Feeding America Visits Boulder
Among all of the hot topics surrounding food these days - content, origin, environmental impact - the most basic of all stands out in its urgency: do people actually have food to eat? Data from the recently published and most comprehensive study conducted to date, Hunger in America 2010, provide a startling answer to this question. The recession of 2008 pushed the number of food insecure Americans dramatically higher than the previous review, up to a current 49 million, which was a 36% jump from 2007 alone. That is sixteen percent of our entire population!
Feeding America is the umbrella organization for over 150 food banks across the United States. Its ongoing mission is to bring food to families whose pantries are empty, with targeted programs to care for particular demographics. Creative initiatives such as the backpack program, which enables children to carry home food for the weekend, helps fill the gaps. But the organization has a tougher job with rising numbers: its network feeds approximately 37 million people, and that leaves a gap now of approximately 12 million people across the country, with 150,000 food insecure individuals right here in Boulder County.
Feeding America is making its first-ever Boulder visit on December 3, from 3-5 pm at a private home near downtown. Seven officers will be attending to put faces to these numbers and to provide a road map to close this gap. BSW is sponsoring the event and wishes them much success in tackling this issue. Shining a light on the problem and educating the rest of us is the first step to the solution.
Please contact Debi at debi@bsw.com for more information.
- Debi Baydush, Partner
Thanksgiving & 3Q11 Portfolio Update
The Thanksgiving Holiday begins tomorrow, a time to express our gratitude for our family, friends, colleagues and the fullness of our lives. Financial markets, unfortunately, have little to be thankful for during the past few weeks. Just a few days ago, the Congressional “super committee” announced that they had failed to reach an agreement on how to reduce the federal deficit. This was precisely the outcome BSW expected – both in terms of the committee’s failure and the equity market’s reaction. I hate to root for bad news, but there is some satisfaction in the “I told you so” aspect of our portfolio’s defensive posture – and markets wild swings during the past two months.
You see, through the close of the Third Quarter of 2011, the BSW Growth Portfolio was strongly outperforming its benchmark. Following an ugly September, the BSW Growth Portfolio was down 9%, while our benchmark had lost nearly 12%. As Europe’s debt crisis returned to the forefront in September, investors shed risk assets indiscriminately. Although the BSW Growth Portfolio managed to sidestep a significant portion of this drop, even our defensive positions were not fully immune. Still, we were outperforming the markets by nearly 25% while holding high-quality, dividend-paying companies with strong business prospects, despite tepid economic growth.
Then came October 2011, one of the best stock market rallies in history. I wanted to cheer, but I just could not believe the hype. Again, I hate to root for bad news. I am an indefatigable optimist. From my perspective, optimism is the only realism – the only world view that squares with the facts and the historical record. As an investor, though, one must simply be rational. And a rational analysis of the situation in October was that the market was rallying on form over substance. The debt crisis in the developed world (Europe, Japan, and the United States) is a complex, entrenched, and structural problem that cannot be whisked away with hyperbole and accounting gimmicks. Investors came to realize this once again in November and markets collapsed.
The various debt crises around the world are difficult to fully comprehend, mainly due to numbers that are so unfamiliar in size and scale that we just can’t relate. Who can visualize a “trillion” of anything? That’s why analogies and images help. If there is one image that illustrates how untenable our present situation is, it is this one: http://www.huffingtonpost.com/2011/07/26/us-debt-visualized-graphic_n_906239.html or, better yet, check out the video here: http://www.youtube.com/watch?v=WBxWdD9YKdY&feature=youtu.be. Every conscientious American should spend some time digesting these representations – which could be replicated with similar effect for Europe and Japan.
The European situation is even more intractable because it is fundamentally a cultural clash. Southern/Latin Europe (led by France) is clashing with Northern/Teutonic Europe (led by Germany) about nothing less than how one should live. The Southern Europeans want a “flexible” system that allows for a steady devaluation of the currency to wash away debts and government largesse. The Northern Europeans want France and the PIIGS to live by northern rules: Keep your currency sound, budgets balanced, and let unsustainable entities (companies, agencies, etc.) fail. It is oil and water. For a great distillation of the situation, listen to uber-writer Michael Lewis’ recent interview on NPR here: http://www.npr.org/2011/11/17/142437694/lack-of-trust-underlies-greeces-societal-problems. As such, the European crisis repeats the same pattern over and over again. Bad news sinks markets until European leaders offer up the latest subterfuge “fix.” Markets leap with joy until investors dig into the details and discover, once again, that the Emperor’s “fix” has no clothes – all form and talk, no substance and action. Then the bad news revs up again and markets fall. Repeat.
