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

The Bond King

 

2014 Quarter 3 Market Review

The biggest news in the investment world during the quarter had little to do with the performance of the markets, rather it was the sudden resignation of Bill Gross from the Pacific Investment Management Company (PIMCO). Mr. Gross, at age 70, bolted from the firm he founded in 1971 and signed on with Janus Capital Group, a firm perhaps best known to many as having been involved in the 2003 mutual fund scandal. Gross was commonly referred to as ‘The Bond King’ based on the impressive results of the PIMCO Total Return Fund, a fund which benefitted from a 30-year bull market in bonds and became the world’s largest mutual fund, peaking at over $293 billion in 2013. Bill Gross’s influence on the fixed income markets can hardly be overstated…he spoke and the markets often listened.

Bill Gross

The announcement of Gross’s resignation prompted immediate reaction from investors, as they pulled $23.5 billion from the flagship PIMCO Total Return Fund in September. The fund’s largest daily outflow was on Friday, September 26th, the day of the announcement (and, apparently, the day before Gross was to be fired!). There are concerns that the fixed income market might be affected, as PIMCO may be required to sell large positions in certain securities in order to meet huge redemption requests. The hedge fund vultures have already taken short positions against some of the Total Return Fund’s largest holdings, in anticipation of a drop in their prices.

As many of our clients already know, we had become concerned about the PIMCO Total Return Fund long before Mr. Gross’s surprise announcement. We have recommended this fund to many of our clients over the years, as it was a top-notch performing fixed income fund, managed by a brilliant team of investors, led by Bill Gross. Their approach to managing the fund started with PIMCO’s macro-economic outlook, which then drove their security selection, a strategy referred to as “top/down” investing. A significant contributor to PIMCO’s economic outlook was the co-CEO/co-CIO Mohammed El-Erian, who was rehired by PIMCO in 2007, after spending two years as CEO of the Harvard Management Company, the firm that managed the Harvard Endowment. Mr. El-Erian was highly regarded as an economist, and was considered the heir-apparent to Bill Gross at PIMCO. However, El-Erian abruptly resigned in January of this year, citing disagreements with Bill Gross.

At that time, we conducted an extensive amount of research on PIMCO and their Total Return Fund. We wrote a “Summary of Research & Recommendations” paper on June 10th and, for the first time in the 11-year history of Falcons Rock, we made a carte blanche recommendation to all of our clients who owned the PIMCO Total Return Fund to replace this fund. Our recommendation was not based on poor fund returns, but rather our concern that future performance would be affected by the massive amount of redemption requests from this fund and a change in the fund’s investment process and investment committee. [We are extremely patient with the money managers we recommend to our clients. Our philosophy is that, if we understand each client’s objectives, do a good job up-front of manager research and align managers and investment products appropriately with our clients, then we should rarely have to recommend a replacement. We know that all investment products will go through periods of underperformance relative to their benchmarks and peer groups, but if we understand the reasons for the performance, we are willing to work through the cycles with good managers.]

We could not have predicted back in June that Bill Gross would leave PIMCO for a rival firm, but our research process led us to believe that the Total Return Fund was not the same fund as the one that had performed so well over the years. I believe we were ahead of the curve with our recommendation, as I know of at least three large consulting organizations that had advised their clients to stay with the fund. By no means are we smarter than these organizations, but I believe that our experience over many years of following mutual funds led us to the right conclusion. Unlike some firms, we are not beholden to any investment management firm. We pulled the trigger on this recommendation and I am happy to say that all our clients accepted our recommendation and have already replaced the PIMCO Total Return Fund in their portfolios.

The PIMCO Total Return Fund has suffered 17 straight months of outflows totaling $92.3 billion. The fund’s asset base is now less than $200 billion, and redemptions have recently hit $8-9 billion per day. It is still the largest bond mutual fund in the world and PIMCO claims that it is “well positioned” to handle redemption requests with liquid portfolio positions. The firm employs incredibly talented people and has re-organized its upper management team. There is a chance that this fund will again prove itself to be a very solid fixed income product…time will tell. This is quite a story, indeed.

Third Quarter 2014 Review

Although the S&P 500 Index generated another positive return in Q3 2014, equity mutual funds posted their first quarterly loss (-2.92% on average) in nine quarters. Small cap stocks, international stocks, REITs and commodities all saw losses during the quarter. The best performing sectors in the S&P 500 Index included Health Care (+5.5%), Technology (+4.8%) and Telecom (+3.1%). The worst performing sectors during the third quarter were Energy (-8.6%), Utilities (-4.0%) and Industrials (-1.1%).

