4Q15

March 26, 2015ConsultivaQuarterly Commentary 2015

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The 2015 calendar year will be remembered for the long-awaited first Fed hike in nine years as well as a year of disappointing returns across asset classes, with plunging commodity and oil prices and uncertainty over the pace of China’s slowdown being key forces. Painfully, no year since 1990 has seen more negative returns across equity and fixed income indices, oil and gold prices. While losses in 2008 were sharper, losses in 2015 were more broad-based. Despite the poor investment results, the US economy remained a relatively bright spot in the global economy.

Real GDP growth in the US for 3Q15 was a reasonable, while not spectacular, +2.0% (annualized). After a slow start to the year (1Q15 real GDP: +0.6%), the 2nd quarter print was more robust (2Q15: +3.9%) as weather-related headwinds abated. However, GDP forecasts from the Fed have been declining given global headwinds and the persistent strength of the US dollar. Fed expectations for growth in 2016 were 2.5% to 3.0% as of December 2014, and have since been revised downward to 2.3% – 2.5%. Growth outside the US remained stagnant in spite of continued accommodative policies from central banks (Japan 3Q15 GDP +1.6%; Europe 3Q15 GDP +1.6%). While China’s growth rate remains high (3Q15: +6.9%), its slowdown has been apparent and weighed on economies elsewhere. China’s growth rate was the slowest since the 1^st quarter of 2009 and to further highlight the magnitude of the deceleration, its growth averaged 10.88% from 1989 until 2015.

Central banks remained accommodative across the developed world. The “Big 4” central banks (US, UK, Europe and Japan) expanded their collective balance sheet to $11 trillion. Among developed countries, the US stands alone (with the UK close behind) on a path of what are likely to be gradual rate hikes from the current 0.25% to 0.50% Fed Funds target. In December, the US Federal Reserve imposed it first policy rate increase since 2006. Employment, residential investment and auto sales were bright spots in the US while manufacturing continued to contract. Manufacturers, which account for roughly 12% of the US economy, have suffered from weak global demand, a strong dollar and reduced capital spending from the energy sector. Conversely, low gas prices and a strengthening labor market propelled car sales to 17.5 million in 2015, surpassing the peak hit 15 years ago. Unemployment continued to trend lower through 2015 from a 5.7% reading in January to 5.0% in November. Real wages firmed from very weak levels in recent years with year-over-year real wage growth up to nearly 2% as of November 2015.

Inflation continued to fall short of the Fed’s 2% target for the Personal Consumption Expenditures Index (+1.3% 3Q) but trended higher over the course of the year. The trailing 12-month Core CPI was +1.6% in January of 2015 and by November, it had accelerated to +2.0%. Of course, the energy influence was enormous in 2015, as evidenced by the far more muted 0.4% reading for the Headline CPI, which includes food and energy. However, if/when energy prices stabilize, they will cease to have a disinflationary impact and begin to add volatility to Headline CPI. Across the pond, Europe saw more muted inflation with some countries experiencing deflation.

Oil prices continued to play a key role in market sentiment as well as performance. While much of the decline from the $105/barrel level to today’s (1/12/16) close at $30.5/barrel (WTI crude) occurred in the 2^nd half of 2014, prices continued to fall in 2015. To start the year, spot prices were around $52/barrel and have fallen about 40% to current levels. At this point, oil price forecasts are no more than guesses but the pain felt by the industry is certain and regardless of the path from here, the effects of the decline are readily apparent and will likely be felt for some time.

For broad swaths of US investor portfolios, financial markets went essentially nowhere in 2015. The S&P 500 was down fractionally on a price-only basis and up 1.4% with dividends reinvested, its worst year since the financial crisis. Foreign equities fell modestly in US dollar terms (MSCI EAFE: -0.8%). Interest rates edged up ever-so-slightly with the yield on the US 10yr Treasury ending the year at 2.27%, just 10bps above YE2014. Performance for US core fixed income was barely positive (Barclays Aggregate: +0.55%) as coupon payments eclipsed principal losses from higher rates.

Source: Callan Associates Inc.

Source: Callan Associates Inc.

