The Intelligent Investor
A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) March 6, 2017
SPECIAL EDITION – 2017 ANNUAL CONFERENCE RECAP
Myrna Rivera, CIMA®
Many thanks to the more than 175 clients, collaborators and guests who joined us for this year’s Pursuit of 8% conference. We were glad to see many friendly faces, to share exciting news about our firm, and present our perspectives on the global economy, capital markets and Puerto Rico. This year will mark a turning point for our firm as we roll out new research, reporting and client service functions that will greatly enhance our client’s experience. We also seek to lay the ground work for our expansion into the Caribbean Basin, Latin America and Europe. Our clients will soon have access to custody and clearing services that are exclusive to clients of Registered Investment Advisors, through The Bank of New York Mellon and Pershing Advisor Solutions. BNY Mellon is a global investments company, dedicated to helping clients manage and service their financial assets throughout the investment lifecycle. Pershing, is a long-standing company and subsidiary of BNY Mellon Corp., which is a recognized provider of clearing and custody solutions in the industry. Through its exclusive Pershing Independent Advisor Platform, our clients may access custody and clearing services, without the need for a brokerage conduit. They will also have increased portfolio analysis and reporting capabilities through our new investment management platform - Addepar. Addepar delivers automated data aggregation, robust portfolio analysis, and flexible reporting, on demand. Our advisers and our clients will have electronic access to on-demand reporting, speeding up and deepening portfolio analytics. These innovations will allow our firm to power our current research and reporting protocols on our clients’ behalf. They will also broaden our capacity for addressing the growing demand for our services, without sacrificing attention to individual needs. We truly believe that our firm’s growth, in and beyond our national boundaries, can be a relevant contributor to developing Puerto Rico’s potential as a financial services hub in the region and beyond. You can rest assured that we will continue to work hard for our clients and for Puerto Rico.
Edmundo J. Garza
What happened in 2016? As we have been reporting, the U.S. economic picture continued to improve during the final quarter of 2016. The U.S. dollar reached its highest level against a basket of major currencies in 14 years. Outside the U.S., the euro zone grew at a slow pace and Japan’s economy remained stagnant. United States GDP was up to +3.5% for Q4, the sharpest quarterly increase seen in the last two years. This led the Federal Reserve to raise its Fed Funds target 25 bps to a range of 0.50% – 0.75% in December. This was the Fed's only interest rate hike for 2016. However, meeting minutes confirmed that they expect three interest rate hikes in 2017. Inflation remained benign, amid positive indicators; Core CPI was up 2.2% y-o-y as of December, Personal Consumption Expenditures rose 1.4% y-o-y, wages advanced 3.9% in October and November, and unemployment remained below 5%, reaching a nine-year low of 4.6% in November. Other positive notes in the U.S. include; the Conference Board’s consumer confidence index hitting its highest level in 15 years at 113.3, car sales setting a record high of 18 million, and home prices reaching all-time highs in November, averaging $282,341 for existing single family housing. Meanwhile Euro zone economies remained weak but showed some improvement. Unemployment declined to 9.8% in October from 10.0% in September. Consumer prices increased but remained below the 2% target. Euro zone GDP was up 0.3% for the third quarter, and increased by 1.6% y-o-y. The European Central Bank announced an extension of its asset purchase program, although purchases will be €20 billion lower per month after March 2017. In the Far East, Japan’s GDP was also up 0.3% for the fourth quarter, however this was below the preliminary estimate of 0.5%. Year over year, Japan’s growth for 2016 is currently estimated at 0.9%, while China and India are expected to post 6.7% and 6.6% year over year, respectively. Overall, advanced economies are expected to grow by 1.6%, while developing markets post growth percentages that average 4.1%.
(As of December 13, 2016)
CPI: +2.5% Chg. from yr. ago
Unemployment Rate: 4.8%
GDP: 1.9% Comp. Annual rate of Chg. on 2016:Q4
Ind.Prod.Index: -0.3% change from previous month
Source: St. Louis Fed. Res.
CPI: 1.8% Chg. from yr. ago
Unemployment Rate: 9.6%
GDP: 0.3%, Comp. Annual rate of Chg. on 2016:Q3
Ind.Prod.Index: -1.6% change from previous month
Source: Moody’s Analytics
CPI: 0.1% Chg. from yr. ago
Unemployment Rate: 3.0%
GDP: 0.2%, Comp. Annual rate of Chg. on 2016:Q4
Ind.Prod.Index: -0.8% change from previous month
Source: Moody’s Analytics
CPI: 0.1% Chg. from yr. ago
Unemployment Rate: 12.1%
Payroll Employment: -0.8% Chg. from yr. ago
GDB Econ. Act. Index: -1.9% Chg. from yr. ago
Source: P.R. GDB
Evangeline Dávila, CIMA®
Stocks: January 2017 data shows that all major U.S. indices finished at a higher point than when the year began. The Dow Jones Industrial average, S&P 500 and Nasdaq composite each climbed to all-time highs in response to positive economic data and strong corporate earnings reports. In February, U.S. equities resumed their positive trend, rising nearly 4%, led by large cap growth stocks. Non-U.S. equities were also positive led by Asia ex-Japan and emerging markets. In foreign economies, emerging markets underperformed in Q4 of 2016, but outperformed developed markets for the year.
