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Yale's $40.7 billion endowment (as of June 30, 2023) Source: Yale.edu
Aug 18
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Why we continue to own Emerging Market Stocks?

By Market Outlook

When we talk about emerging market equities today, we find that people are disappointed: there has been under-performance of late. Additionally, there remain key risks:

• The U.S. Federal Reserve (Fed) raises short-term interest rates
• Commodity prices decline

While each of these well-publicized risks can contribute to further volatility, it’s also quite possible that they are already reflected in emerging market equity valuations today.

Dividend Yield as a Barometer for Valuation Opportunities

There are many ways to measure equity valuation, and in this case we look at dividend yields. Specifically, we break the available history (starting in 1988) of the MSCI Emerging Markets Index into high- and low-dividend-yield years.

• High-Dividend-Yield Years: Years that began with a dividend yield above the median dividend yield for all calendar years.
• Low-Dividend-Yield Years: Years that began with a dividend yield below the median dividend yield for all calendar years.
• Squarely High Dividend Yields: The median dividend yield was about 2.3% for the full period. 2015 began with a dividend yield of 3.1%1. As of June 30, 2015, the MSCI Emerging Markets Index had a dividend yield of about 3.0%.

The Bottom Line: Since high-dividend-yield years indicate lower prices relative to dividends, the key question is whether they exhibited different returns, on average, than the low-dividend-yield years, when price levels relative to dividends were higher.

Dividend Yield is a Potential Measure of Relative Valuation in Emerging Markets
(12/31/1987 to 6/30/2015)

Div-Yield-is-a-Potential-Measure-of-Relative-Value-in-EM

  • High-Dividend-Yield Years: When a year began with a high dividend yield, the average return for that year was over 28%. In fact, such values were followed by negative years in only five instances, the worst of which was a negative 25% return in 1998.
    • Low-Dividend-Yield Years: When a year began with a low dividend yield, the average return for that year was below 4%. Such values were followed by negative years seven times, the worst of which was 2008’s negative 53% return.
    • Years That Started with Dividend Yields above 3.0%: Actually, we started 2015 not only with a high dividend yield but with one above 3.0%. There have been only five such years before, and although past performance can never predict future returns, the returns were strong in those years, averaging 58%. The lowest return of any of these years was 2012, when the MSCI Emerging Markets Index was up over 18%.

Is It Time for the Turnaround?

While we strongly believe that emerging markets will come back into favor, it is extremely difficult to predict when this turnaround will occur. There remain very real risks, but the more critical question regards whether the higher dividend yield reflects these risks.

Some things that we’re being particularly watchful of:

  • Stabilization and/or rebound in commodity prices.
  • Further stimulus in China or other activity relating to China’s currency.
  • U.S. Federal Reserve raising short-term interest rates to help people put this in the rear view mirror so that other things can move back into focus. There is concern as to how emerging market currencies might react.

1Refers to 12/31/2014.

Important Risks Related to this Article

Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.

Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments.

(Source: Wisdomtree Blog)

Aug 13
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Endowment Wealth Management® Named Finalist For Wisconsin Innovation Awards

By News

Appleton, WI.  August 13, 2015.  APPLETON, Wis.—ETF Model Solutions and its affiliate, Endowment Wealth Management have been named finalists for the Wisconsin Innovation Awards based on their development of the Endowment Index® (symbol: ENDOW) and related index-based investment strategies.  The Endowment Index® calculated by Nasdaq OMX® has created national awareness, assisted in the development of new strategic partnerships, attracted investors in the firm, and have allowed the firms to expand their respective client bases.  The firms have developed Endowment Index-based investment strategies for individuals and families, endowments and foundations, and retirement plans.

The Wisconsin Innovation Awards (“WIA”) seek to celebrate and inspire innovation. The WIA highlights and honors the development of groundbreaking and innovative ideas. By celebrating transformational ideas, the WIA hope to encourage an even greater environment of innovation by bringing innovators together from various business sectors (e.g. tech, food, healthcare, agriculture, nonprofits, education, government), and from throughout the State of Wisconsin.  The Wisconsin Innovation Awards are led by a steering committee of business, community and entrepreneurial leaders.  The second annual WIA ceremony will take place on August 18, 2015 at the Discovery World in Milwaukee.

ETF Model Solutions® designs ETF-based investment solutions for advisers, institutions, retirement plans and individual investors based upon the Endowment Investment Philosophy®. The Firm is the investment manager for the Endowment Multi-Asset Collective Investment Fund (CUSIP 26923F105), a Collective Investment Trust which can be added as an investment option in most 401(k) plans.

Endowment Wealth Management® is a fee-based investment advisor serving individuals and families, foundations and endowments, and retirement plans.   The firm seeks to build sustainable wealth solutions for its clients through the implementation of the Endowment Investment Philosophy®.

Contact:            Tim Landolt, MBA | Managing Director, ETF Model Solutions®   |  920.785.6012

Info: ETFModelSolutions.com | EndowmentWM.com| EndowmentIndex.com | WI Innovation Awards

Disclosure: You cannot invest directly in an index. Indexes do not have fees. Award recognition does not qualify as an endorsement of any particular index, investment firm, investment, or investment strategy. The firms do not make any solicitation payments to award sponsors in order to be nominated or to qualify for nomination of an award.

Jul 28
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Real Assets A Crucial Component In Endowment Portfolios

By Alternative Investments

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.

Jul 24
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U.S. Inflation Watch July-2015

By Inflation Watch

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)

Jul 24
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2nd Quarter 2015 Earnings Season Update

By Uncategorized

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.

Jun 30
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6 Topics to Discuss with Recent Graduates

By News

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

Jun 29
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“Grexit” Drama

By General

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