Asset Management Letter Archive

1Q 2014 Asset Management Letter

April 14, 2014   ·   By   ·   Comments Off on 1Q 2014 Asset Management Letter   ·   Posted in Asset Management Letter Archive

“Perception or Reality”

As the saying goes, “Perception is reality”. To that end, research at Sweden’s Karolinska Institute has found that imagination of a sound alters brain function in the same way that actually hearing a sound does, thus creating a perceived reality. The price-to-earnings ratio of the S&P 500[i] expanded 23 percent  last year while corporate profits increased 5.1 percent (half of the increase predicted at the start of the year). This, of course, brings up the question in our mind, “Was the growth in the market last year real or illusory?” (Please refer to your statements if you have any worries).

On a similar note, the latest sensationalist story in the financial media is Michael Lewis’s “Flash Boys” about the subject of high frequency trading. We mention this in the same vein as the perception or reality concept, as it really does sound “Matrix-like” when they speak of dark pools, millisecond trades and algorithms. While we applaud Lewis, Brad Katsuyama of IEX, Rich Gates of TFS Capital, and others for shedding light on market inefficiency, our philosophy falls back upon its precepts when facts are questioned. Market manipulation for pennies on a dollar is something we certainly disagree with on principle, but in practice, we have always believed the market oftentimes reflects price and not valuation, to paraphrase Philip Fisher, author of “Common Stocks and Uncommon Profits”.  The reality is that investing takes a well-grounded valuation discipline in the face of volatility. With this strong investment discipline stable results should generally occur more often than not. Therein lies the magic of compounding, consistent and positive results outperform volatile patterns of returns. For instance, one can grow a hypothetical investment of $100 at a rate of 7% annually for 10 years resulting in $196.70. However, the more exciting ride of up 21% and then down 7% over  5 cycles (10 total years) averages up to 7% on an annual basis but only gives one $180.40 after ten years.  It is, of course, the approach of the former and not the latter example that we focus on for our clients. We realize this may not be as “flashy” as the trade du jour at the bottom of your TV screen but it suits us just fine.

On the subject of consistent returns, the Morningstar Moderate Target Index that we most closely associate to our portfolios was up 1.50%i for the 1st quarter and we performed in line with that index. On the surface, the return looks boring but underneath the surface was a significant amount of volatility in sectors such as Russia, China, Japan, emerging markets, biotech, 3D printing and commodities to name a few. China’s Hang Seng Indexi was down 4.15%, while Japan’s Index (MSCI Japan) was down 5.61%. Many emerging markets that were down significantly last year like Brazil and India were up in the first quarter while 3D printing reversed roles with them. Biotech still ended up for the first quarter but gave back 10.25% in March alone. Commodities were mostly up. Most notably gold and silver were up slightly but others were up significantly as coffee was up 60% and corn was up 14% for the first quarter. We mention these outliers to convey we are watching it all with a goal of achieving positive long-term results with limited volatility for our clients.

We recognize that at times the rabbit will leave the tortoise behind; however, the math of compounding suggests that a consistent and methodical approach will win over time… no matter the fleeting perception.  We couldn’t agree more.  Finally, please do not forget how real and substantial the relationships are that we have developed over the years with you. Whether it was a jubilant occasion such as a wedding or a dream home purchase or something as somber as the passing of a loved one, we have been grateful to have served you. Taking the time to express our gratitude reinforces our sense of purpose.

 

General Compliance Disclosures

Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.

Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to

January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.

Investment products and services provided by Synovus are offered through Synovus Securities, Inc, Synovus Trust

Company, N.A., GLOBALT, Inc. and Creative Financial Group. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.

The U.S. Securities and Exchange Commission adopted new oversight rules designed to help and protect all investors. These rules generally reflect a reaction to the Madoff and custody scandals, but they do require that we, like all investment firms, adopt new policies and procedures related to verification of your accounts. As such, we request that you take time to compare your account balances and statements from NFS and to contact us if you do not receive those quarterly statements and/or that the values are materially different.”

Cost basis reporting

If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.

Use of Indexes
[i] The investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell, Morningstar). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time.  Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.

 


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Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank. You can obtain more information about Synovus Securities, Inc. and its Registered Representatives by accessing BrokerCheck