Quarterly Market Review
Q4 Quarterly Market Review Fourth Quarter 2013
Meet with Your Advisor A lot can change over time. Tax, economic and personal changes can affect investment goals and strategies. For that reason, your advisor would like to review your current portfolio with you if you haven’t done so recently. This review process helps us confirm or adjust your portfolio as necessary. It also provides us the opportunity to discuss a variety of issues such as taxes, estate planning, insurance and other items that may be of interest or concern to you. If you are interested in scheduling an appointment, please contact your Client Relationship Associate or your advisor to schedule a time that is convenient for you. We look forward to meeting with you and helping you stay on course. As always, thank you for your business.
2013 Year In Review Forum Letter to Clients Dear Friends and Clients, Here is a forecast from The Economist magazine: Central banks may be keeping their feet to the monetary accelerator but the brakes are being applied in the form of fiscal policy. Even if the developed world is not stuck in a Japanese-style rut, a revival of global growth could bring renewed problems in the form of higher commodity prices. Although investors are not as complacent as they were heading into 2000 or 2007, say, it is still hard to believe this will be a bumper year for returns.
Financial Headlines from 2013 “Rebirth of Equities Ain’t Necessarily So” January 12, Financial Times
“Scant Pickup in Economic Growth Seen for 2013” February 8, Wall Street Journal
“Stock Markets Defy Economic Woes” March 7, Financial Times
“Lesser Expectations: Earnings Hopes Dim for First Quarter” April 2, USA Today
“Stock Market Optimism on This Scale Hard to Explain” May 18, Financial Times
Now for the twist ending – this quote is from “Hope springs eternal,” an article written back on January 5, 2013. For those of you who have been our clients and friends for many years, this was not likely a surprise ending. This past year once again showed that predicting markets based on economic trends or headline events does not constitute a sound investment strategy. Our approach emphasizes the importance of implementing a sound investment strategy. We get to know you and your financial goals, select a diversified portfolio that matches your risk tolerance and help you stick with that plan despite the noise around us.
“U.S. Government Shutdown Battle Looms as Budget Woes Fester” June 7, Wall Street Journal
“As Investors Rush in, Stocks Are Sending Warning Signals” July 7, Wall Street Journal
“Lofty Profit Margins Hint at Pain to Come for U.S. Shares” August 24, Wall Street Journal
“Profits Boost Needed for Wall Street’s Equities Run” September 18, Financial Times
“Get Ready For a Drop in Stock Prices” October 7, Wall Street Journal
We at Forum would like to thank you, our clients, for making this a great year!
“Is This a Bubble?” November 16, Wall Street Journal
Sincerely,
What a great year! S&P 500 finishes up 32% for 2013. December 31, Forum Financial Management
Forum Financial Management, LLC
Past performance is not a guarantee of future results. Returns in US dollars. Graph Source: MSCI ACWI Index. MSCI data © MSCI 2014, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Selected headlines are not indicative of any impact they may or may not have had on the market.
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Surprise! No Selloff in 2013 Looking back at the year in the rear view mirror. The unusually strong performance of US stocks in 2013 was a welcome surprise for investors who are following a simple buyand-hold strategy and a source of exasperation for many professionals caught flatfooted by the steady rise in share prices. It was the best year for the S&P 500 Index since 1997, with a total return in excess of 32%. The size and value dimensions were even more rewarding: 2013 was the best calendar year since inception for the DFA U.S. Large Cap Value Portfolio, while the DFA U.S. Micro Cap Portfolio had its second-best performance in 32 years of operation. To some experts, it wasn’t supposed to look like this. A Barron’s cover story appearing in November 2012 warned investors to “get ready for the recession of 2013.” The title of a Time article on the outlook for financial markets that same month shouted, “Why Stocks Are Dead” in oversize type. A prominent economic forecaster who predicted the downturn in 2008 suggested that four elements—stagnating US economic growth, the European debt crisis, a slump in emerging markets, and military conflict in the Middle East—could combine and lead to a “superstorm.”
Source: Dimensional
Another prognosticator—and longtime Forbes columnist—ticked off a long list of worries, including a new wave of housing foreclosures, persistent government deficits, weak consumer spending, high unemployment, and unsustainable corporate profit margins. His prediction for 2013: “the S&P 500 Index drops to 800, a 42% decline.” Others fretted about a deepening slump in China that could drag the rest of the world down with it. Detroit’s bankruptcy filing in July—the largest American city to do so—and the acrimonious debate over public finances in many cities and states suggested to some that a tectonic shift in municipal finance was underway with worrisome consequences. One prominent Wall Street researcher observed that “the aftershocks of the largest municipal bankruptcy in US history will be staggering, and Detroit will set important precedents.” Individual and professional investors alike braced themselves throughout the year for a sharp selloff that never materialized. At times, the perverse reaction to rising prices was not delight but apprehension of an even steeper decline to come. On March 5, 2013, for example, the Dow Jones Industrial Average finally eclipsed its previous record of 14164.53, set in October 2007. But the Financial Times reported that the prevailing mood among veteran New York Stock Exchange floor traders was “more anxious than joyful.”
Month after month, a Greek chorus of financial journalists recycled the same arguments we have heard regularly for the past several years: Economic growth is well below average, stocks are expensive relative to earnings, corporate profit margins are historically high and can only come down, earnings growth is too weak, asset prices have been artificially inflated by an expansive monetary policy, and so on. What can investors learn from this year’s market behavior? Most of us accept the idea that predicting the future is difficult. And predicting how other investors will respond to unpredictable events is harder still. But, for some of us, the temptation to engage in such efforts is irresistible. If only we could do so, we could be so much wealthier, have the satisfaction of outwitting other clever market participants, and make ourselves more attractive to members of the opposite sex. But results from this past year tell us we should be skeptical of our ability—or anyone else’s—to do this well enough to outperform a simple buyand-hold strategy. When investors are studying the long-run record of US stock market returns several years from now, we suspect many of them will find it difficult to recall exactly what it was that they were so worried about and discouraged them from pursuing the capital market rewards that were there for the taking.
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Market Summary 2013 Annual Index Returns
US Stock Market
+32.39%
International Developed Stocks
Emerging Markets Stocks
-2.60%
+22.78%
STOCKS
Global Real Estate
+1.73%
US Bond Market
Global Bond Market ex US
-2.02%
1.42%
BONDS
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2014, all rights reserved. MSCI data © MSCI 2014, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2014 by Citigroup. US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
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US Stock Market Performance Russell 3000 Index with selected headlines from 2013
Source: Dimensional and Russell Investment Group Past performance is not a guarantee of future results. Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual portfolio.
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World Stock Market Performance MSCI All Country World Index with selected headlines from 2013
Source: Dimensional and MSCI Past performance is not a guarantee of future results. In US dollars. Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual portfolio.
