Blog - Page 26 of 34 - FLI Investors

Bruce A. Siegel, Executive Vice President and General Counsel of First Long Island Investors, and his wife, Rachel were presented with the Gillin Family Humanitarian Award at the 17th Annual Crystal Ball benefiting the Diabetes Research Institute (DRI). The evening raised more than $520,000. Mr. Siegel has served on the DRI Foundation’s regional board since 2011 and is currently Co-chairman of the Northeast Board. He also serves on the National Board of Directors and the National Planned Giving Committee. A recap of the event is available by clicking here.

bruceandrachel

“One thing we have lost, that we had in the past, is a sense of progress, that things are getting better. There is a sense of volatility, but not of progress.”

Daniel Kahneman (Winner of the 2002 Nobel Memorial Prize in Economic Sciences)

The first quarter ended with a whoosh of volatility reflected in a second to last day gain of more than 200 points for the Dow, only to be followed by a loss of 200 points on the last day of the quarter. This sort of volatility permeated the entire quarter, and at the end of the period, the S&P 500 was ever so slightly higher while the Dow suffered a slight loss. International indices did somewhat better on average this quarter, but after underperforming the S&P 500 from January 1, 2008 through December 31, 2014, that is a welcome improvement.

Other markets also suffered from uncomfortable volatility. Oil was down another 10% (falling by more than 50% in the last nine months) while the yield on the 10-Year German Bund (government bond) suffered a drop of almost 60% (declining to a jaw dropping 18 bps). Currency markets also witnessed continued volatility with the Euro dropping to about €1.08 to the U.S. Dollar. Equity markets reached all-time highs while domestic interest rates stayed at very low levels. Unemployment continued to fall, although wage growth remained somewhat anemic. So, what does this all mean and is the volatility overshadowing economic progress?

First, in our opinion, volatility is being caused by the following:

The inevitable increase in short-term interest rates by the Federal Reserve continues to be a source of constant speculation and thus volatility. However, an increase in rates will be slow and probably will not be disruptive to the economy or corporate earnings. It will signify that the U.S. economy has almost fully recovered from the great recession.
The strengthening dollar is adversely impacting earnings for U.S.-domiciled companies with significant overseas operations. The speed with which the strengthening has occurred and its uncertain impact on earnings is contributing to volatility but does not reflect the strength of operations in local currencies.
The precipitous drop in oil and natural gas prices has impacted the earnings projections of oil and gas-related companies. It has also led to layoffs and reduced exploration expenditures in a number of companies. This will have a somewhat negative effect on this sector of the economy. This drop has yet to lead to increased spending by consumers.
The terrorist wars in Syria, Iraq, Yemen, and Libya as well as the murders of Christians in parts of Africa coupled with the ongoing negotiations with Iran, which is sponsoring terror throughout the Middle-East, is causing serious uncertainty and domestic political infighting. The headlines of atrocities are affecting the attitudes of retail investors and causing volatility.
The impact of Europe’s attempt at stemming possible deflation while stimulating the Eurozone through its version of quantitative easing, utilizing bond purchases, has yet to be understood by investors. At the same time, Europe’s old economic nemesis, Greece, has once again changed its political leader and is on the cusp of leaving the European Union.
Many pundits are worried about stock market valuations and, coupled with slowing earnings growth and a downturn in growth in China, is leading to concerns about virtually all markets.
In Washington, the newly elected Republican majority in both Houses of Congress has not relieved the paralysis that has plagued Washington since President Obama took office. So far, the U.S. has not implemented strong fiscal policy to complement our monetary policy, which has been on steroids, leaving us with a continuation of financial repression and little happiness for the average saver and less than optimal economic growth.
After six years of a rising stock market, there is skepticism whether equity markets can continue rising. Thus, any bad news, economic or geopolitical, gives rise to fears that the long-awaited correction (or worse, a bear market) is upon us. This is causing volatility.

