and, play your banjo well.”
*MGAM 4qtr. 2016
The above information is provided for informational purposes only and should not replace specific investment advice. Additionally, actual results will vary for individual client accounts due to customization, strategy elected, advisory fee schedules, timing of additions and withdrawals, diversification, length of relationship, and size of positions among other reasons. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance on the future performance of any specific investment or investment strategy.
Headline Round Up
*Texas Companies Making 52 Week Highs: Southwest Airlines, Frost Bank, Comerica, Texas Pacific Land!
*Don’t Cry for Rex: Rex Tillerson’s $180,000,000 Retirement Package from Exxon! Net Worth Estimated Above $400,000,000.
*Plenty of Room for Your New Desk: 7.5 Million Square Feet of Office Space Coming to North Texas. $50 Per Square Foot Becomes the New Normal for A Class Offices.
*More Net New Private Payroll Jobs!
*Sears Sells Craftsman Tools to Black and Decker.
*Macy’s Downsizing. Amazon Tops $775 per Share.
*Manufacturing in the US Expands the Fastest in 2 Years.
*BlackRock Predicts Emerging Market Bond Rally.
*London Bankers Moving to Europe?
*Robot Automation Versus Jobs. Knowledge Workers? Tom Friedman Could Be Right.
*Natural Gas Mega Merger!
*Williams Transco Pipeline Expansion.
*Who Loves Golar?
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