Q1 2019 Asset Management Letter

October 14, 2020   ·   By logicspeak   ·   Comments Off on Q1 2019 Asset Management Letter   ·   Posted in Asset Management Letter Archive

Thrown a Curve

The market threw investors a curve ball in the fourth quarter of 2018. The market was down significantly for the quarter and the whispers of recession and trade wars had built to a crescendo. Fast forward three months and small cap (Russell 2000i) is up 14.58%, S&P 500i is up 13.65%, and international (MSCI ACWIi) is up 9.98% versus being down 20.20%, 13.52% and 12.54% in the fourth quarter, respectively. More relevant to our discussion is the Morningstar Moderate Target Benchmarki that was up 8.68% for the first quarter after being down 6.81% in the fourth quarter of 2018. One would think with positive returns and positive trade talks that market fears would be put to rest somewhat, but one would be wrong as talk of yield curve inversion picked back up at the end of the first quarter.
On that note, we feel it is important to spend some time on the topic of Treasury yield curve inversion. Many point to the inversion of the three-month Treasury bill to the ten-year Treasury note or the 2 year Treasury note to the ten year Treasury note, as imminent recession indicators. Like many items in the media, the message is only partially right. Per Ned Davis Research, the only yield curve that matters is the 3 month Treasury bill to the 30 year Treasury bond and that is nowhere near inversion. Does that mean we will avoid recession in the near future? As investor Jean Marie Eveillard said many years ago “Only God knows and he isn’t telling”. However, keep in mind that every recession since 1962 has been preceded by an inversion, but not every inversion has been followed by a recession. Furthermore, what happens if there is a significant lag between the indicator and the recession, like 1978 when it took 21 months for the market to turn and then it was only down 10.6%. Finally, what if interest rates are artificially being held down by negative rates elsewhere. Isn’t it possible that global investors would rather buy a positive yielding ten-year Treasury note, rather than a negative or barely positive yielding instrument in a country with a lower GDP and at least comparable debt like Germany or Japan? Plainly said, the yield curve inversion argument is shaky at this point in time. Furthermore, concrete action given what we know or, more importantly, what we don’t know is impractical.

Thus, we fall back to our experience and what we know. A few of our fund managers indicated that some of their recession signals flashed at the end of 2018, but not all of their indicators. To refresh, many of our managers are macro-aware, but not macro-driven so we watch their actions for trends. To that end, many of our managers began deploying significant money in the fourth quarter of 2018 and have been rewarded handsomely. One manager that for years told us not to send money as his sector was fully valued called us up and said, “We are finally finding great values, send us money again.” As an aside and to their credit, we have never had any other money manager tell us not to send them more money. We truly respect that type of conviction and discipline as it is rare. Many managers will continue to receive money and get too big to continue to buy what made them successful. On a similar note, none of the managers we spoke to were buying gobs and gobs of U.S. Treasuries to prepare for an “imminent” recession as the media would call it. However, some of our fund managers hold cash that yields 2 to 3% that we may think will be a great option they can put to work if a recession shows up or even if it doesn’t. In the meantime, the other quality companies they own can earn above average returns with a margin of safety. One might even describe these fund managers as sitting back on their haunches waiting for a curve, to string along the baseball metaphor.
Of course, if the recession is imminent, then does one want to own an index fund that replicates the returns of the market, holds no cash, and hedges against downside risk in no way? We would think not, for then one is just forced to hold one’s finger on the trigger to try and time getting in and out of the market. Typically, bad things happen in this type of scenario as one’s finger gets itchy. Or an investor could tell themselves they have a 30 year investment cycle and shouldn’t worry about the market as it trends up the majority of the time. While we agree with this sentiment, we also realize that we are all human and that the behavioral side of investing is far more difficult than most academic theory realizes. Thus, we continue to be happy with our flexible strategies and you may see us add to some sectors that were beat up like small and mid-cap. Keep in mind that our small and mid-cap managers, like many of our other holdings, can and will hold cash when the market gets pricey.
Furthermore, please keep in mind that we are in this with you. We know that when you are thrown a curve it is natural to feel ones knees buckle. It is hard to dig in, plant ones feet and tee off on an opportunity that may or may not seem like a fat pitch because it wasn’t a fast ball right down the middle of the plate. Life has a way of changing variables on us, but with a good plan in place and lots of discipline we think we are positioned for success no matter what is thrown at us.
As a postscript, if the baseball and pitching metaphors were too much, please let us know and we can call with a better example.

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.