All of the above gives one cause for concern and certainly explains the current volatility, but one would need to have blinders on to not realize the progress that is begrudgingly being made:

The U.S. economy is growing slowly and does not appear to be facing recession anytime soon. Slow GDP growth of 1.5 to 2.5 percent per year, which also reduces inflation risks, seems to be what is in store for us given the lack of fiscal policy initiatives and the strong dollar slowing our exports. Slow growth, low inflation, and continued low interest rates are a sound formula for stock, real estate, and private equity markets to continue to perform reasonably well.
Employment continues to grow at a moderate pace. Wage growth, especially for the middle class, is still somewhat anemic, but there are signs of growth at a pace better than inflation. Additionally, many large employers are unilaterally raising minimum salaries paid and several states have passed legislation to raise their state’s minimum wages. This is progress, any way you slice it, and will support economic growth.
The precipitous drop in gasoline and heating oil prices is a big benefit to virtually all consumers and many businesses. This should more than offset the pain inflicted on oil-related companies. However, up until now there has been very little to no corresponding increase in consumer spending. It is our understanding from our consulting economists that consumer spending increases lag reduced oil prices by at least six months. Thus, we believe there will be a pickup in consumer spending later this year. This will contribute to economic growth and should there be a nuclear arms deal with Iran, more oil supply will come to market down the road as economic sanctions against Iran are lifted. (We have little faith in the Iranians adhering to any deal so this increase in supply might be short lived.)
There continues to be monetary easing in Europe, China, and Japan, while in the U.S. we expect some liftoff to short-term interest rates in late summer or early fall. Those policies reflect the fight against deflation, stimulation of economic growth, and the recognition that economic conditions in the U.S. have improved. We would expect a rise in interest rates to increase consumer confidence and, if consumers are more optimistic, that should lead to aggregate demand that would be positive for the businesses and real estate we invest in.
Equity values, in our opinion, remain fair and do not resemble the bubble markets of 2000 and 2007. One could argue that some regions of the country are facing unreasonably high real estate valuations, and smart investors are seeking better opportunities in other areas. We also believe that stronger demand for office and residential housing is yielding higher prices. Low interest rates remain a driving force in somewhat higher stock market valuations and support higher real estate values.
Bond valuations seem very stretched and that is reflected in unusually low yields. As of March 31, 2015 the 10-year Treasury was at 1.9% and a triple-A 5-year municipal yielded 1.3%. A rise in the short-term rate target from the Federal Reserve may gradually increase those rates, but not by much in our opinion. Our view is that rates will slowly increase. Therefore, low rates might be here for a while unless inflation picks up and that does not seem likely.

So, we believe that volatility is based more on speculation and anticipation, not on well-founded information or Federal Reserve policy at this point.

Investors’ concern about many of the issues outlined above, in and of itself, is a source of volatility. At the same time, the improvement of corporate balance sheets since 2007, slow growth, low interest rates, accommodative central bank policy, reasonable stock market valuations, cheap oil, and better employment globally seems to be what will carry the day on a longer-term basis in our opinion.

In considering asset allocations for our clients, we remain tilted towards our defensive strategies, where a significant part of clients’ asset allocations should be directed. Defensive strategies seek to reduce the volatility of our investments and help clients weather equity market volatility while still seeking to achieve reasonable appreciation and income. Some bond allocation remains necessary, but with shorter duration. In pursuing real estate-oriented investments, we continue to look for some current return as well as potential appreciation. In all cases, valuation in each asset class is critical. In equity-oriented strategies we continue to focus on high active share (concentrated portfolios) given the slower global growth and the increase in volatility. We never forget that preservation of capital is paramount. This is especially the case in a world where there are many geopolitical and economic factors impacting our investments.

At the end of the day, there are legitimate issues causing volatility but as our quote from a Nobel laureate for economic sciences suggests, the progress being made is not being given the attention it deserves. We believe this will prove to be an opportunity and we expect that the slow but persistent progress, despite the volatility, will make 2015 a positive year for our clients.

Please contact any member of our investment team with any questions you might have or to discuss your asset allocation or any other wealth management needs you may have.

Best Regards,
Robert D. Rosenthal
Chairman, Chief Executive Officer
and Chief Investment Officer

Disclaimer: The views expressed are the views of Robert D. Rosenthal through the period ending April 23, 2015, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

Content may not be reproduced, distributed, or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC.
Copyright © 2015 by First Long Island Investors, LLC. All rights reserved.

Robert D. Rosenthal discusses First Long Island’s perspective on the factors concerning investors today and how FLI thinks the longer-term investor should approach 2015 in a web seminar.

