Independence Day
Not to be outdone by fireworks and parades on July 4th the United Kingdom celebrated its own Independence Day on June 23rd in the form of “Brexit”. In a colossal upset, the mainstream media and the “Establishment” leadership were dead wrong on their assumption that citizens would vote to remain a part of the European Union. This vote by the British people to decide their own national and economic sovereignty roiled the markets for two days after the vote and then turned back up. Of course, if the United Kingdom does withdraw from the European Union, the process may take as long as two years. In the meantime many pragmatists argue the European Union may become much more responsive to individual county requests which may be a near term positive. On the other hand, many other pundits have argued that “Brexit” is the domino that brings about the destruction of the European Union and with it all of the positive impact from globalization and free trade.
Call us idealists, but we are big believers in freedom and the ensuing benefits associated with it. The European Union and the idea of “freer” trade throughout Europe is a great concept but with that should also be the ability to control one’s own economy and, for better or worse, the United Kingdom decided it wanted more freedom. In theory, with the pound dropping 8% after “Brexit”, exporters in the United Kingdom just became more competitive from a price standpoint. Sure there may be some additional boundaries imposed by a threatened bureaucracy in Brussels. However, it is our opinion the flow of profits inherent to capitalism will not be dammed no matter the man-made structure.
To forecast is folly so we are careful not to predict the future of the European Union. However, we feel the volatility presented by “Brexit” could be a fantastic buying opportunity. On that note, we have been adding a global fund for clients. Please pardon the pun but we realize that investing in European companies is not only foreign but scary to some. Thus, we have chosen to add to the international market with a global fund that can buy international or domestic firms. Therefore, they are not forced to buy international companies at all costs.
The fund we have chosen to pursue this strategy is First Eagle Global. The fund is up 6.94% through 6.30.16 versus the S&P 500i being up 3.83%, International (MSCI EAFEi) down 4.42% and small cap (Russell 2000i) up 2.22%. We highlight First Eagle not just because their performance is good but more importantly because they exhibit a strong value discipline that leaves them with no exposure to European banks and with 18% in cash as of 06.30.16. In 2008 when international (MSCI EAFEi) was down 43.38 and the S&P 500 was down 37%, First Eagle Global was only down 20.87% because of this same discipline.
In addition, with current P/E ratios in the US market trading higher than their 15 year average in every sector except small cap value, we find it useful to consider pockets of the market trading at a discount. The primary sectors exhibiting these characteristics are international, financial, energy and healthcare/biotech. Many have experienced us nibbling at energy and international last year, but this year we have begun to also selectively add healthcare/biotech and financials. Biotech is down 29.05% in the past year and financials are down 5.96%. Biotech/healthcare is down due to a significant run the previous six years and a normal reversion to the mean along with the political dust up caused by a few bad actors in the sector. The free market system seems to have already removed the egregious parties but the negative atmosphere still remains. What we hear from our managers is that there is not enough political willpower to stymie the growth of Biotech/Healthcare. The financial sector is the other end of the spectrum in our mind. The bad news is so priced into banks that any increase in interest rates or growth in the economy would cause a sector trading below its book value (in the banks case) to skyrocket carrying the financial sector with it, in our opinion.
Thus, all the media headlines aside, we feel there are opportunities we can continue to exploit. In some of these areas we will use managers with a flexible investment mandate like First Eagle Global and for others, we will use exchange traded funds and index funds like Vanguard Financial ETF, iShares Nasdaq Biotechnology Index and Energy Select Sector SPDR. In beaten down sectors and efficient markets, we are fine with index funds and ETF’s, but in inefficient and pricey markets we will continue to make use of managers with strong track records, stable organizations and low expense ratios.
We started out this quarterly with a bit of a nationalistic flavor and in light of current events, we feel even more compelled to keep the theme going in spite of the dry investment commentary in between. Winston Churchill said “Democracy is the worst form of government, except for all others.” Institutions, like people, are imperfect and yet they can still be a positive force. Please take time this Independence “Month” to reflect upon the greatness that life, liberty and the pursuit of happiness has brought to the land of the free and the home of the brave. Thanks to the “Founding Fathers” who laid the framework to protect our freedom at great personal risk and the ones that presently serve to secure that same freedom. As always, please call with any questions.
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. (“SSI”), Synovus Trust Company, N.A. (“STC”), GLOBALT, a separately identifiable division of STC and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. 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 and Synovus Trust. Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.
Pursuant to rules adopted by the U.S. Securities and Exchange Commission governing federally registered investment advisors, we request that you take time to compare your account balances and statements issued by National Financial Services, who acts as the custodian for your account(s). We request you contact us immediately if you do not receive these statements or if the values reflected 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.
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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