Further afield of “core” exposures, the world was a more interesting place. Growth outperformed value by nearly 10% in the S&P 500, the largest bifurcation since 2009. Emerging markets equities massively underperformed US and developed markets and lost nearly 15% in US dollar terms. High yield declined nearly 5%, foreign bonds fell 6%, commodities were sharply lower (Bloomberg Commodity: -24.7%), and MLPs lost a staggering 33%. Large growth equities, both US and developed, were among the only areas of meaningfully positive performance in 2015; however, they could not keep up with developed small caps which turned in the best performance in the capital markets (MSCI EAFE SC: +9.6%).

Dividend Payments

S&P Dow Jones Indices reported that indicated net dividend increases (increases less decreases) rose $3.6 billion during the fourth quarter of 2015 for U.S. domestic common stocks, a massive deceleration from the $12.0 billion increase registered during the fourth quarter of 2014. In dollar terms, the decline equates to a 70.0% year-over-year slowdown in dividend increases. For the full year 2015, dividend net increases fell 29.4% to $38.7 billion compared to an increase of $54.8 billion for the corresponding period in 2014.

Additional findings from S&P Dow Jones Indices’ quarterly analysis of the dividend activity of the US traded common issues include:

• 755 dividend increases were reported during Q4 2015 compared to 971 increases reported during Q4 2014, a 22.2% decrease.
• For 2015, 2810 issues increased their payments, down from the 3308 issues that increased their payments during the 2014, a 15.1% decrease.
• 142 issues decreased dividends in Q4 2015 compared to 67 in Q4 2014, a 112% increase.
• For 2015, 504 issues decreased their dividend payments compared to 291 decreases in 2014, a 73.2% increase.
• The percentage of non-S&P 500 domestic common issues paying a dividend was up to 47.4% from the 46.7% posted in Q3 2015, and the 47.0% rate in Q4 2014.
• The weighted dividend yield for paying issues increased to 2.74% from last quarter’s 2.83%, and the 2.45% seen at the end of Q4 2014.

“Energy issues accounted for 48% of the dividend cuts and 80% of the dollar cuts in the fourth quarter,” says Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. “The dividend cuts to Limited Partnerships and royalty related issues which began near the end of 2014 continued into 2015, starting with the small-cap issues and have now moved to the large-cap issues.”

Within the large-cap S&P 500, 417 issues (82.7%) currently pay a dividend. All 30 members of the Dow Jones Industrial Average® pay a dividend.

Silverblatt found that 70.5% of the issues within the S&P MidCap 400 pay a cash dividend, the same as in the third quarter, but up from the 68% which paid at the end of 2014. Within the S&P SmallCap 600, 53.6% of the issues pay, down from the 53.9% which paid at the end of the third quarter, but up from 52.7% which paid a year ago.

Yields at the index level continued to vary greatly, with large-caps at 2.16%, mid-caps at 1.71% and small-caps at 1.50%. For paying issues, the yields across market-size classifications continue to be compatible, with large-caps coming in at 2.56%, mid-caps at 2.42% and small-caps at 2.50%.

“Looking ahead to 2016, a key statistic to note is that S&P 500’s average dividend increase of 13.08% for 2015 was significantly lower than 2014’s 17.50%,” comments Silverblatt. “This trend is likely to continue given the earnings, cash flow, low inflation and slow economic recovery. Based on current dividend polices, with an eye on issues that may be straining themselves, as well as those with higher dividend coverage rates and a strong history of annual increases, 2016 would appear to extend the record payment years, but with mid-single digit dividend increases.”

U.S. Home Prices

Data through October 2015, released by the S&P Dow Jones Indices for its S&P/ Case-Shiller[1] Home Price Indices, shows that, in the aggregate, home prices continued their rise across the country over the last 12 months.

The S&P/Case-Shiller U.S. National Home Price Index, covering all nine U.S. census divisions, recorded a slightly higher year-over-year gain with a 5.2% annual increase in October 2015 versus a 4.9% increase in September 2015. The 10-City Composite increased 5.1% in the year to October compared to 4.9% previously. The 20-City Composite’s year-over-year gain was 5.5% versus 5.4% reported in September.

San Francisco, Denver and Portland continue to report the highest year-over-year gains among the 20 cities with another month of double-digit price increases of 10.9% for all three. Twelve cities reported greater price increases in the year ending October 2015 versus the year ending September 2015. Phoenix had the longest streak of year-over-year increases, reporting a gain of 5.7% in October 2015, the eleventh consecutive increase in annual price gains.