Again, an analogy is useful. Imagine the developed world as a patient who has grown dangerously obese (indebted) through years and years of overeating (excessive credit) and junk food (wasteful spending). After suffering an acute illness that required life-saving measures (bailouts, emergency fiscal/monetary policy), their physician warns them that they need to change their ways or suffer a worse fate later. He recommends rigorous exercise and dietary changes (saving, budget cuts, and tough choices on spending). The patient heeds the physician’s advice, but finds the going tough and is constantly lured, and disappointed, by unproven “magic pills” (quantitative easing, stimulus spending, etc.). Eventually, though, the patient is forced to accept the inevitable: that recovery will require hard work and discipline over a long period of time.
This analogy is not meant to be grim. Again, I am staunchly optimistic. The debt crises began with consumers, who passed their borrowing folly back to their bank lenders, who in turn passed their lending folly to governments around the world. Governments are struggling, both at home and abroad (five European governments have fallen from power thus far in 2011) because they are the end of the line. But the events of the past week simply hasten the day that financial and political leaders realize that there never were any magic bullets. We simply have to put our shoulders to the wheel and begin the arduous task of “right-sizing” our balance sheets. Many corporations have already done so and are lean and profitable. Consumers have also begun this effort and are about one-third of the way complete. If and when governments can muster the courage, will, and fortitude to do the same, I am confident that several emerging undercurrents (microfinance, the Arab spring, cheap renewable energy, dirt-cheap computing power, genomics, etc.) will set the stage for a sustained period of prosperity similar to 1945 to 1965, which followed the last true global crisis of World War II. Although we have yet to turn this economic corner (and, hence, BSW remains defensively positioned), there is a distant, but visible, light at the end of the tunnel upon which prudent investors (like BSW) remain focused and confident.
We hope this summary provides you with better insight into your portfolio and BSW’s outlook. If you have any questions regarding out positioning or would like to discuss your portfolio in greater detail, please don’t hesitate to contact BSW. From all of us at BSW, have a happy Thanksgiving.
-David Wolf, Chief Investment Officer
Schwab Impact 2010
“Fuel the Movement” was this year’s theme at Schwab Impact and if the record attendance was any indication (over 4,000 attendees), there is enough fuel powering the independent investment advisory industry to keep it moving for quite some time. “The Movement” here refers to the shift from traditional brokerage services to independent advisory services, which, as you know, are unbiased, unconstrained and allow the needs of the client to remain first and foremost.
Matt Samek and Craig Seidler, portfolio managers from the BSW investment group, were the lucky team members to attend this year’s Impact in beautiful San Francisco and definitely made the most of the experience.
Keynote speakers Tony Blair, former Prime Minister of the United Kingdom, and Bill Gross, bond guru and director of mutual fund giant PIMCO, both discussed the need for countries to solve structural debt problems and work together to promote economic growth and stability going forward – no small task.
With the U.S. stock market experiencing historically high volatility over the past few months, one of the predominant themes was the importance of remaining invested and focused on long term goals, instead of reacting to the day-to-day noise created by the soap-opera-like storylines out of Greece and other European countries.
There was much talk circulating at Impact concerning the Occupy Movement, so our inquisitive staff had to see and hear it firsthand at the San FranciscoOccupy campsite. Protestors were happy to be interviewed:
While walking around the hilly streets of San Francisco, Craig and Matt were reminded of the roller coaster ride investments have taken over the past several years. And after speaking with other investment professionals at the Final Night celebration put on by Schwab (it’s amazing the truths that comes out after a few cocktails and some good food), it was comforting to hear what we already knew: that we protected and grew our client’s hard earned principal better than most of our colleagues during these challenging times!
We look forward to next years’ Schwab Impact in Chicago as another opportunity to network, stay connected and keep moving forward.
- Craig Seidler, Portfolio Manager
BSW Portfolio Update: The Policies of Volatility . . .
