Real Assets, which consist of real estate, commodities, energy, infrastructure, natural resources and master limited partnerships are utilized by many of the nation’s wealthiest endowments, but individual investors can also benefit from incorporating real assets into their portfolios. Prateek Mehrotra MBA, CFA, CAIA, CIO of ETF Model Solutions outlines how real assets can provide greater portfolio diversification and protection against periods of high inflation better than traditional stock and bond portfolios in this month’s REALASSETS ADVISOR magazine.
While broadly in line with expectations, last Friday’s consumer price index (CPI) report affirms our view that inflation remains on an upward trend. Pimco projects year-over-year core CPI will finish 2015 at 2.10%, considerably stronger than consensus expectations at the start of the year, and well above 2014’s rate of 1.61%.
However, the drivers of inflation may begin to change over the cyclical horizon. For example, shelter inflation has driven much of the recent strength in core CPI. In June, both rent and owner’s equivalent rent, which combine to make up around 40% of core CPI, increased by 0.4% month-over-month. Shelter inflation should remain strong, but it may be tempered a bit over the medium run by increasing housing supply, a trend underscored by today’s strong housing starts and building permits data.
Weakness in Friday’s report came in core goods (-0.1% month-over-month) and medical care services (-0.2%). Going forward, however, we expect some of the pressure on core goods inflation to abate, as the U.S. dollar and oil prices have been roughly flat since March. We also expect wages to rise over the coming year, which should result in more broad-based services inflation beyond the shelter component.
One wrinkle in the report is that the weakness in medical care inflation means that core personal consumption expenditure (PCE) data should remain soft relative to core CPI data, since the PCE measure places greater weight on medical inflation. Nonetheless, core PCE should still likely finish the year above the Fed’s 1.30% to 1.40% projection for 2015 if our forecasts prove correct.
(Source: PIMCO, WSJ)
An Upbeat Start to Earnings Season
In the first quarter of 2015 reported earnings per share (EPS) were $21.51 for the S&P 500 Index, representing a decline of 14.23% from the prior year. The Materials and the Industrials sectors were the worst performers, with year-over-year EPS declining over 40%. Although Utilities and Financials were bright spots, gaining 40% and 20% year over year, respectively, many corporations provided overall lower guidance, and Wall Street analysts lowered second quarter earnings expectations. Thomson Reuters’ data forecasted a 5.9% gain in earnings for Q2 in January for the S&P 500 Index, and by June these estimates were revised to a loss of 1.5%.
Corporate earnings releases kicked off unofficially on July 8th, when Alcoa (ticker: AA) reported solid second quarter profits. Through the market close on Tuesday, July 21st, 102 companies (roughly 20%) in the S&P 500 Index have reported earnings. Seventy percent beat earnings expectations, and 55% exceeded revenue forecasts. On the heels of a report that existing home sales were strong in June, reaching highs not seen since February 2007, it is no surprise that housing companies posted positive earnings. Specifically, Lennar Corp (ticker: LEN) reported $0.79 per diluted share, versus last year’s $0.61 per diluted share. Corporations that did not perform as well typically had revenue exposure overseas, and were hurt by a strong dollar, which reduces income derived outside of the US. Although the Technology sector posted year-over-year gains last quarter of 8.90%, tech companies surprised the market this week with lackluster earnings, with names like Qualcomm Corp (ticker: QCOM), Apple (ticker: AAPL), SanDisk Corp (ticker: SNDK), IBM and Microsoft (ticker: MSFT) missing expectations in one way or another. For example, Qualcomm reported a 47% decline in quarterly profits; Apple’s iPhone sales were lower than anticipated; SanDisk reported a drop in both revenue and profit; IBM’s operating EPS fell 13%; Microsoft earnings and revenue beat expectations, but had a loss for the quarter when previously disclosed restructuring charges were included.
