Views From 30,000 Feet

This blog post was written by Rob Simon.

Over the past few weeks, I have attended multiple due diligence meetings to gain insight into our fund managers, the state of the economy, and new investment opportunities. An important part of what we do behind the scenes for clients, due diligence events offer an opportunity to hear from fund managers and other industry experts – gleaning their insights and outlooks on the direction of the overall economy. As a result of these meetings and internal reviews, we will be modifying some current investments as well as offering new opportunities. Like a pilot adjusting ailerons, even little movements have a great deal of thought and intention behind them. At the end of the day, however, the priority is making it to your destination – financial success.

Due diligence events I have attended this year include PIMCO, Davis Advisors, and Morningstar’s Investment Conference. Pictured below is PIMCO’s conference room, where they frequently host various noted economists, business leaders, and others from outside their organization to conduct summits several times per year. Led by Ben Bernanke, the former Chair of the Federal Reserve, these summits offer a unique opportunity for PIMCO to gain key perspectives on world events and experts’ economic outlooks. As the first due diligence event I attended, PIMCO provided a plethora of enlightening takeaways from industry leaders. River Capital Advisors currently utilizes PIMCO for several funds, and we feel confident in PIMCO’s analysis of the bonds held within, including their decision making of adjusting duration, credit, etc.

Additionally, Davis Advisors is a storied New York equity investment firm that has now been a part of the Davis family for three generations. Currently co-managed by Chris Davis and Danton Goei, Davis Advisors is very optimistic about the value of their fund holdings and prospective growth considering market conditions. For over three hours Chris and Danton answered direct questions from advisors, a stark difference from the typical one-hour Q&A session other funds may offer. River Capital Advisors has utilized Davis funds for many years, and we have a strong belief in their process and resulting long-term performance.

Finally, the Morningstar Conference was an opportunity to hear from some of the largest names in portfolio management and financial planning. Speakers from this year’s conference included Larry Summers, former US Secretary of the Treasury, who shared his belief that nothing overly differentiates those who make monumental economic decisions – they are regular people, just like you and me. He commented on how ordinary it could be to be in the room where a critical decision is made. This is either comforting or unnerving, depending on how one envisions that decisions are made! With that being said, I think that we must take all economic forecasts with a very strong dose of skepticism.

Here are some big overarching economic points:
(Take these with that strong dose of skepticism I mentioned!)

• • There will be a recession at some point this year.
  • The Federal Reserve is not likely to lower interest rates as much as the market thinks it will.
    • Currently the bond market is priced for three cuts before the end of the year.
    • It is more likely that we only get one rate cut and that is probably going to be towards the end of the year.
  • If the above items are true, then equities are possibly overvalued at current levels by a slight degree (5-10%).
  • The recession that may happen is likely to be shallow. No one that spoke about this is predicting a large recession or anything like 2008 recurring.
  • The issues in the banking sector are likely to be contained although some other smaller institutions may continue to fail.
  • The cost of financing is moving up and this makes it more costly to be a money losing enterprise. This probably continues to take some of the air out of the speculative parts of the market.
  • From a positioning standpoint, international and emerging market stocks continue to look more attractive than U.S. stocks.
  • The dollar is likely to go down in price as it appears overvalued.
  • China and U.S. tensions are likely to persist although large scale provocations are unlikely.
  • Bond returns are likely to be better than they have been for a long time.
  • Private investments offer attractive risk/reward tradeoffs but there may be some repricing in the short term as the pricing typically lags the public market.
  • Private credit is particularly attractive as banks are scaling back on lending.
  • Cash is not going to be a good asset to hold for large dollar amounts as rates now will turn lower.
  • It is better to lengthen out maturity and go into intermediate debt offerings at this point.

With the above as a backdrop, all client portfolios with bond exposure will be shifted away from short-term, high-yield bonds towards intermediate-term bonds. While this will result in yield reduction in the short term, we believe this will produce superior returns in the long run while also reducing overall portfolio risk. This shift will also provide more downside protection in the event of a worse-than-predicted recession. Equity positions will remain at current weightings moving forward, as long-term returns from equities remain attractive. We believe our existing focus on value funds and international funds will also provide more downside protection in the event of a recession and that they will recover more quickly than U.S. growth stocks.

Additionally, we will be discussing various private investments with clients individually to determine if their liquidity needs and investment objectives align with these new investment opportunities. What was once a hard-to-reach portion of the market, interval funds provide access to investors without imposing large minimum investment amounts.

In the end, we must keep in mind that financial predictions are not always correct. In February of 2020, experts believed COVID would not have a significant impact on the market. In March of 2020, experts believed the market could be down for years. We know now that both viewpoints were wrong. The turbulence of 2020 is a reminder that when faced with unexpected rough air, no pilot turns the plane around. Instead, the buckle seat belt sign is turned on and small adjustments are made to find a smoother flight path. Financially, this looks like continuing to buy attractive funds at good prices and letting the power of compounding do its work. A successful “landing” of lifetime investment goals requires discipline, reasonable expectations, and a focus on the destination stronger than the fear of a temporary downturn.