Quarter 3, 2014 Investment Brief

Given the returns you are seeing on your report this quarter, we wanted to share some thoughts on the recent performance of our mutual funds.

It was roughly five years ago that we began making changes to the stable of mutual funds that we frequently use in client portfolios.  We had not been satisfied with the level of downside protection that our previous funds had given during the financial crisis, and it was important to us to find managers who could hold more cash when attractive buying opportunities became scarce.  We knew that this increased flexibility was a double-edged sword: it could potentially mitigate losses in a downturn, but it would also most likely mean sacrificing some of the upside when markets were soaring.  We chose this course with the knowledge of the downside, believing that the strategy would pay off over a full market cycle.   

We are now approaching five years of history with this group of funds.  Below are the average 5-yr returns for the funds, compared to appropriate benchmarks.

*Benchmarks used were 60% Russell 1000/40% Barclays 1 – 3 Yr Govt for Oakmark Equity & Income I, Russell 1000 for Fairholme, Russell 2000 for Royce Special Equity, MSCI EAFE for First Eagle Overseas I and IVA International A and MSCI ACWI for BlackRock Global Allocation I and Ivy Asset Strategy A.  Past performance of any investment cannot guarantee future comparable results.  Data is from Morningstar Direct and is as of 9/30/14.

The average underperformance across the funds over this time period is about 1.13%.  On a relative basis, we are not pleased with the results thus far.  Though this has taken place in an environment that has not been conducive to our strategy, we would have hoped to keep pace better than we have.

The good news is that, in absolute terms, the funds’ performance has been sufficient to allow many of our clients to make progress in achieving their goals.  This is our ultimate goal as well.  We remain committed to our strategy, but more importantly, committed to our clients’ long-term success.

We welcome your comments and questions.

Aaron Pettersen, CFA, CFP®