Category: Newsletter

Click Here for a PDF of the Newsletter

Section Summary

• Market Notes – Markets were broadly positive in the second quarter, but fairly volatile month-to-month. The key factors driving market activity were anxiety over trade tensions and optimism that the Fed would cut interest rates to support the economy.
• Equity & Fixed Income Comments – Our portfolio positioning in the equity and fixed income components of client portfolios reflects our relatively cautious outlook for U.S. equities and U.S. corporate bonds. On the equity side, we made an investment in a mutual fund whose mandate is to invest in companies that have a history of growing dividends. In fixed income, our emphasis continues to be on the higher quality and non-cyclical parts of the credit markets. We like emerging market bonds, securitized assets, mortgage-backed securities, insurance-linked securities and infrastructure debt.
• Research Focus – We have found relatively few investment opportunities among smaller domestic companies, primarily because of where we believe we reside in the economic cycle. However, the story is much different among foreign small- and mid-cap companies. We believe foreign small caps have a number of attractive characteristics that make them an appropriate piece of a client’s long-term equity portfolio.
• Client Focus – One of the key inputs to asset allocation planning for clients is capital market assumptions. What are each of the asset classes being used in client portfolios expected to return? Looking back at historical market returns can be easy for some advisors to do, but we believe those numbers set inappropriate expectations. We think looking forward sets more rational expectations.

Click Here for a PDF of the Newsletter

Section Summary

• Market Notes – Early in the quarter (January 4) Fed Chairman Jerome Powell stressed that the Fed would not hesitate to respond with all tools necessary to counteract an economic downturn or increased turmoil in financial markets. As a result of the about-face by the Fed, many areas of the financial markets that had posted significant losses in the fourth quarter of last year, rebounded strongly in the first quarter.
• Equity & Fixed Income Comments – Our portfolio positioning in the equity component of client portfolios reflects our relatively cautious outlook for U.S. equities at the sub-asset class level. We have tilted portfolios towards large-capitalization stocks and value-oriented stocks (including REITs). We also continue to like emerging markets equities where the short-term picture showed signs of improvement in the first quarter. Fixed income investments are positioned for our expectation of yield curve flattening and client portfolios are now generally about neutral duration. We continue to expect corporate credit to underperform. Within corporate credit, we prefer short maturity bonds from high quality issuers.
• Research Focus – An inverted yield curve occurs when the 2-year Treasury yield is higher than the 10-year yield. This happens when the market believes growth will be lower than the change in Fed policy rates. An inverted yield curve is often referred to as a ‘canary in the economic coal mine’, due to its accuracy in predicting upcoming recessions. We discuss the yield curve and what it tells us today.
• Client Focus – Home Country Bias is the natural tendency for investors to be most attracted to investments in domestic markets. For U.S.-based investors this means having a disproportionately large allocation to investments in the U.S. This bias can limit the investing opportunity set and reduce diversification.

Click Here for a PDF of the Newsletter

Section Summary

• Market Notes – Fourth quarter returns across all global equity markets were broadly weak. Conversely, fixed income markets generally held up well. A combination of factors drove the volatility in equity markets, but slowing economic growth, concerns about future profit growth and interest rate uncertainty highlighted the list.
• Equity & Fixed Income Comments – Our portfolio positioning in the equity component of client portfolios has been focused on bolstering the resilience of our U.S. investments given what we perceive to be elevated risks over the short- to intermediate-term. Fixed income investments are positioned for our expectation of yield curve flattening and to take advantage of opportunities outside of corporate credit with better risk-adjusted value. Across all asset classes we generally favor active management to passive at this point in the economic cycle.
• Research Focus – Corrections. How often do they happen? How to counter the emotional reactions that tend to accompany short-term market volatility?
• Client Focus – Market timing requires two largely perfect decisions to be successful – when to sell before the market goes down and when to buy before the market goes back up (or vice versa). We review the impact of getting those decisions wrong.

Click Here for a PDF of the Newsletter

Section Summary

• Opportunity & Nerve – If we can assess the valuation opportunity of investment alternatives with discipline, nerve is replaced with trust in our work.
• Market Notes – Returns across asset classes diverged considerably in the third quarter, continuing a trend building throughout the year, as emerging market pressures intensified and interest rates pushed higher while corporate earnings growth remained strong.
• Equity & Fixed Income Comments – For the most part, our broad portfolio positioning in the equity and fixed income components of client portfolios is unchanged. We are conducting detailed research on real estate and closed-end fund opportunities as we believe both areas could offer intermediate- to long-term return potential in client portfolios. Our work may or may not result in investments, but the current investing environment has generated interest in both areas.
• Research Focus – A review of diversification. Diversification can reduce portfolio volatility and may assist in modifying behavior – specifically overconfidence in an ability to “outsmart” the market.
• Client Focus – The Global Industry Classification Standards (GICS) recently implemented the largest revision to its methodology in its 19-year history. Roughly 2,100 companies were impacted globally as the evolution of many business models resulted in the introduction of a Communication Services sector.

