Second Quarter 2016

DEAR CLIENTS & FRIENDS;

Despite a rocky start to the year, the U.S. stock market had a solid second quarter rising 3%. International
markets, in aggregate, didnt fare quite as well, but were still able to post a flattish result in the quarter.
The U.S. fixed income markets were strong again this quarter with the Barclays aggregate bond index climbing
2% (and 5% year-to-date). This has benefited our more conservative (lower risk) and balanced (average risk)
portfolios so far this year due to their higher allocations to fixed income assets. Fixed income prices also
benefited from the plunge in the 10-year treasury yield, which fell from 1.8% at the beginning of the quarter
to 1.5% at the end (a new historical low).
Commodity prices were strong across the board in the second quarter. The Dow Jones-UBS Commodity index
posted a 15% gain this period, led by a 31% gain in crude oil (largest quarterly gain since 2009), strong growth
in agricultural-based commodities and a 7% increase in gold prices. We plan to modestly increase our exposure
to select commodity-based funds in the 2H16.
As a reminder, our policy is to rebalance client portfolios on a semi-annual basis (in January & July). This allows
us to realign the positioning of your portfolio with our current market expectations. To that end, we plan to
complete our mid-year rebalancing over the course of the next few weeks. As always, feel free to contact us
to discuss the rebalancing of your portfolio, your targeted risk level, or any other life changes that may be
relevant to how your portfolio is invested.
We also wanted to remind you that we are available to assist with your outside 401Ks, IRAs and taxable
portfolios. We always appreciate the chance to review these portfolios to make sure you are invested
appropriately for your current situation and tolerance for risk. We can also help consolidate these accounts
for you to simplify recordkeeping, more efficiently manage your tax situation and/or lower your overall
portfolio expenses.
Lastly, as we enter the warmer summer months, we are excited to sponsor the Madison West Athletics Booster
Association (MWABA), Italian Workmens Club Charity, Red Mouse and Madison Parks golf outings.
At Wisco, we believe our approach of designing welldiversified, low-cost investment portfolios is the
best way to produce favorable results over time.
We would like to thank you for the opportunity
to work with you as your investment adviser.
We appreciate your business!
Sincerely,

The Wisco Team

Investment Advisors:

Stephen Share sshare@wiscoinvest.com Greg Schroeder gschroeder@wiscoinvest.com

Second Quarter 2016

Wisco Investment Management

Wisco model portfolios are constructed using five different asset classes; Domestic Equity, International Equity,
Domestic Fixed Income, Alternative Investments and Cash. Our current model portfolio asset class allocations
are as follows:

WISCO MODEL PORTFOLIOS

Conservative

Balanced

Balanced Growth

Growth

Aggressive

Domestic Equity
28%
35%
40%
47%
64%
International Equity
8%
13%
19%
24%
28%
Domestic Fixed Income
50%
38%
28%
17%
0%
Alternative Investments
7%
9%
10%
10%
7%
Money Market 8% 6% 4% 2% 1%
Total
100% 100% 100% 100% 100%
Target Volatility* 6% 8% 10% 12% 14%
*Target Volatility is our estimate for the annual standard deviation of portfolio returns.
Source: Wisco Investment Management LLC

Second Quarter 2016 Market Review

DOMESTIC EQUITY
35%

33%

30%
25%
20%
15%

16%

13%

Quarterly Returns

10%
5%

0%

0%

3%

6%
1%

0%

3%

-5%

-7%
2Q16

1Q16

4Q15

3Q15

2Q15

YTD16

2015

2014

2013

2012

-10%

Source: Dow Jones U.S. Broad Stock Market Index and Wisco.

The domestic equity market returned 3% in

2Q16, despite lackluster earnings and economic
growth. The S&P 500 finished the quarter at
2099, just slightly below its all-time high of 2135
reached May 20, 2015. GDP in the first quarter
increased just 1.1%, while S&P 500 1Q16 operating
earnings decreased 5.7% compared to 1Q15. Poor
results from energy companies and retailers hurt
earnings. In addition, a strong dollar has reduced
multinational companies earnings. That said, the

trade weighted dollar index has fallen 5% since its

peak in late January. This softer dollar could be a
tailwind for corporate earnings for the balance of
2016. The Federal Reserve has also been much
more dovish in recent months which likely played
a part in the equity markets 2Q16 performance.
Going forward, we feel low single digit earnings
growth is possible as the headwinds from low oil
prices dissipate. GDP could also benefit from higher
consumer spending, lower interest rates and a
softer dollar.
While long term we continue to be optimistic about
the domestic equity market, in the near-term its
possible domestic equities tread water until
uncertainty surrounding the November election
is resolved. The S&P 500 is trading at a P/E of
17.4x 2016 consensus operating earnings which
seems fully valued unless earnings growth starts to
accelerate in the second half of 2016 and into 2017.
This election uncertainty combined with a relatively
high P/E could result in second half returns below
those generated in the first half of the year. With
this in mind, we are modestly reducing our domestic
equity exposure in all of our client portfolios.