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World Asset Classes 2013 Annual Index Returns
Strong performance in the US and developed markets lead returns. Emerging markets lagged developed markets as commodities struggled through the year and many companies in these markets relate to the production of raw goods. Bond markets around the world experienced low to negative returns as most countries yield curves rose throughout the year.
Russell 2000 Index
38.82
Russell 2000 Value Index
34.52
Russell 1000 Value Index
32.53
S&P 500 Index
32.39
MSCI World ex USA Small Cap Index (net div.)
25.55
MSCI EAFE Index (net div.)
9.30
MSCI World ex USA Value Index (net div.)
21.47
MSCI World ex USA Index (net div.)
21.02
S&P Global ex US REIT Index (net div.)
2.36
S&P Global REIT Index (net div.)
1.73
Citigroup WGBI ex USA 1-30 Years (hedged to USD)
1.42
Dow Jones US Select REIT Index
1.22
MSCI Emerging Markets Small Cap Index (net div.)
1.04
One-Month US Treasury Bills
0.02
Barclays US Aggregate Bond Index
-0.14
MSCI Emerging Markets Index (net div.) MSCI Emerging Markets Value Index (net div.)
-1.01 -1.09
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Large Cap (S&P 500 Index); US Small Cap (Russell 2000 Index); US Small Cap Value (Russell 2000 Value Index); US Value (Russell 1000 Value Index); US Real Estate (Dow Jones US Select REIT Index); Global Real Estate (S&P Global ex US REIT Index); International Developed Large, Small, and Value (MSCI World ex USA, ex USA Small, and ex USA Value Indexes [net div.]); Emerging Markets Large, Small, and Value (MSCI Emerging Markets, Emerging Markets Small, and Emerging Markets Value Indexes); US Bond Market (Barclays US Aggregate Bond Index); and Treasury (One-Month US Treasury Bills). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2014, all rights reserved. MSCI data © MSCI 2014, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
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Quarterly Market Review Fourth Quarter 2013
This report features world capital market performance and a timeline of events for the last quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets. The report also illustrates the performance of globally diversified portfolios and features a topic of the quarter.
Overview: Market Summary Timeline of Events World Asset Classes US Stocks International Developed Stocks Emerging Markets Stocks Select Country Performance Real Estate Investment Trusts (REITs) Commodities Fixed Income Global Diversification
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Many Happy Returns Fourth Quarter 2013
It’s that time of year when the talking heads of television and the prognosticators of print issue their sage outlooks for the coming 12 months. While this crystal ball gazing is always entertaining, it becomes even more so a year later.
In journalism, this is known as the "silly season." Lots of people are on vacations, and the flow of news slows to a crawl. So the wide open spaces are filled with forecasts about the economy, markets, and anything else you can think of. Think back a year ago, when politicians in Washington were in the grip of one of their now familiar “fiscal cliff” standoffs. As has become the custom, the theater of brinksmanship kept everyone guessing until a last-minute resolution. For some, the excitement was just too much. The publication Financial News told its readers that “political storm clouds loom over the global economy. From Washington to Beijing, the financial markets are in thrall to seismic political events.” 1 In The Economist magazine, the tone about 2013’s prospects was equally skeptical, if not quite as florid. The magazine noted that while surveys showed investors were optimistic, the coming year was unlikely to be a one to remember. The reason was that the past year’s gains partly reflected relief that the worst fears about the euro zone had failed to materialize, the magazine said, which meant that reality might intervene as investors judged shares as expensive. “Although investors are not as complacent as they were heading into 2000 or 2007, say, it is still hard to believe this will be a bumper year for returns,” the columnist Buttonwood said in his column.2 It’s easier to see from all this forecasting that many investors might have taken fright at the developments around the turn of the year and sought to trim their exposures to risky assets because of what the media pundits were saying.
That would have been a shame because, as of early December 2013, many global equity markets were notching record-breaking years. In local currency terms, the S&P 500 total return index, for instance, was up by just under 29% at time of writing, on track for its biggest annual gain in more than a decade. In Japan, the Nikkei 225 total return index was 53% higher as of early December, heading for its best yearly gain since 1972. In the UK, the FTSE 100 total return index reached a 13-year peak in May this year. It has come off a little since then, but was still nearly 15% higher for the year by December. As the year came to an end again, there were still plenty of gloomy stories to fill the newspapers—including ongoing speculation of what happens when the US Federal Reserve begins tapering its monetary stimulus program.
This isn’t to say these stories are necessarily incorrect. Most of them accurately reflect the sentiment prevailing at the time they were written and the uncertainty about the future, as expressed in prices. But as an individual investor, there is not much you can do about that. These expectations and uncertainties are already built into the market. Investing is about what happens next. We don’t know what happens next. That’s why we diversify. And think about this: If any of the gurus who regularly appear on financial television or in the newspaper really had a crystalclear view of the future, why would they bother sharing it with the world? It makes more sense to focus on what’s in your own control. In the meantime, many happy returns!
1. Financial News, January 7, 2013 2. “Hope Springs Eternal,” The Economist, January 5, 2013. Adapted from “Many Happy Returns” by Jim Parker, Outside the Flags column on Dimensional’s website, December 2013. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale. All expressions of opinion are subject to change. Diversification does not eliminate the risk of market loss. General investment risks include loss of principal and fluctuating value. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Dimensional Fund Advisors LP ("Dimensional") is an investment advisor registered with the Securities and Exchange Commission.
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Market Summary Fourth Quarter 2013 Index Returns
US Stock Market
+10.10%
International Developed Stocks
Emerging Markets Stocks
+5.56%
+1.83%
STOCKS
Global Real Estate
-1.00%
US Bond Market
Global Bond Market ex US
-0.14%
0.44%
BONDS
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2014, all rights reserved. MSCI data © MSCI 2014, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2014 by Citigroup. US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
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Global Stock Market Performance Selected headlines from Q4 2013 “Housing Data Brightens US Economic Growth Outlook”
8%
7%
“World Indexes Finish Vintage Year”
“Fed Taper Boosts World Markets”
6%
“ECB Cuts Rates Unexpectedly as Low Inflation Threatens Recovery”
5%
4%
3%
2%
“Janet Yellen Nominated as Fed Chairman”
1%
0% 9/30
10/31
11/30
12/31
-1%
-2%
“Markets Edgy as US Shutdown Continues”
“Iran Reaches Nuclear Deal with World Leaders”
“Tokyo’s Nikkei Index Soars 57%”
Past performance is not a guarantee of future results. Returns in US dollars. Graph Source: MSCI ACWI Index. MSCI data © MSCI 2014, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Selected headlines are not indicative of any impact they may or may not have had on the market.
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World Asset Classes Fourth Quarter 2013 Index Returns
Strong performance in the US helped developed markets lead equity returns during the quarter. Emerging markets lagged developed markets as commodities continued to struggle. The poor performance of REITs in the US, Australia, and Japan contributed to the negative performance delivered by global REITs.
