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

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The Warning Shot

 

2013 Quarter 2 Market Review

Last night, my family went out to watch the annual Fourth of July fireworks in our hometown park – nothing more Americana than that! This holiday is one that should remind all of us how fortunate we are to live in the USA, with all of the freedoms that we enjoy on a daily basis. The fireworks, as always, were very bright and exciting, and began with the traditional "warning shot" boomer that informs everyone that the show is about to start. Play ball with a winning investment lineup

Over the past two months, interest rates on U.S. Treasuries have increased as the Fed hinted at a tapering of their monthly asset purchasing program, creating uncertainty for fixed income investors.

The yield on the 10-Year Treasury was 1.67% on April 30th, 2.13% on May 31st, and 2.49% on June 30th – a nearly fifty percent increase in just two months. The "real" yield, after factoring in inflation, was 0.81% as of June 30th:

Granted, these yields are still very low by historical standards, as the average nominal yield over the past 55 years is 6.42% and the average real yield is 2.55%, but I can't help but wonder if we will look back on this short-term increase in yields as the warning shot for the much anticipated longer-term rise in interest rates. If so, the outlook for investors, especially conservative investors, could be challenging. We have essentially lived through a thirty-plus year bull market in bonds, as interest rates peaked on September 30, 1981 at 15.84% (remember those days?) and have trended lower ever since. Prior to that date, interest rates had risen for twenty-three years – long-term cycles are not unusual in the capital markets.
Current Yields
on 10-Year Treasury
  • 1.67% — April 2013
  • 2.13% — May 2013
  • 2.49% — June 2013
  • ?? — July 2013.

Most of us understand that patience is required when investing in the stock market (which, by the way, is now up over 16% from its former peak in October, 2007 and is up over 160% from the market low in March, 2009). Conservative investors may now be also asked for patience with their fixed income holdings. As interest rates rise, the market value of most fixed income securities will fall. The measure of this interest rate risk is called "duration" and it varies by fixed income sectors.

For example, the duration of 10-year Treasuries is 9.3, meaning that a 1% rise/fall in interest rates will inversely impact the price of these bonds by 9.3%. The duration of 5-Year Treasuries is 4.9, so there would be less market value decline if an investor held a 5-Year Treasury bond vs. a 10-Year Treasury bond when interest rates rise. Of course, you are also earning less interest on the 5-Year Treasury bond… risk/return tradeoffs are prevalent in all areas of investing.

For comparison purposes, the duration of convertible bonds is around 3.0, the duration of mortgage-backed securities is 5.2, the duration of municipal bonds is 6.6 and the duration of corporate bonds is 6.9. Understand that these are measures of broad fixed income sectors, and bonds of varying durations are available in every sector.

  • If interest rates rise quickly and steeply, bond investors will feel the pain.
  • However, if rates gradually increase, fixed income money managers should be able to adapt by periodically selling (or holding to maturity) lower yielding bonds and replacing them with higher yielding bonds.

The total return of bond portfolios would not be very attractive during this process, but the longer-term results of these portfolios should be acceptable to patient investors. In order to partially protect market value should interest rates rise, most fixed income managers have reduced duration to something less than their respective benchmark indexes.

The Good News...

The good news behind rising interest rates is that the economy will likely be improving. Historically, an improving economy is a positive for the stock market (as witnessed by the past four-plus years). Furthermore, over the past fifty years, there has been a generally positive correlation between interest rate movements and stock market returns – up until rates exceed 5%, at which point the cost of capital may hinder corporate profitability

So, let the warning shot be heard! And, let's hope that the rise in interest rates is not as explosive as last night's fireworks display.

Second Quarter 2013 Review

Despite some choppiness during the quarter, the U.S. stock market continued its upward trend with most sectors generating small gains. The best performing sectors included Financials (+7.3%), Consumer Discretionary (+6.8%) and Health Care (+3.8%). Sectors generating losses during the quarter were Utilities (-2.7%), Materials (-1.8%) and Energy
(-0.4%).

While the bullish trend continued in the U.S. equity markets, most other capital markets did not fare so well. Commodities and the emerging markets stocks of commodity-reliant countries were hit hard during the quarter. Lipper reports that, in June, Precious Metals Funds (-12.3%) and Precious Metals Equity Funds (-17.6%) posted their worst monthly returns since October 2008. The shine has worn off of gold, as confidence in the U.S. economy improves.

Due to rising interest rates, nearly every sector of the bond market lost value in the second quarter. The U.S. dollar continued to strengthen relative to most global currencies (excluding Europe) during the quarter, dampening returns in foreign securities held by U.S. investors. The losses incurred in fixed income and international equity markets generally overwhelmed any gains in the U.S. stock market, resulting in small losses in most balanced portfolios.

Here are the returns for select market indices for Q2 2013 (as stated in U.S. dollars):2013 Qtr 2 Returns on Market Indices

Outlook

The U.S. economy continues its slow climb, as Q1 2013 GDP growth was 1.8% and Q2 GDP growth is expected to be about 2%. Economists are generally expecting improved GDP growth of 2-3% over the next two quarters. Pent up demand is driving strong vehicle sales and a stronger housing market (especially single-family). Consumer sentiment continues to improve as the unemployment rate declines…many economists now believe that the slow growth in the labor force is primarily due to demographic forces rather than people giving up on their job searches. Corporate profits are high, corporate debt is low, and business spending bounced back in Q2. Generally speaking, U.S. economic indicators are positive, which is one of the reasons the Fed hinted at reducing their bond buying program. While this announcement spooked the market, some investors perceived this as a buying opportunity in an improving economy.

While most developed countries, including Europe, remain in recession, there are signs that they are beginning to shake out of the doldrums. The Global Purchasing Managers' Index for Manufacturing has climbed to at or near 50 for some developed countries. A PMI of 50 or better indicates expansion of the sector. On the flipside, the PMI for many emerging markets countries has declined to around 50 from much higher levels in 2012. China now appears to be more focused on stability rather than rapid growth.

So, while the economic news seems to be improving, the U.S. and other developed countries still face the triple-threat of debt, deficits and demographics over the intermediate to long term. Add to those risks the warning shot of rising interest rates, and the investment environment becomes tricky. The best outcomes will be found in the diversified portfolios of disciplined and patient investors.

Enjoy the rest of your summer and thank you for being a client of Falcons Rock.

Greg Wait, President of Falcons Rock

Gregory D. Wait, President
Falcons Rock Investment Counsel, LLC

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