Northwest Investment Counselors is pleased to share that we are #7 on the list of Oregon’s top Registered Investment Advisory firms as ranked by assets under management by Investment News.* “We are pleased to have made Investment News’ list,” said Mark Scarlett, Principal and Co-founder of Northwest. “I want to thank our clients for the trust they have placed in us and the hard work and dedication of our employees. As a result, we have grown by over $150 million in the last 10 years, ” he added.
Founded in 1998, Northwest now manages over $300 million for families and foundations, primarily in individual stocks and fixed income securities. Our financial guidance can be summed up by three key attributes that make Northwest’s wealth management distinct and valuable. We put our clients’ needs first rather than products or quotas. Our wealth management team draws upon a wide breadth of experience, education, and credentials to develop portfolios that fit the unique needs of our clients. And the in-house and rigorous nature of our investment process, which has produced tax-efficient investment results with below average volatility, is directed by a team of portfolio managers, all of whom have earned the Chartered Financial Analyst (CFA) designation.**
*Methodology: Investment News qualified over 1,600 firms headquartered in the United States based on data reported on Form ADV to the Securities and Exchange Commission as of May 1, 2015. To qualify, firms must have met the following criteria: (1) latest ADV filing date is either on or after January 1, 2015, (2) total AUM is at least $100M, (3) does not have employees who are registered representatives of a broker-dealer, (4) provided investment advisory services to clients during its most recently completed fiscal year, (5) no more than 50% of amount of regulatory assets under management is attributable to pooled investment vehicles (other than investment companies), (6) no more than 25% of amount of regulatory assets under management is attributable to pension and profit-sharing plans (but not the plan participants), (7) no more than 25% of amount of regulatory assets under management is attributable to corporations or other businesses, (8) does not receive commissions, (9) provides financial planning services, (10) is not actively engaged in business as a broker-dealer (registered or unregistered), (11) is not actively engaged in business as a registered representative of a broker-dealer, (12) has neither a related person who is a broker-dealer/municipal securities dealer/government securities broker or dealer (registered or unregistered) nor one who is an insurance company or agency.
**To learn more about the CFA charter, visit CFA Institute.
While you should receive our detailed year end newsletter soon, we wanted to quickly reach out to you to provide our thoughts and action plan.
First off, up until last summer US stock markets have been rather subdued with no correction (more than 10% down) in a few years. Even the dramatic decline in the price of oil which began mid 2014 had been orderly up to late last year.
WHAT’S CHANGED THEN?
China is probably the best explanation with the strong Dollar a contributor too. We have written about both of these before as well as covering the drop in oil in one of our quarterly economic updates at the beginning of 2015. We said you should expect the price of oil to stay low for a while, and that consumers would benefit and eventually spend some of the windfall.
We would boil this market correction down to changing expectations for corporate earnings this year. We don’t see a recession in the US or anything approaching 2008-2009. So take comfort from that. The US only exports something like $120 billion in goods directly to China. Also, interest rates are not increasing to any degree such that this would change how investors capitalize earnings or pose competition for investor dollars. Inflation, too, is still on hiatus. The drop in the price of oil is far from being a negative for our economy. The drop in gasoline prices alone added $134 billion to consumers’ pockets (more than total exports to China) in 2015 versus 2014. So, no recession here unless you live in oil country.
Even without a US recession global companies are exposed to slowing conditions abroad. For example, around half of the sales of companies in the S&P 500 index are from international markets. So Investors are concerned that corporate earnings will not measure up to what was expected in 2016 with the world economy slowing. They’re probably right. With the Dollar up, US firms can become less competitive and earnings abroad translated back into Dollars will be lower than expected just last year. And as we wrote in our year end newsletter, stocks are expensive and probably priced for perfection.
NOW FOR THE GOOD NEWS.
Take a close look at the chart below of S&P 500 profits per share since 1960 and the S&P 500 index value. (The red line shows earnings, and the blue line represents price.) Through war, recession, whatever, never before has the S&P 500 price and earnings failed to find a bottom and recover. This time will be no different–be patient.
The sell off has made some of the companies we own buys again. Many have been holds to use Wall Street jargon. And we have been able to add a couple new names in the industrial sector that we think are high quality and now good values –MSC Industrial Direct in the Smaller Companies portfolio and Rockwell Automation in Equity Income. We are looking for more. You can read more about those additions in our year end newsletter. Most of you, too, have a large portion of your portfolio in bonds. Bonds are up over this period of volatility as investors seek safety. That’s the benefit of diversification.
So again, please be patient but don’t hesitate to call or come in if you have questions, concerns, or your circumstances have changed that may impact your tolerance for risk in your portfolio.
The securities mentioned are not the only securities we have purchased in the last year for our clients. If you would like a list of all securities purchased in the last year, please contact us. Additionally, it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned.
