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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Flavor of the Day

 

2013 Quarter 3 Market Review

Summer is over, but local frozen custard shops still offer a tasty "flavor of the day" that might now include pumpkin spice or some other fall treat. These daily specials are posted on outdoor signs and attract customers to the shop. Many people are willing to try anything at least once! Flavor of the Day Investing

I've recently been reminded that our clients often desire the latest flavor of investment product or idea, whether that product might fit well within their portfolio or not. If you would ever check the internet or worse yet, ask your friends (especially on the golf course) for investment ideas, you will get no shortage of exciting or exotic sounding pitches.

Many of these great ideas sound too good to be true, and they usually are! Do a little more searching, and you will find countless investment "gurus" who made millions of dollars, only to be found guilty of insider trading or some other fraudulent activity. How soon we forget about Bernie Madoff, Charles Ponzi, Allen Stafford, Enron, WorldCom, Qwest Communications, Long Term Capital Management, Collateralized Mortgage Obligations (circa 2008)…and the list goes on and on!

At Falcons Rock, we are introduced to new investment products nearly every week, some of which promise terrific returns or creative new trading strategies. Representatives of investment firms continually call on us to pitch their latest idea. Sales pitches do not work well with us! That said, when we learn of an interesting investment product, we will conduct further research to determine its risks and potential rewards. Our research initially consists of a quantitative analysis of historical returns and volatility relative to an appropriate benchmark and peer group. We especially focus on the risks involved with the strategy and determine if the historical or potential returns are in line with the risk profile. If the product passes our initial screens, we will initiate our qualitative analysis which includes personal interviews with portfolio managers. If the manager passes our qualitative standards, we would typically observe the product's performance for a period of time before ever recommending the product to clients.

As an example of our ongoing research, we spent much of 2012 evaluating liquid alternative strategy funds. Alternative strategies are generally considered to be anything other than "long-only" stocks, bonds or cash portfolios. These strategies are numerous and can include relatively straight-forward assets like real estate or commodities, or more complex strategies such as long/short, market neutral, convertible arbitrage, merger arbitrage, or global macro. Historically, alternative strategies were only available by investing in hedge funds that had high minimums, charged high fees and were less liquid than traditional investments. In more recent years, some alternative strategies have become available in a mutual fund structure with daily liquidity. After analyzing dozens of alternative strategy mutual funds, we concluded that an optimized package of these funds could be beneficial in certain client accounts and, if so, we have recommended these funds.

I think our next research focus will be in the area of Socially Responsible Investments (SRI) or Environmental/Social/Governance (ESG) investing. There is growing evidence that suggests that ESG factors, when integrated into investment analysis and decision making, may offer investors potential long-term performance advantages. SRI/ESG investment strategies can provide returns similar to traditional investment solutions while incorporating a value-driven component, which is often appealing to endowments or foundations.

We do our most significant research when we recognize investment strategies that can add value, either risk reduction or return enhancement, over a long period of time. However, our core belief is that, if our clients can clearly and accurately communicate their objectives, time horizon, cash flow needs, tax situation and risk tolerance, we can develop a strategic asset allocation that will achieve their goals. Once we develop the appropriate strategy, we use our research to identify investment managers and products to fill each slot in the client's asset allocation.

Our goal is to match investment managers and products with client preferences. If we can accomplish these two tasks up front, there should not be a need to make wholesale changes to the portfolio based on the latest newspaper headline or political boondoggle. Rather, we look for market dislocations caused by investor overreaction to such events and then recommend that our clients rebalance their portfolios, possibly with a tilt toward attractive asset classes. Only if a client's objectives change significantly (usually based on a life altering event such as retirement or the sale of a business) will we recommend a major change in the strategic asset allocation.

While our approach may not be exciting or sexy, our research tells us that this is absolutely the best way to invest money over time. Our clients' portfolios tend to be focused on risk management, with commensurate return patterns. During cycles when the stock market is riding high on speculation, risk-focused portfolios will not keep pace; however, during cycles when the markets are crumbling, our approach will reduce the downside volatility. Most of our clients are not interested in roller-coaster rides when it comes to their investment portfolio!

So, while the flavor of the day might sound tasty, it may not be good for your long-term health.

Third Quarter 2013 Review

The U.S. stock market continued its upward trend with most sectors generating nice gains. The best performing sectors included Materials (+10.3%), Industrials (+8.9%) and Consumer Discretionary (+7.8%). The worst performing sectors during the quarter were Telecom (-4.4%), Utilities (+0.2%) and Consumer Staples (+0.8%). Do you ever notice that the worst performing sectors in one quarter often become top performers in the next quarter?

Unlike last quarter, when U.S. stocks were the only positive performing asset class, most other capital markets fared reasonably well in the third quarter. International stocks, both developed and emerging markets, posted strong returns. Commodities broke a long losing streak.

The bond market recovered a bit in the third quarter, following the interest rate scare earlier this summer. The U.S. dollar weakened a bit relative to most global currencies during the quarter, enhancing returns in foreign securities held by U.S. investors. Overall, most balanced portfolios enjoyed gains during the quarter.

Here are the returns for select market indices for Q3 2013 (as stated in U.S. dollars):
Here are last quarters returns

Outlook

I recently attended an investment conference, where one of the featured speakers was Liz Ann Sonders, Chief Investment Strategist at Charles Schwab & Co. Liz Ann is bright, articulate, and considered one of the best strategists in the U.S. She described the last five years as "the most hated bull market ever." In 2009, when the stock market was up 26.5%, two-thirds of investors said the market was down or flat. At least a third of investors have thought the market was down each of the past four years when, in fact, it was up each year. Pension funds have de-risked and their fixed income exposure is now above their equity exposure. Endowment funds have reduced their equity exposure in favor of alternative investment strategies.

These supposedly "sophisticated investors" have reduced equity exposure throughout the entire bull market. Liz Ann highlighted a number of positive developments that lead her to believe that our economy and stock market is well positioned for the next few years:

  • U.S. Dollar is stronger for the “right” reasons…better relative growth
  • U.S. Stocks appear undervalued on a forward earnings basis
  • Given the low level of interest rates, Stock Valuation Expansion could continue
  • On a technical basis, stocks have broken through a “triple top” with fundamentals much better than at prior tops
  • Housing is turning up as a percentage of GDP; home prices and the economy are tightly linked
  • The U.S. Manufacturing and Energy Renaissance is no longer a pipe dream
  • The U.S. Federal Deficit is shrinking dramatically, which should help stabilize debt growth
  • The Private Sector Deleveraging has come a long way and is no longer causing an economic drag
  • Household Net Worth is at an all-time high
  • Inflation remains low and is in a decent zone historically for the stock market
  • Global Central Banks have loosened monetary policy, incenting growth
  • Federal Government Spending is now the only drag on U.S. GDP due to budget cuts

Of course, there are reasons for some concern, including the federal debt, unemployment and consumer confidence; however, Ms. Sonders is generally optimistic going forward. At least in the intermediate term, I have no reason to doubt her outlook.

Thank you for being a client of Falcons Rock. We truly value your friendships and loyalty.

Greg Wait, President of Falcons Rock

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

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