1Q 2016 Asset Management Letter

May 3, 2016   ·   By cfgadmin   ·   Comments Off on 1Q 2016 Asset Management Letter   ·   Posted in Asset Management Letter Archive, News

March Madness (or From Chaos comes Order)

Every year March and April presents us one of the best sporting events around in college basketball’s “March Madness”. The skill level displayed by the athletes is only matched by the high drama of the “Cinderella” teams who upset the storied programs. Of course, we are partial to the high drama given our contrarian tendencies. This year was particularly riveting as a #15 seed blew up many individual’s brackets as Middle Tennessee State defeated the #2 seed Michigan State (a pick many had winning the entire contest). Certainly underdogs capture the collective imagination, however, not many make it to the Final Four (the last four teams left standing in “March Madness”). More often than not the Final Four is heavy on top seeds, not #15 seeds. The similarities to investing are not lost on us.

The ‘Momentum/Growth’ vs. ‘ Value’  style reminds us of the “March Madness” pattern. Trendy teams can put together a small run in the tournament, but typically the teams with strong fundamentals and a deep bench are the ones left that last to the final games. Think of a team like Syracuse who runs a traditional but somewhat stodgy zone defense that hardly anyone uses anymore and therefore draws very little glamour throughout the year. However, come tournament time Syracuse is known for its deep runs into the tournament (see Final Four this year). We can’t help but speculate that many of the most renowned value managers must be fans of Syracuse if they follow basketball.

Similarly, our style of investing, global diversification with a “value” tilt may be bucking the trend.  Oftentimes it takes awhile for value to turn the tide and outperform momentum and growth stocks, but when it does it can be very significant. Barron’s magazine wrote an article in March titled  “Will Value Beat Growth” alluding to this direction and it is a movement we certainly support. Further to the point, AMG funds wrote another article ”Will Growth, Large and Mega-cap Stocks Continue to Dominate” that highlighted some very interesting patterns that support our desire to remain overweighted in value stocks. In 1999, 90% of the top 20 stocks were growth stocks and they made up 24% of the S&P 500 returns while sporting an equal weighted Price-to-Earnings ratio of 83.7 (which is very expensive). In 2015, 95% of the top 20 stocks were growth stocks and made up 16% of the S&P 500 return. This same group had a P/E ratio almost equal to 1999 with a P/E ratio of 69. Keep in mind that value stocks significantly outperformed growth stocks from 2000 to 2006.

There is a saying that “an ounce of patience is worth a pound of brains”. For this reason, we are spending so much time on this value ‘concept’. It is our feeling that our global value strategy will reward but patience is required. Similar to Villanova, the NCAA March Madness victor, one must hone a strategy with discipline and patience in order to come out on top. Villanova lost to Oklahoma earlier this year by 23 points before their strategy was hitting on all cylinders, but in the Final Four they beat Oklahoma by 44 points. A nearly 300% improvement in results is not one we expect, but it is certainly a trend we would welcome in value stocks.

P.S – To those clients who do not follow basketball, we apologize. We do have a few resident Kentucky fans who are happy to fill in the blank spots, as they are the most fanatical basketball fans we have found in the South. The majority of our clients are just bidding their time until football season and hopefully you can forgive our excursion into “March Madness”. Of course, if any of you have any pull to get a January Madness started for college football we would welcome that as fodder for an end of the year commentary.

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 toJanuary 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 

ⁱThe 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,). 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.