Northwest Q2 Letter

Dear Clients:

Before we discuss investments, we have a few other topics to cover.  A transition in life is typically accompanied by a long “to-do” list. Occasionally some of the details don’t make your list and thus are never addressed.  Don’t let changing your beneficiaries be one of the tasks that gets overlooked!  At the time of death the current beneficiary on your account will be the one to receive the proceeds of your IRA or Trust even if it’s no longer your intent to have that person as the beneficiary.  For your IRA accounts, you can either contact your custodian to get a Change of Beneficiary form, or contact us and we will send you the form.

We want to connect with you.  Many of you know we have a blog linked to our web site ( ) where we discuss topics of interest in the capital markets and other areas of client interest.  We are also on Twitter, where we tweet links to our blog comments in addition to other information you will find valuable.  If you are on Twitter, please search for @NWInvestment and follow us so you can stay up to date.  Finally, if you are a LinkedIn user, you can connect with our company page.


Stocks continue to have an exemplary year, as the S&P 500 was up 13.8% through June 30th.  The long run annual average for stocks hovers around 10% (depending on exactly what you look at), so this is shaping up to be a rewarding year.  There are concerns on the horizon, however, and that has led us to allow a bit more cash to build up in client accounts than normally would be there.  Perhaps the most significant factor is the interest rate environment – please read the “Fixed Income” section of this letter below for more details.  In addition, most foreign economies are growing very slowly, if at all, and earnings gains for businesses here at home look to be somewhat muted in the second half of the year.

All in all, we are somewhat cautious right now.  We spend our days sifting through a variety of informational sources looking for good investments.  Those good investments are elusive currently.  There are certainly a lot of well-run, growing, healthy businesses listed on the stock exchange – the problem is valuation.  We are looking for a margin of safety, and the pickings are slim in that regard.

Most of you will be aware that we sold the majority of our REIT position in the second quarter in our Model portfolios.  We have felt for a while that valuations in this space were stretched.  Where once yields well above 6% were commonplace in this asset class, the yield on the REIT ETF fell below 3% earlier this year.  That was not an attractive risk-return tradeoff in our view.  Proceeds have gone to small cap stocks and preferred stocks.  If you have a custom allocation (i.e., not one of our Models), we will need a signed change of allocation form if you want to follow our recommendation.

NW Equity Income

The current yield on the Equity Income Portfolio stands at about 2.9% weighted by position size, which is just about the lowest it’s been in the history of this portfolio.  Primarily, this is a function of a run-up in stock prices.  With income in short supply for investors, many who would ordinarily purchase bonds for income have instead purchased dividend-paying stocks.  The cautionary note here is that the risk of stocks compared to bonds is apples to oranges.  A given stock may have an attractive yield of, say, 4%, but if that stock falls in price by 20%, that is real pain to the investor.  A bond may only yield 1% (or whatever) in this environment, but the kinds of bonds we purchase are very unlikely to have a significant price decline like a stock.

Note that many clients have holdings that were purchased over the last several years and their yield based on their cost could well be between 4%-5%.

NW Blue Chip Growth

While our buy/sell activity was fairly muted in Q2 in Blue Chip Portfolios, there were a fair number of holdings who announced dividend increases.  Examples include Oracle, which doubled its dividend to $0.12/share, PepsiCo which increased its dividend 6% as it continued with a long string of increases, and Johnson & Johnson, which pushed its dividend up another 8.2%.

Many companies also continued to repurchase their shares.  Both of these actions serve to return excess funds, which are not needed to reinvest back into the business, to investors.

NW Smaller Companies

We added one new holding to the Smaller Companies portfolio during the quarter:  Navigant Consulting (NCI).  NCI, a specialty consulting firm, provides dispute, investigative, economic, operational, risk management, and financial and regulatory advisory solutions to companies, legal counsel, and governmental agencies facing the challenges of uncertainty, risk, distress, and significant change in the United States, the United Kingdom, and internationally.  NCI has shown increasing profitability over the last few years, has a good balance sheet, and offers good potential returns to shareholders.

In other news, Advent Software, a current portfolio holding, announced it would pay a special $9 per share dividend out of cash on hand as well as utilizing its debt facilities.  This move to reward shareholders was announced in Q2 and should be received into client accounts on July 9.


The second quarter of 2013 started innocently enough with the interest rate on the 10 year US Treasury note at 1.87%.  In fact, yields actually continued to move lower through April, reaching a low of 1.66% by May 1.  However, some pieces of good economic news with respect to personal spending, consumer confidence, jobless claims, and inflation started a push on interest rates gradually upward through mid June to 2.2% as the markets saw an improving economy that might someday be able to stand on its own two feet.

However attractive the concept of a healthy economy that is self-sustaining might be, the fixed income markets weren’t quite ready for the same assessment from the head of the Fed, Dr. Ben Bernanke.  On June 19 he had the audacity to suggest that at some day in the future the Fed would not need to feed the US economy $85 billion each month.  Mind you, he said that day was not now, and he added that rather than taking away $85 billion/month he might just reduce it somewhat. Nonetheless, within 5 days interest rates on the 10 year jumped to 2.6% and pundits predicted higher & higher rates and an imminent bond market meltdown. Thankfully, we are not in the business of entertainment – we manage your money as your fiduciary – so some perspective is in order.

In the business entertainment world (you know that Cramer and CNBC are in the entertainment business, right?), the 10 year US treasury bond is an important rate for a range of things and is closely followed.  Many residential mortgage rates are set based upon the 10 year, and general corporate borrowing can be affected by its level, too.  So, as a barometer of the cost of money, the 10 year has its place.  And, if you owned the 10 year treasury as rates have increased the price of that bond has gone down.  The 10 year treasury on May 1 had the market price of $103.33 (and a yield of 1.63%), and by the end of June its value had dropped to $96.17 for a 6.9% drop in the span of just 60 days!

Contrast that with changes on the price of the 3 year US treasury.  Today we manage our Intermediate Fixed Income bond portfolios to have short maturities (on average) that are much closer to 3 years. The graph below shows how these two different bonds behaved during the May and June periods of this year.

bondsThe white line is the price of the 10 year treasury (what Jim Cramer & Rick Santelli scream about), while the orange line (3 year treasury) is much closer to what Northwest bond portfolios are designed to do.  Both bonds were lower in price during the time period; only one of them makes for good entertainment.  Rest assured, we seek to invest our clients’ bond portfolios for low volatility and safety – not entertainment value.

We thank you for the trust you have placed in Northwest.  Alleviating the financial burden that comes with managing wealth is what we do. Numerous studies show that the individual investor’s emotions take over when it comes to managing their own money and thus they underperform the markets.*  We would be more than happy to have an initial meeting with anyone you know that is feeling burdened by the sudden responsibility of managing their wealth.

Should you have any questions or would like to set up a quarterly portfolio review meeting, please do not hesitate to contact us at 800.685.7884.