A sharply rising US Dollar caused losses in stocks of most foreign countries held by US investors during the quarter. The best performing countries included the emerging markets of India (+2.3%), and China (+1.5%). Among the developed countries, Japan (-2.2%), the United Kingdom (-6.0%), France (-8.3%) and Germany (-11.2%) all posted negative returns.

Bond markets were mixed during the quarter, with positive returns in municipal bonds but generally negative returns in both domestic and foreign bond mutual funds. Overall, most balanced portfolios and alternative strategies posted small losses during the quarter. Commodities markets were hit hard by an oversupply in some agricultural commodities, a rising US Dollar, and an expected slowdown in China’s infrastructure build out.

Here are the returns for select market indices for Q3 2014 (as stated in U.S. dollars):


This and That

  • The US unemployment rate just fell to 5.9% and is now below the long-term average of 6.1%1. The number of job openings was 4.46 million in May, from a bottom of 2.2 million during the recession, and nearing the record high of 4.7 million in 20072. There were 2.2 unemployed per opening in May versus a bleak 6.2 during the worst of the recession3. There now appears to be a mismatch between job openings and skills required to fill those jobs, which, along with an aging population, has led to a historic decline in the overall labor participation rate.
  • Guess where this recent quote was published: “After 30 years of rapid development, the environmental issue is not only an economic problem or a social problem, it is also a political problem. The local economic development should not be only measured by GDP, financial growth, and residential income growth. If people can’t breathe, what’s the point of faster economic growth?” It was found in the People’s Daily, a sounding board of the Communist Party’s Central Committee in China. After building out a huge fleet of coal-powered plants to satisfy China’s soaring energy needs, the Party has realized that it has come with environmental and health costs. [A recent study in the medical journal The Lancet attributes 1.2 million premature deaths to air pollution. The poor air quality found in Beijing is only found in the US during forest fires.] Going forward, it appears that China is moving toward a multi-faceted energy approach to include hydro, nuclear, wind and solar power.
  • The so-called “experts” have been prematurely forecasting a rise in interest rates for at least five years. At some point, interest rates will indeed rise, and the Fed is projecting five rate hikes for its Fed Funds Rate in 2015. Some investors are very concerned about the effect of rising rates on their portfolio. Morningstar recently published a study that detailed the average six-month asset-class returns during historical interest rate scenarios (1926-2013). As expected, the study shows a high (inverse) relationship between the returns of government bonds and the movement of interest rates. Corporate bonds also performed poorly during rapidly rising rate environments, but better than government bonds (other factors, such as default rates also influence the price of corporate bonds). Periods of short-term losses in high yield bonds are not highly correlated with interest rate changes. Cash is highly dependent on the actual interest rate, but not affected by rate changes. Stocks have shown a minimal relationship to interest rates. Their conclusion is that diversified investors need not fear rising rates.
  • In the aggregate, US Household Net Worth is at an all-time high4, although widening income inequality has become a serious concern for policymakers. The average pretax income for the wealthiest ten percent of US families rose 10% in 2013 from 2010, but families in the bottom forty percent saw their average inflation-adjusted income decline over that period5. The Household Debt Service Ratio is at an all-time low at 9.9% of disposable personal income6, which could bode well for consumer spending going forward. Bank lending standards should loosen up with an increase in long-term interest rates, as loans will become more profitable.
  • Golf equipment sales have been weak in recent years, with no sign of near-term improvement. Take up tennis…it is better for your health!

We believe that part of our job as investment advisors/consultants to our clients is to keep them from making “The Big Mistake.” Big mistakes occur during periods such as 1999, when numerous business owners sold very successful companies with hopes of retiring comfortably, only to invest their new-found cash in high-flying tech stocks that had been performing so well. Some of those former business owners had to find other employment and are still working to this day! While nobody can predict the movements of interest rates or the investment markets with precision, we believe that maintaining a prudent and diversified portfolio increases the likelihood of long-term success and the achievement of investment objectives. We do not proclaim to be the “king” of anything, but we work hard to provide sound advice.

Thank you for being a client of Falcons Rock.

Greg Wait, President of Falcons Rock

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

1 JPMorgan Guide to the Markets – Q4 2014
2 Morningstar Magazine, August/September 2014
3 Morningstar Magazine, August/September 2014
4 JPMorgan Guide to the Markets – Q4 2014
5 Federal Reserve 2013 Survey of Consumer Finances
6 JPMorgan Guide to the Markets – Q4 2014

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