S&P 500 Index
10.51
Russell 1000 Value Index
10.01
Russell 2000 Value Index
9.30
Russell 2000 Index
8.72
MSCI World ex USA Value Index (net div.)
6.01
MSCI World ex USA Index (net div.)
5.56
MSCI World ex USA Small Cap Index (net div.)
5.51
MSCI Emerging Markets Index (net div.)
1.83
MSCI Emerging Markets Small Cap Index (net div.)
1.26
MSCI Emerging Markets Value Index (net div.)
0.57
One-Month US Treasury Bills
0.01
Barclays US Aggregate Bond Index
-0.14
S&P Global ex US REIT Index (net div.)
-1.01
Dow Jones US Select REIT Index
-1.09
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Large Cap (S&P 500 Index); US Small Cap (Russell 2000 Index); US Small Cap Value (Russell 2000 Value Index); US Value (Russell 1000 Value Index); US Real Estate (Dow Jones US Select REIT Index); Global Real Estate (S&P Global ex US REIT Index); International Developed Large, Small, and Value (MSCI World ex USA, ex USA Small, and ex USA Value Indexes [net div.]); Emerging Markets Large, Small, and Value (MSCI Emerging Markets, Emerging Markets Small, and Emerging Markets Value Indexes); US Bond Market (Barclays US Aggregate Bond Index); and Treasury (One-Month US Treasury Bills). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2014, all rights reserved. MSCI data © MSCI 2014, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
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US Stocks Fourth Quarter 2013 Index Returns
The US equity market delivered a strong performance across style and size indices during the quarter. Large cap growth recorded the strongest performance.
Ranked Returns for the Quarter (%) Large Cap
10.51
Growth outperformed value market-wide, driven by the strong performance of large cap growth stocks. The effect was reversed in small caps. Across the size dimension, large caps outperformed small caps.
Large Cap Growth
10.44
Marketwide
10.10
Large Cap Value
10.01
Small Cap Value
9.30
Small Cap
8.72
Small Cap Growth
World Market Capitalization—US
8.17
Period Returns (%)
50% US Market $20.7 trillion
* Annualized
Asset Class
YTD
1 Year
3 Years**
5 Years**
Marketwide
33.55
33.55
16.24
18.71
7.88
Large Cap
32.39
32.39
16.18
17.94
7.41
Large Cap Value
32.53
32.53
16.06
16.67
7.58
Large Cap Growth
33.48
33.48
16.45
20.39
7.83
Small Cap
38.82
38.82
15.67
20.08
9.07
Small Cap Value
34.52
34.52
14.49
17.64
8.61
Small Cap Growth
43.30
43.30
16.82
22.58
9.41
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (S&P 500 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap: Russell 3000 Index is used as the proxy for the US market. Russell data © Russell Investment Group 1995–2014, all rights reserved. The S&P data are provided by Standard & Poor's Index Services Group.
10 Years**
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International Developed Stocks Fourth Quarter 2013 Index Returns
During the quarter, international developed markets continued to post gains. Large cap and small cap stocks posted similar performances in US dollar terms.
Ranked Returns for the Quarter (%)
US Currency
Local Currency
6.01
Value
6.86
Value outperformed growth across all size segments. The US dollar appreciated relative to most major foreign developed currencies.
5.56
Large Cap
6.46 5.51
Small Cap
6.97 5.08
Growth
World Market Capitalization—International Developed
40% International Developed Market $16.6 trillion
6.05
Period Returns (%)
* Annualized
Asset Class
YTD
1 Year
3 Years**
5 Years**
Large Cap
21.02
21.02
7.34
12.49
7.07
Small Cap
25.55
25.55
7.49
18.45
9.24
Value
21.47
21.47
7.96
12.52
7.08
Growth
20.53
20.53
6.71
12.41
6.99
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth). All index returns are net of withholding tax on dividends. World Market Cap: Non-US developed market proxies are the respective developed country portions of the MSCI All Country World IMI ex USA Index. Proxies for the UK, Canada, and Australia are the relevant subsets of the developed market proxy. MSCI data © MSCI 2014, all rights reserved.
10 Years**
15
Emerging Markets Stocks Fourth Quarter 2013 Index Returns
Dragged down by the poor performance of materials and energy stocks, emerging markets lagged developed markets as a group but still finished with gains. Growth stocks outperformed value across large caps and mid-caps but underperformed in small caps. Large caps slightly outperformed small caps.
Ranked Returns for the Quarter (%)
4.20 1.83
Large Cap
2.96 1.26
Small Cap
2.27 0.57
Value
10% Emerging Markets $4.3 trillion
Local Currency
3.10
Growth
The US dollar appreciated against most emerging markets currencies.
World Market Capitalization—Emerging Markets
US Currency
1.71
Period Returns (%)
* Annualized
Asset Class
YTD
1 Year
3 Years**
5 Years**
10 Years**
Large Cap
-2.60
-2.60
-2.06
14.79
11.17
Small Cap
1.04
1.04
-3.48
19.58
11.97
Value
-5.11
-5.11
-3.34
13.88
12.00
Growth
-0.18
-0.18
-0.84
15.67
10.31
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap: Emerging markets proxies are the respective emerging country portions of the MSCI All Country World IMI ex USA Index. MSCI data © MSCI 2014, all rights reserved.
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Select Country Performance Fourth Quarter 2013 Index Returns Many European equity markets, led by Germany, recorded strong performances in US dollar terms. Most developed markets posted gains; however, emerging markets countries were mixed. Greece, recently reclassified by MSCI as an emerging market, and Egypt were the top performers. Turkey was the worst-performing market following news of a graft probe. Developed Markets (% Returns)
Emerging Markets (% Returns)
Germany
12.89%
Italy
12.02%
Spain
11.46%
Denmark
10.63%
Ireland
10.55%
Finland
10.33%
USA
10.10%
Portugal
8.88%
Netherlands
8.57%
United Kingdom Belgium Norway
Egypt
19.03%
Greece
18.85%
India Mexico Malaysia
4.59%
Poland
4.58%
Taiwan
4.28%
China
4.28%
Korea
7.86%
Peru
2.44%
South Africa
1.96%
Israel
6.27%
Russia
France
6.25%
Czech Republic
5.55%
Switzerland
4.71%
Hong Kong
3.89%
Canada
3.75%
Austria
3.24%
Japan
1.90%
Singapore
-1.17%
Australia
-1.18%
New Zealand
-1.87%
7.80%
7.87% 6.75%
Sweden
11.55%
3.30%
0.40% -0.61%
Philippines
-5.75%
Hungary
-5.79%
Brazil
-5.85%
Indonesia
-6.48%
Chile
-7.39%
Thailand
-10.59%
Colombia
-11.00%
Turkey
-13.88%
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), Russell 3000 Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2014, all rights reserved. Russell data © Russell Investment Group 1995–2014, all rights reserved. Greece has recently been reclassified as an emerging markets country by MSCI, effective November 2013.
