To Our Business Partners

THE INVESTING(?) LANDSCAPE

While tempted to replace the word “investing” with “speculating” in the title, we thought we’d review some interesting developments in the investing world over the last few years that have caught our attention and whether they are positive for the investor. 
 
Exchange-traded funds (ETFs) are pools of assets that are listed on the stock exchanges and can be traded at all times of the day.  These funds are usually “unmanaged” (computers manage the portfolios, not humans), and usually track a market index or sector.  ETFs number nearly 3,900 in the U.S. and could grow to exceed the number of publicly traded U.S. stocks!  The supposed benefit of ETFs is that they can be bought/sold 24/7, compared to plain old mutual funds, which are priced based on net asset value at the end of each day.  While this adds convenience and additional liquidity, it has seemingly become another avenue for speculation.  Is this liquidity benefit really producing better results for investors?  It’s doubtful. 
 
The average mutual fund now has a “turnover” ratio of almost 80% which means the whole portfolio is bought and sold every 9.6 months, which also means the average holding period of a stock is a little over a year.  Many funds report turnover rates of over 100%, meaning they’re holding a stock for less than a year!  These fund managers trade stock symbols and have seemingly no interest in long-term business ownership.  Does this frenetic activity benefit the fund holder?  Data suggest this is likely not the case. 
 
Taking speculation a bit further, many funds have started to add “private equity” (non-publicly traded company) holdings to their funds, thus offering an alternative to investors besides public stocks and bonds.  In the past, private equity firms used initial public offerings (IPOs) to book the profits from ownership of private companies.  Lately, the IPO market has weakened so private equity managers have turned to the mutual fund industry to liquidate some of their holdings.  While this may seem to be an attractive opportunity for the fund holders, two huge disadvantages are non-marketability and pricing of the assets.  What do you suppose might happen if the stock market turns down and these private companies (1) can’t be easily sold, and (2) it becomes nearly impossible to correctly price the securities?  The speculative phenomena described above likely won’t yield a pretty outcome for these ETF and mutual fund holders. 
 
The financial services industry has always been good at creating “shiny new” investment products for the investing public.  The real question is how many of these will enhance the returns realized by the investor and not just those who created and sold them.  Meantime, Your Managers will stick to their conservative, disciplined, patient, time-tested stock-picking strengths. 

PORTFOLIO VALUATION 

There’s still no change in the investing marketplace.  We have more cash than good investment ideas.  Stocks are generally priced to yield mediocre long-term returns.

RECENT RESULTS

The markets rebounded in May after two months of declines, with most indexes rising 4-6%. The NASDAQ Composite had a gain of over 9%, rebounding sharply from larger losses earlier in the year due to a snapback in big technology stocks.  Year-to-date, the indexes are mixed, with large cap indexes up marginally and smaller stock indexes down a not insignificant 7-8%. Over the past 12 months, market performance has varied widely. Large-company stock indexes are up 12-14%, while mid- and small-cap indexes have remained nearly unchanged. Our group* of portfolio holdings has produced positive returns in all three periods but lag the large cap indexes over the last 12 months. 

*The group of “portfolio stocks” — our Equity Composite for the purpose of evaluating investment performance — consists of 19 stocks that are held in our clients’ accounts. Portfolios might hold some or all of these stocks, depending on investment guidelines unique to each client, the timing of purchases and sales, and start dates of accounts. The performance of this group of stocks is a good proxy for our equity performance but might vary widely among accounts. Of course, past performance is not necessarily indicative of future results.

We hereby offer to deliver to you without charge a copy of our current Form ADV Part 2, in accordance with the U.S. Securities and Exchange Commission’s “Brochure Rule.” Please contact us if you would like us to send you a copy.