Broker Check

July Newsletter 2022


July 5, 2022

“Buckle Up for a Wild Ride"


With Independence Day still “top-of-mind”, I can’t help but be thankful for our Independence and the freedoms our forefathers gave their lives for so that we can enjoy the liberties and opportunities which this great country bestows upon us. With all the challenges we now face daily, we need to take a bigger and broader view of our world that is seemingly in constant turmoil. We WILL get through this, even despite the discomfort and challenges we endure. And so will our portfolio of investments that has been built on the fundamental soundness of our capitalistic economy. Yes, valuations have been driven down by the inflation-induced recession and the Fed’s attempts to fight inflation; much like the dark days of the 1970s. The economy rebounded then, and it will again!

Our job of managing your portfolios to meet your long-term goals involves spending much time reading and reviewing articles and “white papers” written by many economists and market observers. With the June 30th numbers “in the books”, I have seen the reference to “Nowhere to Run and Nowhere to Hide” as analysts refer to the second quarter 2022 market results which wiped out the equity gains from the 2021 highs. In fact, many commentators are referring to the Covid period (February 2020 through June 2022) as the time when we saw the broad equity markets fall and then rise on the back of the newly printed money to “save us” creating the December 2021 highs.  Only to fall again in 2022 as the devalued dollar sank the markets, as inflation roared, all bringing the equity markets back to the 2020 pre-Covid levels. Looking at the results of our broadly diversified equity portfolio for the same period, we found that our aggregate managed equity portfolio also fell in value from its 2021 highs, but our portfolio is still substantially higher than it was at the same pre-Covid point (by over a third of the beginning value). We never like to report negative returns, but we are comforted by the fact that our broad diversification and “alternatives” have cushioned the blow in 2022, even as the broad markets report losses not seen since 1970, with the S&P 500 plunging over twenty percent in the first six months of this year. Laura has prepared this five-year graphic of our equity portfolio performance to illustrate this point:

As you review the enclosed Quarterly Portfolio Review for the period ended June 30, 2022, please focus on the Performance by Asset Class section which breaks out the Equity and Income portfolio results. The equity results are reflected in the above graph. The Income Portfolio results need further comment. The income portfolio includes our CD/Bond Ladder of maturing securities which provides a steady stream of interest income to help fund the regular distributions for clients “in distribution”. When the positions mature, the funds are then re-invested in new notes and bonds which again mature in the future. The key to this strategy is that when new positions are purchased, they reflect, and pay interest at the current rising rates. Despite the full return of the invested principal at maturity, the current value of the ladder is depressed as the old interest rates are now generally lower than current rates for new notes and bonds. The effect of this anomaly is that reported values and investment returns do not reflect the security of the principal of the investment as long as the positions are held until maturity. It would be rare for us to sell notes and bonds before maturity.

Also included in the income portfolio are income producing securities that do not mature. Many of the positions are Preferred Stocks which pay fixed rates of dividends as long as the issues remain outstanding. Since those issues do not mature, the dividend rate when issued is generally higher than the interest rate on maturing notes and bonds. With rising market interest rates, the preferred stock market values have been depressed in the same way that the bond values have been depressed, although at deeper de-valuations because the preferred stocks do not mature. Like the interest received on the notes and bonds, the dividends received on the Alternative Income category of securities are either used to fund recurring distributions or re-invested back into the overall portfolio.

The Total Return on your portfolio is a combination of the equity portfolio returns and the income portfolio returns, weighted by your asset allocation in your Investment Policy Statement (as updated from time-to-time). The five-year returns reflected in your Performance Report when annualized are likely a good representation of what can be expected going forward for the next five years, with all the ups and downs that we must continue to expect as the economy recovers and once again grows to new highs. On that basis, a 50/50% Portfolio would produce annualized five-year returns in the six percent range. In the next five years we all must “Buckle Up for a Wild Ride” as the recent volatility will most certainly continue as long as there are more sellers than buyers.  The good news is that we have seen this movie before and we do expect a similar ending, with the securities markets recovering over the next several years as the Fed tames the current inflationary spiral. It will take several years as interest rates need to be raised slowly to avoid an economic crash in the process. In the meantime, we will continue to “buy low” with all available cash the quality positions that will be needed to meet our clients’ long-term financial goals.

As always, please reach out to us if you have questions.



Intelligent Investment Management, LLP