17
Real Estate Investment Trusts (REITs) Fourth Quarter 2013 Index Returns
The poor performance of REITs in the US, Australia, and Japan contributed to the losses delivered by global REITs during the quarter. This was the third consecutive quarter of negative performance for US REITs.
Ranked Returns for the Quarter (%)
Global REITs (ex US)
-1.01
US REITs
Total Value of REIT Stocks
-1.09
Period Returns (%)
45%
55%
World ex US $349 billion 208 REITs (21 other countries)
US $427 billion 85 REITs
* Annualized
Asset Class
YTD
1 Year
3 Years**
5 Years**
US REITs
1.22
Global REITs (ex US)
2.36
10 Years**
1.22
9.04
16.36
8.22
2.36
7.26
14.79
6.62
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Dow Jones US Select REIT Index data provided by Dow Jones © 2014. S&P Global ex US REIT Index data provided by Standard and Poor’s © 2014.
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Commodities Fourth Quarter 2013 Index Returns
Commodities ended the year on a negative note as the DJ-UBS Commodity Index returned -1.1% during the fourth quarter, finishing the year down 9.5%.
Individual Commodity (% Returns) Natural Gas
10.99
Zinc
With the improvement in the economy pushing up interest rates, precious metals were hit hard, finishing down 9−11%. Soft commodities, with the exception of soybeans, finished down 4−12%. The energy complex, with the exception of WTI crude oil, had a good quarter, with natural gas leading the way, finishing up approximately 11%.
6.12
Unleaded Gas
5.61
Brent Oil
4.26
Heating Oil
3.10
Soybean
2.03
Copper
1.93
Live Cattle
0.73
Nickel
-0.91
WTI Crude Oil
-3.41
Cotton
-4.45
Aluminum
-4.86
Coffee
-5.36
Lean Hogs
-5.80
Soybean Oil
Period Returns (%) Asset Class Commodities
* Annualized
YTD
Q4
1 Year
3 Years**
-9.52
-1.05
-9.52
-8.11
5 Years** 10 Years** 1.51
0.87
-6.44
Corn
-6.88
Gold
-9.47
Sugar
-9.54
Silver Wheat
-11.01 -12.26
Past performance is not a guarantee of future results. Index is not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. All index returns are net of withholding tax on dividends. Dow Jones-UBS Commodity Index Total Return data provided by Dow Jones © 2014.
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Fixed Income Fourth Quarter 2013 Index Returns
Bond investors got a bit of bad news at the
US Treasury Yield Curve
Bond Yields across Different Issuers
end of the quarter with the US Federal Reserve announcing the tapering of its monthly bond purchases from $85 billion
5
4.73 12/31/13 9/30/13
4
(current level) to $75 billion beginning in January 2014. This move was not a surprise to the market. The Fed signaled earlier in
3
3.45
3.03 2.61
12/31/12
2
the year that, with continuing improvement in the economy, it would begin to taper the
bond purchase program. However, the initial reduction in purchases was much less than
1 0 1 Yr
5 Yr
10 Yr
30 Yr
10-Year US Treasury
expected. During the quarter, the market
State and Local Municipals
AAA-AA Corporates
A-BBB Corporates
reacted to the impending news by taking bond yields from 2.61% on the bellwether 10-year at the end of September to a close of 3.03% at year end.
Period Returns (%)
* Annualized
Asset Class
YTD
1 Year
The continuing improvement in the
BofA Merrill Lynch Three-Month US Treasury Bill Index
0.07
0.07
0.10
0.12
1.68
economy also spilled over into the TIPS
BofA Merrill Lynch 1-Year US Treasury Note Index
0.25
0.25
0.35
0.54
2.07
market. Real rates across most of the
Citigroup WGBI 1-5 Years (hedged to USD)
0.62
0.62
1.67
1.86
3.19
maturity spectrum rose quarter over quarter.
Long-Term Government Bonds
-11.36
-11.36
5.50
1.94
6.06
-2.02
-2.02
3.26
4.44
4.55
Barclays US Aggregate Bond Index
3 Years**
5 Years** 10 Years**
Yield-seeking investors were rewarded as
Barclays US Corporate High Yield Index
7.44
7.44
9.32
18.93
8.62
credit spreads narrowed.
Barclays Municipal Bond Index
-2.55
-2.55
4.83
5.89
4.29
Barclays US TIPS Index
-8.61
-8.61
3.55
5.63
4.86
. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. AAA−AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA−AAA rated. A−BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB−A rated. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citigroup bond indices © 2014 by Citigroup. The Merrill Lynch Indices are used with permission; © 2014 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved.
20
Global Diversification Fourth Quarter 2013 Index Returns
These portfolios illustrate the performance of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time.
Ranked Returns for the Quarter (%) 100% Stocks
7.42
75/25
5.53
50/50
3.67
25/75 100% Treasury Bills
1.83 0.01
Growth of Wealth: The Relationship between Risk and Return Stock/Bond Mix 70,000
100% Stocks
60,000
Period Returns (%)
75/25
* Annualized
50,000 Asset Class
YTD
1 Year
3 Years**
100% Stocks
23.44
23.44
10.33
15.53
7.72
75/25
17.24
17.24
7.87
11.79
6.43
50/50
11.27
11.27
5.33
7.95
4.96
25/75
5.54
5.54
2.71
4.04
3.33
100% Treasury Bills
0.02
0.02
0.04
0.07
1.54
50/50
5 Years** 10 Years**
40,000 25/75 30,000 100% Treasury Bills 20,000 10,000 12/1988
12/1993
12/1998
12/2003
12/2008
12/2013
Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management an actual portfolio. Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World Index (gross div.) and Treasury Bills represented by US One-Month Treasury Bills. Globally diversified allocations rebalanced monthly, no withdrawals. Data © MSCI 2014, all rights reserved. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
21
Disclosures Forum Financial Management, LLC, is a Registered Investment Advisor. The home office of Forum is located at 1900 S. Highland Ave., Suite 100, Lombard, IL 60148, ph: 630.873.8520. Before making an investment decision, please contact our office at 630.873.8520 to receive a copy of Forum’s Form ADV Part 2 and the Forum Advisory Agreement, both of which include Forum’s fee schedule. This information is intended to serve as a basis for further discussion with your professional advisors. Although great effort has been taken to provide accurate numbers and explanations, the information in this presentation should not be relied upon for preparing tax returns or making investment decisions. Information is used with the express permission from Dimensional Fund Advisors. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Dimensional funds are distributed by DFA Securities LLC. Nothing in this publication should be construed as investment advice. All information is believed to be from reliable sources; however, its accuracy and completeness and the opinions based thereon by the author are not guaranteed and no responsibility is assumed for errors and omissions. Any economic and performance data published herein is historical and not indicative of future results. All rights reserved. Please consult your personal advisor and investment prospectus before making an investment decision.
