The Quarter in Review | 3Q 2016

Here is our professional insight and opinion on market results in the third quarter as well as what’s happening in the investment world. In this issue of our letter, The Quarter in Review, we’re highlighting specifics on:

Please follow this link to read more about the Quarter in Review and referenced article on presidential elections


The Quarter in Review | 2Q 2016

Here is our professional insight and opinion on market results in the second quarter as well as what’s happening in the investment world. In this issue of our letter, The Quarter in Review, we’re highlighting specifics on:

  •  Volatility Surges Due to Surprise Brexit Vote
  •  Earnings of U.S. Companies Decline for Fourth Straight Quarter
  •  Interest Rates Hold Steady
  •  A Look Forward

Please follow these links to read more about the Quarter in Review for the 2nd quarter of 2016 and the referenced article on GDP Growth & Equity Returns.


UK Referendum: What Happened, the Impact and Market Reaction

On June 23, citizens of the United Kingdom (UK) voted to leave the European Union (EU). Britain's decision, one of the most significant by a Western country in the past several decades, reverses course of expansion for the EU which had grown to 28 countries.  This action had significant impacts on the global markets over the last few days.  Here is a link to the summary providing additional background on what happened, the impact and our thoughts on the market’s reaction.   

Please follow this link to read more about the UK Referendum.


Why Should I Diversify?

As individual investors, we all have the inclination to focus on and compare ourselves and our portfolio to the highest levels of performance, including what's performing well at the moment. This is human nature – coupled with influences from media – that drives us to look for immediate gratification versus longer term rewards.

U.S. vs. International Markets

One recent comparison issue as it relates to stocks has been comparing returns of U.S. versus International stock markets. Over the last six years, the S&P 500 (a U.S. stock index) has had an annualized return of 11.6 percent while the MSCI World ex USA has returned 2.26 percent and the MSCI Emerging Markets Index has had a -2.28 percent return. So the question may arise: why do I own International stocks that underperform?

As noted in the first article from Dimensional Funds (see link below), failing to diversify can be quite costly over the long term. During the recent period of 2000-09, often called the lost decade for U.S. stocks, the S&P 500 had a negative cumulative return of -9.1 percent. Over that same period, the MSCI World ex USA Large Cap Value Index returned 48.7 percent; the MSCI World Ex USA Small Cap returned 94.3 percent; and the MSCI Emerging Markets Index return a whopping 154.2 percent. It would have been quite disappointing to be all in with U.S. stocks during that decade.

A further point to consider is that based on market capitalization, the U.S. accounts for only 52 percent of the global stock market. This figure may be a surprise to many who have always thought the U.S. market made up a larger majority of the global markets. The point here is a vast number of investment options and opportunities exist outside of the U.S. that should be considered in constructing a portfolio.  While the performance of different country stock classes will vary, there is no reliable evidence that performance can be predicted in advance. Therefore, maintaining some level of global stock diversification – even during down times – leads to stronger total returns over longer periods of time.

Stocks vs. Bonds

A second point of investing diversification outlined by one of J.P. Morgan's global market strategists (see link below) relates to portfolios with different allocations of stocks and bonds. When markets are rallying and folks are feeling more "confident" the common question arises: why do I have a particular allocation to bonds when they are not doing so well?  A classic comment is I am "underperforming" the market. Then when stock markets are selling off (such as the first two months of 2016), the question should I get out of the stock market altogether? is a familiar one. As the saying goes, there is no free lunch. Risk and reward go hand in hand.  A more meaningful set of questions should revolve around this mindset: am I best positioned given my financial goals, risk tolerance and this particular stage of life?

A more conservative portfolio will never outperform an all-equity portfolio during rising markets. Then again, it will never go down as much during market selloffs.  We consistently try to educate clients to avoid comparing their portfolios to the extremes – such as the stock index when markets are surging or bond index when markets are falling. Instead, comparing portfolios to benchmarks that are proportionate to their agreed-upon portfolio mix is a much more prudent approach.

As noted in the Barron's article, since March 2009 a balanced investment approach has underperformed an all equity portfolio. However, if you look at how three different stock/bond portfolios (40/60, 60/40 and 100 percent stock) performed during the financial crisis of 2007-09, a very different story emerges. All three portfolios declined during the market meltdown, the 40/60 portfolio lost less than a quarter of its value whereas the all stock portfolio lost more than 50 percent of its value.

As one might expect, the recovery period for each portfolio was very different as well. A portfolio with 40% stocks and 60% bonds fully recovered its losses less than nine months after the crisis ended, a 60/40 portfolio took about a year and a half before fully recovering.

Please see links to the two articles referenced: 

Comparatively, a 100 percent stock portfolio took more than three years to get back to even – more than double the recovery period of the 60/40 portfolio and almost four times as long as the 40/60 portfolio.

Further, if you look at performance over a longer period from 2000-15, the balanced portfolios outperformed the all equity portfolio with less volatility.

Some Final Thoughts

Over longer periods of time, investors can benefit by having consistent exposure to both U.S. and International stocks. We can say with certainty that, yes, there will be further recessions on the horizon. While nobody can predict the future to know exactly when, maintaining a steady allocation of bonds help portfolios weather the storm of those volatile times.

Every client has a different and unique personal situation. A number of factors go into determining an appropriate portfolio - financial goals, stage of life, size of asset base and personal risk tolerance are a few of the items considered in helping to best determine and recommend an appropriate investment mix.