This report on the Fourth Quarter will be brief as, by now, you should have received our annual thought piece: The Longer-Term Investor – 2015 and Beyond. It contains our view of the future and describes many aspects of the investment landscape confronting the longer-term investor, some of whom might be thinking about evacuating from the equity, and other risk, markets that have provided them with significant returns over the long term. Fear of record prices, volatility, geopolitical hot spots, and political uncertainty are causing a fog. Our thought piece tries to pierce that fog and give direction to our clients.
Perhaps the fourth quarter provides a glimpse into what 2015 might be. For in the fourth quarter we lived through appreciation for most, but not all, equity indices, a precipitous drop in oil prices, continued concern over geopolitical hot spots, a robustly growing gross domestic product, a contentious mid-term election giving Congressional control to the Republicans, and growing earnings for many companies. Also, ongoing concerns from some of these factors led to a spike in volatility in the equity markets during the quarter which resulted in a number of significantly down and up days (As usual, the big down days were not fun). This in turn hurt many hedge funds while resulting in better results for long-only equity strategies for those
advisers and investors who stayed the course.

In particular, our defensive equity strategies each had a strong quarter. Additionally, our traditional equity strategies had solid performance in the quarter with excellent performance from our traditional growth strategies. In all, each FLI strategy appreciated during the quarter.

Of course, fixed income continues to be perplexing as the Fed has continued to kick the can of raising interest rates down the road. However, at the most recent meeting, the Fed did change the language in its statement, and it looks like it will finally start to slowly raise short term rates in mid-2015. This of course assumes that our domestic economy continues to expand and international economies do not significantly worsen. When (and if) rates go up this could create some additional short-term volatility.

The fourth quarter demonstrated to us that fundamentals of rising earnings, low interest rates, and reasonable valuations do matter. These factors prevailed over short-term volatility caused by geopolitical, domestic, and foreign economic headlines. Many active managers failed to keep up with indices during 2014 as lower-quality companies (those with poorer balance sheets) appreciated more than stronger companies. We believe this began to change in the fourth quarter. We expect this will continue in 2015 as growth in earnings should be more dependent on revenue growth from stronger companies as opposed to higher profit margins from layoffs and cost cutting initiatives.

The fourth quarter also reflected greater consumer confidence resulting from better employment numbers and the significant decrease in oil prices. The decline in oil prices acted as a tax cut and gave all consumers

Results are exclusive of one strategy which has yet to report results. and oil consuming businesses extra cash flow. Some of this extra cash found its way into consumer spending in the quarter and we expect to see more of this in 2015.

In summary, on balance, we had a strong fourth quarter. Several of our defensive and traditional equity strategies exceeded their benchmarks for the quarter and most achieved strong absolute returns for the year. When considering that these results followed a banner 2013, we are quite happy and we hope you are too.
At the same time, we try to keep risk low through prudent asset allocation and concentration within each asset class. As an example, we continue to significantly underweight foreign-domiciled companies (with respect to both stock holdings and fixed-income portfolios). Foreign equities continued to underperform (in the fourth quarter and all of 2014) all domestic equity indices. In our opinion, a modest international allocation is still most appropriate.

We remain cautiously optimistic going into 2015 and think the bumps in the fourth quarter might just set the stage for what we will have to endure this coming year. By the way, from a historical standpoint, the third year of a Presidential term has been positive for domestic equity markets over the past 50+ years.
That is a nice historical data point, but as we often mention it is not a guaranty, just a guide.

We look forward to serving and guiding you as we enter 2015. Please feel free to call upon us for any of your wealth and money management needs. Starting a new year is always a good time to review your asset allocation, estate, and income tax planning, and all of your life, health, and property insurance needs. If we
do not hear from you rest assured you will hear from us each quarter.

Best regards and Happy New Year,

Robert D. Rosenthal
Chairman, Chief Executive Officer
and Chief Investment Officer

*The forecast provided above is based on the reasonable beliefs of First Long Island Investors, LLC and is not a guarantee of future performance. Actual results may differ materially. Past performance statistics may not be indicative of future results.
Disclaimer: The views expressed are the views of Robert D. Rosenthal through the period ending January 12, 2015, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

Content may not be reproduced, distributed, or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC.