Meet with Your Advisor A lot can change over time. Tax, economic and personal changes can affect investment goals and strategies. For that reason, your advisor would like to review your current portfolio with you if you haven’t done so recently. This review process helps us confirm or adjust your portfolio as necessary. It also provides us the opportunity to discuss a variety of issues such as taxes, estate planning, insurance and other items that may be of interest or concern to you. If you are interested in scheduling an appointment, please contact your Client Relationship Associate or your advisor to schedule a time that is convenient for you. We look forward to meeting with you and helping you stay on course. As always, thank you for your business.
2013 Year In Review Forum Letter to Clients Dear Friends and Clients, Here is a forecast from The Economist magazine: Central banks may be keeping their feet to the monetary accelerator but the brakes are being applied in the form of fiscal policy. Even if the developed world is not stuck in a Japanese-style rut, a revival of global growth could bring renewed problems in the form of higher commodity prices. Although investors are not as complacent as they were heading into 2000 or 2007, say, it is still hard to believe this will be a bumper year for returns.
Financial Headlines from 2013 “Rebirth of Equities Ain’t Necessarily So” January 12, Financial Times
“Scant Pickup in Economic Growth Seen for 2013” February 8, Wall Street Journal
“Stock Markets Defy Economic Woes” March 7, Financial Times
“Lesser Expectations: Earnings Hopes Dim for First Quarter” April 2, USA Today
“Stock Market Optimism on This Scale Hard to Explain” May 18, Financial Times
Now for the twist ending – this quote is from “Hope springs eternal,” an article written back on January 5, 2013. For those of you who have been our clients and friends for many years, this was not likely a surprise ending. This past year once again showed that predicting markets based on economic trends or headline events does not constitute a sound investment strategy. Our approach emphasizes the importance of implementing a sound investment strategy. We get to know you and your financial goals, select a diversified portfolio that matches your risk tolerance and help you stick with that plan despite the noise around us.
“U.S. Government Shutdown Battle Looms as Budget Woes Fester” June 7, Wall Street Journal
“As Investors Rush in, Stocks Are Sending Warning Signals” July 7, Wall Street Journal
“Lofty Profit Margins Hint at Pain to Come for U.S. Shares” August 24, Wall Street Journal
“Profits Boost Needed for Wall Street’s Equities Run” September 18, Financial Times
“Get Ready For a Drop in Stock Prices” October 7, Wall Street Journal
We at Forum would like to thank you, our clients, for making this a great year!
“Is This a Bubble?” November 16, Wall Street Journal
Sincerely,
What a great year! S&P 500 finishes up 32% for 2013. December 31, Forum Financial Management
Forum Financial Management, LLC
Past performance is not a guarantee of future results. Returns in US dollars. Graph Source: MSCI ACWI Index. MSCI data © MSCI 2014, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Selected headlines are not indicative of any impact they may or may not have had on the market.
3
Surprise! No Selloff in 2013 Looking back at the year in the rear view mirror. The unusually strong performance of US stocks in 2013 was a welcome surprise for investors who are following a simple buyand-hold strategy and a source of exasperation for many professionals caught flatfooted by the steady rise in share prices. It was the best year for the S&P 500 Index since 1997, with a total return in excess of 32%. The size and value dimensions were even more rewarding: 2013 was the best calendar year since inception for the DFA U.S. Large Cap Value Portfolio, while the DFA U.S. Micro Cap Portfolio had its second-best performance in 32 years of operation. To some experts, it wasn’t supposed to look like this. A Barron’s cover story appearing in November 2012 warned investors to “get ready for the recession of 2013.” The title of a Time article on the outlook for financial markets that same month shouted, “Why Stocks Are Dead” in oversize type. A prominent economic forecaster who predicted the downturn in 2008 suggested that four elements—stagnating US economic growth, the European debt crisis, a slump in emerging markets, and military conflict in the Middle East—could combine and lead to a “superstorm.”
Source: Dimensional
Another prognosticator—and longtime Forbes columnist—ticked off a long list of worries, including a new wave of housing foreclosures, persistent government deficits, weak consumer spending, high unemployment, and unsustainable corporate profit margins. His prediction for 2013: “the S&P 500 Index drops to 800, a 42% decline.” Others fretted about a deepening slump in China that could drag the rest of the world down with it. Detroit’s bankruptcy filing in July—the largest American city to do so—and the acrimonious debate over public finances in many cities and states suggested to some that a tectonic shift in municipal finance was underway with worrisome consequences. One prominent Wall Street researcher observed that “the aftershocks of the largest municipal bankruptcy in US history will be staggering, and Detroit will set important precedents.” Individual and professional investors alike braced themselves throughout the year for a sharp selloff that never materialized. At times, the perverse reaction to rising prices was not delight but apprehension of an even steeper decline to come. On March 5, 2013, for example, the Dow Jones Industrial Average finally eclipsed its previous record of 14164.53, set in October 2007. But the Financial Times reported that the prevailing mood among veteran New York Stock Exchange floor traders was “more anxious than joyful.”
Month after month, a Greek chorus of financial journalists recycled the same arguments we have heard regularly for the past several years: Economic growth is well below average, stocks are expensive relative to earnings, corporate profit margins are historically high and can only come down, earnings growth is too weak, asset prices have been artificially inflated by an expansive monetary policy, and so on. What can investors learn from this year’s market behavior? Most of us accept the idea that predicting the future is difficult. And predicting how other investors will respond to unpredictable events is harder still. But, for some of us, the temptation to engage in such efforts is irresistible. If only we could do so, we could be so much wealthier, have the satisfaction of outwitting other clever market participants, and make ourselves more attractive to members of the opposite sex. But results from this past year tell us we should be skeptical of our ability—or anyone else’s—to do this well enough to outperform a simple buyand-hold strategy. When investors are studying the long-run record of US stock market returns several years from now, we suspect many of them will find it difficult to recall exactly what it was that they were so worried about and discouraged them from pursuing the capital market rewards that were there for the taking.
4
Market Summary 2013 Annual Index Returns
US Stock Market
+32.39%
International Developed Stocks
Emerging Markets Stocks
-2.60%
+22.78%
STOCKS
Global Real Estate
+1.73%
US Bond Market
Global Bond Market ex US
-2.02%
1.42%
BONDS
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2014, all rights reserved. MSCI data © MSCI 2014, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2014 by Citigroup. US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
5
US Stock Market Performance Russell 3000 Index with selected headlines from 2013
Source: Dimensional and Russell Investment Group Past performance is not a guarantee of future results. Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual portfolio.
6
World Stock Market Performance MSCI All Country World Index with selected headlines from 2013
Source: Dimensional and MSCI Past performance is not a guarantee of future results. In US dollars. Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual portfolio.
7
World Asset Classes 2013 Annual Index Returns
Strong performance in the US and developed markets lead returns. Emerging markets lagged developed markets as commodities struggled through the year and many companies in these markets relate to the production of raw goods. Bond markets around the world experienced low to negative returns as most countries yield curves rose throughout the year.