Our objective at Trinity is to invest and manage an appropriate portfolio specific to your goals, and to educate you along the way so you can remain composed during periods of uncertainty. We believe this long-term perspective helps you to have a healthy and informed attitude about risk and volatility. As your investment partner, we're committed to keeping you on track and moving towards achieving your stated goals.

Please see links for the articles referenced:  Dimensional and Barons


The Quarter in Review | 4Q 2015

Here is our professional insight and opinion on market results in the fourth quarter as well as what's happening in the investment world. In this issue of our letter, The Quarter in Review, we're highlighting specifics on:

  • Overall market performance
  • Fed Raises Interest Rates
  • International Markets
  • Caution and Preservation

Please follow this link to read the full article.  


The Quarter in Review | 3Q 2015

Here is our professional insight and opinion on market results in the third quarter as well as what's happening in the investment world. In this issue of our letter, The Quarter in Review, we're highlighting specifics on:

  • Overall market performance
  • Return of Volatility
  • Merger & Acquisition Activity Heats Up

Please follow this link to read the full article. 


Recent Market Volatility

With the associated headlines of last week’s stock market performance, and its continued retreat on Monday, we believed it prudent to send a note addressing recent economic developments and our related positioning of portfolios.

The current selloff is a result of failed global growth expectations, particularly in China, and China’s initial resulting policy response, which was disappointing to some investors. In our recent quarterly letter we highlighted the volatility occurring on China’s stock market. More recently, China announced a devaluation of its currency sparking concerns that their growth was a bigger issue than thought. It is important to note that China is not the sole reason for the recent global stock market performance but more the lightning rod of overall global economic growth not meeting “hoped for” expectations.


Undoubtedly, the ugliest part about the recent week is the speed at which negative sentiment can perpetuate into the psyche of investors and ultimately the markets. There are institutional traders poised to take advantage of market uncertainty (both up and down). The speed and capital behind these traders is large and can cause significant short-term volatility. This, coupled with emotional selling by investors focused on the short term, can create sizable market sell-offs. Helping perpetuate these sell-offs is a confluence of media outlets sensationalizing every market movement in a hope to attract viewership. During these times we remind ourselves that media companies make money by selling advertising to a large viewership, not investing money.


 This year we have been positioning client portfolios more conservatively as our outlook on the markets and economy have generally followed a cautious tone. In short, we continue to be underweight in riskier assets such as emerging markets and high yield. In addition, we have trimmed equity exposure in portfolios and reallocated those monies to fixed income, providing additional benefits to the portfolio when markets stumble. Lastly, a number of the active managers we utilize have built up cash reserves within their portfolios. Most notably, FPA Crescent, a substantial holding in client portfolios, has built a 40% cash / bond position to take advantage of opportunities like this.

Although our portfolios may be more conservatively positioned, they will undoubtedly decline in the short term as markets decline from the current moves being seen. We have entered a phase in the market where growth has become a major focus of returns in the aggregate. When those growth expectations fail to manifest themselves, selloffs will ensue.

Staying disciplined to our investment principles is what allows us to act differently than the crowd and be able to focus on the long-term goal of growing your investments. Unfounded media hysteria is likely to continue, especially among short-term traders and “market experts” whose goal isn’t to affirm your balanced portfolio, but rather to leverage the moment for exposure and awareness.


JP Morgan recently released an interesting graph (see attached PDF) outlining intra-year volatility. As noted on the graph, over the last 35 years (1980 – 2015) the average “intra-year drop” in the S&P 500 was 14.2 percent.  Thus, in an average year the S&P500 will drop over 14 percent from its’ intra-year high to an intra-year low. Yet in 27 of the last 35 years the S&P500 still realized positive returns for that year. Over the last few weeks, the S&P 500 has dropped approximately 11 percent from its intra-year high, so nothing out of line. In the short term, we do not know how long the current turbulence will last. Regardless, we will continue to focus on exercising prudent and disciplined judgement in managing client investments.

In closing, we would like to reinforce that events like this will happen. In fact, we should all expect it. However, we recognize that knowing volatility will happen does not remove the human emotional element of fear and concern that can arise during unpredictable market swings.

Please follow this link to see the annual returns and intra-year declines in a chart format.


Why Morningstar’s Rating of Dimensional Funds Matters

Dimensional Funds (which we use at the core of client portfolios) recently received Morningstar's Top Stewardship rating of "A".   A number of factors are scored by Morningstar in assessing and rating fund families such as:

  • Does the firm exhibit a culture that is shareholder friendly?
  • Are fund manager incentives aligned with those of its investors?
  • Are fund fees below industry norms?
  • Does the firm follow a consistent and disciplined investment process?
  • What is the turnover rate of fund managers?
  • How strong is their Board of directors?
  • Does the firm have any regulatory issues or shareholder lawsuits?

Only a small handful of fund families received a similar "A" rating.  We are pleased to utilize funds from Dimensional knowing their strong focus on investor stewardship.  Dimensional Funds are offered only through select investment firms that meet their stringent criteria and Trinity is honored to meet those high standards and offer their highly respected funds to you.

Please follow this link to read Morningstar's article they released regarding DFA's disciplined approach.


The Quarter in Review | 2Q 2015

Returns for the second quarter of 2015 were relatively mild given the headline drama with China and Greece. One could almost characterize it as a quarter of Much Ado About Nothing as broad market equities were relatively flat across the globe. Investments more sensitive to interest rates stumble as yield rose, pushing prices down. Overall, as the Greek and Chinese drama unfolded, we found that true economic growth remains a concern and continued our focus on investment fundamentals.

Please follow this link for the full edition of The Quarter in Review | 2Q 2015.