2012 was an interesting year for investors. Looking back every year at the prognostications, one can only conclude that even the best investment forecasts are often a crapshoot. On January 1, 2012, Tobias Levkovich, Citigroup’s chief U.S. equity strategist told the Wall Street Journal that European leaders may do enough to address their nations’ debt issues that “fears subside,” – not bad, and U.S. elections also could spur politicians to address the nation’s own fiscal imbalances – eh, not so much.
James Paulsen, chief investment strategist at Wells Capital Management, noted in the same article that foreign markets may do even better than the U.S. in 2012, as fears of a global slowdown subside – pretty…pretty good.
Oil was at $100 a barrel and seen going higher, and natural gas was below $3 and seen going lower. The opposite occurred.
Famed PIMCO portfolio manager noted in his beginning of the year letter, “investors must lower return expectations, 2–5% for stocks… Equity allocations should favor higher yielding companies in sectors with relatively stable cash flows: Electric utilities, big pharma and multinationals should head your shopping list.”
I personally find it more interesting to read year previews with 20/20 hindsight than at the time it is written with no foresight whatsoever. It becomes an excerise in logic rather than the equivalent of listening to a fortune teller. What was his or her thesis on January 1 of last year, and how did world economic factors make the call a right one or a wrong one. Such an exercise can help your own decision making process. It also works when evaluting your own investment portfolio. Take a few moments to review your holdings from last year. Don’t look at just how they performed. Understand why you owned them in the first place, and what factors led to success of failure. If you don’t know why you owned them in the first place, then maybe it’s time to review your portfolio strategy.
The only sure thing – the thing now in the record books – is the 2012 asset class returns.
The Global Market Index, a passively-weighted, unmanaged benchmark of all the major asset classes run by James Picerno, logged an 11% return for the year- a healthy return, lead by foreign equity and debt markets (including Emerging). Although not as strong as many foreign indicies, the total return in the S&P came close with a 16% return, even after a modest decline in the fourth quarter. Interestingly enough, the more narrow Dow Jones Industrial Average lagged by almost half.
Financials performed the best, with the XLF up 23.4%, led by Bank of America. Consumer Discretionary and Transportation (US Airways was up 159%, and Avis was up 78%, each somewhat offset by Arkansas Best which was cut in half) were a strong second and third place, respectively. The worst performing sector was the Utility sector. The XLU was down 3.5%.
High Yield Debt performed in-line with the S&P with the BoFA/ML Index returning almost 16% for the year. After a year where as much as half of the return came from capital appreciation, and a current spread of 516 over Treasuries, that will be hard to duplicate – but I guess that’s a prognostication, isn’t it?
For their class, Investment Grade Corporate Debt had a good year as well. The Barclays Corporate Index returned almost 10%. Considering the fact that the Federal Reserve targeted mortgage bonds with its third round of quantitative easing, the Government Sponsored Entities (GSEs) Ginnie Mae, Fannie Mae and Freddie Mac returned 7.3%, 7.4%, and 6.4%, respectively. Municpal bonds also continued their tax-free rally at 5.5%.
Even Real Estate had a good year. REITs and other real estate investment vehicles were up strong double digits. Builder, Hovnanian Enterprises, generated a return in excess of 300% and Lumber Liquidators almost tripled. PulteGroup and Lennar were each among the top ten S&P 500 performers.
Technology dominated much of the decliners. As we mentioned in yesterday’s blog, Intel and Hewlett-Packard dominated much of the poor performance of the Dow. They, and other technology companies, dominated the list of S&P 500 underperformers.
As CNBC noted, bearish hedge fund managers have lost out in 2012, with the $2 trillion industry suffering another year of disappointing returns as traders were wrongfooted by a change in fortunes for the euro zone. The HFRX Hedge Fund Indicies will not be reported until Monday, but it is widely reported that the “average” hedge fund was up 5%. Obviously that significantly varies by investment strategy. Distressed Debt strategies are expected to report returns near 12%, whereas Equity Market Neutral and some Commodity strategies are expected to be negative. The largest hedge fund, Bridgewater Associates, is an example of the dichotomy. The Pure Alpha funds will struggle to report in the black depending upon December returns, whereas the All Weather Fund is nearing 20%.
Overall investor sentiment going into 2013 is neither particularly high nor particularly low. The American Association of Individual Investors (AAII) sentiment index showed that wrangling over the fiscal cliff during the final days of 2012 had a modest negative effect, but after five weeks of increases, bullish sentiment settled the year above its earlier lows at 38.7%. Although I don’t have the numbers, the “resolution” of the talks likely saw a snapback as seen in yesterday’s rally.
I can tell you who knows what 2013 will bring. No one, although many think they do. As we start the year, I leave you with one stat tweeted by my friend Larry McDonald, Buying the ten biggest losers in the S&P 500 in 2011, all rated sell or neutral by Wall Street Analysts, returned 24% in 2012.