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Q2 2018 Quarterly Letter – Adjusting Sails

Q2 2018 Quarterly Letter – Adjusting Sails

The winds blowing in Washington have captivated the attention of the global financial markets and many people around the world. In general, RegentAtlantic prefers not to get drawn in to the fray of politics, since it could cloud our investment decision-making. The following quote has served as our mantra during this tumultuous period:

“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” – William Arthur Ward

Instead of complaining or wishing things were different in the financial markets, we instead adjust to the realities. And the realities, as we see them, are that we are in a very long, slow economic recovery. The economy and corporate profits continue to grow. Employment is very strong and inflation has been relatively minor. The financial recovery in the rest of the world took hold after ours and probably has further to go and will last longer than the U.S. recovery. Overall, these are all very favorable winds.

Unfortunately, the United States is entering a trade war that may cause our economy and the global economy to slow. At this point, trade issues are largely still rhetoric. We are not sure what President Trump will do and for how long. This will create an economic headwind.

The value of “adjusting sails”

In reaction to current economic realities, our RegentAtlantic team has been busy adjusting the sails on the bond side of the portfolio. We made two big changes in reaction to the shifting winds:

We moved a portion of the bond allocation from opportunistic bond managers to U.S. Treasuries.

In our inflation-indexed bond allocation, we increased our allocation and moved out of some mutual funds in favor of individual U.S. Treasury Inflation Protected Securities (TIPs).

Here’s a bit of background on our decisions: First, we increased our holdings in U.S. Treasuries because we weren’t earning enough extra yield to take the credit risk. In addition, interest rates on more stable Treasuries have increased.

The difference in interest that investors can earn on corporate bonds compared to what they could earn on U.S. government bonds—known as the “credit spread”—has declined steadily since 2009. In fact, the credit spread is currently close to a historic low.  As a result, we decided it was a prudent time to reduce our credit risk in the bond market.

Also, the yield on TIPs is going up. Last quarter, we took the opportunity to move some of our allocation from mutual funds into the individual Treasury bonds and to increase our allocation in inflation-indexed bonds. Why? One of the risks of a trade war is increased inflation due to an increase in the tariffs on imported goods (and therefore their prices).

At the same time, the rise in the Consumer Price Index (CPI) causes the TIPSs coupon interest to increase. That makes TIPs good inflation hedges.

Additional benefits of increasing our investment in Treasuries:

We eliminated the expense ratios on the mutual funds we replaced.

Treasuries are free of state income tax.

We’ll continue to monitor the winds in the bond market and may make more adjustments when appropriate.

International stocks still make sense

When it comes to the world’s stock markets, the winds have been quite variable in 2018. At the end of the first quarter, foreign stock markets were doing better than U.S. stocks. Last quarter, that situation reversed, with U.S. stocks now outperforming international markets, as of year-to-date.

On the stock side of our portfolio, we have chosen not to make any allocation changes, despite the short gusts of wind blowing the markets around. Why: We believe that our current allocation, which is somewhat heavily weighted in international stocks and emerging markets, is the best allocation for today’s market conditions.

Global economic growth continues to be reasonably strong. The U.S. led the world out of recession and is now more mature in its recovery. However, foreign economies are younger in their expansion phase and, we believe, should enjoy favorable winds for longer. From a valuation point of view, we see foreign stocks as better buys than U.S. stocks. In our view, this price advantage gives international stocks a better chance of outperforming their U.S. peers in the long run.

In addition, we know that no one actually wins a trade war. Every economy pays a cost. Since it’s not clear if this trade skirmish will be more damaging to U.S. stocks or foreign stocks, we remain diversified and will continue to own both.

Regular rebalancing is key 

The portfolio adjustments we’re making are a good reminder: rebalancing is a great tactic to use when the financial winds are variable and need adjusting sails. Rebalancing regularly is a disciplined way to use profits from appreciated assets to buy more of the assets that are currently “on sale.” We scan our portfolios for rebalancing opportunities on a weekly basis.

Rest assured that RegentAtlantic remains aware and realistic about the current economic winds. We will take action to adjust our course and adjusting sails when it’s warranted, and will remain patient and prudent when we believe that it is the best course of action.

I hope you have a great time sailing through your summer. Please contact your Wealth Advisor or me with any portfolio questions or concerns.

Chris Cordaro
Managing Partner and Chief Investment Officer

Additional Disclosures

Certain information contained in this article is based on forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The author believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events may differ materially from those reflected in forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.

RegentAtlantic’s positions and recommendations discussed are as of June 30, 2018. Due to various factors, including changing market conditions, these discussions may no longer reflect current positions and/or recommendations. There is no guarantee that these positions or recommendations were or will be profitable or that any recommendations we make in the future will be profitable. Moreover, you should not assume that any discussion is itself, or a substitute for, personalized investment advice from RegentAtlantic.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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