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

Reelin' in the Years

 

2015 Quarter 4 Market Review

Empty champagne bottles

The 1972 Steely Dan classic song (with one of the all-time great guitar riffs!) opens with “your everlasting summer, you can see it fading fast” and then asks: “are you reelin’ in the years…stowin’ away the time?”  As we enter another New Year, which we hope will be peaceful, healthy and prosperous, some investors are wondering if the long seven-year bull market is fading fast.  Does it seem to you like we’ve had seven straight years of positive returns in the U.S. large cap stock market?  I think this has been the most underappreciated bull market (and economic expansion) since I started in the business 31 years ago.

The S&P 500 Index has climbed 249% (including dividends) since the market bottomed out in March, 2009.  The duration of this bull market (83 months) is now the second longest since the inception of the S&P 500 composite in 1925.  Corporate profits (earnings per share) have risen from roughly $10 in early 2009 to nearly $29 as of Q4 2015.  U.S. household net worth has climbed to an all-time high of over $87 trillion.  The U.S. household debt service ratio is down to 10% of disposable personal income, which is the lowest on record.  The housing affordability index is near its all-time best level.  The U.S. unemployment rate has now dropped below its 50-year average, and currently stands at 5% (wage growth unfortunately hasn’t kept pace, but is finally showing signs of improvement).  Since early 2010, total U.S. private employment has gained 13.7 million jobs, more than offsetting the 8.8 million jobs lost during the financial crisis.  Inflation has remained very low and does not appear to be a threat in the near future.  Americans should not be reelin’ and stowin’!

Some have said that the pace of economic growth has been less than average, and that is true.  The average historical year-over-year rate of GDP growth is 2.9%, and we have averaged 2.2% annual growth during this expansion.  But, here’s the thing:  2% GDP growth is actually above our current capacity based on U.S. demographics.  The growth in our working age population (ages 16-64) has been only 0.7% over the past ten years, which is the lowest growth rate in at least six decades.  The forecast for the next ten years is only 0.4% growth.  Two key drivers of GDP are the growth in workers plus the growth in real output per worker.  Over the past ten years, these two factors combined have grown by only 1.5%.  The U.S. labor force participation rate is at its lowest level since the mid-1970s and has now trended below its long-term average of 63%.  Contrary to what some believe, “discouraged” workers represent less than ten percent of the decline in labor force participation.  The largest factor contributing to the declining rate is the baby boom generation starting to turn age 65 and retiring at a faster pace over the next ten years.  At the opposite end of the working age population (ages 16-24), many more young Americans are staying in school longer or going to college and are therefore not looking for work (only 56% currently).  Other factors include the growth in disability benefits and a higher percentage of working-age men with a criminal record.  So, the reality is that the declining labor force participation rate is a structural problem, not a cyclical problem.  Potential solutions to this long-term challenge would be smart immigration and entitlement reforms.  The United States is unique as a global magnet for talented young workers that could help fill the void of the retiring baby boomers, and for less-skilled workers who help fill the void of lower-paying jobs that a more educated U.S. workforce do not want.  Also, indexing the age at which we all start receiving Social Security and Medicare benefits (based on life expectancies) would help keep some people working longer.

Some good years have reeled past us and some challenging years lie ahead.  We are all blessed to live in a very prosperous and dynamic country and we should do our best to appreciate our time here on Earth…and we should do what we can to help our neighbors and fellow workers stay engaged.  Let’s not just stow away the time!

Fourth Quarter and Calendar Year 2015 Review

The three big stories that drove market volatility in 2015 were: oil prices are too low, the U.S. Dollar is too high, and China’s economic growth is slowing.  While low oil prices tend to enhance consumer spending, the staggering drop in oil prices over the last 12-18 months has taken a toll on many large energy-related companies and it has shown in their stock prices.  The exceptionally strong U.S. Dollar has made our exports more expensive to foreign buyers and has dampened the earnings of some large corporations.  China is transitioning from an infrastructure and manufacturing economy to a consumer-driven economy as they grow their middle-class.  These events resulted in a frustrating year for investors in all asset classes.

The U.S. stock market came back nicely in Q4, after a correction in Q3, but finished the year with mixed returns depending on size and style.  Value-style investors and mid/small cap stocks were generally in the red, while large cap growth stocks produced solid returns.  The best performing sectors in the S&P 500 Index for the full calendar year included Consumer Discretionary (+10.1%), Health Care (+6.9%), Consumer Staples (+6.6%) and Technology (+5.9%).  The worst performing sectors during the year were Energy (-21.1%), Materials (-8.4%), Utilities (-4.8%), and Industrials (-2.5%).  Outside of the Energy sector, S&P 500 earnings per share were generally positive.

During the year, the U.S. Dollar continued to strengthen against most foreign currencies.  Non-U.S. stocks, as represented by the MSCI ACWI Index, produced flat returns for the year (-1.8% in U.S. Dollars, +1.8% in local currencies).  In their local currencies, this year’s best performing countries included Russia (+22.9%), France (+12.3%), Japan (+10.3%) and Germany (+10.0%).  However, in U.S. Dollars, these returns were dampened or negated entirely.  Selected countries whose stock markets delivered the worst returns included Brazil (-12.5%), China (-7.7%) and the United Kingdom (-2.2%).