Despite the soft spot in the Technology sector, the overall earnings season has started out well. In fact, we’re seen growth across Basic Materials, Consumer Goods, and Financials, with names like Bank of America (ticker: BAC) and Citigroup (ticker: C) beating expectations. Additionally, Walgreens Boots Alliance (ticker: WBA), Monsanto Co (ticker: MON), Constellation Brands (ticker: STZ), Darden Restaurants (ticker: DRI), and UnitedHealth Group (ticker: UNH) all posted EPS growth of 57%, 48%, 30%, 26%, and 15%, respectively. Should earnings continue to beat expectations, the US Equity market may extend its gains and even tolerate a future rate hike by the Fed.
As new graduates leave college and transition into adult life, there are many aspects of their financial situations that will change. Here are some financial areas that you may want to talk about with recent grads.
- Develop a Discipline to Control Spending– Managing expenses will be one of the first financial tasks a new graduate will have to conquer. Creating a budget to monitor larger costs like housing and transportation, as well as smaller everyday expenses can help keep track of where money is being spent and can help identify unnecessary splurges.
- Saving for the Unexpected– The next goal for a recent graduate should be to save up an emergency fund that will cover 3-6 months’ worth of expenses in case of an unexpected expense or loss of employment. This can be difficult when student loan payments are due and getting a start on retirement savings is being constantly encouraged, but an emergency fund should be a high priority.
- Student Loan Debt– Most recent college graduates will begin their careers with a fair amount of student loans to pay off. Student loans or any other forms of debt that charge the highest interest rates should be paid off first. Just meeting the minimum payment may be the best option early on though as an emergency fund is built up and money is diverted towards retirement savings.
- Saving for Retirement– Once debt is under control, saving for the future, namely retirement, is the next big step. Starting early is crucial for young new grads as they have one major advantage; time. Taking advantage of their employer 401(k) plan with a company match is a smart place to start.
- Investing Long-Term– Retirement savings should be invested with a long-term view, as a recent graduate who starts saving in their first few years will allow that money to compound for the next 40+ years. Short-term market fluctuations, even drastic ones, should not be cause to panic.
- Credit Rating– A young adult will also want to familiarize themselves with their credit rating and how missing a loan payment or electricity bill could affect them when making a big purchase down the road, like a car or house.
All of these responsibilities will take some time to implement, but they will offer the recent graduates a good learning experience in balancing their short and long term financial goals.
We agree with the views of one of our favorite Economists on the above subject. It is copied below:
Ignore Greece
Don’t let anyone tell you Greece is sticking up for its “dignity” by fighting “austerity.” The current Greek government is sticking up for socialism by fighting reality.
After several years of working toward some very minor market-friendly reforms, and finally starting to see a glimmer of economic growth, Greece elected a far left government back in January. It’s economic and financial situation has gotten worse ever since. Instead of trying to boost growth and pay its debts, by trimming government spending and reducing regulation, the government is saying it won’t cut retirement benefits and wants to raise taxes on what little private sector it has left.
Since Greece no longer has its own currency, it can’t just devalue and cut pension benefits by sleight-of-hand. Instead, politicians have to make tough choices. Greece finally ran out of other peoples’ money. And, since private investors will no longer buy Greek bonds, it has to count on government entities. Fortunately, so far at least, the IMF, the EU, and the ECB have refused to support the status quo.
So what does the new government do? It blames the only groups willing to lend it money and refuses to cut spending. Then, it decides to have a vote, scheduled for July 5th, on the lenders’ latest offer, which would combine higher taxes with pension cuts and some other market reforms. This referendum is all about politicians running scared. They don’t want to make the choice themselves, so they put it to a vote, again.
But Greece has debt payments to make this week, before the vote, on which it’s likely to default. Worse, the government is urging citizens to vote against the lenders’ offer.
Meanwhile, Greek banks have seen massive outflows of deposits. To meet the demand for liquidity, Greek banks have been getting Euros from the Bank of Greece (their central bank), which prints them with permission from the ECB. But now that a debt default is a serious concern, the ECB has withdrawn its permission for the Bank of Greece to print more Euros.
So, the Greek government has declared a “bank holiday” until July 6, during which depositors can only withdraw 60 euros per day. Greece also imposed capital controls to try to keep Euros in the country. This is a travesty, and Greece is headed for a double-dip Depression.
