A Letter from the CEO, David Ferris to clients on November 9, 2016
The last year has proven to be a contentious one for our nation in a number of ways. Whatever side of the divide we find ourselves, there is solace today in the hope that we as Americans along with President elect Trump can bridge divides and address the number of issues that we as a nation face. No matter which way you voted in the election, you are undoubtedly aware that there will be changes which impact our nation and national economy. Here at Ferris Capital, we serve as your Fiduciary. Part of that responsibility is to take emotion out of investment decisions. In doing so we look at underlying fundamentals, valuations, and a plethora of trends across investment locations and sectors.
Our experience has taught us that we could see immediate volatility around the election and geo-political risks as a whole. As such, we have taken measures to de-risk client portfolios. As I mentioned earlier in the year, Ferris Capital’s Investment Committee has been making a concerted effort to reduce risk while increasing income/yield in a low-yield/low-return environment. We have also been running higher than “ normal” levels of cash, cash-alternatives, and ultra-short bonds in all client portfolios. Just this week (on Halloween), we reduced our successful allocation to Alliance Bernstein High Yield Municipals by 50%, and had decided to wait out the election results in cash. Also, as I communicated in earlier communications, we had reduced S&P 500 exposure in favor of High Yield Bonds and cash.
I also want to remind our clients that it is not always about where you are invested, but rather where you are not. For our conservative clients we have no allocation to Small-Cap stocks (a portfolio component more prone to volatility than Mid and Large-CapStocks). Our moderately aggressive investors also have a greatly reduced weightings. We also have no allocation to Emerging Market stocks. This has proven to be an important omission, that I will outline in sector comments below.
The immediate impact of this election is that we expect a volatile market environment for the remainder of this year. As we saw with the “Brexit” vote, the markets detest uncertainty. Analysts world-wide will attempt to decipher what a Trump presidency will do in the near-term that will alter global trade, as well as the domestic economy. It is our InvestmentCommittee’s opinion that once these details begin to take shape, markets willstabilize, similar to the aforementioned U.K. referendum. Our Investment Committee had researched the potential impacts of a Trump win ahead of the election and made sure that we were positioned well for that outcome. Some of the findings were:
- Stocks - Volatility will likely increase as investors try to parse through how Trump policies will impact global markets and the impact on a Fed rate raise in December.
- US Dollar - Negative due to protectionism fears and anticipation of deficit spending (Cutting taxes, boosting spending).
- Bonds – There would be a short term “Flight to “quality”. Flows to Treasuries could temporarily increase, reducing yields and increasing prices. However, US government bonds could see a similar impact as the dollar in the long term due to potential tax cuts and spending increases.
- Emerging Markets – NEGATIVE outlook due to fear of collapsing trade deals. IMPORTANT NOTE: Ferris Capital has no allocation to EM Stocks for clients as we identified this sector as not having the requisite risk/reward profile for investment.
- Energy – POSITIVE outlook for metals, oil, and coal due to potential regulatory changes. IMPORTANT NOTE: We recently added MLP’s to portfolios as they are offering yieldsof approximately 7% and have been severely punished over the last 24 months. We will consider using cash reserves to add to our existing allocations if fundamentals dictate.
As with any period of significant change, it is important to let the facts and fundamentals win out when making decisions. That is why we continue to take a measured approach to constructing your portfolio. Our Investment Committee will certainly be vigilantly watching these results in the coming months and years to determine their impact on markets. In the short-term, we are confident in our portfoliosand do not want to react harshly in either direction based on one (albeit major) event. The Investment Committee will look for ways to take gains where appropriate, cut losses when necessary, use cash strategically and ultimately focus on our clients long-term goals.
In the interim, if you have any questions or concerns, please feel free to reach out to me or any member of our team to discuss.