The Intelligent Investor
A bi-weekly publication from Consultiva Internacional, Inc. (Registered Investment Adviser) April 19, 2017
Myrna Rivera, CIMA®
Today we comment on Puerto Rico. I was one of many at the Center for a New Economy’s conference “Debt, Austerity, and Growth: There is Another Way”, held on April 6th at the Pablo Casals Symphony Hall. As many of you may have read in the press, Nobel laurate, Dr. Joseph E. Stiglitz, who is not a stranger to Puerto Rico, was the CNE’s guest speaker and he warned that the Fiscal Control Board’s austerity measures may back fire, causing more harm than good. For Stiglitz, the Board is confusing efficiency with austerity, meaning that an increase in the government’s productivity (being able to do equal or more work with less resources) will not solve the island’s real problem, which to him is increasing the demand for goods and services produced in Puerto Rico, and in turn generate earnings that can be taxed by the state. To put it in Stiglitz’s terms, “Puerto Rico is in a demand-constrained regime, demonstrated by the significant subutilization of its factors of production”. In a “demand-constrained regime” the answer shouldn’t be lowering wages or increasing labor-market flexibility either. A lower quality labor market can decrease consumption of goods and services, aggravating the depression further. It can also drive off badly needed professionals who will look to the U.S. for higher salaries and a greater prospect for an improved quality of life. I agree with Stiglitz that a commitment to restoring economic growth should be at the center of any restructuring proposal for Puerto Rico and any other jurisdiction facing similar economic woes. However, in addition to his proposal of allowing Puerto Rico’s government to borrow into arrears, meaning, making new debt senior to old debt, we should also continue to promote public policy that spurs the flow of private capital into the economy. Act 185, signed into law in November 2014, was a step in that direction. Over the past two years, we have witnessed the creation of more than 10 new Private Equity funds that, in aggregate, have amassed capital commitments approaching $100M. This is capital that is being invested in Puerto Rico based companies that will create new jobs. As seen in the graph below, the private sector has employed the majority of Puerto Rico’s workforce over the past 25+ years and it should remain as such. Over that same period, risk capital (private equity and venture capital) has become a dominant force in the financing of innovative companies in the U.S. and other developed economies. In fact, a recent study conducted by Stanford’s Graduate School of Business shows that of the current U.S. public companies founded between 1979 and 2013, 43% started with venture capital financing and they currently employ 4 million people. While our economy does not compare in size, this is the type of effect Puerto Rico needs and we deem it achievable.
Edmundo J. Garza
Volatility in equity markets increased somewhat in March, as the Republican-led Congress withdrew legislation designed to repeal and replace Obamacare. Investors also assimilated the Fed’s decision to raise short-term interest rates at its March meeting. Analysts expect that there will be two more rate increases in 2017. U.S. employers added 98,000 jobs, below the expected 180,000 and well below the 235,000 added in February. Economists cite winter storms as one factor adversely affecting job growth. International equity markets, on average, delivered superior returns relative to domestic markets in March. With the exception of Japan, gains were experienced in most regions, and within both developed and emerging markets.
(As of April 19, 2017)
CPI: 2.4% Chg. from yr. ago
CPI: 2.0% Chg. from yr. ago
CPI: 0.2% Chg. from yr. ago
CPI: 0.5% Chg. from yr. ago
Evangeline Dávila, CIMA®
Stocks: In March the S&P 500 gained +0.1%, and is now up +17% over the past twelve months. The Dow Jones Industrials (DJIA) gave up some ground, declining -0.6%. The tech-heavy Nasdaq Composite Index rose by +1.6%. The Russell 2000 Index of small cap stocks performed in line with the Russell 1000 Index of large cap stocks. Growth stocks outperformed value stocks. The MSCI All Country World ex-U.S. Index advanced by +2.5% for the month. Emerging markets also gained ground, with the MSCI Emerging Markets Index posting a return of +2.5% for the month, and is now up +17.2% for the past twelve months. The MSCI EAFE Index, which measures developed markets performance, gained +2.8%. Regionally, Europe (+4.0%) and Asia (+3.3%) were the best relative performers while Japan (-0.4%) and Latin America (+0.6%) were the poorest relative performers.
Bonds: The yield on the 10-year U.S. Treasury note climbed to 2.61% in the aftermath of the rate hike (the highest level since 2014) and came back down to end the month at 2.40%, four basis points higher than the level on February 28. Performance of broad-based fixed income indices was varied in March, with the Bloomberg U.S. Aggregate Bond Index declining -0.1%. Global fixed income markets performed well, with the Bloomberg Global Aggregate ex-U.S. Index gaining +0.3%. Intermediate-term corporate bonds were slightly lower, as the Bloomberg U.S. Corporate 5-10 Year Index eased by -0.1%. The Bloomberg U.S. Corporate High Yield Index dropped by -0.2%. Municipals advanced by +0.2% in March.
Alternatives:Commodities slumped (Bloomberg Commodity Index: -2.7%) amid a monthly 6.3% drop in West Texas Intermediate crude oil prices. The catalyst for the descent was a series of reports showing that U.S. oil inventories climbed to the highest level since weekly stockpile data started being released in 1982. Real Estate Investment Trusts (REITs) also experienced difficulty in March (FTSE/NAREIT Equity Index: -2.3%).
The Wall Street Journal recently published an interesting article on financial advisory fees that shows how many options investors have and how much confusion there still is on this subject. Traditionally, most people went through a broker to buy or sell securities. The broker’s compensation came mostly from commissions either paid by the individual or the securities manufacturer or distributor (e.g., mutual funds and exchange traded funds, among other investment vehicles). This compensation structure can create a significant conflict of interest, because a fund might be paying a significant commission to the broker who sold or recommended the fund, thereby creating an incentive to sell a particular investment that could or could not be in the investor’s best interest. Many people now use fee-only advisers, who charge a percentage of the assets under management, often within a scale. Some investors also pay by the hour or by engagement, for example, to develop financial plans, estate plans or retirement plans. These other arrangements aren’t free of potential conflicts of interest. An advisor working under an assets under management arrangement will have an interest in capturing or holding on to assets, and depending on the situation, this might not always be in the client’s best interest. For example, a client with a sizeable debt might be better off paying said debt with invested funds rather than remaining fully invested. A knowledgeable investment advisor should be able to recognize these benefits and help clients make the right decisions. After all, an advisor should be mostly interested in a long-term relationship and willing to tie their compensation to the future performance of their client’s portfolio.
In March, investors digested a jam-packed month of economic, political and central bank news. Despite the volatility in headlines, the S&P 500 and Bloomberg Aggregate Bond indices finished the tumultuous period at essentially the same levels at which they started. The post-election rally in equities stalled amid questions over President Trump’s pro-growth agenda, while monetary tightening from the Federal Reserve (Fed) had minimal effect on borrowing costs. Amid an uncertain scenario we 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.