Fortunately, Greece is not Lehman Brothers. It’s like Detroit. When Detroit defaulted, the U.S., and even Michigan, survived just fine. Detroit had already wasted the money it had borrowed, and so has Greece. The only thing left is recognizing the loss. That does not damage the economy; it will be absorbed by the IMF, EU, and ECB.
What Europe wouldn’t be able to absorb is if it caved to the Greek government, if it let them rollover their debts without insisting on reforms that will help Greece eventually repay its obligations. That would bring more Euro leftists into government and lead to even more stagnation and default in the future.
Regardless of how this turns out, it’s getting way more press than it deserves. Any sell-off in US equities is a buying opportunity. Stay the course.
Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist
On June 22, 2015, Prateek Mehrotra, MBA, CFA®, CAIA®, Chief Investment Officer, and Wendy Orth, Investment Adviser Representative of Endowment Wealth Management join “Money Matters with Christopher Hensley” radio show. In an informative 30-minute interview, Prateek and Wendy provide an informative interactive discussion that describe the multitude services that a family or multi-family office is designed to support your family’s wealth and legacy within the family’s value system.
This 30-minute podcast provides an informative discussion that covers the services, organization, purpose, mission and support that a family office or multi-family office provides to its client. Prateek and Wendy join the show at the 5:30 mark on the podcast.
A traditional family office is a business run by and for a single family. Its sole function is to centralize the management of a significant family fortune. Typically, these organizations employ staff to manage investments, taxes, philanthropic activities, trusts, and legal matters. The purpose of the family office is to effectively transfer established wealth across generations. The family office invests the family’s money, manages all of the family’s assets, and disburses payments to family members as required. The family office structure takes into account nurturing the human capital within the family along with their financial wealth with a multi generational perspective.
The Family Office itself either is, or operates just like, a corporation (often, a limited liability company, or LLC), with a president, CFO, CIO, etc. and a support staff. The officers are compensated per their arrangement with the family, usually with overrides based on the profits or capital gains generated by the office. Often, family offices are built around core assets that are professionally managed.
A recent article by CNBC economics reporter John W. Schoen provides an in-depth look into reasons behind the rising cost of higher education in the U.S. It’s a complicated issue, with many moving parts. The after-effects of the 2008 recession, expanding student services, required budgetary expansion in state budgets, such as pensions, healthcare and Medicaid, and other issues have forced schools to increase the student tuition costs.
The improved economy and recovering markets have helped private institutions repair the losses to their endowments caused by the Great Recession. However, the wealthiest schools with the largest endowments are more successful in fund raising and are receiving an increasingly greater share of donations.The top 40 richest schools received nearly 60 percent of all gift revenue last year, according to Moody’s. Comparatively, most schools have far less money to help subsidize the cost of higher education. The median endowment size for the largest 50 schools is $3.5 billion, while the median college endowment for the entire endowment universe was just $113 million.
That leaves schools with smaller endowments at a disadvantage competing for the best and brightest applicants. For example, at wealthier schools, the share of tuition paid by students is about 15 percent, while the average share of tuition paid for at all private colleges is 75%.
The entire article can be read at: http://www.cnbc.com/id/102746071
Highlights from the report:
- In 2014, the average holding period peaked at 5.9 years for companies exited.
- Last year, 1,686 exits valued at a total of $442 billion took place, indicating that general partners were still capitalizing on suitable exit opportunities for their investments.
- The lowest average holding period was 4.1 years for deals sold in 2008.
- European companies sold this year had the longest average holding period, 5.7 years, compared with 5.3 years for North America companies sold in 2015.
- Since 2006, energy and utilities companies have had the shortest average holding period, 4.3 years, while companies in the industrial sector and consumer and retail had the longest one, 5.3 years.
- Deals of $1 billion or more underwent the biggest change in average holding periods since 2006, from a low of three years in 2008 to a high of seven years in 2014.
- Average holding periods for deals in the $250 million-to-$999 million range increased from 3.2 years in 2006 to 6.4 years for portfolio companies fully exited in 2014, and for deals of less than $250 million, it increased from 3.5 years in 2008 to 5.8 years in 2014.
Source: Prequin