Global markets swooned yesterday as nervous investors sold off every asset class (even gold) in a lemming-like rush for the (perceived) safety of US Treasuries. The Greek debt drama, and Europe’s fumbling and bumbling response to it, has once again taken center stage. US policymakers have fared little better, as the US Federal Reserve’s announcement of “Operation Twist,” intended to drive US Treasury holders into riskier assets, produced the exact opposite outcome. Investor demand for US Treasuries pushed yields to a record low of 1.67% and the dividend yield on the S&P 500 (2.15%) is now higher than the yield on a 10-year US Government Bond.
Sign of the times? An insightful sign observed in Washington DC this week (with reference to the classic ghost movie, The Sixth Sense).
When markets yo-yo, BSW strives to immediately communicate our outlook, actions, and positioning to our clients, colleagues, and friends. That charge has become increasingly challenging as volatility within the markets has dramatically surged. Markets are up, down, back up, back down – well, you get the picture. The most important question, though, is not really, “What’s happening in the markets/economy?” Instead, it is, “What is happening in MY portfolio?” To answer that, we ran the numbers on BSW’s Growth Portfolio -- so below please find a concise summary of BSW's recent performance, along with our outlook, positioning, and “news you can use.”
BSW Growth Portfolio Performance (through August 31, 2011):
We have continued to emphasize “defense as offense” in the BSW Growth Portfolio, with allocations to gold, managed futures, long/short commodities, and defensive stock market sectors like consumer staples and healthcare. This defensive tilt has insulated the portfolio from much, but not all, of the market’s weakness – and has handily outperformed our benchmark thus far. In a nutshell, we are aiming to find a balance between defense and keeping our “oars in the water” with investments in asset classes with strong fundamentals and growth prospects.
BSW Economic Outlook:
Theme #1: We are still feeling the aftershocks of the “Great Recession.”
If the financial crisis of 2008 had been a normal, garden-variety recession, the economy should be absolutely roaring after so much monetary, fiscal and bailout stimulus. But, as we have been consistently saying, the 2008 financial crisis is/was closer to a depression than a recession. Looking at the past 800 years of financial history, recovering from a financial crisis typically takes about 7 years. This would suggest that we won’t be back to “normal” until 2015 or 2016 – and the ongoing sluggishness in employment, growth, and housing evidences this.
So, BSW expects weaker, “new normal” growth to continue for a while. Consumers and governments need time to retrench, pay down debt, and rebuild their balance sheets. Further, the overhang of housing and the specter of the long-term unemployed will continue to dampen bright spots along the way.
Finally, although it is certainly possible that we will revisit the lows of 2008, we don’t believe it is probable. The wild card is Europe. If the Europeans cannot agree to coordinated efforts to stem their debt crisis and a dis-orderly “Euroquake” default of Greece occurs, it could produce a Lehman-like contagion spreading to Italy, Spain, and Portugal that would plunge the world into a Japan-like lost decade (or two).
Theme #2: Two-tier recovery.
The recovery from the 2008 Great Recession is bifurcated at many levels: developed vs. emerging, high end vs. low end, and Inflation vs. Deflation.
First, the emerging markets are recovering (they never really recessed) at a much faster rate than their developed market peers because their financial houses are, largely, in order.
Second, companies that sell high value goods (Apple, Whole Foods, etc.) and companies that sell low end goods (consumer staples) are both still doing well. Companies that market to the mid-range consumer (such as non-staple items at Wal-Mart) however, are badly hurting. That’s because the middle class is getting squeezed and is trading down. Their primary “asset” (their home) is still losing value, companies are hesitant to hire (especially middle management), and wages are stagnant. As such, the “class warfare” rhetoric has returned to our political dialogues – and looking historically, class warfare dampens economic growth even further.
Finally, the dichotomy of inflation versus deflation. Certain items (food, fuel, healthcare, insurance premiums) are rising in price, while other items (houses, wages, etc.) are falling in price. The forces cancel each other out and keep the Consumer Price Index (CPI) measure of inflation low -- precise but not accurate.
Theme #3: Keynesian “Race to the bottom.”
As my favorite Swiss-rabble rouser, Marc Faber, likes to say, “Everyone has become a Keynesian.” He’s referring to the economist John Maynard Keynes who advocated that the government use monetary and fiscal policy to “manage” the economy. For me, Keynes has always been like Marx. Both were absolutely brilliant, but practically speaking, their policies are disastrous and remind me of oxymoronic “forest management” that tends to result in both: a) Massive wildfires; and b) Ridiculously expensive fire-fighting techniques. Dropping a bucket of water on a wildfire with a helicopter is reminiscent of “Operation Twist.” Forests have had fires as long as forests have been around. And banks/countries/companies have been going bankrupt since they originated as well. Most often, the “system” manages itself best without interference from well-intentioned bureaucrats.