“Generally good economic conditions continue to support gains in home prices,” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Among the positive factors are consumers’ expectations of low inflation and further economic growth as well as recent increases in residential construction including single family housing starts. Inventories of existing homes have averaged around a five month supply for the past year, a level that suggests a fairly tight market with limited supplies. Sales of new single family homes, despite recent increases in construction, remain mixed to soft compared to the trend in existing home sales.”

“The recent action by the Federal Reserve raising the Fed funds target rate by 25bp and spreading expectations of further increases during 2016 are leading some to wonder if mortgage interest rate might rise. Typically, increases in short term interest rates lead to smaller increases in long term interest rates. The chart below shows the average rate on 30-year fixed rate mortgages and the Fed funds rate. From May 2004 to July 2007, the Fed funds rate moved up from 1.0% to 5.25%; over the same period, the mortgage rate rose from about 6% to 6.75% during a sustained tightening effort by the Federal Reserve. The latest economic projections published by the Fed following the recent rate increase suggest that the Fed funds rate will be around 2.6% in September 2017 compared to a current rate of about 0.5%. These data suggest that potential home buyers need not fear runaway mortgage interest rates.”

The chart below depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 5.2% annual gain in October 2015. The 10-City and 20-City Composites reported year-over-year increases of 5.1% and 5.5%.

The chart below shows the index levels for the U.S. National, 10-City and 20-City Composite Indices. As of October 2015, average home prices for the MSAs within the 10-City and 20-City Composites are back to their winter 2007 levels. Measured from their June/July 2006 peaks, the peak-to-current decline for both Composites is approximately 11-13%. Since the March 2012 lows, the 10-City and 20-City Composites have recovered 34.9% and 36.4%.

U.S. Equity

Corporate profits before taxes fell 1.6% in the 3^rd quarter and 5.1% year-over-year. Against this backdrop, US equities suffered their worst performance post 2008. News out of China played a pivotal role in stock market performance in 2015. The five worst performing days for the S&P 500 in 2015 came alongside negative news from China. Returns were highly concentrated both among names and by date in 2015. Without the now-famed “FANGNOSH” (Facebook, Amazon, Netflix, Google, Nike, O’Reilly Auto Parts, Starbucks and Home Depot), the S&P 500 would have been down for the year. Amazon and Netflix were the star performers, up more than 120% for the year. This performance belies much weaker results from the broader constituency. As mentioned earlier, the S&P 500 Index declined 0.8% on a price-only basis, up 1.4% with dividends.

Large caps performed best (R1000: +0.9%) and results worsened as one went down the capitalization path (Rmidcap: -2.4%, R2000: -4.4%, Rmicro: -5.2%). Growth outperformed value across capitalization, and in large caps, growth outperformed value by the widest margin since the financial crisis (R1000G: +5.7%, R1000V: -3.8%).

Source: Callan Associates Inc.

Quality Sectors

Albeit high and low quality results for the 4^th quarter were similar, high quality stocks outperformed low quality by more than 6% in 2015 (the most since 2011) with the vast majority of the margin coming in the turbulent 3^rd quarter.

Source: Callan Associates Inc.

During the quarter, low quality outpaced higher quality stocks mainly in the growth style sector.

In 2015, low quality outpaced high quality stocks only in the large cap growth style sector.

Economic Sectors

From a sector perspective, Consumer Discretionary (+10%) and Health Care (+7%) performed best while Energy (-21%) and Materials (-9%) suffered the most in 2015. Yet, Materials (+10%) was the best performing sector during the last quarter of the year, followed by Health Care (+9%) and Technology (+9%).

Source: Standard & Poor’s; Callan Associates Inc.

Non-U.S. Equity

Outside of the US, developed markets outperformed domestic by a wide margin when measured in local terms (MSCI EAFE Local: +5.3%); however, the strength of the US dollar pushed returns for unhedged US investors into negative territory (MSCI EAFE US$: -0.8%). As in the US, growth sharply outperformed value in the developed world (MSCI EAFE Growth: +4.1%, Value: -5.7%). Developed markets small cap was the top performer (MSCI EAFE SC: +9.6%). Conversely, emerging markets were a disaster and represented the worst performing area of global equities (MSCI EM US$: -14.6%). Emerging Market was also hurt by the US dollar strength (MSCI EM Local: -5.6%).

