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March 2017 Performance Review

April 4, 2017

The rally in stocks fizzled in March and bonds didn't offer much help as rates drifted up slightly. Foreign stocks performed better as the valuation gap — after years of underperformance to the U.S. stock market — may be attracting more money.

Our Conservative portfolio gained 0.69% in March. The Aggressive portfolio rose 0.85%. Benchmark Vanguard funds for March 2017 were as follows: Vanguard 500 Index Fund (VFINX) up 0.10%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.06%; Vanguard Developed Markets Index Fund (VTMGX) up 3.00%; Vanguard Emerging Markets Stock Index (VEIEX) up 2.25%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.85%.

We beat the benchmarks this month (finally…) largely on the strength of foreign stock funds, and fair performance from our shorts (including a 10% gain in PowerShares DB Crude Oil Dble Short (DTO)). At the top of the traditional fund heap was iShares MSCI Italy Capped (EWI), up 8.84% for the month and leading the already strong European markets (Vanguard European ETF (VGK) also performed well, up 4.43%)).

Emerging markets were hot with iShares MSCI BRIC Index (BKF) up 2.57%, largely on the work of Indian stocks.

Mortgage REITs also sizzled, with the Conservative portfolio's iShares Mortgage REIT (REM) up 2.88%. In general we're seeing risky yield-reach again by investors.

Our only notable bad performers from March: Vanguard Telecom Services ETF (VOX), down 2.11% — and now quite attractive again given recent lagging. Value stocks in general were weak with Homestead Value (HOVLX) down 0.72% and Vanguard Value (VTV) down 0.92%. We had mild declines in longer-term bond funds like Vanguard Long-Term Bond Index ETF (BLV), down 0.70%, and Vanguard Extended Duration Treasury (EDV) down 0.97% — though longer-term bonds are not attractively priced after the big gain in U.S. stocks over the last year.

Large-cap growth was the strongest U.S. category with a roughly 1% return, but we're not directly exposed here now.

Foreign stocks aren't really that cheap when you factor in the likely slower earnings growth than the U.S. market in larger markets and the heighted risk in emerging markets, but with our currency expensive after a multi-year rise large gains can be made investing abroad in unhedged funds solely on our currency weakening. Bottom line: you are now getting more diversification benefit from owning foreign assets than probably anytime in the last 10 years.

Non-emerging market foreign stock fund categories generally have higher ratings on our proprietary category rating system because the returns have been relatively weak and money flows have been less positive recently. Ideally we'd see huge outflows from foreign stock funds, which we'd buy into. But there may just be too many investors today who diversify to any and evertying, in contrast to the sort of 1990s style performance chasing we used to witness. Emerging market stock funds have done well and have beaten U.S. markets this year but are still seriously underperforming from levels hit in early 2011 — actually going in a different direction completely through much of this time. Right now, emerging market stocks are not that attractive given the recent gains, and interest by investors we'll likely focus more on larger foreign economies.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)10.00%
iShares MSCI Italy Capped (EWI)8.84%
Vanguard European ETF (VGK)4.43%
Vanguard Europe Pacific ETF (VEA)3.06%
ETRACS 1xMonthly Short Alerian MLP (MLPS)3.06%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)3.00%
iShares Mortgage REIT (REM)2.88%
iShares MSCI BRIC Index (BKF)2.57%
Artisan Global Equity (ARTHX)2.49%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)2.25%
Proshares Ultrashort NASDAQ Biotech (BIS)1.42%
Gold Short (DZZ)1.04%
[Benchmark] Vanguard 500 Index (VFINX)0.10%
Vanguard Utilities (VPU)-0.05%
Proshares Ultrashort Russel2000 (TWM)-0.62%
Homestead Value (HOVLX)-0.72%
Vanguard Value (VTV)-0.92%
Vanguard Telecom Services ETF (VOX)-2.11%
Bond Funds1mo %
SPDR Barclays Intl. Treasury (BWX)0.76%
Artisan High Income Fund (ARTFX)0.18%
Vanguard Mortgage-Backed Securities (VMBS)0.10%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.06%
Vanguard Long-Term Bond Index ETF (BLV)-0.70%
Vanguard Extended Duration Treasury (EDV)-0.97%