In essence, all Central Banks are in a race to devalue their currencies and all countries are bent on trying to export their way out of their current predicament. But as another of my favorite economists, Ken Rogoff, cogently argued in the Financial Times recently, traditional economic analysis leads to traditional policy prescriptions, which are useless and inappropriate in a "Great Recession." Far from being a stabilizing force on markets, Central Banks have simply amplified volatility, with their influence and actions serving as the ultimate uncertainty – and markets hate uncertainty.
We hope this summary provides you with better insight into your portfolio and BSW’s outlook. If you have any questions regarding out positioning or would like to discuss your portfolio in greater detail, please don’t hesitate to contact BSW. As always, we are happy to help.
-David Wolf, Chief Investment Officer
Non-Business Business
What started as a rainy, east coast kind of day early in September cleared up beautifully for the annual BSW community appreciation open house. The courtyard was tented, food plated, and doors opened, so the fifteen of us happily greeted clients and colleagues from the Boulder-Denver area (we missed every one of you who could not attend!).
A chance to share more of the personal side is always a wonderful opportunity to get to know each other better. Shawn Preston, an accomplished magician from Denver, livened up the evening by entertaining everyone with his table magic as well as two shows in the conference room.
He delighted and puzzled his audience, with some attendees choosing to return for the second show to try and figure out just how he amazed us - but to no avail!
Introductions and conversations went on for hours as suggestions for future BSW events grew ever-more creative. A travel group? Annual conference to educate around a theme? Fly-fishing trips? They all sound good to us, so please share any thoughts you may have.
The end of the evening saw smiles all around and the feeling that once a year is just not enough for this event.
Debi Baydush, Partner
Harbor Portfolio Tour
In August, portfolio manager Elias Bachmann toured several Harbor Group properties currently in the BSW portfolio. Trips like these are an integral part of BSW’s on-going due diligence of Harbor Group and are key to understanding and evaluating the execution of value-add strategies.
At Treybrooke, located halfway between Raleigh and Durham, NC, capital improvements have been completed and include new pavement for parking lots, conversion of a tennis court to a children’s game area and updating of apartment interiors. Investments in apartment improvements can pay for themselves in as little as one year. During the summer, the property manager began hosting movie nights by the pool. Such amenities enhance quality of life and build a greater sense of community, which can help reduce the level of resident turnover.
In Tampa – St. Petersburg, contractors were hard at work remodeling the office, club house and fitness center at Sienna Bay Apartments. By updating the look, functionality and feel of these amenities, Harbor Group has been able to increase resident satisfaction. Sienna Bay serves as a good “before” picture of the improvements completed at Treybrooke.
The Metro Baltimore properties exemplify a very different value-add strategy because the properties were already performing at a high level of efficiency and resident satisfaction. In this case the size and complexity of the deal was a significant barrier to entry for other potential buyers and allowed for significant value on the purchase price and the terms of financing.
At the time of the visit Harbor Group had yet to complete the purchase of the Belvedere Tower in Baltimore. Touring the property with the acquisition manager, Elias saw the many improvements Harbor Group planned to make, including; landscaping, pool area maintenance and a broad range of common area updates. AIG, the current owner, assumed building management responsibility after it dissolved a joint venture with the operating partner. Because AIG is not in the business of managing apartments, the property was priced to sell quickly. Harbor saw the opportunity to make improvements in operations and marketing as means to add significant value in a short period of time.
Given the persistence of economic factors that have buoyed the multifamily real estate market, BSW remains bullish on the outlook for this segment. While a rising tide lifts all boats, we are pleased to see how our managers continue to identify compelling opportunities to unlock additional value for our investors.
Elias Bachman, Portfolio Manager
BSW Portfolio Update: On Defense as Offense . . .
Global stock markets plunged today, following the downgrade of US debt to AA+ by Standard & Poor’s. The S&P 500 suffered its largest drop in nearly three years, losing more than six percent of its value as nervous investors fled equity markets.
Although BSW invests across a multitude of asset classes, when reeling markets make headlines, we aim to proactively and clearly communicate with our clients regarding the BSW Growth Portfolio. And these days, our best Offense has been playing strong Defense. So below please find a distilled summary of our actions, our performance, our outlook, and our commitment to BSW clients.