The probability of a rate hike at the December 16th FOMC meeting, as calculated by the market, now stands at 80%. Whether it actually takes place in a week, or whether the move takes place at one of the next two meetings, the consensus is that short-term rates will move higher soon. We have written over the past months, and even years, not only our view of when the Fed will raise rates, but also what the impact will be on the most rate-sensitive area of most portfolios: bonds.
Just yesterday I received an email that was likely similar to emails you have been receiving lately, from one of the many financial services firms who have taken it upon themselves to save our fixed income portfolios. The subject header read, “Is your fixed income portfolio prepared for rising rates?” The first line, in bold, warned me, “It’s the interest rate risk inherent in fixed income: when interest rates rise, bond values fall.” Based on the severity of warnings such as these, that we have all been subject to through news media outlets and the marketing divisions of asset gathering financial companies, I decided to do some digging to see just how “at risk” we truly are with regard to bonds.
In actuality, my “digging” involved updating a chart to which I like to refer that I think should relieve those concerned about rising interest rates. The chart below, using data compiled by Morningstar’s Ibbotson SBBI 2015 Classic Yearbook, shows that even during long periods of rising interest rates, US intermediate-term government bonds rarely exhibit negative returns: (Click on the chart for a larger version)
While the long explanation for these welcome results is related to duration and convexity (i.e. more is gained from a fall in yield than is lost when interest rates rise), the shorter answer is that total returns from bonds comes from a capital appreciation component and an income component. In a bond portfolio that is properly laddered and/or managed, maturing bonds are reinvested at higher rates, so that over time, higher rates mostly offset capital losses, even during rising rate periods.
An even more positive chart (pun intended) explores what happens to bond returns with longer holding periods. This data, also provided by the Ibbotson SBBI 2015 Classic Yearbook, demonstrates how holding assets for long periods of time has the effect of lowering the risk of experiencing a loss of capital: (Click on the chart for a larger version)
Throughout these 5-year rolling-periods there were times where interest rates undoubtedly rose for an extended length of time. In spite of rising rates, bonds have demonstrated a remarkable ability to preserve capital when held judiciously and through full market cycles.
It should be noted that here at Northwest Investment Counselors we invest primarily in corporate and US Government Agency debt securities. Agency bonds tend to move almost in lockstep with US Treasuries due to their implicit government guarantee, the major difference generally being the structure of agency bonds, many of which are callable, compared with plain vanilla, non-callable Treasuries. The above trends, while similar for all high-quality, investment grade bonds, are likely somewhat different for corporate bonds, with the notable difference being the higher return volatility of corporate bonds. Since they are inherently riskier, the returns in good years will be higher, and the negative return years will see more capital depreciation. Nonetheless, well-researched corporate bonds will offer many of the same portfolio stabilizing characteristics of US intermediate-term government bonds when held for long periods, while in most cases providing a higher level of income.
Please contact us directly to learn more about the contents of your bond portfolio specifically or to hear about our various fixed income solutions that provide income while also matching cash flow with liabilities.
As China’s markets fall and drag down global equities, the underlying concern is undoubtedly how much a slowdown in the Chinese economy will affect the rest of the world. Since the 2008 global financial crisis, China has notably emerged as one of the twin engines of world growth.
China has contributed as much to world GDP growth as the US in the past decade and a half, and even more than the world’s biggest economy since the 2008 financial crisis, according to the IMF. Indeed, the IMF projects that China will generate around double what the US contributes to world output until the end of the decade. Together, the US and China are expected to generate as much world output as the rest of the world put together.
Prior to China integrating with the world economy, the US was the biggest and sole engine of global growth as it accounted for nearly a quarter of world GDP, based on market exchange rates. So, it’s the rapid growth of China, which rose from accounting for a mere 2% of world GDP in 1995 to around 15% now, that helped the world economy grow so quickly in the 2000s.
As China slows from the nearly 10% growth rate that it clocked in the first three decades of its reform period, which began in 1979, to what is thought to be a more sustainable 7% or so, the world economy is likely to slow with it. The main areas where the impact will be felt would include not only commodities, but also consumer goods, including luxury goods.
China’s re-balancing of its economy means that consumption (what consumers buy) will become a bigger part of the domestic economy than investment, and services will become a more important driver of growth than manufacturing. As a result, a Chinese slowdown will affect not just commodities and capital goods, but also global consumer demand and thus the profits of multinational companies in America and Europe. Here’s a breakdown of the most affected:
1. Commodities exporters
The countries most affected by a Chinese slowdown are still likely to be those that export a great deal to China, notably commodity exporters such as Australia. As Chinese demand for raw materials and commodities decline, there will be a knock-on effect in terms of their economic growth.
For Australia, China accounts for around one-third of all exports.