Russell 2000 Index
38.82
Russell 2000 Value Index
34.52
Russell 1000 Value Index
32.53
S&P 500 Index
32.39
MSCI World ex USA Small Cap Index (net div.)
25.55
MSCI EAFE Index (net div.)
9.30
MSCI World ex USA Value Index (net div.)
21.47
MSCI World ex USA Index (net div.)
21.02
S&P Global ex US REIT Index (net div.)
2.36
S&P Global REIT Index (net div.)
1.73
Citigroup WGBI ex USA 1-30 Years (hedged to USD)
1.42
Dow Jones US Select REIT Index
1.22
MSCI Emerging Markets Small Cap Index (net div.)
1.04
One-Month US Treasury Bills
0.02
Barclays US Aggregate Bond Index
-0.14
MSCI Emerging Markets Index (net div.) MSCI Emerging Markets Value Index (net div.)
-1.01 -1.09
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Large Cap (S&P 500 Index); US Small Cap (Russell 2000 Index); US Small Cap Value (Russell 2000 Value Index); US Value (Russell 1000 Value Index); US Real Estate (Dow Jones US Select REIT Index); Global Real Estate (S&P Global ex US REIT Index); International Developed Large, Small, and Value (MSCI World ex USA, ex USA Small, and ex USA Value Indexes [net div.]); Emerging Markets Large, Small, and Value (MSCI Emerging Markets, Emerging Markets Small, and Emerging Markets Value Indexes); US Bond Market (Barclays US Aggregate Bond Index); and Treasury (One-Month US Treasury Bills). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2014, all rights reserved. MSCI data © MSCI 2014, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
8
Quarterly Market Review Fourth Quarter 2013
This report features world capital market performance and a timeline of events for the last quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets. The report also illustrates the performance of globally diversified portfolios and features a topic of the quarter.
Overview: Market Summary Timeline of Events World Asset Classes US Stocks International Developed Stocks Emerging Markets Stocks Select Country Performance Real Estate Investment Trusts (REITs) Commodities Fixed Income Global Diversification
9
Many Happy Returns Fourth Quarter 2013
It’s that time of year when the talking heads of television and the prognosticators of print issue their sage outlooks for the coming 12 months. While this crystal ball gazing is always entertaining, it becomes even more so a year later.
In journalism, this is known as the "silly season." Lots of people are on vacations, and the flow of news slows to a crawl. So the wide open spaces are filled with forecasts about the economy, markets, and anything else you can think of. Think back a year ago, when politicians in Washington were in the grip of one of their now familiar “fiscal cliff” standoffs. As has become the custom, the theater of brinksmanship kept everyone guessing until a last-minute resolution. For some, the excitement was just too much. The publication Financial News told its readers that “political storm clouds loom over the global economy. From Washington to Beijing, the financial markets are in thrall to seismic political events.” 1 In The Economist magazine, the tone about 2013’s prospects was equally skeptical, if not quite as florid. The magazine noted that while surveys showed investors were optimistic, the coming year was unlikely to be a one to remember. The reason was that the past year’s gains partly reflected relief that the worst fears about the euro zone had failed to materialize, the magazine said, which meant that reality might intervene as investors judged shares as expensive. “Although investors are not as complacent as they were heading into 2000 or 2007, say, it is still hard to believe this will be a bumper year for returns,” the columnist Buttonwood said in his column.2 It’s easier to see from all this forecasting that many investors might have taken fright at the developments around the turn of the year and sought to trim their exposures to risky assets because of what the media pundits were saying.
That would have been a shame because, as of early December 2013, many global equity markets were notching record-breaking years. In local currency terms, the S&P 500 total return index, for instance, was up by just under 29% at time of writing, on track for its biggest annual gain in more than a decade. In Japan, the Nikkei 225 total return index was 53% higher as of early December, heading for its best yearly gain since 1972. In the UK, the FTSE 100 total return index reached a 13-year peak in May this year. It has come off a little since then, but was still nearly 15% higher for the year by December. As the year came to an end again, there were still plenty of gloomy stories to fill the newspapers—including ongoing speculation of what happens when the US Federal Reserve begins tapering its monetary stimulus program.
This isn’t to say these stories are necessarily incorrect. Most of them accurately reflect the sentiment prevailing at the time they were written and the uncertainty about the future, as expressed in prices. But as an individual investor, there is not much you can do about that. These expectations and uncertainties are already built into the market. Investing is about what happens next. We don’t know what happens next. That’s why we diversify. And think about this: If any of the gurus who regularly appear on financial television or in the newspaper really had a crystalclear view of the future, why would they bother sharing it with the world? It makes more sense to focus on what’s in your own control. In the meantime, many happy returns!
1. Financial News, January 7, 2013 2. “Hope Springs Eternal,” The Economist, January 5, 2013. Adapted from “Many Happy Returns” by Jim Parker, Outside the Flags column on Dimensional’s website, December 2013. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale. All expressions of opinion are subject to change. Diversification does not eliminate the risk of market loss. General investment risks include loss of principal and fluctuating value. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Dimensional Fund Advisors LP ("Dimensional") is an investment advisor registered with the Securities and Exchange Commission.
10
Market Summary Fourth Quarter 2013 Index Returns
US Stock Market
+10.10%
International Developed Stocks
Emerging Markets Stocks
+5.56%
+1.83%
STOCKS
Global Real Estate
-1.00%
US Bond Market
Global Bond Market ex US
-0.14%
0.44%
BONDS
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2014, all rights reserved. MSCI data © MSCI 2014, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2014 by Citigroup. US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
11
Global Stock Market Performance Selected headlines from Q4 2013 “Housing Data Brightens US Economic Growth Outlook”
8%
7%
“World Indexes Finish Vintage Year”
“Fed Taper Boosts World Markets”
6%
“ECB Cuts Rates Unexpectedly as Low Inflation Threatens Recovery”
5%
4%
3%
2%
“Janet Yellen Nominated as Fed Chairman”
1%
0% 9/30
10/31
11/30
12/31
-1%
-2%
“Markets Edgy as US Shutdown Continues”
“Iran Reaches Nuclear Deal with World Leaders”
“Tokyo’s Nikkei Index Soars 57%”
Past performance is not a guarantee of future results. Returns in US dollars. Graph Source: MSCI ACWI Index. MSCI data © MSCI 2014, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Selected headlines are not indicative of any impact they may or may not have had on the market.
12
World Asset Classes Fourth Quarter 2013 Index Returns
Strong performance in the US helped developed markets lead equity returns during the quarter. Emerging markets lagged developed markets as commodities continued to struggle. The poor performance of REITs in the US, Australia, and Japan contributed to the negative performance delivered by global REITs.
S&P 500 Index
10.51
Russell 1000 Value Index
10.01
Russell 2000 Value Index
9.30
Russell 2000 Index
8.72
MSCI World ex USA Value Index (net div.)
6.01
MSCI World ex USA Index (net div.)