Portfolio Performance:
We took profits and rebalanced the BSW Growth Portfolio on June 16th, 2011, when markets were making new highs and prior to the US debt ceiling or downgrade dramas. A complete discussion of those rebalancing actions is contained in our Second Quarter 2011 Portfolio Commentary (here). In a nutshell, we sold and took profits on several positions (Australia, EAFE, Software), raised a 7% Opportunistic Cash position, initiated a Sweden position, and raised our Healthcare allocation.
From the period of June 15th to the market close on Friday, August 5th, the BSW Growth Portfolio has lost 4.4%. During the same time, our blended benchmark has lost 6.7%. In essence, for every dollar the market went down, our portfolio went down $0.66. – roughly one-third less than the market.
Looking back on the year so far, since the start of 2011 through August 5, 2011, the BSW Growth Portfolio is down 3.07% versus our blended benchmark which is down 5.37%. In summary, the BSW Growth Portfolio has avoided 43% of the market’s losses so far. It underscores (again) our conviction that disciplined profit taking and risk management are two of our key strengths.
Defensive Posture:
Since our June 16th rebalancing, we have maintained a 25% portfolio weighting to defensive positions – three of which have been going UP while the stock markets have gone DOWN. These include:
Managed Futures = UP +0.71%
Gold = UP +7.73%
Long/Short Commodities = UP +0.45%
Our portfolio also includes large weightings to defensively-oriented positions like Consumer Staples and Dividend-paying Asian Companies. Consumer Staples is down 3.91% for the period, but has strongly outperformed the S&P 500, which is down 4.97%. Meanwhile, our Matthews Asia position is down 0.58% versus the Emerging Markets index which is down 6.03% – a remarkable 10% downside capture ratio.
Bond Allocation:
It’s also important to remember that equity market exposure is just once component of your diversified BSW portfolio, which may also include bonds, foreign currencies, direct real estate, hedge funds, etc. Beyond that, BSW mandates that all clients maintain a minimum of 20 percent in stable, secure, liquid and income-producing bonds. So, to put the recent market gyrations in context, we looked at the year-to-date performance of a BSW client's "real life" portfolio with a very basic allocation of 70% to Growth and 30% to Bonds. Thus far, her portfolio is down just 1.71 percent for the year. Not where we’d like it, of course, but hardly a sign of financial Armageddon.
Lastly, a final note on where the market is (or may be) heading. We remain defensive BUT are actively seeking to take advantage of opportunities based on rational expectations. Sure, the stock market is going down – it tends to do that every so often. But the sky is not falling. The sun will rise in the east. And disciplined investors will profit over the long term.
If you have any questions or would like to discuss your portfolio in greater detail, please don’t hesitate to contact BSW. As always, we are happy to help.
-David Wolf, Chief Investment Officer
2011 Slow Money National Gathering – October 12-14 – San Francisco
One of the most rewarding aspects of BSW's efforts and leadership in Impact Investing has been developing relationships with other organizations and people who share our vision and values. Slow Money, whose motto is "Investing as if food, farms, and soil fertility mattered," is one such pioneering organization. Slow Money was inspired by the Slow Food movement, which began in Italy in response to the creeping proliferation of fast food chains and strives to preserve traditional, regional, and locally produced cuisine. Slow Food was a catalyst for "farm to table" restaurants like Chez Panisse and Gather (my favorite) in Berkeley, California, as well as Boulder favorites like The Kitchen, Black Cat, Frasca and Dish.
Slow Money aims to be a similar catalyst for sustainable food systems by changing the way farmers and food interact with the financial world. Why? Because food is a big, big deal. Quite simply, everybody eats. As such, the means by which we produce, transport, and consume our food have dramatic and far reaching impacts on fuel consumption, pesticide/herbicide use, land use, health, etc. In many ways, if you get food "right," many other things fall into place. As recognition of food's central role in our lives, society, and economy grows, so too have alternative and sustainable food systems. Organic food production has increased nearly 20 percent per year for the last two decades. Community Support Agriculture (CSA) operations, like the Boulder area's Abbondanza Farms and BSW-favorite Frog Belly Farms (which was just profiled recently here!), have grown from just 60 in 1990 to 12,549 in 2007. Likewise, Slow Money, launched just three years ago, has quickly expanded to two-dozen local chapters across the United States (including one in Boulder), hosted two national gatherings that attracted more than 1,000 people from 34 states, and facilitated $4.25 million of investment into small food enterprises. 
