It’s rare to find someone who likes to be early to a party. It’s a unique person indeed who enjoys what most consider at best, an awkward situation with a host who silently wishes they had a few extra minutes to prepare. At the other end of the etiquette spectrum are those who don’t know when to leave. Most make their exit while still having fun, but there are always a few who overstay their welcome, fueled by the adrenaline of rich food and heavy handed cocktails. Sound familiar? Like most celebrations, the “market party” has an awkward beginning with a handful of guests making idle chatter while anxiously waiting for others to arrive. Somewhere along the way, the early arrivers are joined by the validators. The party then takes its legitimate place as a festive, burgeoning event where everyone seems happy and revels in good cheer. Last but not least, the latecomers arrive. Whether due to procrastination, an overbooked dance card or just plain forgetfulness, every party has them. Whichever group the investor may belong to there is Read on! →
In the last newsletter, I offered my perspective on the Dow Jones Transportation Index (DJTI) in the form of proxies that most everyone finds familiar. As expounded on in March, planes, trains and automobiles are important foundations of a successful U.S. economy and equity market. When reflecting on topics for May’s missive, it became clear while reading Berkshire Hathaway’s latest annual report that expanding on the trifecta might not only be fun, but also prove informative in a very portfolio specific way. It will not come as a surprise to readers who have owned Berkshire Hathaway (BRK.A & BRK.B) for a number of years, or to those who may have just purchased the company stock last year, that its per-share market value experienced a drop of 12.5% in 2015. While somewhat disappointing, we concluded the decline created an attractive discount to the company’s fair market value. Select legacy holdings and new positions were subsequently increased and added, respectively. While it is impossible to predict long term results, we are pleased to share that BRK.B (share class owned by Clearview clients) 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.