“Wars are not won by evacuations.”
– Winston Churchill

As we enter the New Year, many investors are facing a fog of investment war caused by their fear of the recent record levels of the equity markets, the latest spike in volatility, and an increasing uncertainty of how to face the future. Investing is a marathon and often feels like a war when confronted with conflicting factors such as:

Equity, art, and real estate markets at or near all-time highs
Interest rates stubbornly staying at virtually all-time lows, resulting in investors earning paltry bond and cash returns
Inflation remaining quite low
Oil prices having dropped by about 40% in the last three months
A new Congress controlled by Republicans hoping to break years of political paralysis
Geopolitical hot spots in Russia/Ukraine and the Middle East
Employment steadily improving in the U.S., but mostly at lower level jobs
A slowing economy in China while Japan is in recession, Europe is on the brink of recession, and the Eurozone is still facing structural issues
A squeezed middle class in the U.S. with real wage growth continuing to be minimal
A slower growing deficit but still raising the national debt to approximately 18 trillion dollars
The continuing war against a growing crisis of terror led by the barbaric ISIS

I am sure I have left out a number of both comforting and troubling factors also contributing to this fog surrounding the thoughtful, longer-term investor, but the above factors do present a formidable list. So, it is not surprising that our clients are looking for even more direction after the volatility of 2014, despite reasonably good results from most of our bond, defensive, and traditional equity investments. The easy thing for investors to do is “evacuate” from higher-risk assets such as equities after having realized years of appreciation. In our opinion, this would be a mistake. The key is how to invest in equities.

First, let us just briefly mention that being a longer-term investor is, in our view, the only way to succeed in an investing world constantly challenged by a changing and seemingly growing “wall of worry” that evokes fear. Investing for the longer term requires ignoring the emotions of fear and greed that typically negatively influence investors. Fear and greed are normal emotions, but they can destroy wealth creation and even worse, can lead to a permanent loss of capital. Numerous studies have shown that many investors make the wrong investment decisions when driven by fear or greed.

Reducing investment risk or trying to mitigate volatility is a worthwhile exercise which we believe can be accomplished through prudent asset allocation. A customized asset allocation reflecting one’s investing temperament as well as one’s stage in life can put one on the path to reasonable investment returns without being overly influenced by either fear or greed. Of course, the asset allocation has to be unemotionally reviewed periodically to reflect changes in market valuations and other life factors.

Over the past several quarters we have urged clients to become somewhat more defensive while remaining prudently exposed to certain markets that have continued to appreciate. As we face this new year and years to come, global growth might become more difficult making quality and selectivity in picking investments even more critical. Additionally, unavoidable volatility from events that one cannot even forecast requires investors to be patient, and unemotional, while having faith in their advisor’s judgment as to asset allocation and selection of quality investments.

Now, being a longer-term investor requires a brief discussion on what “longer-term” means. As our clients span the age spectrum from infants to about ninety, longer is obviously relative. However, the good news is that people are living longer and one should have an investment plan that seeks to provide returns at least above the rate of inflation after taxes over the long term (we hope to be able to do better than that). This requires thought on what asset allocation provides good risk-adjusted returns while still permitting one to sleep at night.

Specifically, while equity markets are at highs, earnings are at record levels for the S&P 500 (constituting many large, domestic companies) as well as many smaller companies. We believe that many (but not all) companies’ earnings will set new records in 2015. That is why we focus your equity investments in high quality companies with continued earnings growth; high-quality companies with growing and above-average dividends; or those that represent what we, or the managers we entrust your funds to, consider great opportunities from a valuation standpoint. In previous letters we have talked about being concentrated in the best ideas. We are cautiously optimistic and believe that there will typically be solid investment opportunities in reasonably valued companies. The challenge is focusing on those and not others. That is why we still believe strongly in active management, not passive index funds. We are confident that the team at FLI, and the managers we work with, are up to that task! Looking ahead, we believe that we can continue to deliver reasonable appreciation over the longer term in our equity strategies. The combination of reasonably valued, quality companies, coupled with earnings and revenue growth, should result in investment success this year and in the future. As a point of information and pride, our under-allocation to companies domiciled outside the U.S. proved to be prescient as those markets as a whole continued to underperform U.S. equities. We still do not see much changing and remain underweight to both developed and developing international equity markets. We also seem to sleep better with the vast majority of our equity and fixed income investments being domiciled in the U.S. However, we continue to believe that having some international allocation is prudent while we wait for fundamentals to dictate a greater allocation. Furthermore, we do achieve some additional international exposure through great U.S. domiciled multi-national companies like Coca-Cola, PepsiCo, Microsoft, Apple, Pfizer, and many others.
In the fixed-income area, we, along with most, have been wrong. We expected that longer-term interest rates would increase in 2014. They declined. This shocked most. However, we still believe this could happen sometime in 2015 and those that have purchased long-term bonds to achieve higher yields might be in for some unpleasantness. Meanwhile, our defensive equity strategies, where we are over-allocated in lieu of a higher allocation to bonds and traditional equities, did well and we expect that to continue. So, we remain convinced that long-term interest rates will creep up during this coming year and therefore are concerned that high-quality bonds will not deliver a return above inflation (even for those that take some interest rate risk by extending maturities). However, we still believe that all clients should have a bond allocation although we remain under-allocated for most at this time.