5.56
MSCI World ex USA Small Cap Index (net div.)
5.51
MSCI Emerging Markets Index (net div.)
1.83
MSCI Emerging Markets Small Cap Index (net div.)
1.26
MSCI Emerging Markets Value Index (net div.)
0.57
One-Month US Treasury Bills
0.01
Barclays US Aggregate Bond Index
-0.14
S&P Global ex US REIT Index (net div.)
-1.01
Dow Jones US Select REIT Index
-1.09
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Large Cap (S&P 500 Index); US Small Cap (Russell 2000 Index); US Small Cap Value (Russell 2000 Value Index); US Value (Russell 1000 Value Index); US Real Estate (Dow Jones US Select REIT Index); Global Real Estate (S&P Global ex US REIT Index); International Developed Large, Small, and Value (MSCI World ex USA, ex USA Small, and ex USA Value Indexes [net div.]); Emerging Markets Large, Small, and Value (MSCI Emerging Markets, Emerging Markets Small, and Emerging Markets Value Indexes); US Bond Market (Barclays US Aggregate Bond Index); and Treasury (One-Month US Treasury Bills). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2014, all rights reserved. MSCI data © MSCI 2014, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
13
US Stocks Fourth Quarter 2013 Index Returns
The US equity market delivered a strong performance across style and size indices during the quarter. Large cap growth recorded the strongest performance.
Ranked Returns for the Quarter (%) Large Cap
10.51
Growth outperformed value market-wide, driven by the strong performance of large cap growth stocks. The effect was reversed in small caps. Across the size dimension, large caps outperformed small caps.
Large Cap Growth
10.44
Marketwide
10.10
Large Cap Value
10.01
Small Cap Value
9.30
Small Cap
8.72
Small Cap Growth
World Market Capitalization—US
8.17
Period Returns (%)
50% US Market $20.7 trillion
* Annualized
Asset Class
YTD
1 Year
3 Years**
5 Years**
Marketwide
33.55
33.55
16.24
18.71
7.88
Large Cap
32.39
32.39
16.18
17.94
7.41
Large Cap Value
32.53
32.53
16.06
16.67
7.58
Large Cap Growth
33.48
33.48
16.45
20.39
7.83
Small Cap
38.82
38.82
15.67
20.08
9.07
Small Cap Value
34.52
34.52
14.49
17.64
8.61
Small Cap Growth
43.30
43.30
16.82
22.58
9.41
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (S&P 500 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap: Russell 3000 Index is used as the proxy for the US market. Russell data © Russell Investment Group 1995–2014, all rights reserved. The S&P data are provided by Standard & Poor's Index Services Group.
10 Years**
14
International Developed Stocks Fourth Quarter 2013 Index Returns
During the quarter, international developed markets continued to post gains. Large cap and small cap stocks posted similar performances in US dollar terms.
Ranked Returns for the Quarter (%)
US Currency
Local Currency
6.01
Value
6.86
Value outperformed growth across all size segments. The US dollar appreciated relative to most major foreign developed currencies.
5.56
Large Cap
6.46 5.51
Small Cap
6.97 5.08
Growth
World Market Capitalization—International Developed
40% International Developed Market $16.6 trillion
6.05
Period Returns (%)
* Annualized
Asset Class
YTD
1 Year
3 Years**
5 Years**
Large Cap
21.02
21.02
7.34
12.49
7.07
Small Cap
25.55
25.55
7.49
18.45
9.24
Value
21.47
21.47
7.96
12.52
7.08
Growth
20.53
20.53
6.71
12.41
6.99
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USA Growth). All index returns are net of withholding tax on dividends. World Market Cap: Non-US developed market proxies are the respective developed country portions of the MSCI All Country World IMI ex USA Index. Proxies for the UK, Canada, and Australia are the relevant subsets of the developed market proxy. MSCI data © MSCI 2014, all rights reserved.
10 Years**
15
Emerging Markets Stocks Fourth Quarter 2013 Index Returns
Dragged down by the poor performance of materials and energy stocks, emerging markets lagged developed markets as a group but still finished with gains. Growth stocks outperformed value across large caps and mid-caps but underperformed in small caps. Large caps slightly outperformed small caps.
Ranked Returns for the Quarter (%)
4.20 1.83
Large Cap
2.96 1.26
Small Cap
2.27 0.57
Value
10% Emerging Markets $4.3 trillion
Local Currency
3.10
Growth
The US dollar appreciated against most emerging markets currencies.
World Market Capitalization—Emerging Markets
US Currency
1.71
Period Returns (%)
* Annualized
Asset Class
YTD
1 Year
3 Years**
5 Years**
10 Years**
Large Cap
-2.60
-2.60
-2.06
14.79
11.17
Small Cap
1.04
1.04
-3.48
19.58
11.97
Value
-5.11
-5.11
-3.34
13.88
12.00
Growth
-0.18
-0.18
-0.84
15.67
10.31
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCI Emerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap: Emerging markets proxies are the respective emerging country portions of the MSCI All Country World IMI ex USA Index. MSCI data © MSCI 2014, all rights reserved.
16
Select Country Performance Fourth Quarter 2013 Index Returns Many European equity markets, led by Germany, recorded strong performances in US dollar terms. Most developed markets posted gains; however, emerging markets countries were mixed. Greece, recently reclassified by MSCI as an emerging market, and Egypt were the top performers. Turkey was the worst-performing market following news of a graft probe. Developed Markets (% Returns)
Emerging Markets (% Returns)
Germany
12.89%
Italy
12.02%
Spain
11.46%
Denmark
10.63%
Ireland
10.55%
Finland
10.33%
USA
10.10%
Portugal
8.88%
Netherlands
8.57%
United Kingdom Belgium Norway
Egypt
19.03%
Greece
18.85%
India Mexico Malaysia
4.59%
Poland
4.58%
Taiwan
4.28%
China
4.28%
Korea
7.86%
Peru
2.44%
South Africa
1.96%
Israel
6.27%
Russia
France
6.25%
Czech Republic
5.55%
Switzerland
4.71%
Hong Kong
3.89%
Canada
3.75%
Austria
3.24%
Japan
1.90%
Singapore
-1.17%
Australia
-1.18%
New Zealand
-1.87%
7.80%
7.87% 6.75%
Sweden
11.55%
3.30%
0.40% -0.61%
Philippines
-5.75%
Hungary
-5.79%
Brazil
-5.85%
Indonesia
-6.48%
Chile
-7.39%
Thailand
-10.59%
Colombia
-11.00%
Turkey
-13.88%
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), Russell 3000 Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2014, all rights reserved. Russell data © Russell Investment Group 1995–2014, all rights reserved. Greece has recently been reclassified as an emerging markets country by MSCI, effective November 2013.
17
Real Estate Investment Trusts (REITs) Fourth Quarter 2013 Index Returns
The poor performance of REITs in the US, Australia, and Japan contributed to the losses delivered by global REITs during the quarter. This was the third consecutive quarter of negative performance for US REITs.
