Broker Check

August Client Letter

August 5, 2020


“Hope Is Not…”

All of us at Intelligent Investment Management HOPE that you have been able to find some time and a safe space in which to enjoy our beautiful blue skies which come with occasional rain! Working from home, I am fortunate to have a view from my office window of the serenity that our area provides during these troubled times. We do have much to be grateful for as we navigate the maze of mostly confusing news that seems to constantly emanate from our twenty-four-hour news cycle.

Despite the recessionary economic data, our securities markets are “high” on “HOPIUM”  as many individual investors rush in every day, influencing and pushing markets to new highs. I just read that one of the largest mutual fund companies took in over one hundred-million dollars in July as money flew out of money market deposits and bond funds into equity funds by these individual investors HOPING to get their share of the pie.  That gave us more opportunity to “sell high” and rebalance all portfolios along the lines discussed in last month’s letter. We now have shifted significant amounts out of Domestic Equities and reinvested the proceeds into Alternative Equities and Alternative Income positions. In the process, we added some new names (and an old one) to the real estate investment trust allocation.  That shift not only shores up the inflation protection aspect of our portfolio, but also adds much-needed cash flow from the generally higher and predictable cash inflows needed by many of our clients to sustain their regular distributions. Overall, the rebalancing proved very rewarding: Our twelve-month look-back results on July 31 increased by 3.24 percent over the twelve-month-look-back from just one month ago (+1.94% vs -1.30%).

As GOALS BASED INVESTMENT ADVISORS, it is results like these that contribute to all managed portfolios achieving each client’s long-term priorities. As we focus on the HOPED-for outcomes (and often multiple goals) we can measure our success and progress. Our strategy is firmly based on getting to the “finish line” with less risk than a strategy based on volatile and short-term market performance results. Looking back, we are proud to be able to say that “established goals are being met” despite the many speed bumps that have been laid out in front of us. Last Thursday, the Commerce Department reported that the US gross domestic product (GDP) fell at a 32.9 percent annual rate in the second quarter ended June 30 (the steepest decline on record dating back to 1947). At the same time, consumer spending fell at a 34.6 percent rate as we stayed home to stay well.

Even with the “Virus-effect” on our economy, our five-year results are worth noting. Below, Laura has graphed our performance results for five, five-year periods going back to the period July 31, 2011 - July 31, 2016, through the most recent five-year period July 31, 2015 through July 31, 2020. The graph shows both the aggregate managed Equities Portfolio and the Income Portfolio results. Please note: each client’s individual Total Portfolio includes the equity and income results, but they vary dramatically based on each client’s GOALS, as established in their Individual Policy Statement. As a result, the aggregate managed portfolio total returns are not generally meaningful to individual clients with dramatically differing asset allocations. (For example, an individual client with only a thirty percent equity allocation will have a very different total portfolio return than a client with a sixty percent equity allocation.)

In total, the five, five-year periods cover ten years of variable results, reflecting recessions, political shifts, geo-political tensions and a pandemic; all resulting in much volatility in our securities markets. If we focus on the worst equity return (24.22% in the first period) and the worst income return (20.01% in the middle period) and assume our mean portfolio allocation today of roughly fifty percent equity and fifty percent income, we could use the 4.4 percent average annual total one- year return as a guide for the foreseeable future. If in fact that is a worst-case scenario for the next five years as we recover from the pandemic, I believe that most goals for sustainability can be achieved. At the same time, goals for luxuries will probably need to be put on hold until the Virus is behind us, as well as civil unrest and geo-political threats are put to bed.

Longer-term, I believe that the cost of surviving the pandemic and the debt created because of it will result in the return of inflation (perhaps the likes of the 1970s) which will challenge our tactical portfolio decisions for years to come. We have positioned the Alternative Equities portfolio to withstand the ravishes of inflation (think REITs with high distribution rates); and equities in and of themselves are an inflation hedge as companies raise prices to ”keep up”. Right now, my number one concern is the negative real rates of interest on the CD/Bond income portfolio. To minimize that impact on cash flows, we have increased the allocation to Alternative Income positions in preferred stocks, infrastructure funds and utility companies. The current indicated cash flows for that category are currently six percent.

What this all means, is that if you have not recently reviewed your custom individual Investment Policy Statement (IPS) with us, we should schedule a visit (probably virtually) to update expectations. And, as you know: HOPE IS NOT AN INVESTMENT STRATEGY! However, our hard work on your behalf and our proven, long-term Intelligent strategy will go a long way in achieving your goals.

Helen tells me that our premier magazine issue of PERSPECTIVES will show up in your mailbox by the middle of the month.  Please tell us what you think and if you would prefer to receive the Fall issue electronically.

As always, we sincerely appreciate your referrals. We will treat them with the same professional and fiduciary standards that have guided our Firm over the last twenty-three years.

We HOPE for a resolution to this pandemic and how it impacts our lives, families and economy.

With that said: Stay Well! Be Safe! And Be Smart Out There!


Stephen Wheeldon,