Source: Callan Associates Inc., Dow Jones

U.S. Fixed

Yields rose throughout the 4^th quarter as investors grew increasingly certain that the Fed would hike rates before year-end. Sentiment proved correct as the Fed raised the fed funds target from its 7-year “near zero” target to 0.25% to 0.50% at its December meeting. The yield on the 10-year Treasury rose 21 bps over the quarter and closed the year at 2.27%, up 11 bps from 12/31/2014.

Source: US Department of the Treasury

Source: US Department of the Treasury, Bloomberg

The Barclays Aggregate Index was down modestly for the quarter (-0.6%) but up slightly for the year (+0.5%), thanks to coupon payments. Investment grade credit and mortgages outperformed like-duration US Treasuries for the quarter but underperformed for the full year. Declining commodity prices and negative sentiment continued to take a toll on high yield corporates. The Barclays High Yield Index was down 2.1% for the quarter bringing its 2015 loss to 4.5%. The Energy component, which comprises 11% of the Index, bore the brunt of the pain with returns of -12.9% for the quarter and -23.6% for the full year.

Source: Callan Associates Inc.

Municipal bonds outperformed taxable bonds for the quarter and the year. A favorable technical picture contributed to the results as supply was down 10% from the 3^rd quarter while flows into mutual funds attracted inflows for thirteen consecutive weeks. The Barclays Municipal Bond Index returned 1.5% for the quarter bringing the full year return to 3.3%. The shorter duration Barclays 1-10 Year Blend posted a 0.8% 4^th quarter return and was up 2.5% for 2015.

Other US Fixed Income

Source: Callan Associates Inc.

Non-U.S. Fixed

Outside of the US, the strength of the US dollar was reflected in the outperformance of hedged indices versus their unhedged counterparts. The US dollar climbed nearly 3% versus the euro and pound with more modest appreciation (+0.4%) relative to the yen. Versus a trade-weighted basket of major currencies, the dollar was up 2.3% for the quarter and 8.2% for the year. Yields dropped in Italy, Spain and Japan but were otherwise flat to modestly higher in other developed markets. The Barclays Global Aggregate Index (unhedged) returned -0.9% in the 4^th quarter. Hedged in US dollars, the Index was up 0.1%. Results for the year were +1.0% and -3.2% (hedged and unhedged, respectively).

Source: Callan Associates Inc.

Emerging markets debt staged a comeback in the 4^th quarter with the dollar-denominated JPM EMBI Global Diversified Index up 1.3%. The local currency-denominated JPM GBI-EM Global Diversified Index was flat for the quarter but remained down nearly 15% for the year, far worse than the +1.2% return for the dollar-denominated Index.

Currencies

Rising short-term US yields (monetary policy divergence) and falling oil prices continued to provide a supportive backdrop for the US dollar, particularly versus European (euro, -2.7%; British pound, -2.7%) and oil-dependent (Canadian dollar, -3.5%; Norwegian krone, -3.6%) currencies.

The New Zealand dollar (+7.0%) was an exception and its rally was driven by dairy prices, which staged a strong recovery, bucking the trend in other commodities. The Australian dollar (+3.6%) advanced as strong jobs data more than offset the ongoing Chinese slowdown. Also, Governor Stevens’s call that market participants should “chill out” for Christmas led to a paring back of expectations for aggressive policy easing. Emerging market currencies were generally weak, most notably the Russian ruble (-10.2%) and South African rand (-10.8%). The Brazilian real was an exception as it rallied 0.6% during the quarter, but it was down 32.8% versus the green-back over the last 12 months.

Source: Wellington Management

Puerto Rico

Puerto Rico has been able to meet its most important debt obligations; thus far General Obligation Bonds and Cofina bonds have been paid. The Puerto Rico government is biding time, awaiting the US Congress to pass legislation that would enable to restructure its debt under a predetermined legal framework. House Speaker, Republican Paul Ryan, has instructed Congress to reach a resolution by the end of March. It is suspected that Congress will provide much needed parity for Medicare/Medicaid, as well as some form of economic stimulus. However, odds of a Chapter 9 resolution appear remote. Congress might also enable a local agency backed by federal funds to issue debt and provide bridge financing, in a bid to buy time for voluntary restructuring and debt negotiations with major bondholders. All such measures enacted by Congress would likely be accompanied by some form of federal supervisory facility, with broad powers, in order to oversee both budget and government spending.

