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January 2019 Letter

The First Index Investment Trust was the first index mutual fund ever created in the world. This week, we lost the creator of this mutual fund with the death of John ‘Jack’ Bogle, at age 89. As the founder of the Vanguard mutual funds, Mr. Bogle bridged the gap between Wall Street and Main street by creating simple, low cost, index funds. He will be missed by many of us who had the pleasure to hear him speak, the impact he made on the investment industry, and the way he carried out his work with honor and trust. Throughout his life, he was able to see an incredible transformation of the industry and how people invest. Certainly, active managers still have the majority of mutual fund assets, but the tide is changing. While we are not direct proponents of index-based mutual funds, we are closely aligned to Bogle’s ideas of controlling costs, staying diversified, and believing that public markets are efficient. In perhaps an ode to Mr. Bogle in his final days, as the markets pulled back in December, 2018, active mutual funds lost a combined $44B in December, while passive funds gained $60B in December in the US. (reported by CNBC)

Markets have rallied in 2019, thus far, from the decline of late 2018. We continue to track the individual asset classes that define the market. As many of you know, US growth stock performance has been leading the way in recent years, fueled by the FAANGs (Facebook, Amazon, Apple, Netflix, Google). Since 1927, small cap stocks and value stocks have outperformed large cap and growth stocks over long periods of time. While this relationship does not hold in every period, investors who tilt portfolios toward small cap and value stocks have been rewarded with better long-term returns. Though the time period is very short, and in no way a sign of a trend, US small cap stocks are leading the way in this January 2019 rally.

Here is a graph that illustrates the “Value Premium”, or extent to which value stocks outperform growth stocks over ten year rolling periods. Each 10 year period is illustrated at the end of each calendar year. If the graph has a blue bar chart, value beat growth over the previous 10 year period. If it is red, growth beat value. It also shows the magnitude of the difference. 86% of the time in history, value stocks have beaten growth stocks over a 10 year time period. However, growth has outperformed value for several periods in a row. While we are not market timers, we do believe in reversion to the mean, and continue to posture portfolios toward value stocks. The dividend discount model, we believe, still applies and in the long run, value stocks should continue to have a positive expected return over growth stocks.


The Fed has finally begun to look at pausing rate increases, based on economic conditions. We will see what that means for interest rates as the yield curve continues to get flatter and flatter. It is not often that cash is the best performing asset class in a calendar year. In 2018, it was. Emerging Markets and International stocks continue to underperform the US markets. Trade wars, a strong US Dollar, and uncertainty across Europe (and Brexit) continue to be headwinds for non-US markets. However, we continue to look at the power of long-term diversification outside the United States. While we aren’t saying that the US and non-US markets operate in cycles, the first 10 years of this century (2000-2010) were marked as the “lost decade”, a period when the US Markets were near flat for 10 years. During that same period, the non-US markets provided positive returns, strongly rewarding global investors. Since that time, US markets have performed much better and have left the non-US markets behind. We believe that we shouldn’t be complacent and flood to just US markets, just as we didn’t flood to non-US markets in 2010. 

Finally, January is littered with the prognosticators making their predictions about markets. Generally, investors flood to their biases. We can guarantee that you can find a forecast that fits your own view of what might happen. As you know, we do not attempt to time or predict the market, mainly because the market is too good in efficiently pricing assets and because the market is driven by news, and we cannot predict the news. Most writers were very positive on the prospects for the market in 2018 and they looked pretty smart on September 30th, their predictions and crystal balls however seemed to crack in the 4th quarter of 2018.

As we usher in 2019 and what looks to be another unpredictable year both economically and politically, we continue to stick to our principles:

  • We work with every client on a liability-driven model that protects near term cash flows. We want to ensure that the ups and downs in the market are just noise and not effecting short-term liabilities, including living expenses.
  • We continue to believe that low-cost global diversification is the best way to weather any storm that occurs in any market.
  • Based on one’s circumstance and risk tolerance, alternative investments can offer a non-correlated advantage to a traditional stock and bond portfolio.
  • We strive to continue to earn your trust and confidence, helping you remain calm during times of markets stress, knowing that your long-term plan is securely on-track.

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