During this time, Slow Money's founder, Woody Tasch, and Executive Director, Ari Derfel, have fast become friends and trusted colleagues of BSWs. As such, we wanted to make our BSW Blog readers (particularly our San Francisco-area clients) aware of Slow Money's upcoming, 3rd Annual National Gathering this October 12-14 at the beautiful Fort Mason Center in San Francisco. The national gathering is a wonderful venue to meet other thought leaders and change makers looking to invest in and help create new, better, and smarter local food economies and communities (and the food in San Francisco is pretty darn good to boot). I will be attending -- and I look forward to connecting with clients, colleagues, and friends at the event! Hope to see you there!
-David Wolf, Chief Investment Officer
Special Update: More Proactivity (or Ants Marching Onward) . . .
"Go to the ant, you sluggard! Consider her ways and be wise, which having no captain, overseer or ruler, provides her supplies in the summer, and gathers her food in the harvest."
-Proverbs 6:6-9
Continuing on our theme of pro-activity, this morning we transitioned ALL BSW-managed money market fund positions to cash/bank deposits. In light of Congress' ongoing inability to find a compromise solution to the debt ceiling issue, it is increasingly likely that the US may be downgraded from AAA and possibly endure a technical default (no matter how minor or short-term).
As discussed in prior posts, any downgrade and/or technical default has the potential to disrupt financial markets and may create a rush for liquidity. In such a liquidity rush, money market funds (which often hold instruments linked to US Treasuries) might come under considerable duress. Whether this duress is real or just feared is debatable -- as most money market funds also hold European bank debt and commercial paper. Still, as is so often demonstrated, the perception of a problem is generally greater than the reality of the problem.
Just to be on the safe side, we have moved all BSW clients out of money market funds and into plain vanilla, FDIC-insured bank deposit cash. There is essentially no downside to the switch, considering that money market funds currently pay a whopping 0.01% of interest -- basically the same rate of interest earned by bank deposit cash. Once the Washington drama has (temporarily) subsided, we can easily move back into money market funds. Considering how slow the money market funds which "broke the buck" in 2008 were to make investors whole, why bear the risk?
Once again, it is BSW's stance that some muddling deal will be struck and that the chances of a true default remain miniscule. But one of BSW's key investment disciplines is being PROACTIVE rather than reactive. Aesop's wisdom in the Ant & the Grasshopper (circa ~500 B.C.) is still as valid and relevant today: "To work today is to eat tomorrow."
1919 Milo Winter illustration of Aesop's Ant & Grasshopper fable.
If you have any questions regarding this transition or would like to discuss your portfolio in greater detail, please don’t hesitate to contact BSW. As always, we are happy to help.
-David Wolf, Chief Investment Officer
Portfolio Commentary: 2011 Review & 2012 Outlook
This portfolio commentary and outlook is being posted from Furano, Japan, a small town in center of Japan’s northernmost island of Hokkaido.
As many BSW clients know, my wife is from Japan and we visit her family during each New Year’s holiday. Residing here yields a very in unique perspective on the global economy and investment markets for several reasons. First, Japan is still mired in an economic malaise that began in 1990 following a massive real estate bubble. These so-called “lost decades” offer keen parallels to post-real estate bubble dynamics in the United States. Second, Hokkaido is becoming a global skiing destination and now attracts visitors from around the world. My wife spends the winter here working as a backcountry skiing guide for Hokkaido Powder Guides and, in that context, I have the opportunity to meet and speak with her clients, who are generally business owners and corporate executives from Australia, Canada, China, Europe, Japan, New Zealand, and Russia.
Tree skiing in Daisetsuzan National Park with Hokkaido Powder Guides.
Finally, as clearly evidenced by 2011 dynamics, investment markets are increasingly driven by global, macro-economic themes (for example, the European debt drama) that are, unfortunately, given short shrift by the US media in favor of inane, paparazzi-like coverage of the Iowa caucuses or, even worse, the Penn State football program.
Looking back on 2011, it would be very easy to assume that is was a grim year for investors. The year was beset by challenges, both in terms of number and magnitude, including:
Despite all this, the global economy seemingly muddled through – and obscured some persistently good data from the US, that I will discuss below. While the European debt crisis and the tragedy in Japan combined to sink international markets (EAFE down 12 percent), and uncertainty about Obamacare and taxes hurt US small companies (Russell 2000 down 4 percent), large cap US companies managed to eke out a small gain (S&P 500 up 2%) and continued to benefit, via strong earnings, from their “right-sizing” following the 2008 correction.