REITs held up relatively well for the year and were among the better performing areas of the equity markets (NAREIT Equity: +3.2%). At the other end of the spectrum, MLPs were an unmitigated disaster; hit by both lower energy prices and sharply higher cost of capital. Fears of distribution cuts and credit rating downgrades pushed the group to its worst performance since 2008 (Alerian MLP: -32.6%).

Source: Callan Associates Inc.

US Real Estate

The U.S. REIT market (as measured by the FTSE NAREIT Equity REITs Index) posted a positive return of 7.3% for the quarter, performing in line with the S&P 500 (+7.0%) and above the Barclays Aggregate Bond Index (-0.6%). The average U.S. REIT dividend yield at quarter-end stood at 3.92%, as compared to 2.15% and 3.09% for the S&P 500 and Barclays Aggregate Bond Index, respectively.

Source: FTSE™, NAREIT®.

Anybody could be forgiven for having the impression that 2015 was a bad year for REIT investors. It was full of headlines about the impending increase in interest rates, and equally full of speculation that the Fed’s action would spell trouble for real estate. Yet REITs (+3.2%) managed to outperform both the S&P 500 (+1.4%) and Barclays Aggregate Bond Index (+0.5%) during 2015.

Self-storage posted the strongest return for the quarter and year (+16.8% and +40.7% respectively). This sector was followed by Manufactured Homes (+25.7%) and Apartments (+16.5%). Lodging/Resorts (-24.4%) and Health Care (-7.3%) were the weakest sectors in 2015.

Source: FTSE™, NAREIT®.

Other Real Estate

Source: Callan Associates Inc. EPRA: European Public Real Estate Association (Non-US Real Estate)

Commodities

Commodity returns were no less than terrible in 2015, led lower by the energy complex. Indeed, all major groups suffered substantial declines. The energy-heavy S&P GSCI fell nearly 33% while the more balanced Bloomberg Commodity Index (BCI) slipped 25%. Brent Crude and WTI Crude fell 45.6% and 44.4%, respectively. Cotton was the only contract within the BCI to post a gain in 2015, a muted +3.0%. Gold fell 11% to close the year at around $1,060/oz, near a 6-year low.

Source: Callan Associates Inc.

S&P Goldman Sachs Commodity Index (“GSCI”)

Commodities (-16.6%) ended 2015 with challenging performance across all four sectors for the 4^th quarter. Agriculture and livestock (-3.2%) saw the grain crops decline during the quarter, as corn (-9.6%), soybeans (-3.9%), and wheat (-9.0%) all slumped in response to reports of favorable growing conditions globally and increasing exports coming out of Argentina. Livestock saw gains in live cattle (+2.9%), as beef prices and U.S. export sales rebounded, yet lean hogs (-13.7%) fell on reports that cold- storage inventories increased.

Precious metals (-5.0%) experienced a great deal of volatility throughout the quarter, as both gold (-5.0%) and silver (-5.2%) experienced multiyear lows following the Fed’s December decision to tighten monetary policy for the first time since 2006.basis.

Industrial metals (-6.6%) faced widespread weakness across the underlying commodities. During the quarter, aluminum (-4.9%), zinc (-5.8%), copper (-8.7%), and nickel (-15.6%) all faced oversupply concerns and weaker demand from China.

Energy (-25.1%) plummeted amid further volatility in oil (-25.6%) following OPEC’s decision in early December to maintain production levels and in light of continued high US inventory levels, which led to market concerns that the US might breach operable storage capacity. Gasoline (-7.0%) also declined, causing national average prices to fall below US$2 per gallon for the first time since 2009. Inventory levels of natural gas (-23.5%) remained extremely high, and a historically warm start to the winter heating season weighed on the commodity price.

Source: S&P

Hedging Strategies and Hedge Funds

Hedge funds failed to provide a bright spot for investors. The HFRI Fund Weighted Composite underperformed both stocks and bonds in 2015 (HFRI FWC: -0.85%). Hedge Fund of Funds performed slightly better; however, still ended the year with a loss (HFRI FoF: -0.36%). Volatility was the year’s big winner from a strategy perspective (HFRI RV Volatility: +7.0%) while Yield Alternatives were the worst performers (HFRI RV Yield Alternatives: -16.5%) due in large part to heavy exposure to MLPs.

