You’ve got to know when to hold’em Know when to fold’em Know when to walk away Know when to run… The Gambler (released 1978), lyrics by Don Schlitz, vocals by Kenny Rogers Growing up in rural western Kentucky, it shouldn’t come as a surprise that country music stations littered the AM/FM radio dials. The Gambler received significant air time not only on country stations but also pop stations as the country sound began a “crossover” from its honky-tonk roots to arguably, the more mainstream pop or Top 40 genre. While our method of following disciplined allocation strategies doesn’t correspond with the chorus, the lyrics do seem to reference the subtleties of reading a situation and taking steps (in a portfolio) that might work to one’s advantage. The Winning Streak To date, 2017 has been a positive year for equity and bond markets alike. It is always gratifying to see client portfolios increase in measured increments without the anxiety that often accompanies a sharp peak or a deep, extended valley. What may be less obvious is the un-harried Read on! →
As I write this commentary at the mid-point of 2017, the markets have made steady progress in the first 6 months despite what has been an unpredictable and often concerning geopolitical environment around the world. I often tell clients and interested parties that unexpected events can have an impact on markets but they are generally short-lived. At the end of the day, the markets go back to being influenced by companies and their profits. That seems to be the case so far in 2017 as we get ready to celebrate with July 4th fireworks, even though every week is filled with news about our partisan politics or the latest terrorist incident. In the U.S., the Federal Reserve (Fed) made good on raising interest rates. Unemployment is low, workers are producing goods and services and financial markets have responded in-kind. While somewhat different economic factors are in play, most overseas’ economies and financial markets are outperforming the U.S. Even bonds, an asset class most felt would lag as the Fed raised rates, have done well on a relative basis. Read on! →
DIVERSIFICATION AND COMMITMENT
Two keys to positive, long term performance with lower volatility are diversification and commitment. Diversification, assessed more objectively through correlation analysis and other valuations metrics, can be achieved through the use of various types of investments across different asset classes. Commitment, sometimes subjective and influenced by human behavior, is typically shown by a willingness to hold an investment or group of investments through both peaks and valleys over a long period of time.
Market performance since the Great Recession and more recently, the 2015 Correction focuses our attention on these two aspects of investment management. It is also the reason Clearview Wealth Management maintains an allocation to a category of investments we define as “Hybrids”.
HYBRIDS – ROLE AND COMPOSITION
Hybrids play a unique role in a portfolio by behaving differently (uncorrelated) than bonds and traditional equity investments therefore enhancing diversification and complementing long-term portfolio returns. This uncorrelated asset class is comprised of four distinct subgroups and uses investments that are publicly traded and liquid.
HEDGE FUNDS – Investment strategies that include short selling, the use of futures, options, derivatives and arbitrage that seek to achieve absolute returns. Absolute return refers to attempts by a manager to achieve a return on an asset irrespective of the direction of the wider market. This is in contrast with relative returns where the performance of an investment is compared with a market benchmark or index. Absolute return funds aim to make money for investors in both rising and falling markets.
ALTERNATIVE INCOME – US and non-US speculative grade or high yield junk bonds that are rated below investment grade at the time of purchase. This investment strategy has a higher risk of default, but pays a higher yield than investment grade bonds to attract investors.
INFRASTRUCTURE – Defined by Merriam-Webster dictionary, a system of public works of a country, state, or region; also: the resources (as personnel, buildings, or equipment) required for an activity. Investments grouped in this category include oil/gas pipelines, utilities, public works, toll roads, international airports, and selected logistic centers (ports/docks/rail).
HARD ASSETS – Commodities or raw materials used in the production of foodstuffs and in manufacturing industries. Commodities include oil, metals, grains and cereals, soft commodities such as
sugar, cocoa, coffee and tea and vegetable oils such as palm oil, soy bean oil and sunflower seed oil. Exchange-traded commodities are quoted in specific lots of a specific quality for specified delivery.
PERFORMANCE – THE LONG AND THE SHORT
During the months leading up to the bottom of the Great Recession in the middle of March 2009, Hybrid category investments performed as expected relative to the other asset classes of fixed income and equities. Performance was lackluster when compared to the steady positive performance shown by the S&P 500 since the Great Recession but Hybrids again showed their strength during the 2015 Correction. The Table below illustrates these fluctuations during the 2015 Correction and will hopefully reinforce the value hybrid investments can play during market cycles and shorter term corrections.
CONCLUSION – THE CASE FOR HYBRIDS
When used together with investment grade fixed income and traditional equity investments, hybrids have the potential to make positive contributions to the long term performance of a portfolio. There will be times it becomes easy to criticize the category and/or a specific investment but long term, the Investment Team believes the Hybrid asset class represents an opportunity for favorable risk adjusted returns.
Portfolio Recap The 2nd quarter was marked by very low equity market volatility and steady, positive performance across all major indices. Our diversified approach to managing investments continued to focus on limiting downside equity risk through a bias for value-oriented, high quality, dividend paying domestic and international equities. In the short term, volatility and potential for loss has been further mitigated by allocating fewer investment dollars to US Small Cap stocks. They have experienced significant gains over the past several years and in our opinion, have been richly valued for quite some time. This is why we reduced our positions in the latter half of 2013, well in advance of Fed Chair Janet Yellen’s remark about the category valuations being stretched. Hybrid investments, led by preferred stock, global bonds and energy infrastructure, had a strong quarter validating our belief the asset class can perform well during strong equity markets. Our consumer-focused emerging market investments slightly under-performed during the quarter but exceeded our expectation on a risk-adjusted basis. Despite headwinds created by the Federal Reserve’s plan to stop tapering and end Read on! →
May 2014 Newsletter If you can identify with a May 1st deadline, you are likely dealing with a rising college student. For those who are not aware, May 1st is the date by which decisions must be made to accept the “college of their choice.” As we approach Memorial Day weekend, most families are deep in the throes of final exams, final concerts, graduations and the associated parties to celebrate the accomplishments of their graduates. This is indeed a time for celebration. However, if you look a bit deeper, it is also likely a time of angst as parents worry they haven’t accomplished everything necessary before their child leaves for college. There are the obvious things, like packing and paying the tuition when it comes due. There are also some essentials you may not have thought about, which need to be discussed before your child leaves the nest. Not only will it help make your life easier in the long-term, but it can go a long way toward clearly setting expectations and laying a good foundation for your young adult’s Read on! →