June 2016 Performance Review
With a sharp rebound following a fast drop, a casual market observer reviewing one-month performance numbers might not think much happened in June. But recent days have been anything but ordinary. The cause was Brexit, the British referendum to leave the EU not going as market players though it would.
Thanks to sliding interest rates, our duration heavy portfolios did well. Our Conservative portfolio gained 2.54%. Our Aggressive portfolio gained 2.32%. Benchmark Vanguard funds for June 2016 were as follows: Vanguard 500 Index Fund (VFINX) gained 0.25%; Vanguard Total Bond Market Index Fund (VBMFX) up 1.94%; Vanguard Developed Markets Index Fund (VTMGX) fell 2.25%; Vanguard Emerging Markets Stock Index (VEIEX) up 5.04%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, fell 0.08%.
The most notable consequence of Brexit so far is a low pound-to-dollar exchange rate and significantly lower interest rates globally. Thanks to British nationalism, you can now refi your mortgage at even lower rates.
While we have plenty of foreign stock funds that took a performance hit because of Brexit, in general we had a good month. Our Conservative portfolio is enjoying ongoing interest rates declines and is now up 7.49% for the year. Our recent addition of utilities, which are in essence a rate play, is offering a huge boost - Vanguard Utilities (VPU) is up almost 25% in just a few months.
Dividend rich telecom stocks performed equally well with Vanguard Telecom Services ETF (VOX) up 7.17%. Surprisingly, emerging market stocks did very well, up 5%, while European economies slid. Our own iShares MSCI Italy Capped (EWI) was our hardest hit stock fund, down almost 8% as Italy could be next in line for trouble if the EU unwinds. Italy is swimming in debt and Italian banks are on the verge of a nervous breakdown. Of course such real fears can mean greater upside when the fears wane.
Shorting oil and gold didn't help the portfolios in June as low rates sparked more fears of future inflation. The best portfolio protection last month was in ultra-long-duration government bonds. Our Vanguard Extended Duration Treasury (EDV) holding gained 9.68% for the month.
Our top holding overall was Proshares Ultrashort NASDAQ Biotech (BIS), up 15.42% in June as shorting riskier biotech stocks worked when money ran to the safety of bonds and lower-risk stocks.
In general, Brexit is a signal to begin a gradual to shift from bonds to stocks. At the depth of the panic a few days ago the S&P 500 yielded more than the investment grade bond market as a whole. This is not an opportunity to reach for yield and buy more junk bond funds and any number of investments with impressive yields - we're only making relatively small moves into credit risk with recent buys of iShares Mortgage REIT (REM) and Artisan High Income Fund (ARTFX).
It`s also becoming a good time to get out of the low volatility trade and into higher volatility stocks. Investors have flocked to safer stocks. This is partially because of a boom in 'low volatility' ETFs. The trouble with 'safe' stocks is if too much money floods into them and out of higher volatility stocks, the safe stocks will be the ones with the most downside - they may slide long and slow and with little volatility.
Investors really want lower downside. From these levels 80% in high volatility stocks and 20% in cash will likely produce a better risk/reward than 100% in low volatility stocks. This increasing popularity of low volatility investing could mean our biotech short will need to be unwound.
The only way stocks are going to underperform bonds over the next decade is the one thing - still a longshot hopefully - that can destroy investments across the board: deflation.
Ultimately that is the risk today. Not recessions, not central banks creating inflation to kick dead horse economies. Any asset backed by debt is doomed if the price level goes into steady decline (as happened in Japan through much of the last quarter century). This is why long-term U.S. government bonds have some merit at ridiculously low rates - the U.S. government will pay you back even with deflation and a corporation, especially a higher risk creditor, won't have the cash flow to make the payments years down the road if revenues decline with the price level.
|Stock Funds||1mo %|
|Proshares Ultrashort NASDAQ Biotech (BIS)||15.42%|
|Vanguard Utilities (VPU)||7.66%|
|Vanguard Telecom Services ETF (VOX)||7.17%|
|[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)||5.04%|
|iShares MSCI BRIC Index (BKF)||4.01%|
|iShares Mortgage REIT (REM)||2.94%|
|Vanguard Value (VTV)||1.12%|
|[Benchmark] Vanguard 500 Index (VFINX)||0.25%|
|Artisan Global Equity (ARTHX)||-0.31%|
|Homestead Value (HOVLX)||-1.01%|
|Proshares Ultrashort Russel2000 (TWM)||-1.44%|
|Vanguard Europe Pacific ETF (VEA)||-2.10%|
|[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)||-2.25%|
|Vanguard European ETF (VGK)||-4.16%|
|PowerShares DB Crude Oil Dble Short (DTO)||-5.85%|
|ETRACS 1xMonthly Short Alerian MLP (MLPS)||-5.90%|
|iShares MSCI Italy Capped (EWI)||-7.91%|
|Gold Short (DZZ)||-17.89%|
|Bond Funds||1mo %|
|Vanguard Extended Duration Treasury (EDV)||9.68%|
|Vanguard Long-Term Bond Index ETF (BLV)||5.13%|
|SPDR Barclays Intl. Treasury (BWX)||3.77%|
|[Benchmark] Vanguard Total Bond Index (VBMFX)||1.94%|
|Artisan High Income Fund (ARTFX)||1.03%|
|Vanguard Mortgage-Backed Securities (VMBS)||0.90%|