Multiple Employer Plans (MEPs) have been around for decades, yet, many people have never heard of this type of retirement plan. A multiple employer plan is a plan maintained by two or more unrelated employers. MEPs are often coordinated via a trade or business association. For example, an MEP could be sponsored by a state dental association or a group of companies spread across the U.S. that share a common nexus, such as auto part manufacturers.
Why consider forming an MEP?
Let’s expand upon the concept of an auto manufacturer MEP. Taking advantage of economies of scale, each auto manufacturer that adopts into the MEP shares in the benefits of its collective structure. By pooling their investments, administration and governance structure, the MEP members could garner greater efficiencies and purchasing power. MEPs are formed to minimize costs while adding value-added services, typically offered at a premium to stand-alone retirement plans. Just as important, plan sponsors can often minimize their fiduciary liability by participating in an MEP.
What are some of the main benefits of MEPs?
Plan Costs – By participating in an MEP, plan sponsors can potentially benefit from a reduction in:
Staff time and labor used to administer the plan
Recordkeeping costs
Plan audit costs
Investment expenses
Form 5500 costs
Plan amendment and restatement fees
Administration – Employers can outsource many of the responsibilities associated with plan administration to the MEP sponsor. Some of these duties include:
Approving loans and hardship withdrawals
Approving distributions and qualified domestic relations orders (QDROs)
Plan document and operational compliance
Form 5500 administration
Plan audit, when applicable
Investments – Employers can benefit from the aggregate plan`s assets and by being able to outsource investment management responsibilities. Some of the benefits include:
Investment menu selection
Ongoing investment monitoring
Access to institutionally priced investment options
Governance – Employers can outsource certain plan sponsor roles to the MEP
The MEP is structured to assume an administrative fiduciary role
The MEP is structured to assume the investment fiduciary role
The member company shifts its Fiduciary liability to the MEP
Though you may not have heard of an MEP, they are quite common in the corporate 401k space. They are also gaining popularity with legislators, who want to provide coverage for small businesses (regardless of a common nexus) that are not offering employees any type of vehicle for retirement savings. These are called “open” MEPs and a timely reference is the Retirement Enhancement Security Act (RESA) of 2018. Further, we are seeing higher education organizations create MEPs that are structured as a 403(b) plan rather than a 401(k). For example, 14 independent colleges in Virginia recently decided to create their own MEP to share in the outsourcing of education and advice, the monitoring of investments and fees, administration and fiduciary responsibilities.
MEPs come in all shapes and sizes and even offer sponsors flexibility with different plan designs. However, MEPs must adhere to certain plan qualification rules under IRC 401(a), such as with vesting, eligibility and distribution rules. In other words, some of the rules may apply to the aggregate plan while others to the adopting plan sponsor. Here is additional insight.
Hopefully, you now know a little more about Multiple Employer Plans and don’t confuse them with other plan types. Quite often, people mistakenly refer to them as Multiemployer Plans, which are those created for unrelated companies covered under a collective bargaining agreement. But, that is a whole other story.
For further information, please contact us at info@www.thirtynorth.com
“What a long, strange trip it’s been” – Jerry Garcia, Bob Weir, Phil Lesh, and Robert Hunter
The US stock market burst energetically out of the gate in January. Fresh off double digit gains last year, the tech heavy NASDAQ index crossed 7,000 for the first time on January 3rd. At its peak on January 26th, the S&P 500 Index was up almost 7% in the first three weeks of the year. Nine trading days later, the market entered correction territory by dropping more than 10% from that peak. The remainder of the quarter was volatile, and half of the remaining trading days saw moves greater than 1.0% in the S&P 500 Index. The S&P 500 finished the quarter down -0.76%; a long, strange trip indeed.
For the quarter, International stocks, as measured by the MSCI EAFE Index, slumped along with the US, and were down -1.04%. Emerging market stocks, however, continued their leadership. The MSCI Emerging Market Index was up 1.42%. Continuing a trend from 2017, growth stocks led value stocks amongst large, mid, small and international stocks. Interest rates rose, and bonds prices suffered. The Bloomberg Barclays US Aggregate bond index was down -1.46%. International bonds provided a lift with the hedged Citi World Government Bond index up 1.50%. REITs were hurt by the prospect of rising interest rates and were down -6.66%. Finally, commodities were mixed with the Bloomberg Commodity index closing down slightly for the quarter.
As we celebrate the Women Impact Strategy’s second anniversary in April, it’s a bit thrilling to reflect on all that has happened in this relatively short period of time.
We began with the seed of an idea in 2015:
If it is true that gender diversity in corporate leadership roles (directors and executives) produces better results, is there a relatedinvestment strategy that may be both financially rewarding and socially impactful?