Bonds: U.S treasuries halted their post-election descent in January. Bonds were slightly up in February, with credit and high yield outpacing rates and mortgage-backed bonds. High yield corporates were the strongest performer in 2016. In February, non-U.S. yields moved up into positive territory, although weaker demand for short-term German bonds might signal investor’s concerns about Europe. Recall that non-U.S. fixed income had plunged in the 4th quarter of 2016 due to a strong dollar.
Alternatives:In January the U.S. dollar declined amid a frenzied month of political events. However, it continued marching towards parity with the Euro (see Graph I below). Commodity prices were essentially flat for February, but continue to benefit from OPEC’s announced supply cuts and prospects in the U.S. of infrastructure spending. Hedge fund strategies rose modestly in February and have performed well since the end of 2016 mostly due to a surge in oil prices, gains in the equities markets and increased interest rates in the U.S.
David L. Alvarez
This year’s Pursuit of 8% panels and presentations showed us how important it is to maintain a well-diversified portfolio. A 2005 study published in the Journal of Wealth Management entitled “Strategic Asset Allocation and Other Determinants of Portfolio Returns” shows that on average, strategic asset allocation explained 77.5% of the variability of the portfolio returns examined. Asset allocation is thus a key driver of portfolio return variability, but what are the other determinants? The investment process should not be limited to strategic asset allocation. Managers can also add value through tactical asset allocation and security selection. While the contributions of security selection and tactical asset allocation may seem small compared to strategic asset allocation, the power of compounding returns makes them significant to individual investors. Therefore, meeting periodically with your advisor can help you take advantage of optimal management in the short-term, and help you remain focused on long-term investment goals. Active managers are usually in a better position to take advantage of temporal opportunities that arise in volatile markets as they may not be concentrated in any one sector, country or category. Some are also able to incorporate hedging and non-correlated strategies into portfolios to increase risk mitigation through diversification.
We have entered 2017 with U.S. stock markets at new highs, rising interest rates and historically low volatility. The U.S. economy continues to gain traction and there are glimmers of hope that a bottom has been reached overseas. However, a whole host of geopolitical challenges continue to cause angst. Donald Trump’s tweets and recent address to congress continues to cause widespread speculation as to the impact his policies will have on markets, but much uncertainty remains with respect to the scope, implementation and timing of these policies.Amid an uncertain scenariowe continue to recommend prudent asset allocation and risk assessment, based on future capital needs, for plan sponsors, institutions and individual investors. Due diligence reviews and an adherence to a well-developed investment policy remain the most prudent course for long-term investors. Continued fiduciary education is paramount.
Consultiva is a Registered Investment Adviser. The registration with the Securities and Exchange Commission does not imply a certain level of skill or training. Consultiva has compiled the information for this report from sources Consultiva believes to be reliable. Sources include: investment manager(s); mutual fund(s); exchange traded fund(s); third party data vendors and other outside sources. Consultiva assumes no responsibility for the accuracy, reliability, completeness or timeliness of the information provided, or methodologies employed, by any information providers external to Consultiva. Conclusions reflect the judgement of Consultiva Investment Strategy Committee at this time and is subject to change without prior notice. There also can be no guarantee that using this information will lead to any particular result. Past performance results are not necessarily indicative of future performance. Diversification does not guarantee a profit or protection against loss. This document is for informational purposes only and is not intended to be an offer, solicitation, recommendation with respect to the purchase or sale of any financial investment/ security or a recommendation of the services supplied by any money management organization neither an investment advice or legal opinion. Investment advice can be provided only after the delivery of Consultiva’s Brochure and Brochure Supplement (ADV Part 2A and 2B) once a properly executed investment advisory agreement has been entered into by a client and Consultiva. This is not a solicitation to become a client of Consultiva. There are risks involved with investing including the possible loss of principal. All investments are subject to risk. Investors should make investment decisions based on their specific investment objectives, risk tolerance and financial circumstances. Global and international investments may carry additional risks that are generally not associated with U.S. investments, such as currency fluctuations, political instability, economic conditions and varying accounting standards. Annual, cumulative, and annualized total returns are calculated assuming reinvestment of dividends and income plus capital appreciation.