Broker Check

July Newsletter

July 6, 2020



“All the King’s Horses and All the King’s Men Couldn’t Put…”

I hope that your Independence Day was as fulfilling as mine. Our granddaughter was the Grand Marshal of the Fourth of July parade from our barn to the road, as she proudly rode her shiny black horse “Mister”, throwing beads, flags and candy to our family members; enjoying the festivities. Our grandson rode behind on the farm tractor driven by Jeannie, smiling from ear-to-ear as he too waved the American flag enthusiastically. The festivities continued with a backyard bar-b-que and as evening approached glow lights were waved as we listened to the far-off sounds in celebration of our independence and freedoms. The “Stars and Stripes” waved through the night, lit from below by spotlight for all to see.

After a farm-style breakfast on Sunday morning, the tent was taken down and the kids left.   Jeannie and I watched a film version of the original Broadway production of Hamilton.  Watching it over the holiday reaffirmed what our Founding Fathers did for our Country. Even as our Country is again testing our Constitution with open and fierce debate, I believe that the Democratic process will, survive as we all exercise our rights of speech and selection in this politically charged election year. Even without all the crowds and rodeos, I believe that the kids will have memories of this Independence Day as they, too, pursue their American dream of a future filled with promise and fulfillment.

As we examine “the numbers” at the half-way point of 2020, it is that same fulfillment that has now carried us out of the depths of the Virus-laden hole that almost drowned out global economies in the first quarter of the year. Americans, American businesses and American institutions rose to the challenge and there is now real hope of a recovery in the foreseeable future. It appears from the analysis of many economists, that the Virus has resulted in a five-to-ten percent decline in our Gross Domestic Product (or GDP).

Based on last Friday’s Job Report, our economy gained more jobs than expected and the unemployment rate has improved to 11.1 percent from a recent all-time low of almost 25 percent. As a medical solution is found, more and more people will be returning to work and driving our amazing economic engine to new heights.

Our second quarter results were driven by new consumer spending at record rates in May (remember that two-thirds of our economic growth is from consumer spending). There is no doubt that the Virus will impact our economy for the balance of 2020. Ultimately, if we all can “stay safe” and heed common sense practices, our economy can grow despite the continuing threat. If we cannot “stay safe”, our economy will once again deteriorate and we will fall back into the hole. Just maybe, “All the King’s Horses and All the King’s Men CAN put…”.  

Based on just regaining a two or three percent growth rate, the lost piece of the economy can be recovered as we enter the next phase. All-in-all, the road to renewed prosperity will include many speed bumps as we navigate the Virus, geo-political threats, civil unrest, and the up-coming election cycle; any one of which could derail the recovery. In the meantime, the continuing volatility will create many opportunities for our managed portfolio to “hold-its-own” as our very capable fund managers explore the many new technologies and strategies that have resulted out of necessity.  

US stock indices lost about 35 percent of their value in less than six weeks in February and March, the same US stock indices just finished their best quarter in more than twenty years. The S&P 500 finished the quarter up twenty percent. Here is how our aggregate managed portfolio fared for the periods ended June 30, 2020:

Note:  As of June 30, 2020, the aggregate portfolio was invested 47.15 percent in equities and 52.85 percent in income investments.

Depending on each clients’ risk tolerance (as documented in their Investment Policy Statement), for the one-year period ended June 30, 2020 the more aggressively allocated accounts reported returns ranging from minus two percent to minus three percent. The more conservatively managed accounts reported returns ranging from point eight percent to minus two percent. Your individual Portfolio Appraisal reports reflect your allocation to each category based on your current “risk/return” profile. Please contact us if you want to discuss your specific allocation.

