Heritage Investment Review: Q4 2016

Heritage clients experienced strong investment returns in 2016. While global stocks increased by 7.86% , our equity allocation increased by 14.75%. This exceptional performance in stocks more than offset the subdued year for Heritage’s alternatives allocation, which ended the year down 1.68%. Heritage’s short-term and yield-oriented positioning in bonds paid off in 2016. Our bond portfolios’ total returns exceeded the 2.65% return from the U.S. investment grade bond market.

Within global stock markets, tilting the allocation towards small companies and value stocks added to return. Across global stock markets, our persistent overweight to emerging markets, with a corresponding underweight to developed international markets, further enhanced performance.

One may recall emerging market stocks were down 14.92% in 2015. In January of 2016, they started the year down yet another 13.28%. At that time, panic set in, and many undisciplined investors were selling emerging market stocks. Instead, in mid-January, we increased our clients’ allocation to emerging markets and partially rebalanced out of bonds and alternatives, which had performed well. From this low point through the end of the year, emerging market stocks increased 28.22%. Buying an asset when others are afraid to hold it and acting with the utmost discipline tends to pay off over time.

Heritage’s alternatives allocation was a detractor from performance in 2016. However, one may recall our alternatives allocation produced a 6.03% return in 2015 when global stocks were down 2.36% and U.S. investment grade bonds were up a mere 0.55%. One may further recall our alternatives allocation produced a strong 18.62% return in 2014 when global stocks were up only 4.16% and U.S. investment grade bonds were up 5.97%. Over the past three years, Heritage’s alternatives allocation has been its best performing asset class.

Heritage’s bond strategies outperformed U.S. investment grade bonds. This was accomplished on two fronts. First, holding shorter-term bonds helped performance as interest rates rose across the yield curve. Second, investing in international, yield-oriented bonds outperformed as global credit spreads tightened (Heritage’s primary manager in that space produced an 8.66% return).

Thank you for the confidence you have in us as stewards of your wealth. Heritage clients experienced strong investment returns in 2016. We take pride in delivering the long-term investment results—and taking no more risk than necessary—to help you reach your financial goals.

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