This year has been enormously challenging for us -- both as investors and as advisors. While it is some consolation that 2015 has been difficult for many professionals, it's really become a year to which we'll be happy to say goodbye.
While we were correct, in theory, about many of the big-picture themes that were likely to play out this year, the subsequent investment results have been less than exciting. I was of the out-of-favor view that, despite tightening rhetoric out of the Fed, we were likely to see a flattening yield curve rather than steepening. I felt the Saudis' strategy of flooding the world with oil, and the resulting collapse in oil prices, would have a much larger impact on countries outside the U.S. (like Venezuela, Brazil, Russia, Nigeria and Mexico) than it would here at home. And I worried that the fall in oil prices would not be unilaterally positive for the U.S. -- that any "savings" by the consumer would likely be offset by resulting currency headwinds to U.S. large-caps (low oil = strong dollar = pressure on U.S. large-cap stocks to cut costs and outsource work).
I was of the view that the U.S. stock market was fully (fairly?) valued at the beginning of the year, and that better opportunities for investment existed in Europe -- where stimulus efforts are still very much alive and equity valuations opened the year discounted for the worst-case scenario, with almost double the yield of the S&P.
We outlined these views in January, many of which have come to pass, to some extent. But being right in this context was simply not helpful in 2015.
Through August, European stocks did outperform those in the U.S. -- and if you were properly hedged against the falling euro, the outperformance was even more pronounced. But since then it's been essentially a wash:
Midstream MLPs, which make up a portion of most of our clients' portfolios, have more or less been an unmitigated disaster -- with the exception of providing an uninterrupted flow of tax-advantaged distributions (to go along with tax loss selling opportunities). My belief is that fears of distribution cuts in the space are largely overblown, and have sprung up as a result of price action. Investors in MLPs have been whipsawed this year multiple times, and are desperately searching for a (logical) explanation for the volatility. The most common reason we've heard is "leverage" -- and while I believe that to be true, I think it's more about the owners of the companies' stocks than the companies themselves.
We remain long the following names in the midstream space: Buckeye Partners (BPL), Enterprise Products Partners (EPD), Enbridge Energy Partners (EEP), Energy Transfer Equity (ETE), Energy Transfer Partners (ETP), Magellan Midstream Partners (MMP), Oneok Partners (OKS), Plains All American (PAA) and Williams Partners (WPZ). We have sold our position in Kinder Morgan (KMI). (Energy Transfer Partners is part of TheStreet's Action Alerts PLUS portfolio.)
And for any readers and fellow contributors with similar experiences, the battle going into 2016 with clients may have become, "What are we going to change to improve into next year?"
What if the "right" answer is "not much"?
Speaking on behalf of our clients, after many portfolio reviews, the general feeling is that we must now construct a plan -- a different plan -- to "fix" what is wrong. And it only makes sense; the phenomenon known as "recency bias" tells us to expect more of what we have just seen. If it's been cool and cloudy for the past few days, it feels more likely to be cool and cloudy tomorrow.
How likely is it that the euro continues to weaken next year at the same pace -- or at all -- against the U.S. dollar? Or that oil falls further into territory in which it's uneconomic for everyone bringing it to market? How likely is it that the dislocations we're seeing in the high-yield market simply don't end?
The carnage that 2008 brought to many investors is still very fresh, and I believe many continue to wear their scars on their investment sleeves. The fact that something terrible can happen -- confirmed by fairly recent history -- can make it very difficult to maintain conviction in an investment thesis.
My advice going into next year, provided you had a similar experience in 2015, is to resist the urge to make sweeping changes. Consider carefully whether your strategy/allocation still has merit, and don't make changes for the sake of making changes.