Our third quarter letter focused on the opportunity for positive impact from expected fiscal policy stimulus after the election. Optimism and the beginnings of "animal spirits" have characterized the last several weeks. For the year 2016, our All-cap stocks were up about 16%, more than 2% better than the benchmark. Our small-cap stocks were up 20%. In both portfolios we benefited from the outperformance of value versus growth stocks and All-cap also benefitted from small vs. large stocks.
In our opinion, these trends have further room to run. Data from the third quarter of 2016, to the present, reflect an economy that continues to expand without further help from the Federal Reserve. Better economic health should lead to increased market breadth, lower equity market correlations and further value stock outperformance. Additionally, individual investors have held cash on the sidelines or used bond funds as cash proxies. The fourth quarter experienced a reversal of this pattern with equity mutual funds experiencing net inflows and outflows from bond funds. All of these factors should benefit active management and Winslow in the coming year.
The stark differences between 2015 and 2016 can be more easily summed up by a quote from Colonial Consulting, LLC (November 2016):
“We believe excess return can be generated from investors accepting volatility, tracking error and illiquidity in their portfolios. It is clear that difficult times cause others to find these qualities increasingly unappealing and this in turn amplifies the rewards for those who are able to accept these risks.”
Essentially, in 2015, we took on the risk of not chasing momentum stocks at inflated prices. We did not deviate from our core philosophy in 2015 and our clients were handsomely rewarded in 2016.