Storms and Boats
After a very busy 2017, I enjoyed a much needed break at my ranch, leaving aside worldly matters for a tractor, chainsaw, and pruners. Late last year, we acquired our ranch neighbor’s parcel and doubled the size of our “nature preserve.” My son August has been enjoying riding the all-terrain vehicle (ATV) that came with the purchase. His mother, not so much. The purchase also came with a barn, and I enjoy fixing and building things – the other day I hung up our canoe on some new wall hooks, and that got me thinking back to the many, many small boats that appeared as unexpected saviors during Hurricane Harvey. Boats from garages, from trailers, from Texas, from Louisiana, hauling people in and keeping them out of the floodwaters.
2017 was tumultuous not just in Houston but in the entire United States of America, building on the very dramatic and nation altering election-related events of 2016. Much of the tumult, of course, continues to be related to American politics generally and specifically the highly volatile Trump presidency. At the beginning of 2017, many if not most believed that a volatile President would bring volatile roller coaster financial markets. Instead, the markets – all markets – were up. As usual, you can find both year-end performance reports of your accounts and complete Quarterly and Annual market reviews in your Morningstar report vault. Here’s a snapshot of 2017:
New Capital’s ongoing commitment to international investments paid off handsomely in 2017, as international and emerging market stocks substantially outperformed US stocks (though US stock performance was nothing to sniff at) helped further along by a weakening dollar (down 10% in 2017).
Probably the biggest market surprise of the year was not the upward direction of the stock market but the relative quiet of the stock market, with very low volatility like a placid lake – every single month of the year experienced positive gains - something that has never happened before.
Instead, volatility shifted into an entirely new and unexpected area: cryptocurrencies, led by Bitcoin, new monetary markets which exhibited astounding volatility and tech bubble like enthusiasm. At New Capital we will not invest your money in things we cannot value, and we cannot put a value on Bitcoin, although we certainly recognize the technological benefits that cryptocurrencies represent: de-centralized, supply-limited, secure store of value and means of exchange.
Many investors, advisors, and clients express some trepidation with the elevated levels of asset values. I count myself in that group. After almost a decade of mostly rising stock and bond prices, yields on most financial assets (and frankly on any assets) are relatively low, and their prices relatively high. Global growth across the world is very strong right now, which provides tremendous support for both stock and bond prices. However, any bump in the road could cause some problems for securities given that many assets are “priced for perfection.” In the United States, labor markets are operating at close to full employment. Walmart, in the wake of the rapid passage of the year-end tax law has just announced an increase in its minimum wage. While inflation has been low and benign over the past decade, there is the possibility that we will see upward pressure on prices.
The merits of the tax law itself are extraordinarily debatable. While it is clearly a boon to companies and their shareholders, and to wealthy families, its potential effects on the general population are far more ambiguous, as many may find their net tax bills only marginally impacted after being forced to completely re-calibrate and modify their financial behavior around their housing (restrictions on property tax deductions), charitable giving (higher threshold to itemize deductions), tax filing entity (lower tax rates on some pass through businesses), education (use of 529 plans permitted for private school), and more. We are all learning about the details in the new law, and there will be much more to say about it, but for now it is clear that the very wealthy and the accountants are the big winners.
As your advisor I have no control over natural disasters, politics, or tax laws. Instead we at New Capital are focused on what we can control, and at our October client conference we highlighted the many things we are working on.
We maintain a constant daily focus on our research, portfolio management, client services, client meetings, and our business partner relationships.
In 2017 we began our implementation of eight model portfolios. Our model portfolios are portfolio risk targets designed to give us more control over client portfolios and therefore the ability to respond more rapidly to changing market circumstances. Please note that assigning you to a model portfolio does not mean your portfolio cannot have custom elements, as our system allows for both model compliance and custom elements.
We are spending a lot of time thinking about and discussing each client, considering your specific case, considering your risk capacity derived from our financial planning work together, reviewing your risk tolerance, and matching you with the model portfolio and benchmark that we think fits you best. Each year when we review your profile with you we will also want to review your model assignment to make sure it’s still the right one for you.
We are concluding our implementation of a sophisticated trade and rebalancing system owned by Morningstar and which integrates into our trade and reporting systems. This software, TRX, gives us a daily alert of any client portfolios that deviate substantially from their target model, allowing us to focus our attention on those clients. Our addition of TRX therefore means that we are watching your portfolio on a day to day basis, an enormous enhancement to our portfolio and account management capabilities. We can also rebalance your portfolio very quickly and with tax awareness. For us, therefore, TRX is a trade system, rebalancing system, and alert system all in one.
In 2018 we will debut a new website that will have new areas for clients, and we will expand our initial forays into client conference calls and webinars.
We are evaluating and implementing a lot of technology. In 2018, we will, among other things, roll out the Glip communications platform so that we can communicate and work with you in a more organized and secure way, and the Box file sharing system, so that we can share information with you more easily and securely.
In 2017, we fielded a full team. The full-time additions of Jaycee Smalley and Todd Centurino were very important steps for New Capital. In Jaycee, we have a terrific young account administrator who is organized, task-oriented, and happily and efficiently gets account details done for you. In Todd, we landed an experienced investment officer who keeps a close eye on markets, understands fund performance better than almost anyone, and comes with a strong work ethic. Catherine Bahr, who did a superb job in client service for four years, now works to enhance our client and market communications so that you hear from us in the right ways at the right times. New Capital began thirteen years ago with a very strong team – of one. Your needs, my needs, New Capital’s needs, and the financial service industry’s needs have since grown and it has been my obligation to you to respond accordingly with investments in people and technology, and I am doing that.
in advisory fees. For example, ten years ago New Capital’s top AUM tier rate was 100 bps (1%), and is now 75 bps (.75%). The advent of robo-advisors has been a major driver in this area. However, as with the fund business, I believe that advisory fees have hit bottom, and may actually see some modest increases. This has already occurred with some robo-advisors, who were entirely too aggressive in their initial projections of advisory costs and set fees too low, requiring them to raise fees.
There is probably no more important way for an advisory to keep fees on the low side than to experience regular, sustainable growth, which we have always done. Growth means that the fixed cost investments in people and technology – our “raw materials” - can be spread across a larger client base. If you know anyone else who needs a good advisor in these uncertain times, we would be pleased to meet them.
A handful of clients have asked whether a growing New Capital means a less focused or less personal New Capital and my answer is emphatically NO. The investments I am making in people and technology are designed to give us plenty of capacity to serve existing clients even better, or I wouldn’t do them. Our clients like you are our reason to exist as a business, and only when you are happy and taken care of am I happy to explore additional client relationships.
It’s true that New Capital is in the financial planning and investment management business. It’s also true we are in the boat building business. May 2018 be a calm and dry year for you, with the winds at your back. And if it’s not - if it’s turbulent, wet, and windy, like 2017 was here in Houston - may you have a good and strong boat. We always want to be that strong boat for you, confidently holding your trust and your confidence.
Enough for now. Back to the saw horse.