Weekly Insight: Q1 2017 Review and Outlook

We are very pleased to report another quarter of positive performance. In my January letter, I discussed many of the changes we made to our portfolios during the second half of 2016, such as eliminating mutual funds which had been underperforming, bringing down internal expenses, narrowing our individual stock selection and the addition of low cost ETF’s to balance risk in portfolios. These shifts continue to be rewarding. Looking at the past year, from the end of Q1 2016 to the end of Q1 2017, performance for most of our accounts, has been well above targets.

Most importantly, for our investors, the several years of dominance by an S&P only portfolio as compared to a diversified portfolio is starting to fade. Investors are finally becoming more cautious in realizing that the value is elsewhere and our risk discipline and globally diversified approach we have adhered to is back in vogue. These types of trends, where one index dominates tend to be secular, swapping between periods of outperformance vs. underperformance. They are also always difficult to time however, as they usually start very early and last way too long.

Most foreign markets YTD are outperforming U.S markets. For our clients owning individual stocks, our patience in 2016 with companies like Disney has paid off so far, this year. After going nowhere in 2016, the stock is already up 9% so far YTD as people leave the indexes in search of quality and real growth. I spoke a little about this on CNBC yesterday. Money has moved abroad in search of greater bargains and within the U.S., companies like Disney, that are best in breed, are no longer lock step with the index. This is called correlation. Correlations have been very high for the past several years which made owning individual stocks quite challenging. That has changed in the past couple of quarters as you are starting to see the cream rise to the top.

When you talk about individual stock selection vs. just buying an index, it brings up the age-old debate of passive vs. active management. This debate is whether as an investor, you should put all your money in an unmanaged index or selectively invest in the companies you believe are superior to the market.

At Surevest, we believe that investors are best served by doing both. There are clearly times where certain sectors within the market or the market itself is cheap. In those periods, it makes sense to actively shift your portfolio more towards those indexes which are on sale. Today for example, we are more heavily weighted towards indexes for international allocation of our portfolios because of the discount compared to our markets here. The corollary to this strategy is equally as important. A good example was in 2000, right before the S&P collapsed. The market was trading at nosebleed valuations. Any way you cut it, there was no rational explanation for owning the index at that point. Many investors hypnotized by the gains of the 90’s, stuck to a buy and hold approach which ignored valuations as well as good risk management while their portfolios cratered. We firmly believe that valuations do matter and should dictate your investment approach. We don’t own anything unless it fundamentally makes sense and is aligned in achieving your objectives. This discipline helps avoid psychological errors that harm long term plans and creates a place for active management alongside passive holdings.

Investors like Warren Buffet didn’t make their fortunes by owning an index. They carefully chose and invested in companies they believed had tremendous long-term potential. They took a long-term time horizon and many times went against the herd to see their research pay off. In all our Surevest portfolios, we combine both passive and active management to help achieve our client’s goals. We shift between the two depending on the risk and rewards we are presented with.

Active management today, I believe in the U.S at least, will continue to outperform index investing. I see this as a multi-year phenomenon. For our clients that invest solely in mutual funds and ETF’s, we are using actively managed institutional funds to capture that shift. Alongside the funds, we are layering in ETF’s in targeted areas that we are finding value in the indexes. For our clients that own individual equities, we are investing in best in breed, market dominating companies that we believe will outperform. As an example, our largest individual stock investments across all client portfolios, as of April 6, are AMAZON, APPLE, GOOGLE & DISNEY. All four companies continue to adapt to a changing economy creating tremendous shareholder value. When markets become fully valued, owning this type of quality makes sense.

I know, because I hear, that politics are also on everyone’s mind. I don’t think I need to say much about the political environment here other than over the long run, it has absolutely nothing to do with the stock market returns. Trying to gauge what to invest in or what to avoid based on who is in office is a loser’s proposition. On CNBC yesterday, I also spoke of the “Trump Trade.” These are areas of the market investors are hoping that policy will move the stocks. These also happen to be the areas of the market that appear the most vulnerable from a valuation perspective. Making these types of “bets” with your serious money is foolish. For our part, we will continue to block out the noise and listen to the management of companies we are investing in, watch what consumers do not say, and invest in high quality at a reasonable price while avoiding overpriced mediocrity. Inserting my political views almost certainly would do nothing except create biases in our investment process and hamper my fiduciary responsibility to you.

I leave off this quarter where I did last. This is, very optimistic about the future for you. We continue to work on improvements within our firm that allow us to spend more time and dedicate greater resources towards accomplishing your personal objectives through comprehensive planning and world class asset management.

We sincerely appreciate your loyalty to our firm and the opportunity you give us daily to help secure your future and fulfill your goals.

Robert J. Luna, CIMA

Robert has over 16 years of experience in managing assets for institutions, professional athletes, small business owners and high net worth investors. He is an alumnus of the Wharton School at the University of Pennsylvania graduating from the Wharton Advanced Management Program (AMP) and has been a Wharton Fellow since 2011.
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Surevest Wealth Management, 2425 E. Camelback Road, Suite 890, Phoenix, Arizona 85016 - Phone: 480-272-7116 Fax: 480-272-7118 Email: info@svwealth.com

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