Click Here for a PDF of the Newsletter

Section Summary

• Decisions – Is it transitory or secular? The hardest decisions we make as investors are the ones we make when things don’t go perfectly.
• Market Notes – Returns across asset classes varied considerably during the second quarter as a strong U.S. dollar, fear of trade wars, weakness in emerging markets, political instability in Europe, strong U.S. corporate earnings growth and improved U.S. economic growth left markets uncertain about future direction.
• Equity & Fixed Income Comments – Within our foreign equity allocations we have spent considerable time reviewing our emerging market investments and remain confident in our position over the intermediate-term, but expect further volatility in the short run. In U.S. equity markets, we have begun to bias our research efforts to value opportunities, but are currently roughly style neutral. On the fixed income side we have less interest rate exposure than our benchmarks, remain underweight corporate credit and are using active management in areas of the market we are finding value. We continue to de-emphasize passive mutual funds and ETFs.
• Research Focus – Performance swings, emerging markets and the negative impact of behavioral biases.
• Client Focus – Less is More. A quick look at losing less or gaining more and which is more valuable to long-term wealth compounding.

Click Here for a PDF of the Newsletter

Section Summary

• Market Axioms – Stick with big, “easy” decisions and eschew activity. Performance comes, performance goes. Fees never falter. (Limit them.)
• Market Notes – Markets hate uncertainty. During the first quarter, the markets were presented with the uncertainty of a new Fed Chairman, a potential trade war with China, due to steel and aluminum tariffs, and political stress impacting the technology sector on several fronts.
• Equity & Fixed Income Comments – Within our foreign equity allocations we continue to have a high degree of confidence long-term in small- and mid-cap equities, as well as emerging markets more broadly. In U.S. equity markets, we continue to favor large-cap companies over small-cap companies, but we do not believe the relative value gap is as large as it once was. On the fixed income side we have less interest rate exposure than our benchmarks, remain underweight corporate credit and are using active management in areas of the market that offer late cycle diversification.
• Research Focus – Infrastructure debt asset class primer.
• Client Focus – 2017 was a great year. So far, 2018 has been volatile. What is normal?

Click Here for a PDF of the Newsletter

Section Summary

• Expanding Our Team – On January 2, we added our first new team member since our firm was founded.
• Market Notes – A quick review of our global market drivers does not indicate much change on the horizon. Things broadly look positive. We are not, however, conditioned to blissfully ride the wave. We are wired to be cautious – particularly when it seems like all is well.
• Equity & Fixed Income Comments – Within our equity allocations we continue to emphasize domestic large-cap growth stocks, foreign small-/mid-cap equities and emerging market equities, although we have begun to reduce our exposure to growth equities in the U.S. Fixed income allocations remain moderately short interest rate risk and underweight corporate credit risk. Broadly, we like emerging market bonds, securitized assets and insurance-linked securities.
• Research Focus – Investment bubbles are hard to witness and not want to take part in. However, we have to remain disciplined as investors. We cannot sacrifice our long-held beliefs in the pursuit of a quick buck.
• Client Focus – Focus Matters. The challenges of dealing with market complexity.

Click Here for a PDF of the Newsletter

Section Summary

• Investor Behavior – Here is what we know from experience – being invested when the market corrects can be costly, BUT not being invested as the market surges can be just as damaging.
• Market Notes – Despite worries around rising tensions with North Korea and extreme weather disrupting many major southern cities and states, the underlying fundamentals signal the U.S. economy is healthy and on track for moderate growth. Equity and fixed income returns broadly continued to move higher.
• Equity & Fixed Income Comments – Within our equity allocations we continue to emphasize domestic large-cap growth stocks, foreign small-/mid-cap equities and emerging market equities. Fixed income allocations remain short interest rate risk and underweight corporate credit risk.
• Research Focus – Our relative value analysis is a key component of our asset allocation process. We review our recent decision to increase the amount of emerging markets exposure we have allocated within client equity allocations.
• Client Focus – What is Home Country Bias? We discuss the pitfalls.

Click Here for a PDF of the Newsletter

Section Summary

• Passive v Active Investing – Has the debate moved from a thoughtful discussion to fact? What are the risks of a one-sided discussion as passive flows dominate active? Are we in a passive bubble?
• Market Notes – Despite a considerable amount of political items filling the front pages and taking up time on television, market participants continued to weigh economic trends and corporate progress when voting their opinions. Over the long-term we think this is the most prudent course of action.
• Equity & Fixed Income Comments – We continue to favor emerging markets and small- to mid-cap companies among foreign equities and large-cap companies among domestic equities. We continue to scale back corporate credit and favor high quality corporate bonds where we do have exposure. We moved to underweight interest rate risk.
• Research Focus – We visited the Putnam Tax-Free High-Yield team during the quarter and share our takeaways from this “boots on the ground” part of our research.
• Client Focus – What does it mean to be a Fiduciary? We discuss Department of Labor change and our beliefs.

Click Here for a PDF of the Newsletter

Section Summary

• Reform – At the start of 2017, consumers and businesses were excited by the prospects for an aggressive, pro-growth fiscal agenda coming from Washington. Optimism was tempered by a mix of potential impediments to future growth expectations.
• Market Notes – The S&P 500® Index earnings growth rate for the first quarter is estimated to be +8.9%. If this growth rate materializes, it will be the highest year-over-year earnings growth for the index since the fourth quarter of 2013.
• Equity & Fixed Income Comments – We did not make any large changes to portfolios in the first quarter because our outlook has not changed meaningfully.
• Research Focus – There is nothing wrong with the methodology of the Morningstar Star Rating. The flaw is how it is used.
• Client Focus – Dynamic Total Return is our most recent investment management offering. An overview of the investment strategy is included in our newsletter.