“There are no endings. If you think so you are deceived as to their nature. They are all beginnings. Here is one.” (Thomas Cromwell) – Hilary Mantel, Bring Up the Bodies.
Overview
On behalf of LaSalle St. Investment Advisors LLC, I’m pleased to announce that the beginning of SCI (Salt Creek Investors) was a success. Our “road show” was well attended and the feedback we’ve received for this new platform has demonstrated confidence in our ability to navigate an environment that is undergoing a significant change embedded with real risks. Our
results give validation to our efforts, and moving forward we will continue to provide quality service to you and your clients. Thank you to all of our advisors and their clients who are a part of Salt Creek Investors.
New DOL rules are game changers, and whether changes are made or lawsuits prevail, the proverbial horse is out of the barn. All the players in the financial world will be held to a higher standard than before. Whether or not you support the changes being mandated by the DOL, there is public support for these changes. If you haven’t already, I would encourage you to start the process of adjusting your business model to accommodate the coming changes. This is a process that will take time and effort.
SCI utilizes a familiar strategy based on the principals of asset allocation. Many studies have been performed and published about the benefits of asset allocation. Looking at the Callum periodic chart of investment returns shows both the strengths and weaknesses of an asset allocation program. While asset allocation is not for everyone, for many investors it removes the
risk associated with concentrated investments. It also allows investors access to a wide cross section of risk factors.
Leveraging our relationships with Institutional Wealth Services, a division of Fidelity Investments along with Sortino Investment Advisors, we have created a unique proposition in this space. Using Fidelity as the custodian allows us access to funds that are NTF (no ticket charges) as well as their robust platform. Sortino uses its unique ability to analyze thousands of data components for thousands of funds and brings to SCI those actively managed funds that are true fits for the asset allocations we have designed for each portfolio. SCI then performs a second layer of screening to determine the final funds to be used in each portfolio. This final screen incorporates some of the best practices in our industry with regard to those factors contributing to outperformance. Rebalancing is performed as soon as the data is available at the end of each calendar quarter.
Quick Facts
- In the eight years since the collapse of Lehman Brothers, the world’s top 50 central bankers have, on average, cut rates once every three trading days. 10 cuts occurred in June (Alex Dryden).
- Real consumer spending increased at an annual rate of 4.2% in the second quarter of 2016.
- Final sales (growth of real GDP excluding inventories) rose at an annualized rate of 2.4%.
- First half growth was the slowest since 2011.
- Of the 44,000 Buy/Sell recommendations made by 4,000 analysts over the past 5 quarters, 53% were wrong (tipranks.com).
- The Japanese unemployment rate was 3.1%, the lowest since 1995, while inflation forecast in the year until March 2017 was .1% (Robin Harding, Financial Times)
- Average yield for the S &P 500 is roughly 2.1%; yield of the 10-year Treasury note is around 1.5% (Jeff Sommer, New York Times).
Economy
A previous week’s Barron’s had an interview with a leading expert on interest rates. Calling them the Ph.D. standard, James Grant gives little credence to the current models being used to generate growth, lift the wages of millions who have experienced income stagnation, and ultimately improve a standard of living that seems to have been put on hold. The experiment will continue because for at least 3,000 years and perhaps longer, we’ve never experienced negative interest rates. The amount and number of bonds now having negative yields is astounding. In dollar terms, the amount is in trillions.
There is no precedent to predict what the result will be. Central banks are searching for a solution to low growth and deflation that probably only a political solution can provide. That looks unlikely. Last Friday’s GDP report was not encouraging. Inventories hurt the results and personal consumption helped; otherwise it was an anemic report, which seems to have become the norm.
The ECI (Employment Cost Index) offered some evidence of rising costs in the labor market. If wages are on the rise and growth remains below trend, then a return of “stagflation” is possible. Inflation occurs when prices are increasing faster than productivity. It’s well known that productivity has been declining for several quarters. Productivity is the factor that creates the growth in an economy and lifts the wages of workers.
Capital investment by business is primarily how productivity is created in an economy, whether it’s new machines or new technology. A real concern from the GDP report, nonresidential
fixed investment of business spending (capital investment) declined at a 2.2% annualized pace in Friday’s release. So where is business investing its capital? Some firms invest in labor instead of capital, resulting in the creation of lower paying jobs (easier to pay minimum wage that can later be fired than invest in big capital projects), or they invest in buying back
stock and increasing dividends. Either way productivity remains muted.
The election cycle will further delay new business initiatives. Perhaps a different political environment brings clarity and, with luck (which, like hope, is not a good strategy), some
leadership in dealing with the fiscal issues we currently face. As John Authers wrote this weekend in the FT article, Why Central Banks Are Not The Enemy, “trust is fragile and under attack. The urge to give the rich and powerful a kicking links the UK’s Brexit vote, the nomination of Donald Trump, and the rise of populist movements across Europe. Distrust of
ruling elites is often justified but the breakdown of trust that is taking place today is different. The internet and social media have turned robust debate into ugly and intolerant tribalism.”
2nd Quarter for SCI
The second quarter of 2016 marked the first full quarter of investment for the Salt Creek program. Our expectation is that the use of actively managed funds will produce alpha beyond the
cost of obtaining it. If it doesn’t, then the investor would be better served investing in a passive index.
We evaluate each manager against a passive benchmark that meets the criteria for being called a benchmark. (Sortino evaluates each fund by customizing a benchmark for each of the more than 4,000 funds they analyze for us. This is necessary for Sortino to perform the type of comprehensive analysis they provide to Salt Creek. SCI does not use their benchmarks, as they would not be available as an alternative to an investor in the public market.)
The results we obtained were very encouraging. As mentioned above, most of our allocations did produce positive alpha. Decisions to underweight or overweight certain asset classes produced the majority of the excess return, or lack of, depending upon the asset class in question. Of note was the overweighting of real estate. As was the case in the first quarter, SCI remained underweight the small and micro-cap space. These types of decisions are made quarterly based on the economical, market and statistical data we examine to determine the final allocations. These may vary from quarter to quarter, but not in any significant manner.
In our 3rd quarter allocation we have made a few minor tweaks to the allocations. From time to time these changes will be necessitated by the current environment and what it is indicating. Inflation, interest rates, valuations, liquidity, and global factors will be incorporated into our processes to determine how the new allocation is set. Major changes to the portfolios
from quarter to quarter are not anticipated, but we reserve the right to make any changes necessary to protect clients from sudden and adverse changes occurring in the markets.
Salt Creek Investors Data Report
1. Fund turnover from the 2nd quarter to the 3rd quarter was 33%
(excluding cash component).
2. All model performance for the 2nd Quarter was positive relative
to the benchmarks.
3. Average fund fees for the 3rd quarter are 91 bps.
4. Number of 3rd quarter funds with manager ownership (equity funds only)
9 out of 10.
5. Overlap among fund holdings remains very low.
6. Six out of seven domestic equity funds had positive alphas relative to
their tracking error over the past three year period as measured on a
monthly basis.
7. Over 4,000 actively managed funds were analyzed for inclusion in
the portfolios.