Category: Newsletter

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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.

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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.

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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.

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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?

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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.

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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.

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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.

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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.

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Section Summary

• Buffet Wisdom – “We have no idea – and never have had – whether the market is going to go up, down, or sideways in the near or intermediate-term future. What we do know, however, is that occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. And the market aberrations produced by them will be equally unpredictable, both as to duration and degree. Therefore, we never try to anticipate the arrival or departure of either disease. Our goal is more modest: we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
• Market Notes – During the fourth quarter, the clearly dominant headline was the U.S. presidential election. By the time this newsletter reaches you, we will be talking about President Trump. His victory contributed to some surprisingly dramatic movements in equity and fixed income markets as “consensus” thinking seemed to rally around some major themes.
• Equity & Fixed Income Comments – Market volatility provided us with the opportunity to make some strategic adjustments to client portfolios during the quarter.
• Research Focus – We review the Anatomy of an Investment Decision we recently made in client portfolios to provide insight into our decision making process.
• Client Focus – Behavioral biases are arguably one of the most harmful detractors to long-term investment compounding that an investor can experience. And unfortunately they are numerous. Combating these biases can be simple if you establish a plan, invest long-term and do your homework. That is the basis of what we do at Entasis.

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Section Summary

• Market Performance – Too often the “market” is only discussed in the context of highly publicized indexes such as the S&P 500 Index. Portfolios and investment opportunities are influenced by a much broader set of circumstances. Use our return table for a better understanding of the how the “market” performed beyond the headlines.
• Market Notes – We do not draw conclusions every quarter. We are long-term investors. We use quarterly information on a few core market drivers to help shape our assessment of long-term trends relevant to client portfolios.
• Equity & Fixed Income Comments – In these sections we provide a review of market results and discuss how we are currently positioning our investment portfolios.
• Research Focus – All of our research and investment decisions made for client portfolios is done in-house. In this section we provide a review of the process behind a recent decision.
• Client Focus – We believe that too many investors do not have clear answers to how much they are paying for financial advice or how fees are calculated on their accounts. In this section we provide some context. Contact us to talk about how we can improve your experience.