When we update our clients’ financial plans, we solve for the long-term required rate of return (RRR) that their portfolios need to generate in order for our clients to achieve the long term goals in their plan.  Because the time frame for our clients’ plans are generally always longer than 10 years, we always look at the longest return data available to try to match the plan time frames to the portfolio return time frame (typically the inception date return).

Often, short-term portfolio performance (6 months or less) is more confusing than it is insightful. This is because the return time frame does not come close to matching the financial plan time frame.  Unless someone is planning on cashing out their investments in 6 months, it is inconsistent to judge a 6 month return on a portfolio structured to provide consistent returns over a 10 year time horizon.

Typically, only traders are concerned with short term performance. Investors have longer time horizons unless there are known cash flow needs that the portfolio needs to fund. Additionally, investors are generally more concerned with portfolio risk characteristics and how the long-term performance measures up against the benchmark.  For financial planning clients, that benchmark should be their financial plans RRR.

The major market indices had the following performance through June 30:

  1. AGG (bond) index was down .34%
  2. S&P 500 (U.S. stocks)  index was up 1.21%
  3. EAFE (international equity) index was up 6.12%

The key market themes for 2015 have been:

  1. A strong dollar, which has helped U.S. consumers by providing lower energy prices, but has hurt U.S. companies (especially energy companies) by making U.S. exports less desirable.
  2. The 10 year treasury has risen from 2.17% on 12/31 to 2.35% on 6/30.  This has been a headwind for fixed income performance, as the aggregate bond index was negative for the first 6 months of the year.
  3. International markets economic fundamentals improving, offset by a sell-off in late June due to the Greek debt crisis and Chinese stock volatility.

Below is a summary of the key contributors and detractors for year to date portfolio performance for D3 clients after reviewing year-to-date performance for 2015:

Contributors to Performance

  • Taxable fixed income security selection- 6 of the 7 taxable fixed income funds that D3 uses had positive performance for the first half of 2015, while the AGG index was down .34%.
  • Exposure to domestic small cap equities and international equities – The Russell 2000 index (small cap) was up about 4.5% and the EFA index (international) was up about 6% for the first 6 months of the year.  These indices outpaced both the S&P 500 (U.S. stock) and AGG (bond) indices.
  • Risk pool security selection – Our “risk pool” asset class is used in our more aggressive asset allocation models, and is designed to gain exposure to themes that D3 portfolio managers anticipate will outperform the equity markets on a 10 year time horizon. The two themes we  have been participating in, biotechnology and cybersecurity, had positive performance between 19% and 25% over the first 6 months of the year.

Detractors to Performance

  • Municipal Fixed Income- Most of our municipal bond funds were down less than 1%, which was in line with their indices.
  • Alternative Investments – Our energy MLP funds, publicly traded REIT funds, and the volatility hedge exchange traded note were all down 4-6% during the first half of 2015.  This was due to energy price weakness, profit taking in the REIT sector from outperformance in 2014, and relatively low volatility in the first 6 months of the year.
  • Large Cap Value & Equity Income Funds- The Russell 1000 value and Dow Jones Select Dividend indices were down about 1% and 3% respectively year-to-date.  For the first half of 2015, growth stocks have outperformed value.


The biggest performance contributors were in higher risk asset classes (small caps, international, and risk pool).  For this reason, clients in our growth and aggressive growth models have seen positive year-to-date performance.  Our biggest detractors were in our lower risk asset classes.  For this reason, clients in our Income with Growth, Income Oriented, and Capital Preservation models have seen neutral year-to-date performance.


– Donald D. Duncan MBA CPA/PFS CFP CFA