2011 Portfolio Review:
For 2011 as a whole, the BSW Growth Portfolio lost 4% versus our blended benchmark that was down 2%. Here’s my summary assessment of the BSW Growth Portfolio’s 2011 performance:
Positives:
Negatives:
Analysis:
2012 Outlook:
Although the global economy is far from out of the woods, as I have discussed in prior blog posts, I am a dedicated rational-optimist. Bad news sells, so it seems that is all we get from the media. But the negatives of 2011 drowned out some compelling data for astute investors, especially regarding the US. First, the fourth quarter of 2011 was the ninth consecutive quarter of US economic growth. In fact, US economic growth actually accelerated during each subsequent quarter of 2011.
Second, the US has now had 21 consecutive months of private sector job gains. As context, the US lost 8.8 million jobs during following the great recession of 2008. We have now recovered 3.3 million of those jobs. Although US unemployment will likely remain higher than its historical level, these job gains point to underlying growth and demand rather than continued demise. Finally, US consumer sentiment has now recovered from its lows following the Congressional Debt Ceiling drama and consumer spending is making relatively small but directionally important gains.
Looking abroad, European leaders will, ultimately, act to save the Euro via more fiscal integration – though Greece will probably get kicked out eventually. In the long run, the forced austerity measures will be beneficial to Europe by reducing bureaucracy and forcing a disgorgement of subsidized industries. In the emerging world, softening raw materials prices are reducing the risk of a hard landing of the Chinese economy, but China’s real estate bubble remains a true sword of Damocles for the global economy. Nearly 25 percent of all investment in China is linked to real estate – their own version of a real estate bubble that was largely created by tying the Yuan’s exchange rate to the US dollar.
The skidding of the Chinese economy has been evident here in Hokkaido, as the number of Chinese visitors has decreased dramatically. The ripple effects of this are also seen via Hokkaido’s Australian presence, as Australia is the primary supplier of China’s raw material binge. In the ski village of Niseko, where the Japanese joke that they now need an Australian visa to enter, property prices have stalled or collapsed, and there is a palpable, yet unspoken sense of tension. As the “Saudi Arabia of Rocks” (my new expression), Australia is essentially just a mining boom-bust town with a national anthem.
Niseko, Japan real estate . . . just stalled or skidding? Yet another installment on the global property bubble circuit . . .
In a nutshell, I am rationally-optimistic for investment markets in 2012. Indeed, a few factors may conspire to bolster a Goldilocks scenario for US investors over the coming years. Shale gas and fracking have the potential to meet US energy demands, reinvigorate the auto industry, and wean the US off it foreign oil dependency – but it must be done responsibly. US industry and manufacturing is strong and poised for a renaissance. Here, the media confuses US industrial employment with industrial output. Consider that US factories now produce double what they did in the 1970s – but with far fewer (highly skilled) employees. And, as the Chinese Yuan appreciates, the Chinese labor arbitrage in manufacturing becomes less and less competitive versus their American peers.
Finally, 2012 is an election year in the US, which generally means nothing gets accomplished politically. Again, being in Japan offers up an interesting perspective. In September 2011, Yoshihko Noda became Japan’s prime minister, the 7th prime minister in the past 5 years. The country ‘s one-party dominance and squabbling, do-nothing politicians have starved initiative and squandered countless opportunities to revive the moribund economy and eliminate wasteful bureaucracy. Japanese people are incredibly, remarkably, and awe-inspiringly polite and nice – perhaps too nice. They should be marching on the Japanese Diet to tar and feather the whole lot. Alternatively, Americans pride themselves on a rugged individualism and a distrust of government. Hopefully those factors manifest themselves in strong election year demands of real change and decisive bi-partisan action to address our collective challenges – the remaining roadblock to renewed and sustained US economic growth and prosperity.
Overweights & Underweights:
In terms of our portfolio overweights and underweights, we are now positioned as follows:
Summary:
We hope this Portfolio Commentary provides you with better insight into the components of your growth equity portfolios and our 2012 economic and investment outlook. If you would like to discuss these positions or your portfolio in greater detail, please don’t hesitate to contact BSW. As always, we are happy to help.