INTERNATIONAL EQUITY
20%
15%

17%

7%

14%

Quarterly Returns

5%

0%

0%

3%

0%

0% 0%

-3%

3%

3%

2%

0%
-1%

-1%

-12%

-2%

2Q16

1Q16

4Q15

3Q15

2Q15

YTD16

2015

2014

While Brexit got the headlines, what may be

overlooked is that Euro area GDP accelerated
growing a respectable 2.2%. We dont think Brexit
will significantly impact this growth momentum given
Britain will remain in the EU for at least two years.
Turning to valuation, international markets continue
to trade at a significant discount to the domestic
stock market suggesting more upside oversees.
Therefore, we continue to hold international equities
in all portfolios and are adding an emerging markets
ETF to our most aggressive client portfolios, as we
feel emerging markets offer more growth potential
than developed markets albeit with more volatility.

2013

International equity appeared likely to post positive

returns until Britain surprised the market voting
to leave the European Union June 23rd. The
Brexit vote sent markets lower and resulted in
the MSCI All World Index posting flat returns for
the second quarter in a row. In Europe, many EU
countries posted negative results with the weakest
results in Italy and Poland. In Asia, the Nikkei 225
increased 2% while the Shanghai composite (-5%)
had negative results. The FTSE Emerging Market
Index increased 3% in the quarter, as Brazil (+14%)
and Russia (+6%) more than made up for losses in
Malaysia and Mexico.

-2%

-2%
2012

2Q16

1Q16

4Q15

3Q15

2Q15

YTD16

2015

2014

2013

2012

Source: MSCI ACWI ex USA and Wisco

-3%

2%

1%

0%

-15%

Quarterly Returns

3%

1%

-6%

-10%

5%

5%
4%

-5%

6%

6%

10%

-20%

DOMESTIC FIXED INCOME

Source: Barclays Capital U.S. Aggregate Bond Index and Wisco.

Fixed Income had solid results in 2Q16 with

Barclays Capital U.S. Aggregate Bond Index
increasing 2%. Once again, fixed income strength
was broad based with TIPS (+2%), Investment
Grade Bonds (+4%) and High Yield Bonds (+4%)
all posting positive returns. The 10-year treasury
yield started the quarter at 1.79% and ended 2Q16
at 1.49%, as Brexit concerns drove down interest
rates. The soft economy and election uncertainty
resulted in the Federal Reserve delaying short term
interest rate increases and we think it is possible
that the Fed will not increase rates at all in 2016.
This unexpected dovishness of the Fed likely
contributed to declining interest rates in
the quarter.
With election uncertainty at home and the unknown
impact of Brexit aboard, we think it is possible the
Federal Reserve could be on the sidelines for the
rest of the year. Under this backdrop, we feel Fixed
Income could continue to post positive returns for
the balance of the year. Therefore, we continue
to hold Fixed Income securities in all but our most
aggressive portfolios and think government bonds
and investment grade corporate bonds could
perform better than inflation protect bonds and
high yield bonds.

ALTERNATIVE INVESTMENTS
The Dow Jones-UBS Commodity Index increased
15% in the quarter. In agriculture, grain prices
bounced back this quarter but still remain well off
their 2011 highs. Corn prices increased 2%1, and
Soybean prices increased 29%1. Going forward,
we think grain prices could continue to rally as
inventories are worked down. Gold prices were
strong in the quarter increasing 7%2, while silver
prices increased 22%3. Market uncertainty in the
quarter helped drive precious metal prices higher.
Finally, Crude Oil prices increased 31%5 in 2Q16, as
the oil market continued to regain its footing after
an awful 2015. Over the last 24 months, Crude Oil
is still down 54%, even after its 2Q16 bounce.
Wisco is increasing its exposure to Alternative
Investments in all our portfolios, holding both a
gold fund and a grain fund. Gold generally performs

well in periods of geopolitical uncertainty. Given the

Brexit vote and the upcoming election in the United
States, we feel this could be an environment where
gold performs well in the upcoming months. We feel
grains may also benefit from lower inventories and
less supply this planting season.

MONEY MARKET
Wisco keeps a modest money market allocation in
all of our portfolios. The current yield of the Schwab
Money Market is 0.01%. Low Federal Funds rates
have held down short-term yields. It now appears
that the Federal Reserve is unlikely to increase
rates in 2016. This will likely result in yields
remaining low for an extended period of time.

1. Return calculation based on the near future contract as quoted in the Wall Street Journal.
2. Return calculation uses ETFS Physical Swiss Gold Shares (SGOL) as a proxy for gold.
3. Return calculation uses iShares Silver Trust ETF (SLV) as a proxy for silver.
4. Return calculation uses Schwab U.S. REIT ETF (SCHH) as a proxy for Real Estate Investment Trusts.
5. Return calculation uses Cushing, OK WTI spot price FOB as a proxy for oil.

Wisco Investment Management LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend
to make an offer or solicitation for the sale or purchase of any specific securities product, service, or investment strategy. Investments involve
risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser, tax professional, or attorney before
implementing any strategy or recommendation discussed herein.

402 Gammon Place, Suite 380 Madison, WI 53719 Office 608.442.5507 Fax 608.237.2206