Author: bbatchelor

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Chartbook Topics

• Economic Growth
• Inflation
• Interest Rates
• Credit Spreads
• Earnings
• U.S. Valuations
• U.S. Style
• Non-U.S. Valuations
• Volatility
• Gold

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Newsletter Summary

• Tax management should not be a substitute for portfolio management. Tax avoidance can potentially lead to gain avoidance.
• We believe one of the most effective ways to protect portfolios from inflationary risks is to buy cheap assets. In our view, these are assets that may have been (or continue to be) out-of-favor with investors for one reason or another, and therefore, have depressed prices when viewed in relation to their future earnings or growth potential.
• Taking everything into consideration, we believe interest rates continue to drift higher with the U.S. Treasury yield curve steepening (the spread between short- and long-term interest rates growing wider). As a result, we continue to position client portfolios to have less interest rate risk than our internal benchmarks.

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Newsletter Summary

• History has shown us that over time clients will be better off if we patiently manage risk in a way to participate strongly in market rallies while doing a better job defending client capital as markets inevitably recede for a time.
• Many traditional stock valuation measures have become stretched.  This has led to questions about the veracity of these metrics and their potential impact on future market returns.
• Despite regional outbreaks of COVID-19, the global recovery is on track. With global activity measures improving, forecasters expect the global economy to expand by 5.8% in 2021.

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Newsletter Summary

• As it turns out, parasailing is quite peaceful, but new market perspectives are not always as calming.
• Experience has taught us that maximizing risk to maximize return is fraught with pitfalls when managing portfolios for the long term.
• The pandemic has forced a fundamental transformation of our economy. Once the economy is fully reopened, and the easy comparisons to last year roll off, the outlook becomes more challenging.

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Newsletter Summary

• At Entasis we prefer to hit for high average than to swing for home runs.  Over time it should produce more consistency and less volatility.
• We believe the U.S. stock market is priced close to perfection. When that happens, it does not take much to disappoint.  Globally, there remain pockets of opportunity.
• Until a significant portion of the population gets vaccinated, we expect an uneven recovery and further fiscal and monetary stimulus.

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Newsletter Summary

• “How much can I make in this investment?” and “How much can I lose in this investment?” are perspectives that always need to be weighed relative to one another.
• Large divergences in the performance of U.S. large-cap v. small-cap stocks, growth v. value stocks and U.S. v emerging markets stocks have gapped even wider this year.
• The path of the economy is highly dependent on the pandemic, fiscal stimulus, unemployment and the election. All of which have a wide range of potential outcomes.

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Newsletter Summary

• The impact of Fed liquidity on sentiment in the second quarter was staggering and it has opened some amazingly wide gaps among sub-asset classes. Our research work lists are full.
• PE ratios tend to have a rather weak correlation to future stock prices over the short-term, but become a much more constructive tool to project return environments over longer periods.
• While some economic data suggests a rebound is underway, analyst forecasts for Q2 economic growth range from -33% to -40%, which are numbers we never expected to see in our lifetimes.

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Newsletter Summary

• From a high level, we are always focused on a few key items: economic growth, interest rates and earnings. We believe that with an understanding of changes in those key variables we can develop a solid foundation for asset allocation decisions and fundamental investment decisions.
• We never try to be surgical with the timing of our investment decisions. We believe that if we can be directionally correct on a consistent basis it improves the odds of long-term wealth compounding for clients.
• The beginning of 2020 has been a historically unique period for individuals, businesses and financial markets. As we navigate the environment we are distilling our research down to the things we can control and positioning portfolios accordingly.

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Section Summary

• Market Notes – Equity and fixed income markets broadly moved higher during the fourth quarter, primarily driven by an accommodative U.S. Federal Reserve and signs of progress in the U.S. and China trade spat. On the economic front, news was mixed, but most investors focused on strong U.S. consumer data that they hoped would prop up tepid U.S. GDP growth and overcome softness in the U.S. manufacturing sector.
• Equity & Fixed Income Comments – Our portfolio positioning in the equity and fixed income components of client portfolios continues to reflect our relatively cautious outlook for U.S. equities and U.S. corporate bonds. The broad rally left us with few opportunities to be active searching for value. On the equity side, two areas that we have not increased investment yet, but are patiently waiting for more attractive entry points are U.S. value stocks and U.S. small-cap stocks. Within fixed income, we continue to like the higher quality and non-cyclical parts of the credit markets and favor securitized assets, mortgage-backed securities, insurance-linked securities and emerging market debt.
• Research Focus – At the end of 2019, Congress quietly passed the SECURE Act, which ushered in the largest retirement planning law changes in over a decade. It is intended to strengthen retirement planning for all Americans. The Act has a number of relevant implications for investors.
• Client Focus – Over our careers we have learned that market catalysts are almost always discussed with certainty in hindsight even though they were often unpredictable before they occurred. How can catalysts be accounted for when making investing decisions?

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Section Summary

• Market Notes – Markets were somewhat of a roller coaster in the third quarter as threats and reconciliation around trade impacted investor sentiment. In addition, investors remained highly sensitive to announcements from the U.S. Federal Reserve around interest rates and the pace of corporate earnings growth. The uncertainty was balanced by still low unemployment levels, which have fueled consumer spending growth.
• Equity & Fixed Income Comments – Our portfolio positioning in the equity and fixed income components of client portfolios continues to reflect our relatively cautious outlook for U.S. equities and U.S. corporate bonds. On the equity side, we remain heavily invested in high quality (companies with strong balance sheets) U.S. large-cap companies, with an added emphasis on the real estate sector and companies that have consistently grown their dividends. During the quarter, we also became slightly less aggressive in foreign markets as we shifted exposure away from Asia (notably China). Within fixed income, our emphasis remains on the high quality, non-cyclical parts of the credit markets. In municipal markets we favor investments in the private and direct origination markets.
• Research Focus – There are generally four stages in a business cycle: early-cycle, mid-cycle, late-cycle and recession. We believe it is important to have a view on where the U.S. (and other countries) reside in the business cycle because different asset classes and sub-asset classes perform better (worse) during the various stages. If we are confident in our estimation of the business cycle phase, we may be able to emphasize or de-emphasize certain areas of the market in client portfolios.
• Client Focus – We are highly practical about the execution necessary to include certain asset classes in client portfolios and skeptical of the value in the complexity that many asset classes bring. We are not averse to owning any asset class in client portfolios. They just need to meet our cost, liquidity and risk-adjusted return hurdles for consideration.