Source: Callan Associates Inc.

Hedge Fund Research Indices (“HFRI”)

Hedge funds posted declines in December, led by Energy and Quantitative CTA strategies, to conclude a volatile, turbulent year in financial markets, according to data released by Hedge Fund Research (HFR®). The year began with major dislocations in currency markets, included steep declines for oil and energy commodities, as well as Emerging Markets, and concluded with rising geopolitical and terrorism threats as well as the first US interest rate increase in nearly a decade. Oscillating between positive and negative performance throughout the year, the HFRI Fund Weighted Composite Index® posted a decline of -0.85% in December, ending the year down -0.85%, only the fourth calendar year decline in hedge fund performance since 1990. Despite the decline, an estimated 55% of all hedge funds posted gains for 2015.

Hedge funds outperformed US equities in December, as the S&P 500 and Dow Jones Industrial Averages declined -1.6% and -1.5%, respectively, on a total return basis, while the Russell 2000 declined over -6.0%. For FY 2015, US equities were mixed, as the S&P (SPX) and Dow Jones (DJI) indices fell -0.7% and -2.2%, respectively, though on a total return basis, these posted narrow gains of +1.4% and +0.2%, respectively.

Equity Hedge strategies outperformed US equities in December, with steep losses in Energy-focused strategies partially offset by gains in Market Neutral strategies. The HFRI Equity Hedge Index fell -0.6% in December, bringing FY 2015 performance to a decline of -0.4%. The HFRI Equity Hedge Index-Asset Weighted posted a narrow decline of -0.1% in December, although the Index advanced +1.8% for 2015. The HFRI Equity Market Neutral Index led EH sub-strategies in December with a gain of +0.7%, while HFRI Technology/Healthcare Index led EH sub-strategies for 2015 with a gain of +6.0%. The volatile HFRI Energy/Basic Materials Index led declines in both December and FY 2015, falling -2.4% and -13.0%, respectively.

The fixed income-based HFRI Relative Value Arbitrage Index posted a narrow -0.2% decline in 2015 after falling -0.8% in December. However, larger RVA exhibited outperformance, with the HFRI Relative Value Arbitrage Index-Asset Weighted gaining +0.9% for 2015. RVA sub-strategies were led by the HFRI Volatility Index in both December and FY 2015, advancing +0.5% +7.0%, respectively. Yield Alternative strategies were the laggard of RVA sub-strategies, as the HFRI Yield Alternatives Index posted declines of -4.6% and -16.5% in December and FY 2015, respectively. The HFRI Credit Index, comprised of all alternative credit strategies, fell -1.0% in December and -1.1% for the year.

Event Driven strategies also declined in December and for FY 2015, though ED sub-strategy performance was clearly bifurcated between credit- and equity-sensitive strategies and non-sensitive strategies. The HFRI Event Driven Index posted declines of -0.4% and -2.9%, respectively, in December and FY 2015, with declines led by the HFRI Distressed Index, which fell by -2.4% and -8.4%, the worst calendar year performance since 2008. Alternatively, the HFRI Merger Arbitrage Index gained +1.2% in December and +3.4% for the year, the strongest annual performance since 2013. The HFRI Activist Index lost -0.6% in December, though the Index gained +1.5% for 2015, recovering from a 4-month, intra-year drawdown of over -9.0%.

Macro strategies declined in December, resulting in a narrow performance loss for the year. The HFRI Macro Index fell -1.4% in December, bringing FY 2015 performance to a decline of -1.3%; the HFRI Macro Index-Asset Weighted was flat in 2015, returning 0.0%. The HFRI Currency Index led Macro sub-strategy performance for the year, gaining +0.3% in December and +1.4% for 2015. The HFRI Macro: Systematic Diversified Index led Macro sub-strategy declines in December and FY 2015, falling -2.4% and -2.3%, respectively.

