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December 2016 Performance Review

January 4, 2017

The Powerfund Portfolios started 2016 well and ended 2016 well, but the underperformance during the interest rate increase was a post-election drag on our bond and foreign funds which lowered both portfolios' annual return numbers. Too little in stocks in general and U.S. stocks in particular and too much shorting led to so-so 2016 returns of 3.9% and 3.82% respectively in the C­onservative and Aggressive portfolios.

In December our Conservative portfolio gained 0.98% and the Aggressive portfolio jumped 1.81%. Benchmark Vanguard funds for December 2016 were as follows: Vanguard 500 Index Fund (VFINX) up 1.96%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.26%; Vanguard Developed Markets Index Fund (VTMGX) up 2.49%; Vanguard Emerging Markets Stock Index (VEIEX) down 0.16%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.90%.

For the year the Vanguard S&P 500 gained 11.81% while the Vanguard Total Bond portfolio rose 2.51%, so a 50/50 U.S. portfolio should have been up just over 7%. Unfortunately we were under 50% stocks and our short positions, while a relatively small part of the overall portfolio allocations, experienced big losses. Outside of our short fund we actually did well by and large, even though we were too heavy in some interest-rate-sensitive stock funds.

All that said, the Powerfund Portfolios experienced very low volatility and downside compared to just about any benchmark in 2016. Our benchmark fund-of-funds, Vanguard STAR, fell 3.74% in January 2016 when the S&P 500 dropped almost 5%, while our Aggressive was down only 0.46% for the month.

Our Aggressive's month-by-month performance in 2016 was only down more than 1% in a single month: November. In the post election market mayhem the Aggressive portfolio fell by a whopping 2.76%. We were positioned well for U.S. stock weakness and economic turmoil, not growing domestic optimism.

In December we had some nice rebounds in Vanguard Telecom Services ETF (VOX) up 7.43% and iShares MSCI Italy Capped (EWI) up 12.33%, as rate sensitive stocks did well and shorting gold and biotech's worked after a rough year.

December was one of our best months of picks relative to benchmarks. The main dogs were shorting oil and small cap stocks, though iShares MSCI BRIC Index (BKF) was down 2.29% even though Russian stocks have been strong all year, China has been a slight drag. Artisan High Income Fund Artisan High Income Fund (ARTFX) rose 1.45% as investors continued to favor riskier debt over less economically sensitive but more rate-sensitive debt.

Our stock funds were, on average, in the top half of their category for 2016 with most in the top third or higher. The only real dog from a pure relative fund performance was Artisan Global Equity (ARTHX) in the bottom 10%. This fund has never been in the bottom half since launch in 2010, but the portfolio mix was too defensive to do well in this market.

On the bond side other than Artisan High Income Fund Artisan High Income Fund (ARTFX) our relative performance was more average.

Bottom line, it wasn't a year to short or be lean on U.S. stocks. Of course, neither was 1999. I'm not impressed with our 2016 returns but those looking for a low downside found it. Those looking for more risk and reward would have been better off in almost any mix of our stock funds, skipping the bonds and shorts. We've never matched a hot stock market but our strong relative performance during declines have always made up for it.

Stock Funds1mo %
iShares MSCI Italy Capped (EWI)12.33%
Vanguard Telecom Services ETF (VOX)7.43%
Proshares Ultrashort NASDAQ Biotech (BIS)5.52%
Vanguard European ETF (VGK)4.92%
Vanguard Utilities (VPU)4.79%
Gold Short (DZZ)4.02%
Vanguard Value (VTV)2.73%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)2.49%
Vanguard Europe Pacific ETF (VEA)2.45%
Homestead Value (HOVLX)2.02%
[Benchmark] Vanguard 500 Index (VFINX)1.96%
iShares Mortgage REIT (REM)0.66%
Artisan Global Equity (ARTHX)0.32%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-0.16%
iShares MSCI BRIC Index (BKF)-2.29%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-3.59%
Proshares Ultrashort Russel2000 (TWM)-6.17%
PowerShares DB Crude Oil Dble Short (DTO)-12.47%
Stock Funds1mo %
Artisan High Income Fund (ARTFX)1.45%
Vanguard Long-Term Bond Index ETF (BLV)0.80%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.26%
Vanguard Mortgage-Backed Securities (VMBS)-0.10%
SPDR Barclays Intl. Treasury (BWX)-0.27%
Vanguard Extended Duration Treasury (EDV)-0.36%