Of note is how the portfolio invested outside of the broad US stock indexes performed in the second quarter when the S&P returned twenty percent:

  • Domestic Equities: 17.77 percent (lead by Royce Value Fund at 32.17%) 20.13 percent of total portfolio
  • International Equities: 19.65 percent (lead by New Germany Fund at 33.88%) 9.56 percent of total portfolio
  • Alternative Equities: 28.90 percent (lead by Gladstone Land Corp at 35.96%) 6.10 percent of total portfolio
  • Global Allocation Equities:  22.32 percent (lead by Royce Global Value at 44.23%) 11.14 percent of total portfolio
  • CD/Bond ladder Income: 3.89 percent; 30.10 percent of total portfolio
  • Alternative Income: 12.28 percent (lead by Ellsworth Growth & Income at 35.46 %) 19.69 percent of total portfolio

Now that you can see where we have been, the hard part is where are we going? If you remember the last set of reported numbers and commentary, the domestic portfolio outperformed in April and May and we took advantage of opportunities to “sell-high” after “buying-low” in February and March.  At one point, the domestic allocation was twenty-five percent, or more, of the total portfolio. After “selling-high” in May, we reinvested the proceeds in either income allocations (for more conservative accounts) or the other equity and alternative income categories. The result paid off, as all the other equity allocations “took-off”; the international and global categories gained as most foreign countries came out of the pandemic ahead of the US and the alternative equity category gained from a move away from “paper” assets to “real” assets (primarily real estate opportunities). We expect that trend to continue into the second half of the year; in spite of the current surge in domestic equity values. We continue to be cautious of domestic valuations that far exceed the norm; particularly considering the current spike in domestic Virus cases that could derail the recovery. At this point, an aggressive domestic allocation will be twenty to twenty-five percent; with most client accounts reflecting twenty percent, or less, in the domestic category. We will continue these defensive allocations until the uncertainty clouding the Virus and the other speed bumps indicated above, can be navigated with more certainty.

With the need to stay ahead of the coming inflation that follows the dumping of massive amounts of new money into the system, we will continue to look for attractive opportunities in the alternative equity category. In that process, we are currently of the mind to avoid brick and mortar retail real estate, residential rentals, medical and office buildings. We continue to like agricultural opportunities (like Gladstone Land) and communication (think 5G) and other infrastructure plays; both for the inflation protection and the underlying cash flows from rents. In an effort to generate a reasonable cash flow to fund retirement and other distributions, we will continue to expand our alternative income allocation to include more preferred stock issues from viable business models, as well as utility stocks that generally pay fairly reliable dividends to their shareholders.

Although we generally avoided adding to the international equity allocations in the first half of the year, those opportunities now look more appealing. Lastly, cash (including short-term CDs and other instruments) is looking like a good investment, despite only nominal interest rates. In this process, we will continue to follow the “unconstrained category” tactical approach to security selection. To that end, we are currently adding to the global allocation equity category where the fund managers can move in and out of global economies without restriction. Since we are “navigating uncertain waters” as we prepare for the post-pandemic world, our first guiding principle will be to not lose value; even at the risk of lower total returns. In addition to the speed bumps outlined above, we now must try to understand the impact of the massive fiscal and monetary experiments currently undertaken by central banks and governments around the globe. In the process, the move away from globalization toward more nationalism will include challenges that have not yet been seen. We firmly believe that our economy will recover, but when and by how much is “up in the air”. All-in-all, we all need to be prepared for changes that will impact our portfolios far into the future; all of which are dependent on the duration of the pandemic and the associated lockdowns. 

Please watch your mail (either snail or electronic) for our new periodic financial planning magazine Perspectives; our first issue will be coming out this August. Our publication will include a variety of articles: from retiring in volatile times to Coronavirus preparedness, with fun items including recipes and puzzles to keep you sharp. The article on “sequence risk” is worth your time, even if it is “number heavy”; the implications are overwhelming and worth a visit with James.  We hope you enjoy this publication and we would really appreciate your feedback about this new client communication. 

Our office hours remain:  9:00am to 2:30pm Monday through Friday.  Someone will be available in the office during these hours to meet any in-person needs.

We are all well and strong! We hope you are too!


Intelligent Investment Management, LLP

Stephen Wheeldon