Our own research, in addition to that of several others[1], concluded that the investment thesis was more than wishful thinking. The research found better stock performance over long periods of time (ten years) for public companies with higher numbers of women at the top. But looking in the rear view mirror has its limitations, and bringing an investment strategy to life in real time is … something else entirely.
So how is it going? Exciting on all fronts, for sure.
Our experience continues to support the thesis.
Our strategy is now available as an separately managed account on the TD Ameritrade platform
Articles are published daily on the benefits of diversity, and the movement of investment dollars into socially impactful investments[2] continues to grow significantly
We are pleased to be among a very short list of independent firms across the country that have launched a gender lens investment strategy using liquid public stocks.
We presented at conferences and had our research published on the Impact of Women in Corporate Leadership
We are encouraged by the increasing numbers of women joining public boards, and the institutional investors who announced they are voting proxies[3] with an eye on the diversity of the board member candidates.
Perhaps most importantly, the benefits of gender diversity across areas such as decision making, innovation, and talent retention, are becoming widely recognized as providing a strategic advantage to companies.
Like a passenger in the back seat on a long car trip, we ask the question “Are we there yet?”. No indeed! We see progress, but we are clearly not at a defined destination. There is no magic number which allows anyone to check a box “Done”.
For the companies in which we invest, it’s about creating and sustaining a corporate culture which values the benefits of diversity. And that, like investing, is best done with a long term view.
[2] “total US-domiciled assets unders management using SRI strategies grew to $8.72 trillion at the start of 2016”, US SIF Foudantion Biennial Reprt on: US Sustainable, Responsible and Impact Investing Trends, 2016.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Suzanne Mestayerhttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngSuzanne Mestayer2018-04-03 14:28:422018-04-04 08:39:57Are We There Yet?
After the recent volatility in the market, I once again recall a few reasonable tips that help me maintain a long-term focus on investing.
Tip Number 1 – First, although you may be watching the “financial” news or an “investing” expert on your local news, remember they are selling news first and foremost and shock value sells. I always remind myself to take what I hear with a grain of salt. Don’t get me wrong, I gather valuable information from the financial media. However, when, like on Monday, February 5th, I hear experts on the news discussing the fact that the Dow dropped the most ever in a day, I take pause. What does that really mean?
Once a drop in the Dow of 250 points seemed large, but is now only a 1% move. This may feel painful when you look at your account balance, but volatility of this nature is normal in the stock markets even if we haven’t experienced it in a while. As Blair duQuesnay, our Chief Investment Officer, reported Monday, February 5th, the 1,175 point drop, when measured in percentage terms, was not in the top 20 historical one day moves for the Dow (https://youtu.be/me7449asL_c). In addition, the Dow is comprised of 30 mega-cap industrial US companies. In today’s global world, this is a narrow list of companies used to measure a much larger universe of stock investment options.
While the Dow is a quick proxy to the markets that is discussed prolifically, for globally diverse investors with holdings in different asset classes including bonds and alternatives, a deeper dive is prudent on these days that are characterized in the press by fear and doom.
Tip Number 2 – This brings me to my second tip which is that you haven’t lost money in your account unless you sell. I often hear pundits on the news talking about how much the market lost in a day. The correct word, in my opinion, should be the amount the market declined. Then, it might be easier to remember that over the long-term, back to the 1920s, the market has been on a steady incline only temporarily slowed by short-term declines.
Yes, the value of an investment on a given day may go down or up, but it is the long-term that really matters. Historically, on average over the long-term, the stock market has gone up delivering positive returns in spite of days that get mischaracterized as the worst down day ever. If, in a moment of fear, you sell, then you have locked in the loss. However, if you hold for the long-term and achieve the expected growth, you should recover the temporary decline in value and more.
Owning a diversified portfolio that includes investments in different asset classes all over the world can effectively help manage the volatility of a portfolio as a whole when one asset class, like stocks, is suffering a temporary decline. I included the cartoon above hoping to make you laugh, but also because many investors feel the market ups and downs most acutely in their 401(k) accounts. Fear raises its ugly head here almost more than anywhere because we our retirement savings are at risk. However, taking an appropriate amount of risk in your investment accounts is paramount to achieving a successful retirement. This is why diversification is important to control the volatility while maintaining the right level of risk in your investment strategy. Remember, it is time in the market that matters not timing the market that is most likely to help prevent us from having to live off our belly fat in retirement.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Fritz Gomilahttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngFritz Gomila2018-02-09 15:47:332018-02-09 15:49:45The Biggest One Day Loss Ever…Really?
