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Annual Review: Navigating 2015’s Changing Markets

FundX Commentary:
A look back at 2015

It was tough to make money in 2015. Globally, stocks as measured by the MSCI All Country World index sank -2.36%, and the MSCI Emerging Markets index fell -16.18%. The U.S. S&P 500 index was a relative bright spot, up just 1.38%, including dividends.

The equity Upgrader Funds ended the year with small gains. Although the Funds are global funds, they avoided the losses that most global strategies experienced in 2015 by investing primarily in U.S. funds that had strong recent returns. The Funds were ahead of the S&P 500 and All Country World indexes for the first half of the year. But the late summer correction hit leading funds articularly hard, and, as a result, the Upgrader Fund (FUNDX) and Aggressive Upgrader (HOTFX) lagged the S&P 500 for the year. Both finished ahead of the All Country World index.

The Tactical Upgrader Fund (TACTX) outpaced the S&P 500 and All Country World indexes. We scaled back exposure into rallies and invested more of the Fund’s portfolio in market dips, which meant the Fund had somewhat greater participation in market rallies and less participation in declines. 

Bonds, as measured by the Barclays Aggregate Bond index, gained 0.5%. But most bond fund categories including corporate bonds, floating rate bonds, TIPs and high yields had losses.

The Flexible Income (INCMX) and Total Return (TOTLX) Funds’ diversification hurt in a year that favored government bonds. The Funds had exposure to world bonds, mortgage securities and total-return funds, but were underweight in government bonds and ended the year with modest losses. TOTLX beat the Morningstar Multi-Alternative Category (click here to see Category returns versus the fund). 

As we shift our focus to 2016, we embrace the uncertainty facing global investors and appreciate the flexibility to adapt our portfolios to whatever leadership changes may emerge. Our optimism will almost certainly be tested at times, but with a world of potential investment opportunities and a long-term perspective, we feel well prepared.

Upgrader Funds Flexible Funds

Increased Exposure to U.S. Large-cap Growth

We had substantial exposure to U.S. large-cap growth funds during the year, and many of these funds were held all year. We owned a few value and mid-cap funds at the start of 2015, but when these funds didn’t continue to perform, we replaced them with large-cap growth funds.

We bought into a few foreign funds in the first half of the year, as foreign markets led. But these funds lost ground in the late summer correction, and we cut our losses, replacing these funds with U.S. growth funds that held up better in the correction. The Upgrader Funds avoided the substantial losses that many foreign markets experienced in 2015.

Technology Continued to Lead

Technology continued to be one of the top performing sectors in 2015. We held tech-heavy funds like PowerShares QQQ (QQQ) all year and added exposure to technology sector funds. We trimmed our exposure to health care and biotech sector funds during the year and added positions in consumer staples.

We continued to avoid lagging sectors like energy and precious metals and most emerging markets during the year.

Current Leadership

At the start of 2016, FUNDX and TACTX are focused on core diversified U.S. large-cap growth funds and have limited exposure to aggressive and sector funds. HOTFX has unlimited exposure to more aggressive funds, and it owned a diverse mix of sector funds, including banking, home construction, technology and consumer staples ETFs at the start of the year. (Banking and home construction ETFs had sold off in December; if poor performance continues, we’ll move on.) 

We know markets will change eventually and the funds we own today won’t always be in favor, and we are prepared to change the Funds’ portfolios when marketleadership changes.

Focused on Higher-quality Bonds

Higher-quality bonds held up better than lower-quality bonds in 2015, and the Flexible Funds had meaningful exposure to higher-quality intermediate-term bonds during the year. We reduced exposure to strategic bond funds in the second half of the year in favor of intermediate-term bond funds that had better recent returns.

The strong U.S. dollar boosted the returns of dollar-hedged foreign bonds, and INCMX had exposure to these bonds all year. (We sold TOTLX’s world bond funds in the third quarter). We continued to avoid Treasuries and long-term bonds, which tend to be more interest-rate sensitive.

Total-return Funds Added Value

In a tough year for bonds, preferred stocks were a bright spot. These stocks pay a fixed dividend like bonds, and they have some of the appreciation potential of equities. We bought into preferred stock funds in the second and third quarters.

We owned total-return funds, like balanced and alternative funds, all year, but we replaced some balanced fund positionswith alternative funds, which typically are less correlated withstock or bond markets.

Current Leadership

The Funds own a diversified mix of bonds, including corporates, dollar-hedged foreign bonds, government mortgage-backed securities, and preferred stocks. And they also own total-return funds, which usually aren’t entirely invested in bonds. (TOTLX has substantially more exposure to total-return funds.)

Interest rates rose in 2015, and most expect they’ll continue to rise in 2016, but we believe we are well positioned to buffer any headwinds. Both Funds have a shorter duration, a measure of interest-rate risk, than the Barclays Aggregate Bond index.


The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Barclays Aggregate Bond Index is an unmanaged index generally representative of intermediate-term government bonds, investment grade corporate debt securities and mortgage-backed securities. The MSCI Emerging Markets Index is a market capitalization index that is designed to measure equity market performance in global emerging markets. The MSCI All Country World Index (ACWI) is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. You cannot invest directly in an index.

Correlation is a statistical measure of the degree to which the movements of two variables, like stocks and bonds, are related.

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data quoted current to the most recent quarter- and month-end may be obtained by clicking here.

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