“Low interest rates, steep commodity losses and intense equity market volatility contributed to a challenging environment in 2015, resulting in a wide dispersion between the best and worst performing funds, and a narrow performance decline for the overall hedge fund industry,” stated Kenneth J. Heinz, President of HFR. “Through this environment and with some variability, the capital-weighted, aggregate industry performance has shown a premium to the equally-weighted performance, resulting in capital-weighted gains across equity- and fixed income-based hedge funds for the year. With volatility accelerating into 2016, strategies which have demonstrated opportunistic performance throughout 2015 are likely to lead industry performance and attract investor capital in the new year.”

Private Equity

Seventy-seven venture-backed initial public offerings (IPOs) raised $9.4 billion in 2015, marking a 40% decline in dollars raised compared to 2014, according to the Exit Poll Report by Thomson Reuters and the National Venture Capital Association (NVCA). For the fourth quarter, 16 venture-backed IPOs raised $2.2 billion, an 18% increase compared to the total dollars raised during the previous three-month period and up slightly compared to the number of offerings listed during the third quarter of 2015. Ninety-one venture-backed M&A deals were reported in the fourth quarter, 26 of which had an aggregate deal value of $3.6 billion, decreasing 48% compared to the third quarter of this year. For full year 2015, 372 M&A transactions were reported, with 84 deals combining for a disclosed value of $16.3 billion, the slowest full year period for venture-backed M&A since 2009.

Source: Thomson Reuters and the National Venture Capital Association (NVCA)

*Only accounts for deals with disclosed values.

**Includes all companies with at least one U.S. VC investor that trade on U.S. exchanges, regardless of domicile.

“When you combine the increased investment activity by non-traditional investors via funding rounds of over $100 million with the recent trend of companies choosing to stay private longer, it’s not surprising to see venture-backed IPO activity down from last year. While some will say this decline should be cause for alarm, it’s worth keeping in mind that the total number of IPOs for the year is down only four percent compared to 2013 and up 60 and 54 percent from 2012 and 2011 respectively,” said Bobby Franklin, President and CEO of NVCA. “With more than 44 venture-backed companies currently filed publicly with the SEC for an IPO and more filing confidentially, the bench of companies seeking to make their debut on the public markets is deep and we are hopeful 2016 will be a strong year for venture-backed IPO activity.”

• IPO Activity

There were 16 venture-backed IPOs valued at $2.2 billion in the fourth quarter of 2015. By number of deals, quarterly volume was up slightly compared to the third quarter of 2015 but registered an 18% increase, by dollars, compared to the previous quarter.

Led by biotechnology companies, eight of the 16 offerings during the quarter were life sciences IPOs, representing half of the total listings in the fourth quarter.

• Mergers and Acquisitions

As of December 31st, 91 venture-backed M&A deals were reported for the fourth quarter of 2015, 26 of which had an aggregate deal value of $3.6 billion, a 17% decline compared to the overall number of deals reported during the third quarter of 2015, and a 48%, by disclosed deal value.

The information technology sector led the venture-backed M&A landscape with 62 of the 91 deals of the quarter and had a disclosed total dollar value of $2.2 billion. Within this sector, computer software and services and internet specific deals accounted for the bulk of the targets with 37 and 14 transactions, respectively.

The 2015 calendar year will be remembered for the long-awaited first Fed hike in nine years as well as a year of disappointing returns across asset classes, with plunging commodity and oil prices and uncertainty over the pace of China’s slowdown being key forces. Painfully, no year since 1990 has seen more negative returns across equity and fixed income indices, oil and gold prices. While losses in 2008 were sharper, losses in 2015 were more broad-based. Despite the poor investment results, the US economy remained a relatively bright spot in the global economy.

While there is no longer uncertainty as to the timing of a rate hike in the US, the pace and magnitude of future rate hikes remains unknown. Concerns over China’s slowing growth are likely to weigh on the markets and the price of oil has not yet convincingly found a bottom.

With expectations of muted returns and higher volatility, we continue to recommend prudent asset allocation and risk assessment, based on future capital needs for plan sponsors, institutions and individual investors. We believe that higher quality, medium duration yield producing assets are favored. In addition, rebalancing is fundamental to a well-executed long-term investment strategy. Hence, we shall continue to explore opportunities for rebalancing as assets shift in weight relative to overall strategies.

Finally, we believe that due diligence reviews and an adherence to a well-developed investment policy remains the most prudent course for long-term investors. Continued fiduciary education is paramount.

© 2016 Consultiva Internacional Inc. (“Consultiva”). Consultiva is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training.

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