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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What's the Alternative?

 

2015 Quarter 3 Market Review

Autumn Hill

As we enter a beautiful autumn season here in Wisconsin, I am reminded of the awesome diversity of the seasons in our part of the country.  Typically, we can enjoy pure white falling snow in the winter, the renewal of outdoor life in the spring, a warm and pleasant summer, and a spectacularly colorful fall.  Each of the seasons plays its part in sustaining our environmental balance, and gives us all hope for good things to come in the future.

Similarly, as investors we need diversification in our portfolios to sustain balance in our results and our psyche.  For most of our clients, part of a diversified portfolio includes alternative investment strategies…but what exactly are alternative strategies?  Here is a pop quiz to test your knowledge of this category of investment vehicles (answers can be found at the end of this letter):

  1. A “market neutral” strategy:
    1. Utilizes exchange-traded funds to deliver returns that equal a market index
    2. Attempts to neutralize portfolio returns by predicting the direction of the global economy
    3. Seeks to decrease returns from broad market movements and increase returns from stock selection
    4. Includes a basket of produce from a local farmers’ market
  2. A “long-short” strategy:
    1. Attempts to profit from stock prices that are moving both up and down
    2. Seeks to generate positive long-term returns regardless of short-term market movements
    3. Includes both long-duration bonds and short-duration bonds
    4. Is co-managed by a tall woman and a short man
  3. A “hedge fund”:
    1. Is very risky and should normally be avoided in a portfolio
    2. May include a variety of investment strategies designed to reduce risk or volatility
    3. Charges fees that are typically less than mutual funds
    4. Is appropriate for people who like to trim their bushes in the fall

When included in a portfolio of traditional stocks and bonds, alternative strategies can serve as an additional diversifier because they are often not highly correlated to the traditional markets.  Given our current market environment, with historically low interest rates on fixed income securities and a stock market that has seen price appreciation since 2009, the outlook for future returns in these traditional asset classes is muted but expectations for future volatility are elevated.  By investing in a basket of alternative strategies, it may be possible to diversify away some market risk.

The summer swoon in the markets over the past quarter illustrates the potential advantage of including alternative strategies in a diversified portfolio.  Within the Lipper U.S. Diversified Equity Funds Classification, the average market neutral fund posted a small positive return during a quarter in which all other equity fund classes lost money.  Disclaimer here: dedicated short-bias funds generated sizable gains during the quarter, but that is a story for another day!

In order to prepare for the many seasons encountered by long-term investors, portfolios should be designed to ride out the storms while enjoying the sunshine whenever it appears.  Diversified portfolios, including alternative strategies, can be considered an “all-weather” design.

Third Quarter 2015 Review

While the potential Greece exit from the Eurozone, described in last quarter’s letter, seems like ages ago and has been largely forgotten, the economic slowdown in China spooked investors in the third quarter.  U.S. stocks of all sizes and styles lost significant value during the quarter and have now met the criteria for a market “correction” (down more than 10% from its peak).  The “best” performing sectors in the S&P 500 Index during Q3 included the typically defensive Utilities (+5.4%) and Consumer Staples (-0.2%), as well as Consumer Discretionary (-2.6%).  The worst performing sectors during the quarter were commodity-dependent Energy (-17.4%) and Materials (-16.9%), as well as Healthcare (-10.7%).

During the third quarter, the U.S. Dollar strengthened against most foreign currencies, resuming a recent trend.  Non-U.S. stocks, as represented by the MSCI ACWI Index, produced mostly negative returns (-9.3% in U.S. Dollars, -8.1% in local currencies).  In their local currencies, this quarter’s “best” performing countries included Russia (-2.6%), India (-3.9%), and France (-6.6%).  Selected countries whose stock markets delivered the worst returns included China (-22.7%), Brazil (-14.8%), Japan (-13.6%), and Germany (-11.1%).

The bond markets were mixed during the quarter, as investors’ fears about emerging markets translated into flows to U.S. Treasuries.  Most balanced portfolios posted losses during the quarter.  Alternative strategy results were mixed but real estate rebounded a bit during the quarter.

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


This and That

  • Lower energy prices have resulted in significant U.S. consumer savings and, with a lag, additional consumer spending.  Energy spending per household has dropped to 4.4% of total expenditures, near a record low.  The consumer saving rate jumped nearly one percent from last fall to this spring.
  • The appreciation of the U.S. Dollar has caused a widening trade deficit, and will be a continued drag on exports.
  • Volkswagen’s unethical business practice (installing software to cheat on emissions tests) is expected to cost the company over $7 billion in earnings and their stock market value is down over $25 billion.  Germany’s manufacturing new orders unexpectedly dropped 1.8% in August and factory orders could decelerate in the coming months if the VW scandal reduces demand for German vehicles.
  • Speaking of ethics, recent studies are indicating that valuations of corporations with better Environmental, Social and Governance (ESG) management reflect higher expected growth and lower cost of capital.  Sustainable business practices impact financial value from operational efficiency and protection of brand value, revenue growth enabled by new products and customer loyalty, to lower cost of capital through enhanced disclosure.
  • The economic slowdown in China should not pose a systemic risk to the U.S. or other developed countries.  It is estimated that the cumulative impact on U.S. GDP after four quarters from a 1% GDP shock in China is only -0.03%.  A Chinese contagion is more likely to affect emerging economies such as Korea, Hong Kong, Taiwan and Singapore.
  • “Not everything that can be counted counts, and not everything that counts can be counted.” – Albert Einstein

As always, there is plenty to worry about in our well-connected global society.  While most U.S. economic indicators are still positive, a few cracks are starting to surface and global economic growth is expected to slow.  Knowing that market-timing is a fallacy, investors with well-diversified portfolios that may include alternative investments should sleep at night with the understanding that their investment experience will be less volatile than the global stock market.  So, please enjoy the beautiful fall season, your family and other things important to you…and let your portfolio work for you.

We at Falcons Rock are truly privileged to serve our clients…thank you!

Greg Wait, President of Falcons Rock

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

Answers to pop quiz:

  1. c
  2. a
  3. b

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