Tenets of Investing
At BTC Capital Management, the process used in the management and oversight of client portfolios is driven by our “Tenets of Investing.” The tenets are comprised of four overarching principles applied across all client portfolios, including:
•Preservation of Capital During Difficult Markets
•Investment Decisions Based Primarily on Strong Fundamentals
•Long-Term View of the Markets
•Risk-Aware Portfolio Construction
While these tenets can be viewed individually, they really build on each other, reflecting an investment process committed to the achievement of our clients’ goals and objectives. For example, regarding the first tenet, Preservation of Capital During Difficult Markets, successful execution of the other three tenets helps increase the likelihood we can preserve a client’s capital during difficult market periods.
Emphasizing strong fundamentals is a foundation of our selection process. When choosing the investments to be utilized in a client’s portfolio, it helps to ensure these holdings could endure throughout difficult market environments. And, our Long-Term View of the Markets, as stated in the third tenet, reflects our focus on filtering through the short-term, day-to-day noise. This allows us to better discern risks to a client’s capital versus momentary blips on the financial market radar screen that do not warrant changes to portfolio structures.
The fourth tenet, Risk-Aware Portfolio Construction, is probably the one that is most tightly linked with our efforts to successfully deliver the desired results sought in the first tenet. As much as we define ourselves as investment managers, we know the other role we have in helping to ensure clients meet their goals and objectives is just as important, and that role is risk management.
There are a variety of tactics used in the evaluation of risk, whether evaluating an overall asset class or individual security. For example, we have specific allowable ranges for the weights of asset classes represented in our strategic benchmarks. This ensures client portfolios maintain a sufficient level of diversification and increases the likelihood portfolio performance outcomes will be in the expected range over time.
In addition to our policy-driven diversification efforts, we incorporate alternative asset classes into portfolios if their inclusion enhances the risk/reward relationship of the overall portfolio. For example, in the past we have maintained commitments to the high yield bond segment of the fixed income markets, as well as targeted positioning in real estate.
Our efforts to preserve capital in difficult markets are, as discussed above, driven by the positioning of asset classes within client portfolios and by determining what specific asset class segments are represented in the portfolio. And, of course, another key is for clients to have the appropriate investment objective in place that reflects their time horizon, need for current income and risk tolerance.
The rate of GDP growth for the U.S. economy is expected to continue at the modest level seen throughout most of the 10 years since the end of the 2008-2009 financial crisis. Currently, estimates for the third quarter are hovering around 2.0%, the same level seen in the second quarter, with some estimates registering slightly lower levels of expected growth. While we have grown weary over the past several years with using “modest” to describe the performance of the U.S. economy, it does represent growth and we are not expecting a recession at this time. The current outlook for the fourth quarter includes estimates between 1.5% and 2.0%.
Some industry experts feel positive economic growth will continue, while others see a potential decline into recession. On the negative side, we have the impact of ongoing trade disputes. Most specifically, the dispute between China and the United States has received most of the publicity, but potential tariffs imposed on the European Union by the United States are now a real possibility. Trade-related issues are impacting economic data such as the ISM figures for the manufacturing and service sectors of the economy. Manufacturing data is also being negatively impacted by the labor strike at General Motors.
On the more positive side we have the state of the housing industry. With the August data release, both housing starts and building permits registered the highest levels seen in this economic cycle. Historically, a peak in housing starts occurs approximately two years before a recession. In reviewing data back to 1969, the shortest time period between the peak in housing and recession was 10 months.
Another indicator on the positive side is the Citi Economic Surprise Index. This index evaluates whether economic indicators are coming in above or below expectations. At the end of June, the index registered -70. Now it is at a positive reading of approximately +35. What this transition means is economists have now lowered estimates to the point where actual data is exceeding forecasted results. This is more representative of what is actually taking place in the economy.
We are currently maintaining our existing asset allocations, which includes an overweight to domestic equities and an underweight to fixed income. With the strong relative performance of U.S. equities compared to fixed income and international equities year-to-date, the current positioning has performed well. This performance is illustrated by the 20.1% return for the Russell 3000 Index of domestic stocks compared to the 8.5% return generated by investment grade bonds, and the 11.6% provided by international equities. While volatility has increased from the more modest September levels, we continue to focus on the tenets of our investment philosophy, specifically the third one, a Long-Term View of the Markets.
Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
The information within this document is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involved risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.