For Sub-Saharan Africa, China is the the largest trade partner, accounting for around one-eighth of all trade. But the impact will be concentrated since five countries account for three-quarters of all of Africa’s exports to China: Angola, the Democratic Republic of the Congo, Equatorial Guinea, Republic of Congo, and South Africa.
China has surpassed the US as the most important trading partner for Latin America, which has traditionally been seen as America’s backyard and therefore most susceptible to the economic fortunes of its northern neighbour. But that is no longer the case. Latin American exports to China have risen to account for a record 2% of the GDP of the region.
As China’s growth slows, its imports have fallen by 8% from a year ago, as seen in the latest data for July, following a similarly sizeable 6% drop in June. The slowdown has been felt in the commodity price falls seen throughout the summer that has led to tens of thousands of job losses by oil and coal companies globally, as well as others.
But, it’s not just commodities. Capital goods imports have also fallen, which will affect countries like Germany where exports to China account for around 2% of GDP. Germany itself accounts for the bulk of EU exports to China so the largest country in Europe, which has recovered on the back of exports, will also feel the impact.
Indeed, the European Union is China’s largest trading partner, and China is the second-largest trading partner of the EU after only the US. So, a slowdown in China will affect Europe, which is also felt in the profit warnings issued by European companies such as Burberry and BMW as their sales in China slow.
3. The USA
But that doesn’t mean that American multinationals will be unaffected. For instance, the world’s most valuable company, Apple, sells more iPhones in China than the US, and its CEO has reassured markets more than once that the Chinese slowdown won’t negatively affect their business.
4. Financial markets
Finally, the Chinese slowdown has been most visibly seen in financial markets. China’s stock market is largely closed to outside investors so does not have a direct impact on global investors. But, despite rebounding from their initial fall, equities markets are certainly reacting to the impact of a Chinese slowdown.
The UK’s FTSE will feel this most acutely, as it has a large portion of commodity stocks and around half are multinational companies, making it one of the most open bourses in the world. No wonder UK stocks experienced their worst one-day fall since the 2008 financial crisis when China’s market tanked.
Undoubtedly it’s unusual for the world’s second-largest economy to be a middle-income country that is not entirely market-driven. Given the importance of China to the world economy, it’s time to get used to monitoring China as well as the US even more closely and becoming accustomed to the greater ups and downs that are likely to be seen in the global economy as a result.
With the 24-hour news cycle, all of you are probably aware of the ongoing correction in stocks (meaning down over 10%), and increased volatility, as the summer draws to a close. What’s going on? Weakness in China has led it to decouple its currency, the Yuan, from the U.S. Dollar. It also has allowed its currency to depreciate compared to the U.S. Dollar and other currencies to help its export sectors. You can see from the first chart how strong the Chinese currency has been over the last decade. Evidently, it has become too strong and weakened its export-focused economy too much for the leaders’ likings. In all likelihood it will manage its currency even lower in the year to come. But, Chinese leaders will pull out all the stops to keep the economy growing to absorb a growing workforce. So weakness shouldn’t be extrapolated to a major economic contraction in our view. We think the Federal Reserve will also delay hiking interest rates in September and this should cheer investors in the coming days.
Let’s keep things in perspective. The second chart shows how subdued volatility has been over the last couple of years. It also shows that it has been a few years, in fact four years, without a meaningful correction in stocks. We were due for a correction in stocks. Where do stocks bottom? We really don’t know and no one else does either. So far, the Dow Jones Industrials are down about 10% for the year while the S&P 500 is down about 7%, both excluding dividends. Another thing to remember, while 500 points on the Dow seems like a big number and would have been a market crash in 1987 (meaning down over 20%), today it is about 3%. Short-term results like this are well within the range of what should be expected from time to time.
What is our strategy? First, we have been at this long enough to know panicking will cost you money in the long run. Second, this pullback has made some companies we have on our target list more attractive in our opinion. So, we plan to stay focused on buying high quality companies at a discount to their intrinsic value rather than trying to time the market.
We encourage you to keep in mind, as long-term investors patience is your best friend. As always, your situation is unique and you may have liquidity needs of which we are not aware. Please do not hesitate to contact us if you have any questions or would like to meet to go over your portfolio.
Scott Grannis of Calafia Beach Pundit blog has an excellent piece on China’s currency move which you can read by clicking the link. Below we show his chart of the real value of the Yuan to keep the longer term in perspective. He writes, “Over the past 20 years, China has strengthened its peg vis-a-vis the dollar considerably, from 8.4 yuan to the dollar to now 6.3. As the chart (below) shows, the real value of the yuan against all other currencies has doubled in the past 20 years. So it’s fair to say the yuan has been an incredibly strong currency for the past two decades. That it should drop 2% against the dollar is hardly noteworthy. Maybe it was just too strong, and now it’s a little bit less than ‘too strong.'”