Quarter 4, 2015 Investment Brief

Happy New Year!

2015 was a challenging year from a performance perspective, though there were some bright spots.  Our international funds, First Eagle Overseas and IVA International, had slightly positive returns despite the MSCI EAFE index being in negative territory.  BlackRock Global Allocation also outperformed the MSCI All-Country World Index.  As far as acts of omission, our hesitancy to utilize commodity-related funds has thus far proven beneficial.

The Fairholme, Royce Special Equity and Ivy Asset Strategy funds all suffered double-digit, or close to double-digit losses.  These losses, though unpleasant at the moment, are not in our opinion indicative of a departure from their stated objective, which is to deliver solid long-term returns.  Fairholme, for instance, has beaten the S&P 500 in about 86% of the 10-year rolling periods in which it has been in existence.  Royce Special Equity topped the Russell 2000 in roughly 85% of its rolling 10-year periods, and Ivy Asset Strategy’s success rate versus the MSCI All-Country World Index was 98%. 

The attentive observer will note that these numbers are not 100% - that is, there are some 10-year time periods when the funds have (and will) underperform.  Through our ongoing research, we have become convinced that the solution to this problem is not to switch to funds that we think will always beat their benchmarks, as we have yet to find many of these (and those that have just haven’t been around long enough).  Even Warren Buffett’s Berkshire Hathaway has not been exempt: the stock has trailed the S&P 500 by almost 1% per year for the last thirteen years. 

Short-term losses are a reflection of the fact that even highly-skilled, bargain-hunters struggle to buy at absolute lows.  A prime historical example can be found in a fund we have recently begun using: Hennessy Focus.  Toward the end of 2000, the fund (then called FBR Small Cap Value) reported a sizable position in American Tower stock.  American Tower had been falling since its peak in March of that year, but was nowhere close to its bottom.  From the beginning of 2001 to end of October 2002, the price had plummeted another 96%!  Instead of selling, management at that time took advantage of lower and lower prices by increasing their share count throughout 2002.  American Tower, still a top holding in Hennessy Focus, has averaged about 30% a year since the beginning of 2003.

We think a recent quote from Bruce Berkowitz of Fairholme accurately summarizes not only his fund, but also our approach in general: “Our strategy requires remarkable patience during volatile periods when we look wrong, but has shown that perseverance will be well rewarded.”

Wishing you a rewarding 2016,

Aaron Pettersen, CFA, CFP®

Data is from Morningstar Direct.

Past performance is no guarantee of future results. Indices are not available for direct investment. All investing involves risk, including the potential for loss of principal.  There is no guarantee that any strategy will be successful.  The information contained herein is based on sources and data believed to be reliable, but is not guaranteed by NorthWest Financial Services, Inc. and is not to be construed as an offer or a solicitation of an offer to buy or sell securities mentioned herein.  It is provided as a courtesy for informational purposes only and is not intended to satisfy any compliance or regulatory conditions set forth by any governing body of the securities industry.  Mutual funds are offered by prospectus.  Before investing, you should read carefully the prospectus and consider the investment objectives, risks, charges and expenses.  A prospectus with this and other information may be obtained by calling our office at 317-844-0448.

The S&P 500 is an index of 500 large US companies having common stock listed on the NYSE or NASDAQ.  The Russell 1,000 measures the performance of the large cap segment of the US equity universe.  The Russell 2,000 measures the performance of the small cap segment of the US equity universe.  The MSCI EAFE Index is an equity index which captures large and mid cap representation across developed markets outside of the US and Canada.  The MSCI ACWI (All Country World Index) captures large and mid cap representation across developed markets and Emerging Markets countries.