The bond markets were also mixed in 2015, as investors’ fears about emerging markets translated into flows to U.S. Treasuries and Municipals.  High yield bonds suffered their first loss in quite some time, as start-up shale oil producers generated some defaults.  Cash (money market funds) again posted a 0% return for the year.  Most balanced portfolios experienced small losses during the year.  Alternative strategy results were mixed this year, but market neutral strategies generally posted small positive returns and commodity-related strategies were pummeled.

Here are the returns for select market indices for Q4 and Calendar Year 2015 (as stated in U.S. dollars):


Responsible Investing Corner

As many of you know, I have devoted a fair amount of time to research on responsible investing concepts and strategies. What began with a research paper in late 2014 (available on our website), from which I concluded that investors do not generally have to sacrifice returns to invest responsibly, lead to two conferences and further study into the ways environmental, social and governance (ESG) factors are integrated into the investment process of a growing number of firms. This industry is now generally referred to as Sustainable, Responsible and Impact (SRI) investing. Investment firms run the gamut from those that employ traditional exclusionary approaches (no “sin stocks”), to those that find ESG criteria to be useful when selecting stocks, to those that invest to truly make an impact on some corner of the world. Starting with this letter, I will devote a section to this topic, in hopes of expanding the awareness and education about this fascinating approach to investing. Here are a few starting facts:

  • Since the inception of the MSCI KLD 400 Social Index in June, 1990, an investment of $1,000 in this index of ESG screened U.S. large cap companies would have grown to $10,680 by June 30, 2015.  If that same $1,000 had been invested in the S&P 500 Index, it would have grown to $9,756.
  • In a study co-authored by the London Business School and the Harvard Business School, which evaluated “High Sustainability” companies vs. “Low Sustainability” companies over the period from 1990-2010, High Sustainability companies significantly outperformed in terms of both stock market performance and accounting measures.  High Sustainability companies included those that had adopted corporate policies regarding commitments to enhance environmental and social performance long ago.
  • Today, over $3.74 trillion, more than 11% of all money under professional management, is invested with ESG strategies, an increase of 22% since 2009.  According to Lipper Thomson Reuters, $88.5 billion is invested in SRI mutual funds, up from $59.1 billion in 2011.
  • Last month, the New York State Common Retirement Fund for public employee pensions (the third-largest pension fund in the U.S.) announced that it will invest $2 billion in a new investment fund that prioritizes companies with smaller carbon footprints.  This fund will also invest another $1.5 billion in its Green Strategic Investment Program, which puts money into companies making products or providing services that reduce climate change; for example, solar or wind-power producers, manufacturers of emission-cutting devices and systems (maybe Volkswagen should look into this!), and companies that do carbon trading or have energy-efficient management.

This and That

  • Retail sales rose 3.3% from October 31 through January 4, about the same pace as the previous year; however, foot traffic in retail stores dropped 6.4%...people are doing more of their shopping online.
  • Millennials, with mostly limited budgets, are spending more money on experiences, such as travel and a dinner out, than on accumulating possessions.  It will be interesting to see if this trend holds up as this generation starts to get married and have children.  If so, it could pose a headwind for traditional retailers.
  • Job openings in the U.S. are about as plentiful as they’ve ever been.  There are now less than three underemployed for every open job position.  In the depths of the recession, there were closer to one open position for every 11 underemployed.  By the end of 2016, it is likely that our economy’s biggest problem isn’t unemployment, but rather a lack of qualified workers.
  • China’s economic growth has slowed to 6.9%, less than half its growth rate in 2010.  The Chinese government has devalued its currency in recent months, and could allow the yuan to fall further to try to boost exports.  Below-trend growth isn’t a “hard landing” and China’s growth rate is still among the highest in the world.  The effect of a slowdown in China on the U.S. economy is less than 1% from a trade perspective.
  • “The stock market is a giant distraction from the business of investing.” – John Bogle

Recent volatility in the global stock markets highlights that there are mixed economic signals around the world and, as always, plenty of geopolitical concerns.  The slowdown in China’s infrastructure build-out has had serious consequences for commodity-driven exporters, such as Brazil and other emerging markets countries.  Low oil prices are more a result of over-supply than falling demand.  Oil production is up 5.4% globally since 2013, with 19.0% growth in U.S. production.  Over the same period, global oil consumption has grown 4.3%.   Global stock market valuations are close to long-term averages, so there is not likely to be multiple expansion to help boost stock prices this year.  Loan defaults have picked up in the high yield market, and Puerto Rico is threatening to default on their loan payments.

With all of these mixed signals, what is an investor to do?  If you are a long-term investor, stick to your long-term plan!  A long-term investment plan typically consists of a well-designed asset allocation strategy with plenty of diversification to smooth out the ride.  If you are an investor with a short-term time horizon, the strategy should be diversified but focused on capital preservation.  It is a fool’s game to try to time the highs and lows of the stock or bond markets, regardless of what you read in the popular press or hear on the electronic or social media sites.  We are here to help!

We at Falcons Rock are thankful for all of our loyal clients, and hopeful for a terrific 2016!

Greg Wait, President of Falcons Rock

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

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