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January 2016 Commentary

 ChartMark Investments

January 2016 Commentary

            Happy New Year from all of us at ChartMark Investments Inc.!  I hope you had a wonderful holiday season and were able to enjoy some special time with family and friends.  For our year-end commentary and outlook, I have enclosed a comprehensive review of the markets in 2015.  This Annual Market Review, as well as multiple additional economic and financial planning alerts, was recently published on our Facebook page.  I would encourage you to take a look at it for some context.  In addition, below I provide a few of my own thoughts about the markets.  For those of you who utilize social media, please “like” our Facebook page.  Upon doing so you will be given access to the useful information posted to the page. 

 By way of review…

             As described in the enclosed 2015 review, investors appeared to spend the year running on a treadmill.  While maybe good exercise, the effort expended seemed to have little impact on the final result.  Financial markets were very volatile, but in the end, didn’t do very much.  The S&P 500 closed within 1% of the prior year’s close.  This small change in value is misleading.  Although it appears that not much happened throughout 2015, it was a tumultuous year.  Investing in 2015 was much more difficult for investors and money managers than it would appear on the surface.  To get the real picture we must dig deeper into the numbers. Below I have borrowed a few points from Charles Schwab’s research as I share a few observations:

             Remember, the S&P 500 is a cap-weighted index; and although it was flat on the year, the average stock in the index did considerably worse---returning -3.8%.  From a market cap standpoint, bigger was better as the 50 largest company stocks were up an average of 1.5% by year-end; while the 50 smallest stocks were DOWN 11.9%.  Growth was better than value as the 40 cheapest stocks (as measured by P/E ratio) were all down at least 5% on the year while the 40 most expensively valued stocks going into the year were all flat or up on the year.  This is unusual as stocks have a tendency to “revert to the mean” from year to year.  For investors who prefer companies that pay dividends it was even worse.  The 10 stocks with the highest dividend yield were actually down 14.6% while the stocks that pay no dividends were up 3.9%.  Finally, the stocks that performed well in 2014 continued to perform well in 2015 while the 50 worst performers for 2014 were down another 28% in 2015…another very unusual fact.

             Perhaps the most compelling statistic is the impact on the S&P 500 of the FANG stocks as they are now called in the media.  FANG is an acronym for Facebook, Amazon, Netflix and Google.  Once again because the S&P 500 is market cap weighted, the impact of these four companies skewed the performance of the index. These four stocks were up over 60% on a cap weighted basis; excluding those four names the S&P was down almost 5%.          

So why not have all of your money invested in the FANG stocks?  Primarily because these are momentum stocks; meaning that traders who invest based on momentum all pile into them at once causing them to go up dramatically and quickly.  However, with stocks that have had great momentum, once that breaks down, it’s difficult to recover.  Momentum often fails because mundane fundamental factors eventually overwhelm the excitement that caused the momentum.  Lackluster sales, business process issues, governmental regulation, competitive pressures and so on, can all work to derail once-popular stocks.  Regaining that momentum is tough as traders typically move on quite quickly.  We realize that we may miss out on some near term upside by not overweighting these names, but we are long term investors and take into consideration both risk and reward when investing our clients’ and our own money. 

 Core Portfolio Review

             For our core portfolio, we were a bit disappointed in the 4th quarter as we underperformed the S&P 500.  With that, for the entire year, we ended up within a percent or so of the overall market net of fees and dividends.  Our average client showed a slightly positive return on the year of about 1%.  Given the analysis provided above, we held our own relatively well given the very difficult and volatile market for 2015.

             During the quarter we reduced by half our position in Praxair.  Although still a great company, Praxair has been disproportionately impacted by the rising dollar as a substantial amount of its business is outside the U.S.  In addition, we added to our position in Target prior to the holiday season.  Under new leadership, we are excited about the growth of TGT’s online business and more disciplined merchandizing strategy. Both should bode well for the company going forward.  As always, please check your individual reports for details regarding your positioning and performance. 

             Our basic investment philosophy of finding and owning good companies and buying them at reasonable prices has served us well over the years.  We continue to believe that owning shares of leading companies over a long period of time still remains the best way to make money for our clients.  We believe in controlling what we can control (what we own) rather than trying to predict the future and/or time the market.  We control risk through diversification of investments and maintenance of adequate cash reserves to meet the short term expenses of our clients.  We will continue to look for quality investment opportunities throughout the coming year and into the future.

             As always, we stand ready to assist you with all of your investment and financial planning needs.  We value the trust and confidence you place in us and look forward to working with you in the years to come.  Until next quarter, have a great start to 2016!

Mark S. Smith

President and CEO

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This site has been published for residents of the United States. The site has been prepared for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular strategy. ChartMark Investments is a Registered Investment Advisor in the states of Oklahoma, Louisiana and Texas. If you are not a resident of one of these three states we will not be able to share investment advice and related services with you at this time. Should you desire information on ways in which our company may help you with your financial service interests please feel free to contact us. We may be able to become registered in your state or qualify for a de minimis exemption at which time we would be able to further discuss how our services may meet your needs.

This communication is strictly intended for individuals residing in the state(s) of LA, OK and TX. No offers may be made or accepted from any resident outside the specific states referenced.

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