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March Newsletter 2025

March 4, 2025

 

“Back To Basics”

Dear Client:

The “Ides of March” are riding the winds of change and creating much volatility in the securities markets as the “Tariff Wars” and geo-political saber rattling are shaking up global economies and heads of state. The nightly news is certainly making investors nervous as we all wait for the the next shoe to drop. While all the chatter and bantering make for much drama, we need to stay focused on the long-term goals for our portfolios. The news does cause movement in the markets as robots and nervous investors try to out-guess the outcomes. None of us have a crystal ball that provides much meaningful guidance. However, we do have the good fortune of history on our side that supports our strategy of staying invested for the long-term. Putting that in perspective, Laura has created the following two graphics of our Total Managed Portfolio’s equity and income positions over the past twelve months, ended February 28, 2025.

You will note the Equity Portfolio graphic below, reflects the volatile ups and downs reflecting both the subjective market response to the news cycles, the Fed’s pontificating, and reports of inflation and employment, and the prices of energy. The more objective view is that the end point is clearly significantly higher than the beginning point; all despite the current downturn from the beginning of the year. The market sell-off today has created opportunities to “buy low” many of the quality equity positions that have been beaten up in today’s trading session that have proven to be long-term winners over the many years of our portfolio management. The volatility will not be over until equilibrium has been established as our economy adjusts to the changes currently underway. Once again, we expect our portfolio to withstand the test of time.

The Income Portfolio graphic below also depicts a steady upward trend, despite the recent “in-actions” by the Fed to lower interest rates. Of note, much of the Income Portfolio total gains are attributable to the recent additions to the Alternative Income category in infrastructure and utility funds, benefiting the Income Portfolio with increasing demands for all things “energy”.

As we patiently watch all the activity and jockeying for position in the nightly news, let’s turn to the everyday work we do in your portfolio. Periodically we meet with clients and go over our quarterly reports. We have all noticed that our reports are lengthy and contain much information, therefore we are in the process of updating the format and simplifying data to make it easier to comprehend. In our attempts to be thorough, we have apparently taken for granted that our jargon is well understood. A recurring question has been asked of us is to explain in “plain English” our performance references, including terms like “yield”, “total return”, “time weighted return”, “internal rate of return”, “realized and unrealized” gains and losses, “cash flows”; and even the difference between “dividends” and “interest”.  We must apologize for the confusion, and we are working on doing a better job of explaining things and keeping it simple.

Over the next several months we will be using the client letter to provide you with some information that will make our reporting more meaningful to you (you being our most important asset). Let’s start with the distinction between “return” and “yield”.

  • Our goal as your investment advisor is to manage your portfolio to maximize your Total Return as we work to meet your investment needs and goals.


  • Total Return has two interrelated components: growth of the investment AND cash flows needed to provide for distributions for retirement needs, etc.


  • Cash flows from the portfolio primarily come from receipts of interest income from the bonds and CDs held in your CD/Bond ladder; and from dividends paid from the investment funds and stocks held in your account.


  • Interest income is generally “fixed” by the terms of the CD or bond as a percentage. The percentage (4.0 percent, for example) is “fixed” at the time the security is issued by the bank (CD) or company (bond or note) and is paid to the holder in regular intervals (monthly, semi-annually, etc.). The current value of the fixed income position may vary over time as market interest rates change. Our goal is to hold the position to maturity (five or ten years, for example) and collect the full principal amount invested when the CD or bond was issued, in addition to the interest payments received along the way.


  • Cash flows from dividends is different than interest payments on fixed income investments. Dividends are paid by the underlying operating company from its profits not needed for reinvestment in its operations. As such, the amount of the dividend is generally not “fixed”. However, many companies have “policies” to pay recurring dividends (quarterly, annually, etc.) to keep its stockholders “happy” with their investment in the company. Many of the equity investments included in each client’s portfolio are in:
    • Regulated Investment Companies (RICs) typically doing business as Closed End Funds (CEFs) and Real Estate Investment Trusts (REITs) that hold many individual investments under its umbrella organization. When the fund sells a position in its portfolio to lock in a gain on the investment, it then pays the gain out to its shareholders as a Capital Gains Dividend. When added to payments of its dividends from profits and capital gains distributions, the combined amount is reported to you as a “dividend” and is a big piece of the return reported to you.
    • The gain component of “return” from RICs reflects the growth in value of the investment over the time period reported. If we sell a position during the reporting period (from rebalancing the portfolio), that portion of the gain is deemed “realized” gain. If the position is held at the end of the reporting period, the gain is deemed “unrealized”. Our reports generally refer to the combined realized and unrealized gain for the period.
  • It is important to note that the gain for performance reporting is NOT the difference between original cost and current value. That distinction does come into play for income tax reporting for individual accounts that are “taxable” accounts only and is reported by Schwab on your IRS Forms 1099 for your taxable accounts.

 

To wrap this lesson up, when the cash flows from interest and dividends is added to the combined realized and unrealized gains in the portfolio, the combined total is referred to as the Total Return for the period. Our reports have reported two categories of returns: Time Weighted Return (TWR) and Internal Rate of Return (IIR). Without getting into the differences and methodology, we will now only report the TWR, and we will just call it the “return”. Similarly, we will now not use the term “yield” to report the cash inflows and now just refer to the term “cash flows”.

It is worth noting that in the long term, it is the cash flows that ultimately become the biggest driver of our managed portfolio total returns. Remember that the funds pay out their realized gains each year to their shareholders. IIM reports those capital gains dividends as just “dividends”. As noted in our last quarterly reports, the dividends and interest portion of the income for the ten-year period was overwhelmingly the biggest component of the reported Total Return. 

We have been managing client investment portfolios for over twenty-five years. Looking back to our beginnings in 1997, one of our first clients was a valued client of my CPA firm. I had been managing his family’s income and estate tax situation since 1984 when I came to Durango (as an escapee from Southern California!). At the time, his family spanned four generations, including parents, children and grandchildren. The family has since grown exponentially and has scattered to the four winds. The tax planning involved was somewhat complicated and it grew into investment planning for the benefit of all family members. In fact, it was his prodding that pushed me into forming an investment management firm to continue the combined tax and investment planning on a family-coordinated basis. The common strategies and tactics evolved to be “generation” specific to account for age differences and appropriate risk tolerances. As each new family member arrived, the plan expanded to include the new member and ultimately educate and appreciate about the power of investing in American companies and the new technologies that sprouted out of the fertile American landscape. Accounts started out small and many grew to six figures, and beyond. Our multi-generational relationship has proven fruitful to all involved.

I am telling this story now to illustrate the benefit from involving new family members at a young age. We have helped younger generations with starting education accounts, first home down payments, world travel, and more. Lately, we have helped with opening Roth IRAs for young workers, that will grow to very large sums by the time retirement beckons. Jeannie and I have opened accounts for our grandchildren as “opportunity” funds for post college that will be ready for the next steps in their lives. With the runaway inflation and out-of-sight home prices these descendants will need a head start to achieve their American Dream. If your family could use our help with getting the next generation educated and tuned into the value of investing for the future, please call any of us and let’s get that ball rolling. It can be as easy as having them join our email list so they can be inspired.

Remember: Dream Big! Invest Intelligently! They will thank you for many years to come.

Sincerely,

Intelligent Investment Management, LLP

 G. Stephen Wheeldon