In the real estate and private equity sectors, we continue to realize returns of capital and profits from most of the investments made in prior years. While we explore new investment opportunities in these areas, we are mindful of a lot of capital chasing these opportunities. We will be quite selective as valuations are rich. A continually improving domestic economy would help future appreciation. It is worth mentioning that all asset classes are being helped by foreign investment in U.S. assets. Foreigners are gravitating to dollar

investments in bonds, stocks, real estate, and collectibles providing some wind in our sails. This reflects confidence in our economy and democracy. Lastly, we have avoided direct investment in commodities (fortunately) and continue to do so. They have been a miserably performing asset class in 2014 and we do not believe this will change any time soon (notwithstanding this, one of our outside managers is investing in what he believes to be a deep-value gold/copper mining company).

I would be remiss in not mentioning an opportunity that could be helpful to investment and economic happiness. It resides in Washington, D.C. After years of paralysis, a new Republican-led Congress could seek bipartisan legislation to help advance challenges in taxation, infrastructure investment, immigration, energy independence, and reducing hyper-regulation. Any improvement in some or all of these areas would create more confidence, investments, jobs, and economic growth. This would be good for investors as well as society. Of course, my optimism is a contrarian opinion to most. We will know more within the next year or so.
Summing up, our clients did reasonably well in 2014 following a great year in 2013. In our view, it is not time to abandon equities. It is time to be both more defensive and more selective within risk assets. Following the sage advice of Churchill (of course from a different context), we will not win the war of long-term investing by selling those asset classes that give investors meaningful returns above inflation over longer periods of time (and after taxes for our high net worth clients).

Our specific recommendations remain similar to our suggestions at the start of 2014:

Underweight fixed income, but maintain an allocation. Short-term rates should creep up, probably by mid-year, and continue to slowly increase, taking long-term rates with them. This assumption is based on a global economy growing by at least 3% and our Fed raising short-term rates some time in 2015, with current guidance indicating mid-year.
Remain overweight to our defensive basket with particular emphasis on our two defensive equity strategies. We expect solid dividend increases to help our Dividend Growth strategy and earnings, revenue growth, and reasonable valuations of our select large-cap growth companies to contribute to the success of our other defensive equity strategy.
Maintain a modest underweight to our traditional equity strategies with a greater concentration within this basket to large-cap domestic companies and continue to de-emphasize foreign-domiciled companies.
Private equity and real estate will remain opportunistic selections for us on a case by case basis. We continue to pursue opportunities within this basket, but must be convinced the reward is worth the greater risk and illiquidity.

Compounding reasonable returns over the long term by avoiding big down years through a prudent individualized asset allocation is the right battle plan for “longer-term investors.” This diversification, not evacuation from equities, should lead to long-term success while enabling our clients to sleep soundly at night.
Please give thought to our perspective and feel free to counsel with any of us on our investment committee.

Have a healthy, happy, and prosperous 2015!
Best regards,

Robert D. Rosenthal
Chairman, Chief Executive Officer
and Chief Investment Officer

P.S. A historical footnote is required. Third years of presidential terms and periods where the power in Washington is divided have a very strong record of positive equity returns. History is a guide, not a guaranty.

Disclaimer: The views expressed are the views of Robert D. Rosenthal through the period ending January 12, 2015, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

Content may not be reproduced, distributed, or transmitted, in whole or in portion, by any means, without written permission from First Long Island Investors, LLC.