Pop Quiz: Who famously said: “If you want to have a better performance than the crowd, you must do things differently from the crowd.” Circle the correct answer.
A: Benjamin Graham
B: John Templeton
C: Warren Buffett
While each choice represents a great investor, a great value investor more specifically, market veterans will recall this line belongs to John Templeton, the Tennessee-born British investor and fund manager. Real old-timers might even remember when Sir John launched his Bahamas-based Templeton Growth Fund in 1954.
“But a pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons.” Warren Buffett
We got to thinking about Mr. Templeton, described as “the greatest global stock picker of the century,” during the brief occasion of Kraft Heinz Co.’s recent takeover bid for Anglo-Dutch giant Unilever. Why? Because both companies represent, almost perfectly, the kind of value stocks a bargain-hunting manager like Templeton might seek — high-quality names with predictable earnings and strong cash flow that trade with lower-than-average volatility. “Low beta” in the modern jargon.
“The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.” Benjamin Graham
There were a number of reasons why the Kraft Heinz/Unilever deal fell apart after just two days in the public eye. And it’s only coincidental that value stocks — which handily outperformed growth stocks in 2016 — have been just as handily underperforming in 2017. Which reminds us of something else Mr. Graham said — “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” Even if you’re doing it differently than the crowd.
What the markets have been doing…
Way to go Dow! Friday marked the old timer’s 11th consecutive record daily close — a streak the Blue Chips have not managed since the 1980s. Not to be outdone, the S&P 500 moved ahead nicely while continuing its run of record-low volatility — the market’s favorite benchmark has not experienced a daily swing of over 1% since mid-December. The NASDAQ also racked up some impressive gains, though it and other smaller-cap benchmarks gave up ground late in the period.
Economic data was generally favorable across the two-week stretch. Most notable, perhaps, was news on the housing front, where reports showed existing home sales reaching their highest level in nearly a decade. During the week, the Federal Reserve released the minutes from its latest policy meeting, which indicated that the continued improvement in the economy was encouraging the central bank to tighten monetary policy. While a hike by June seems almost certain, the likelihood of a March increase appears increasingly possible.
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Treasury yields fell a bit across the period as bond prices rose. Most of the decline took place last week on reports of a decline in the University of Michigan’s consumer sentiment index. Investment-grade corporate prices also rose a bit, most likely due the ongoing strength in equities. High yields also got a boost from a rising stock market along with favorable corporate earnings reports for specific issuers. Municipal bonds traded mostly in line with Treasuries, thanks in part to a light new issuance calendar.
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What Fund Architects has been doing…
The intense pace of stock market gains seems to imply that investors believe that economic growth will continue improving and the economy and markets will benefit from the legislative backdrop. Maybe. But we’re hard-pressed to think the pace is sustainable. There’s bound to be economic bumps and political setbacks along the way.
The particularly high number of unknowns notwithstanding, the overall environment is still supportive of growth and financial markets. In our view, it continues to make sense to stick with a pro-growth investment stance and to overweight the appropriate sectors in our investors’ portfolios.
To that end, the Fund Architect Portfolios are positioned as we want them. On the equity side, our overweights to Global Industrials and U.S. Equities are paying off nicely. We’re particularly pleased with the trade we made in December to move the managed hedge portion of the portfolio completely to U.S. equities. It has been nice to fully capture this upswing. On the fixed income side, our positions Convertible Bonds and High Yields are doing relatively well versus Treasuries and the overall aggregate bond index.
At this hour, there is still no change in any of our top rankings, which indicates the current trends are continuing strong.
It’s probably worth noting that since the markets haven’t had much of a pause or correction in recent months, stocks are overdue for some sort of setback. Over the long term, however, we still expect equity prices to continue climbing, even if unevenly. In this kind of environment, we believe our investors will benefit handsomely from Fund Architects’ systematic strategy that actively adjusts to current market conditions.
Donald’s got nuthin’ on Teddy…
Best stock market performance during a new administration’s first 30 days in office:
ELECTION WINNER YEAR DJIA % CHANGE
Theodore Roosevelt 1905 81.13 6.55%
William McKinley 1901 71.35 5.58%
William Taft 1909 85.94 5.07%
Franklin Roosevelt 1945 159.01 4.13%
George H.W. Bush 1989 2324.82 4.00%
Donald Trump 2017 20550.03 3.69%
Quote of the Week…
“It’s a tough market in which to be a disciplined buyer.”
James Tisch, CEO of Loews Corporation
Number of the Week…
The strike price of options forgone by Bank of America executives. Top executives were sitting on the right to buy 400,000 shares of the bank’s stock at that price, a perk optimistically handed out by its board a decade ago. The stock options expired worthless on Wednesday.
The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional. The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.