Late Spring Bullseye Client Newsletter

Late Spring Bullseye Client Newsletter

by Timothy Guthrie on Jun 1, 2018

Market Recap

January was great, February was awful, and March and April were see-saw at low levels with fear of trade wars or fears that President Trump would say something unconventional roiling markets. The markets were up and down, but importantly held above the market lows of February. Over the last few months the market reaction to various Trump policies slowly became less volatile. The backdrop for all this was an economy hitting on all eight cylinders. Corporate profits are at all time highs, employment is at an all time high, and wages are finally moving up.

Then May arrived. Fears of a trade war subsided. Trump tweeted and spoke (as usual) yet the market reactions were muted. The focus became more centered on the economy and business results, and the news was excellent. The markets forgot the interest rate fears of February and March and climbed out of the rut.

Our performance, on average (results vary, so please contact me to review your account’s performance), are beating the S&P 500 and a blended index of stocks and bonds. On a percentage basis, we are doing much better than the averages, but on an absolute basis, the gains are still modest.

As of May 31st, our YTD average performance was +2.7%. I know, this is not exciting, but the S&P 500 was up +1.5%. That puts us 1.2% ahead of the S&P, after all fees (TD trading fees, my management fees, and any product fees). On a percentage basis, we are beating the S&P by 44%. Further, the S&P is 100% stocks. Our accounts are about 70% stocks on average and have much less risk.

A better comparison is to the blended index of 70% the New York Stock Exchange composite average, and 30% of a Vanguard bond index (BND) that represent the entire US bond market. This matches our portfolios better. This blended index is down -2.3% YTD so we are 5.2% ahead of an index that matches our average allocation. 5.2 percent ahead is very significant ($5,200 per $100,000).

What Is driving our superior performance? Three items:

  1. I sold a lot of our risky assets in February well before the market hit bottom. This trading was not timed perfectly, but it did help.
  2. The bond market has not performed well, as interest rates rise, most bonds decline in value. I had a concern over a year ago that rates may rise, and shifted most of our fixed income holdings to aged mortgages that behave differently than traditional bonds when interest rates rise. Our mortgage fund has risen in value while most bonds have declined in value. The other fixed income strategies I used also are not typical bonds, but adjustable rate securities that also do much better in a rising rate environment.
  3. Stock allocation. Our two largest stock allocations have done far better than the market as a whole. We have an 11% weighting in an excellent Mid-Cap stock fund. Mid Cap stocks are better positioned to benefit from the Trump tax cuts, as smaller companies can’t really implement intricate tax maneuvers around the globe like large companies do, and are less affected by any potential trade issues, because they tend to be very domestic in their sourcing and sales, so a trade spat may not hurt them at all. The Mid Cap fund we use currently is the Eventide Gilead Fund (ETILX), and is it is up 13% YTD. This fund is in the top 1% of all Mid Cap funds. The other allocation that performed very well is invested in medical devices,(symbol- IHI), the I Shares US Medical Devices ETF. This ETF represents about 10% of our assets and is up 14% YTD. The population is aging, and we all know folks benefiting from advances in new medical technology like pacemakers or artificial knees and hips. The need is rising at the same time the possible solutions are also increasing. I like this sector long term.

Obviously, not everything has worked, nobody bats 1000. Managing risk, good allocation to the most attractive sectors and obvious fixed income positioning has really helped us beat the market so far this year. The absolute numbers may not be impressive, but up 2.7% beats being down 2.5%.

I appreciate your continued trust during the market volatility this year. If you have any questions, please contact me.


A few clients have recently asked about gold. Should they buy gold? I believe buying gold coins or bullion is not a good investment generally. Why? The first reason is gold pays no dividends or interest. Buy bonds, collect interest, buy stocks, collect dividends, even if the stock does not appreciate, you collect some income. Gold pays no income, it just sits there, in your safe, you had to buy to hold the gold. Another reason is that gold does no grow. One once of gold stays one once of gold. No growth. Contrast that to a growing company. The company had $1 billion in sales, and 5 years later, it has $2 billion in sales. They sold 100,000 units this year, and five years later sold 200,000 units. 100 shares can split and become 300 shares. This is an advantage that operating companies have over any commodity, growth not just in price, but in scale.

I know, the advertisements call stocks ‘paper’ assets and imply that ‘paper’ is not safe. This is mental slight of hand. A stock certificate is printed on paper, but the stock certificate is not the company. It is merely a representation of the company. Mostly companies own lots of real estate (not paper), factories (not paper), distribution centers, trucks, and even more importantly, have a culture and know-how that is not paper, but quite real.

If you REALLY think gold is going up you should buy gold mining stocks, they trade with more ‘leverage’ than gold alone, and if gold goes up 10% in price gold stocks might appreciate 30% or 50%, as the gold mining operation is now much more profitable. Remember producing gold is not glamourous. It usually involves crushing 20 tons of ore to extract 1 once of gold, and that usually costs north of $1,000 to ‘squeeze’ that once of gold out of that rock.

Lastly, any commodity has the same problem, they trade in ranges, and don’t grow like a company can. It might be attractive to buy any commodity when prices are low but look at oil: it was much more expensive in 2015. Corn and soybeans were higher years ago when I had my farm in Brown County (pre-2008). Commodities have a limited upside and if you don’t catch the low, then the opportunity is just not as attractive as a good growth company. BTW- gold is down 3% this year.


Another heavily advertised product are annuities. They are sold as ‘safe, no risk’ investments. They also don’t disclose fees and commissions (as a registered investment advisor, my firm must disclose all our fees). Often, the agent selling the annuity makes more profit on the deal than the client does over the life of the annuity. The worst deals are often ‘index annuities’. These products are sold as the perfect investment, it goes up when the market goes up and holds its’ ground when the market falls, sounds wonderful.

The problem is revealed in the details. The annuity might go up when the market goes up, but it does not go up as much as the market does. The difference can be huge. One client of mine made 6% in an index annuity when the market went up 18%. Another made 2% when the market advanced 16%, I have a copy of the annuity statement. Going up does not mean going ‘all the way up’. These shortfalls really hurt your results and you can never recover. Further, the annuity sales pitch tells you that the annuity is smart because stocks and bonds are too risky. The fact is that the insurance companies that sell the annuity invest your money in stocks and bonds. Hmm. What’s good for the goose is not good for the gander it appears. The math can work out this way: The annuity averages 3% for the client and the insurance company tries to earn 8-10% investing in the market. Two for them, one for you.

The commissions can be huge. I have seen annuities sold in the Cincinnati area that pay the agent a 27% commission over ten years, with 20% of that upfront when the annuity is sold. These folks can be pretty motivated to make a $20,000 commission on your $100,000. If the agent can do that a few times a month he can get his sears card paid off… These firstyear fees are 16-31 times higher than my firm’s fees.

Lastly, I have never seen an annuity selling agent willing to give the potential client any specific information on the product recommended and leave the office with it, prior to the sale being closed. They cannot afford to let any informed person take a look at what they are selling.

How to contact Tim:

Text: 513-774-3325
Cell: 513-774-3325
Brown/Adams counties: 937-377-1234 (texting does not work on this line anymore)
Ashland: 606-939-1196