Ranked Returns for the Quarter (%)
Global REITs (ex US)
-1.01
US REITs
Total Value of REIT Stocks
-1.09
Period Returns (%)
45%
55%
World ex US $349 billion 208 REITs (21 other countries)
US $427 billion 85 REITs
* Annualized
Asset Class
YTD
1 Year
3 Years**
5 Years**
US REITs
1.22
Global REITs (ex US)
2.36
10 Years**
1.22
9.04
16.36
8.22
2.36
7.26
14.79
6.62
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Dow Jones US Select REIT Index data provided by Dow Jones © 2014. S&P Global ex US REIT Index data provided by Standard and Poor’s © 2014.
18
Commodities Fourth Quarter 2013 Index Returns
Commodities ended the year on a negative note as the DJ-UBS Commodity Index returned -1.1% during the fourth quarter, finishing the year down 9.5%.
Individual Commodity (% Returns) Natural Gas
10.99
Zinc
With the improvement in the economy pushing up interest rates, precious metals were hit hard, finishing down 9−11%. Soft commodities, with the exception of soybeans, finished down 4−12%. The energy complex, with the exception of WTI crude oil, had a good quarter, with natural gas leading the way, finishing up approximately 11%.
6.12
Unleaded Gas
5.61
Brent Oil
4.26
Heating Oil
3.10
Soybean
2.03
Copper
1.93
Live Cattle
0.73
Nickel
-0.91
WTI Crude Oil
-3.41
Cotton
-4.45
Aluminum
-4.86
Coffee
-5.36
Lean Hogs
-5.80
Soybean Oil
Period Returns (%) Asset Class Commodities
* Annualized
YTD
Q4
1 Year
3 Years**
-9.52
-1.05
-9.52
-8.11
5 Years** 10 Years** 1.51
0.87
-6.44
Corn
-6.88
Gold
-9.47
Sugar
-9.54
Silver Wheat
-11.01 -12.26
Past performance is not a guarantee of future results. Index is not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. All index returns are net of withholding tax on dividends. Dow Jones-UBS Commodity Index Total Return data provided by Dow Jones © 2014.
19
Fixed Income Fourth Quarter 2013 Index Returns
Bond investors got a bit of bad news at the
US Treasury Yield Curve
Bond Yields across Different Issuers
end of the quarter with the US Federal Reserve announcing the tapering of its monthly bond purchases from $85 billion
5
4.73 12/31/13 9/30/13
4
(current level) to $75 billion beginning in January 2014. This move was not a surprise to the market. The Fed signaled earlier in
3
3.45
3.03 2.61
12/31/12
2
the year that, with continuing improvement in the economy, it would begin to taper the
bond purchase program. However, the initial reduction in purchases was much less than
1 0 1 Yr
5 Yr
10 Yr
30 Yr
10-Year US Treasury
expected. During the quarter, the market
State and Local Municipals
AAA-AA Corporates
A-BBB Corporates
reacted to the impending news by taking bond yields from 2.61% on the bellwether 10-year at the end of September to a close of 3.03% at year end.
Period Returns (%)
* Annualized
Asset Class
YTD
1 Year
The continuing improvement in the
BofA Merrill Lynch Three-Month US Treasury Bill Index
0.07
0.07
0.10
0.12
1.68
economy also spilled over into the TIPS
BofA Merrill Lynch 1-Year US Treasury Note Index
0.25
0.25
0.35
0.54
2.07
market. Real rates across most of the
Citigroup WGBI 1-5 Years (hedged to USD)
0.62
0.62
1.67
1.86
3.19
maturity spectrum rose quarter over quarter.
Long-Term Government Bonds
-11.36
-11.36
5.50
1.94
6.06
-2.02
-2.02
3.26
4.44
4.55
Barclays US Aggregate Bond Index
3 Years**
5 Years** 10 Years**
Yield-seeking investors were rewarded as
Barclays US Corporate High Yield Index
7.44
7.44
9.32
18.93
8.62
credit spreads narrowed.
Barclays Municipal Bond Index
-2.55
-2.55
4.83
5.89
4.29
Barclays US TIPS Index
-8.61
-8.61
3.55
5.63
4.86
. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. AAA−AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA−AAA rated. A−BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB−A rated. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citigroup bond indices © 2014 by Citigroup. The Merrill Lynch Indices are used with permission; © 2014 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved.
20
Global Diversification Fourth Quarter 2013 Index Returns
These portfolios illustrate the performance of different global stock/bond mixes and highlight the benefits of diversification. Mixes with larger allocations to stocks are considered riskier but have higher expected returns over time.
Ranked Returns for the Quarter (%) 100% Stocks
7.42
75/25
5.53
50/50
3.67
25/75 100% Treasury Bills
1.83 0.01
Growth of Wealth: The Relationship between Risk and Return Stock/Bond Mix 70,000
100% Stocks
60,000
Period Returns (%)
75/25
* Annualized
50,000 Asset Class
YTD
1 Year
3 Years**
100% Stocks
23.44
23.44
10.33
15.53
7.72
75/25
17.24
17.24
7.87
11.79
6.43
50/50
11.27
11.27
5.33
7.95
4.96
25/75
5.54
5.54
2.71
4.04
3.33
100% Treasury Bills
0.02
0.02
0.04
0.07
1.54
50/50
5 Years** 10 Years**
40,000 25/75 30,000 100% Treasury Bills 20,000 10,000 12/1988
12/1993
12/1998
12/2003
12/2008
12/2013
Diversification does not eliminate the risk of market loss. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management an actual portfolio. Asset allocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World Index (gross div.) and Treasury Bills represented by US One-Month Treasury Bills. Globally diversified allocations rebalanced monthly, no withdrawals. Data © MSCI 2014, all rights reserved. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
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Disclosures Forum Financial Management, LLC, is a Registered Investment Advisor. The home office of Forum is located at 1900 S. Highland Ave., Suite 100, Lombard, IL 60148, ph: 630.873.8520. Before making an investment decision, please contact our office at 630.873.8520 to receive a copy of Forum’s Form ADV Part 2 and the Forum Advisory Agreement, both of which include Forum’s fee schedule. This information is intended to serve as a basis for further discussion with your professional advisors. Although great effort has been taken to provide accurate numbers and explanations, the information in this presentation should not be relied upon for preparing tax returns or making investment decisions. Information is used with the express permission from Dimensional Fund Advisors. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about the Dimensional funds, please read the prospectus carefully before investing. Dimensional funds are distributed by DFA Securities LLC. Nothing in this publication should be construed as investment advice. All information is believed to be from reliable sources; however, its accuracy and completeness and the opinions based thereon by the author are not guaranteed and no responsibility is assumed for errors and omissions. Any economic and performance data published herein is historical and not indicative of future results. All rights reserved. Please consult your personal advisor and investment prospectus before making an investment decision.
