Second Quarter 2018 Update
Globescan Capital was founded on the principle that investing in high quality companies at attractive prices is the best and most consistent strategy to achieve long-run risk adjusted performance. This remains as true today as it has ever been. Regardless of political changes, market movements and other investment fads, we have maintained and will continue to maintain the same disciplined adherence to that principle.
Though we believe the best time frame for judging any investment performance is over the course of a full market cycle (5-10 years), it is reasonable to expect superior performance over the course of any given rolling three-year period (excluding a speculative bubble).
In the second quarter, the S&P 500 returned 3.43% including dividends, recouping some of the lost ground from Q1. The Barclays US Aggregate Bond Index returned -0.16%. Year to date, the S&P 500 (a far better gauge than the Dow Jones) is broadly flat, with our equity portfolios typically running ahead of that.
During the quarter headlines focused on the start of a trade war, rising interest rates, Fed tightening, a flattening yield curve, rising inflation, mega-mergers, political upheaval in Italy, rising gas prices, Toys ‘R’ Us filing for liquidation, and nuclear war with North Korea. It is entirely possible that any of these topics could have drastic effects on world markets (aside perhaps from Toys ‘R’ Us…). Taking the brewing trade war as an example, all else equal, tariffs raise prices and reduce consumption. A tit-for-tat escalation would compound the problem and risk disruption to the global supply chain that modern economies are built upon.
Thinking longer term, markets have progressed a long way over the past decade, and are certainly looking more expensive. However, we would argue that we are not in ‘bubble’ territory just yet. For a market top or bubble, typically there is irrational exuberance and various excesses (risk taking, consumer spending, asset concentrations). These excesses have thus far not appeared apart from arguably in specific non- investment ‘assets’ such as crypto currencies. Also, whilst equity markets do not look cheap, part of the reason they have progressed so well is because they still offer relatively good value. Compared to other assets (e.g. cash, fixed income, property) investors can still expect a very reasonable return from equities. In fixed income, as interest rates have risen, bond prices have fallen and therefore yields have risen. For those of you for whom we also invest in fixed income assets, we have been well positioned for this, by remaining in very short duration fixed income assets, which are closer to cash on the risk/ return spectrum and therefore better protected from rising interest rates.
An obvious question is: why can’t you sell my stocks when the market is expensive and buy them back when it’s cheaper? It is an inescapable fact that no investor in history has ever been able to achieve market timing success consistently, despite what some may have you believe. There is no shortage of people predicting market movements and calling tops/ bottoms, but while someone may be occasionally right, no- one is consistently correct. An investor that is randomly flipping coins will at some point hit heads three times in a row, looking like a genius. It is only over more extended periods of time that the difference between skill and luck becomes apparent- they’re unlikely to land 20 heads in a row. To try to predict short term (and by short term we mean less than a year) market movements is a fallacy due to the simple fact that short term market moves are entirely random, driven by emotion and sentiment which are impossible to predict. Our goal is to preserve and grow your capital, without being drawn by short term market movements or noise. By buying high quality companies at attractive prices we are still able to consistently generate very positive long term returns.
Recent Re-balancing and Capital Gains
As most of you know, we have recently put through a number of changes to your portfolios. These are changes that we as a team have been working on for some time. For those of you with taxable accounts, these changes have likely resulted in us crystallizing capital gains, which may result in tax liabilities for you. Whilst we look to minimize tax where possible, our ultimate aim is to grow your capital- sometimes this is better achieved by incurring some tax. It is our expectation that you will see more benefit in portfolio performance over the medium and longer term (either upside gain or downside protection) than you will lose in capital gains tax.
By way of brief example, assume we sold a stock with a 35% gain, incurring tax on the gain at 20%. The new stock we buy would only need to beat the old one by just 5% in the first year for you to be better having paid the tax. If you look at this over a more reasonable 3 year time horizon, the new stock would only need to outperform by 2% each year for the tax payment to be worthwhile.
Globescan Capital Internal Update
We are pleased to announce that our team continues to grow. Recently we added David Shahrestani to the firm as an Equity Research Analyst. During the recruiting process, we were fortunate to receive over 150 applications for the position and we interviewed some very high quality and experienced candidates. David has a strong background in accounting and fundamental research, coupled with an insatiable intellectual curiosity, which we believe will further our investment advantage. Hopefully you will all have the opportunity to meet him soon, if you have not already done so.
As always, please get in touch with any questions you may have.
Legal Disclaimer: This blog expresses the views of the author as of the date indicated and such views are subject to change without notice. Globescan Capital, Inc. has no duty or obligation to update the information contained herein. Further, Globescan Capital, Inc. makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, any information or opinions contained in this blog are not intended to constitute a specific recommendation to make an investment.
The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein or linked to is based on or derived from information provided by independent third-party sources. Globescan Capital, Inc. believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.