History Has Steered Folks to Environmental, Social and Governance Investing.
In this Milwaukee Journal Sentinel article from July 15th, Tom Saler explores socially responsible investing (SRI) and breaks down some recent high-profile examples.
Read July article.

 

New Firm Targets Socially Responsible Investors.
In this article from January 9th, Milwaukee Journal Sentinel reporter Kathleen Gallagher explores Greg Wait's launch of a new company that combines socially responsible investing and online investment advice.
Read January article.

 

Investment Trends, with insights by Greg Wait. In the Milwaukee Journal Sentinel's October 17th article, Kathleen Gallagher and Greg Wait discuss the recent rise of environmental, social and governance, or ESG investing. Greg provides insight into how reduced risk and improved returns are causing money managers to include ESG investing in their portfolios. Read October article.

 

Responsible Investing: Creating Financial and Non-Financial Value by Greg Wait. Do investors sacrifice returns in pursuit of their goal of advocating for a better world in which to live?
Learn more.

 

Ten-Year History of Investment Manager Performance by Greg Wait. As part of our process, we have conducted investment manager research and due diligence resulting in manager or fund recommendations to our clients. Here are our findings.

 

The month of September, 2013 marked the 10-year anniversary of Falcons Rock serving our clients and building relationships. We are grateful for all the years of friendship, loyalty, and support, and look forward to our next decade!

 

Investment Trends, with insights by Greg Wait. In the Milwaukee Journal Sentinel's July 20th article, Kathleen Gallagher and Greg Wait discuss the rising U.S. Treasury rates and using duration as a measure of risk. Greg's comments relate to whether we'll be "looking back on this short-term increase in yields as the warning shot for the much-anticipated longer-term rise in interest rates." Read July article.

 

Dec 9, 2012, Journal Sentinel's Kathleen Gallagher interviewed Greg Wait on current Investment Trends. Read the full article: "Low-quality stocks continue to provide strong returns."

 

We've Grown! Meet our new investment consultant: Tony Sebranek.

 

Investment Trends column of Milwaukee Journal-Sentinel shows Top-Down investment strategies are achieving positive results.
Read article on Top-Down Investing

 

Additional articles in the Milwaukee Journal Sentinel featuring Falcons Rock:
One is a fascinating story about a Mequon drug development company, which has a few of our clients as private investors.
Read article about our angel investors

 

Another features us in the Market Trends column: Strategy targets uncertain economy - and how Falcons Rock confronts specter of slow growth.
Read how we help clients get ready

 

There is a great deal of debate in the investment industry regarding active vs. passive (indexing) investment management.  We researched this topic and the results might be surprising to you.  Please see our research paper on this subject...more

 

We have experienced interesting situations with our clients. To update you on our firm’s activities, check out examples of recent work we have done for our clients...more

Get quarterly market reviews direct from Falcons Rock President, Greg Wait.

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US SIF Member 2017

It's a Wonderful Life

 

2011 Quarter 4 Market Review

Happy New Year!  As I write this letter, we’ve wrapped up another holiday season and I am reminded by the classic Christmas movie It’s a Wonderful Life of the many blessings we all have as Americans.  I’m sure you all know the story:

    It's a wonderful life in Bedford FallsGeorge Bailey, who ran the Bailey Building and Loan Association after the untimely death of his father, reaches his breaking point due to a series of financial crises and attempts to commit suicide on Christmas Eve...only to be rescued by his guardian angel, Clarence. George was given a chance to see what the world would have been like without him.  While he and his father might not have been considered brilliant businessmen because they provided loans to lower and middle class townspeople to build modest homes, George came to realize that by sacrificing profits and his time to help others, he helped Bedford Falls become a better place to live.

In the movie, the bad guy is Henry Potter, a profit-motivated slumlord who preys upon the misfortune of others. In recent years, there have been plenty of bad guys on Wall Street who created derivative financial instruments that generated huge profits for themselves and their firms, while helping create an unsustainable lending frenzy that in turn caused a banking crisis and housing collapse. As a result, unsuspecting investors who were sold on such financial instruments have suffered dramatic losses. Then, even more devious and fraudulent real-life characters like Bernie Madoff scammed thousands of investors with Ponzi schemes...all in the name of greed and the promise of unrealistic investment returns.  Unscrupulous and misinformed people have been around as long as the history of man, and I am confident this will be true for generations to come.

Amid all the doomsday financial press these days, it would be easy to give up on America and most of the developed world, like George Bailey was ready to give up on himself.  We all need a little Clarence in our lives to make us realize that everything is not so bad. 

Let’s take a look at some of the recent economic and market data:

  • U.S. growth was accelerating by year ended, as Gross Domestic Product (GDP) rose by an estimated 3.5% in the fourth quarter of 2011. Sources of U.S. growth are surprising: "onshoring" to America's increasingly competitive manufacturing sector, rising energy independence, and agriculture (farmers are enjoying incomes higher than they have realized in many years).
  • Jobless claims have declined to their lowest level since May 2008.
  • December Employment Report was better than expected and the U.S. unemployment rate is down to about 8.5%.
  • Retail holiday shopping sales were up from a year ago.
  • Consumer confidence indices turned higher in the fourth quarter of 2011.
  • World Giving Index was significantly higher in 2011 than it was in 2010, as more people are giving to charitable organizations.
  • Corporate profits are at near record highs, and balance sheets are sturdy, as businesses have adapted to economic conditions.
  • Deleveraging is in full swing, as household debt payments have dropped to levels last seen about seven years ago.
  • China and other emerging countries are developing a rapidly growing middle class, which is consuming more goods and services.

