Client Meeting December 2008
Russell Hawkes Associates held a client meeting in the Decker Room at the Binghamton Public Library. We had a strong turnout, with over 100 clients turning out for information, reassurance, and to hear our forecast for the future of investing. Peyton Hawkes was the main speaker, and Russell Hawkes, firm founder, provided a welcome address.
The outline of the seminar was as follows:
1. What has happened to the economy and the financial markets?
2. What are some possible outcomes?
3. How have the managed portfolios changed in response to the crisis?
4. What is our outlook for the future, and how will the portfolios reflect this outlook?
5. Traditional vs Modular portfolio construction
1. What has happened to the economy and the financial markets? As of December 2008, virtually all assets classes have been pummeled, with the Dow, the S&P 500, and the NASDAQ all down in excess of 35% for the year. There was nowhere to hide, as even Intermediate Corp Bonds were down over 6%. So what happened? The US Real Estate market, and it’s overextended debt, were primarily to blame. Poorly underwritten mortgages were “securitized”, placed in complex financial notes, and sold as sound assets to banks all over the world. When interest rates reset, and defaults began piling up, bank balance sheets were reduced, and a crisis of confidence infected the banking system worldwide. A more fundamental problem is that American consumers, the primary engine for growth, are overextended and need to save more money and spend less.
2. What are some possible outcomes? The problems we face are quite daunting, and for the first time, reflect the global economy we are now living in. The worst case scenario is that the money supply increases and other stimulus measures will be ineffective, resulting in a worldwide depression. A more likely outcome is a recession, and that the economic setbacks will be buffered by the dramatic measures being taken by governments around the world to stimulate growth. In any case, it appears that capitalism itself has been called into question, and it is unlikely that America will enjoy the same leadership role in international affairs, given the turmoil we have created with our failed oversight and complex financial products. Some are calling this the nexus for a global power shift, where the United States enjoys less clout and a diminished economic stature from now on.
3. How have the managed portfolios changed in response to the crisis? We suffered, as an advisory firm, through a very difficult 3rd and 4th quarter in 2008. It was made particularly difficult as it became clear that this was a crisis unlike anything we, or any of our consultants, had ever seen. Our primary strategist, Litman-Gregory, initiated no less than 2 full allocation changes inside as many months. During this time, it became apparent that traditional portfolio assembly methods were failing us, and that we needed a fresh outlook. This was easier to decide upon than to implement, however, as the safety of all assets, even money markets, were being questioned. So we read and listened and watched the landscape take us to unimagined places, and were trying hard to find a place to put our client’s hard-earned nest eggs. We decided to divide our action into two phases: an initial reallocation to a very safe position, followed by a more sophisticated and complete portfolio allocation when we had decided what it should consist of.
6. What is our outlook for the future, and how will the portfolios reflect this outlook? It is impossible to know exactly what will happen after this financial tsunami, and every day a new wrinkle occurs. But we are going forward with some premises we think are sound. One theme we think will hold up is that the time has come to be less American-myopic in our investment policy. As a consumer-based economy without a significant manufacturing base, we feel growth is likely to occur outside the United States. More disturbing, we feel that the American dollar is at risk for decline versus other currencies. It is for this reason that our portfolios will contain non-dollar-denominated foreign stocks and bonds. Also, we feel that alternative energy, commodities, agriculture, and emerging markets will be leaders in providing returns to investors going forward.
7. Traditional vs Modular Portfolio Construction We consider Modular Portfolio Construction (MPC) to be the next evolution in portfolio design. Unlike the traditional Modern Portfolio Theory approach to portfolio design, MPC recognizes that investment policy can reflect thematic thinking, and that alternative asset classes can and should be used to provide more downside protection and increased diversification. Using MPC, we will be developing more sophisticated portfolios, divided up into three areas: Core holdings, Alpha holdings, and Alternative holdings.