May 1, 2018 | What happened in April? Bolstered by strong corporate earnings reported for the first quarter, the S&P Read More
President & CEO Dan Kraninger reflects on the first quarter of 2017 and provides insights moving forward.
In my previous letter, I wrote about the rise of index investing and the impact it has on big cap stocks – essentially as more investors index, the largest companies simply get more and more expensive. The price/earnings multiples for the following big capitalization names tell the story – GE (26), MSFT (23), XOM (35), AMZN (183), AAPL (17), GOOGL (25), FB (33), BRKA (23). Of the list, only Apple is selling at a reasonable level though its multiple is still trading at the high end of its own 5 year range (10-17). After last quarter’s letter, enough clients contacted us asking for further commentary and questions such as “how can I benefit?” or “what changes should I make?” that it makes sense to me to build out some action steps.
First, let’s give some perspective regarding the run on big cap stocks. The graphic below details how the S&P 500 has performed relative to many other investments. Breaking up the investable universe into its constituent pieces like this reveals some potential areas of risk as well as other overlooked opportunities. Many portfolios, given the success of big cap stocks, are now missing important potential sources of return as a result of putting too many of their “risk” eggs in one basket. Too many hopes are pinned on the prospects of this single asset class. The heavy reliance on the S&P 500 in many portfolios today is worrisome and simultaneously overlooks potentially attractive opportunities in areas such as international equity, emerging market debt, and even other US equity approaches unrelated to market capitalization (think small stocks or growth stocks). Many investors have little or no exposure to these three areas.
Second, I don’t think anything rash is necessary. We like stocks here and are near fully invested in all of our equity strategies. Detailed on the next page, the Navigator spells out our position. In a nutshell, though valuations are a little stretched, other metrics are in place for more gains. Even if we were to have a pullback right now, I would view that as a chance to invest.
Now for the big third! Get in touch with our advisors. They are terrific and well prepared to help you analyze your situation. As Clapton said above, solos are fine but it’s more important to complement the music. Said another way, let us help you build a comprehensive investment portfolio beyond large cap equity that takes advantage of the inefficiencies shown in the chart below. We have an excellent long-term international equity strategy. Our tactical income strategy and our tax managed equity strategy both won money management awards in the 4th quarter for their exceptional performance. Our emerging market ETF approach has started the year off like a racehorse. More clients should be aware of the benefits of liquid alternatives and we offer an approach with our Zero Beta strategy. All of these strategies are listed quarterly on the final page of this letter. The time is now — preparation is the key to success.