We are all fully aware of the headwinds that exist in today's world: political polarization (at the highest level since 1901, by the way, as over 90% of Congressional members vote along party lines), political frustration (the President's approval rating was 45% in December, and the Congressional approval rating was 11%), tensions in the Middle East, and the European sovereign debt crisis. These, and more, are all issues that need to be taken very seriously by investors and citizens. Of course, when these issues are resolved, new problems will develop. Contrary to what some folks would like us to believe, there is almost never a stable time to invest in the short-term. So, like George Bailey, be thankful for what you have and do your best to navigate life's tumultuous events.

Fourth Quarter and 2011 Calendar Year Review

The fourth quarter of 2011 saw the markets rebound tremendously from a very rough Q3. However, like most of the rest of the year, these two quarters mostly offset each other, and calendar year results were very mixed. Here are the returns for selected market indices for Q3 2011 (as stated in U.S. dollars):

Index Returns for 4th Quarter 2011

While it was great to see such a strong end to the year, calendar year results in the stock market were frustrating and disappointing. We entered 2011 with relatively cheap stocks and expensive bonds, but the year brought a wide range of negative events: the Japanese tsunami, the downgrade of U.S. government debt followed closely by the European debt crisis, more political gridlock, and flagging consumer confidence. These events caused a high level of volatility in 2011 in the stock market. In the U.S., all the volatility basically got us right back near where we started the year. In non-U.S. markets, the European contagion was just too much to bear. Let's hope that the more positive economic signs during the fourth quarter give the markets a bit of momentum entering 2012.

Over time, investing in asset classes when they are traditionally inexpensive generates very positive results. However, as 2011 again proved, the positive results do not necessarily show up immediately or in shorter time frames. Over longer periods however, there is a high correlation between buying inexpensive assets and higher returns (see chart below).

I must comment on the active managers and mutual funds in which most of our clients are invested. Generally speaking, there were mixed results with stock funds relative to their index benchmarks. On the bond side, most active managers underperformed the Barclays Aggregate Index due to an underweight in U.S. government bonds during the year. Given that government bonds are paying extremely low interest rates and are priced quite expensively, there is plenty of logic for active managers to shy away from U.S. and most foreign government bonds. I suspect that, as the developed economies show more growth, the active underweight to government bonds will result in better-than-benchmark returns in the near to intermediate term.

All that said, Morningstar recently released their nominees for Fixed-Income, Domestic-Stock, and International-Stock Managers of the Year for 2011. Morningstar will reveal their Manager of the Year in each category soon, but they nominate five managers in each category. I am happy to report that we have recommended at least one finalist in each category to Falcons Rock clients over the years. I believe our due diligence and research on fund managers pays off for our clients in the long-term, and it is nice to see some of these managers getting some formal recognition from Morningstar.

Outlook

At this time of year, it seems that everyone is seeking predictions from economists and investment gurus. Those who actually make such predictions are rarely correct. Looking back to the end of last year, a newly-famous Wall Street analyst named Meredith Whitney predicted (on the TV show 60 Minutes, no less) hundreds of billions of dollars worth of municipal bond defaults. This catastrophe never came to pass and investors who stuck with muni bonds were rewarded with the highest total return of any major asset class (after getting crushed last December following Ms. Whitney's comments).

Another well-publicized prediction was made by Bill Gross, the world-class bond manager of the PIMCO Total Return Fund (the largest mutual fund in the world), as he sold all his U.S. government bonds late last year in fear of a fall from favor of the U.S. government. As I wrote last quarter, even after the ratings downgrade by Standard & Poor's of U.S. government debt, investors flocked to buy U.S. bonds when it became apparent that European bonds were more risky. This "bet" by Mr. Gross cost his fund dearly in relative returns vs. his benchmark and peers.

So, as usual, you will not find any bold predictions here. My best guess is that global developed economies, including the U.S., will continue on a slow-growth pace for at least a few more years as the deleveraging hangover continues to act as a drag on growth and our baby-boomers try to figure out when/if/how they want to retire. Emerging countries are in a better fiscal position and should continue on a more rapid-growth path. There are obvious risks to investors, but there are apparent opportunities as well.

The only proven long-term method of successful investing, with a reduced level of risk, is to maintain an appropriately balanced portfolio of stocks, bonds and cash, and blending alternative strategies into the mix. Over the past ten extremely volatile years, a balanced asset allocation strategy would have generated a cumulative return of 73.5%, well in excess of the S&P 500 Index return of 33.4% over the same period. Individual asset classes take turns leading the pack from year to year, but there has been no single asset class that consistently outperforms a balanced portfolio.

Given the high level of uncertainty in the world, maintaining a balanced portfolio is even more important now as the range of possible outcomes is very wide!

Hopefully, like the angel Clarence in It's a Wonderful Life, I've been able to provide you with some positive perspective as we enter the New Year. I am particularly grateful to have you as a client of Falcons Rock.

Greg Wait, President of Falcons Rock

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