Stocks around the world posted double digit returns in 2017. On the heels of a healthy 2016, the current bull market trudged along triumphantly. In a Goldilocks scenario, volatility was conspicuously absent from the markets. There were only four days that the S&P 500 Index declined more than 1%, with the largest drawdown of 1.82% occurring on May 17th. Emerging markets saw the strongest returns with the MSCI Emerging Markets Index up 37.28% for the year. No, that’s not a typo.
Bond returns were more muted with the Barclays US Aggregate Bond Index finishing the year up 3.54%. International and emerging market bonds also outpaced returns on domestic bonds, aided by a weaker US dollar. Short-term interest rates continued to rise, while long-term rates held steady. The 2 Year Treasury began the year at 1.20% and finished at 1.89% while the 10-Year Treasury barely budged from 2.45% to 2.40%. Oil seemed to break out of the $45 – $55 range it has traded in since mid 2016. West Texas Intermediate (WTI) finished the year at $60.46 per barrel.
Tax Overhaul
On December 22, President Trump signed into law the Tax Cut and Jobs Act of 2017. While the law makes many tweaks to individual taxes, the major changes affect US corporations. The maximum corporate tax rate of 35% drops to a flat rate of 21%. This is combined with the elimination of the alternative minimum tax (AMT) for corporations. Sadly, the AMT elimination for individuals was scrapped in conference negotiations, but the threshold for qualifying for AMT jumps to $500,000 for individuals and $1,000,000 for married couples.[1] In addition to lowering the corporate tax rate, the law allows corporations to bring back cash from overseas and pay a one-time 15.5% repatriation tax rate. This could be a potential boon for the tech industry, as Apple, Microsoft, Cisco Systems, and Google (Alphabet) have $483 billion in cash parked overseas.[2]
Most investors speculate that smaller companies, that conduct most of their business domestically, will benefit the most from the tax changes. However, companies carrying deferred tax assets on their balance sheet will have to recognize a reduction in value of that asset. Further, limits to the deductibility of interest could hinder companies with large amounts of debt.[3] Corporations lauded the changes, with many well-known names announcing one-time bonuses, minimum wage hikes, or increased 401(k) matching for their employees. More time is needed to digest the final implications of the tax changes. Companies reporting year-end earnings will offer the next clues.
Market Valuations
Since the low in March 2009, the S&P 500 Index is up over 430% on a cumulative, total return basis. Investors seem nervous that the market is being overvalued. There are many metrics for attempting to quantify whether or not the market is over or undervalued. Each metric has its merits and each has its flaws. The forward price-earnings (P/E) ratio of the S&P 500 Index is 18.2 times earnings. This is higher than the 25-year average of 16.0 times earnings but below the 1999 peak of more than 24 times earnings. The Shiller price-earnings ratio (CAPE) is currently 32.4, well above the 25-year average of 26.4. The price-to-book ratio (P/B), a more stable valuation measure, is currently 3.1 for the S&P 500 Index versus a 25-year average of 2.9.[4] By all measures, the market value is higher than historical average but not approaching any records.
One crucial factor in considering price-earnings ratios is the denominator, earnings. Third quarter 2017 earnings for the S&P 500 Index were $31.32 per share, an all-time record.[5] Consensus analyst estimates call for the next four quarters of earnings to break this record. If earnings are growing, future projections for PE ratios may not be as rich as predicted. While short-term distractions such as politics, geopolitical tensions, commodity booms and busts, natural disasters, and war move markets in the short-run, the underlying factor for valuation of stocks is corporate earnings. From this perspective, the growth in the markets seems reasonable.
The S&P 500 Index has reached 188 new all-time highs since March 2013. There were 61 new all-time highs in 2017 alone. This statistic tends to make investors nervous. However, historically the stock market has made many new highs to get to today. Try to remember your experience investing during the 1980’s and 90’s. Dare we hope to be in the midst of a similar experience?
Bitcoin
Cryptocurrencies and Bitcoin dominated the financial news cycle when the price of one Bitcoin turned parabolic and climbed to more than $19,000. Let me preface this segment by saying that we have no expertise in cryptocurrencies and understand them only slightly better than the average person. However, the topic is now commonly broached in our client meetings and conversations. What we know is that the technology underlying cryptocurrencies, known as blockchain, could lead to extraordinary advances in the ease of transacting in financial markets. This has led large financial firms such as Fidelity Investments and Goldman Sachs to invest in research for the application of blockchain in financial transactions.
Before you are tempted to download the Coinbase app and start trading Bitcoin, Ethereum, or Litecoin, consider that these instruments lack some of the most basic protections to be considered “investments”. For example, there is no method of custody for cryptocurrencies. A custodian is a financial institution that holds investment assets in safe keeping and communicates the value of your holdings via regular statements. Further, the IRS issued guidance in March 2014, that cryptocurrencies are considered property and subject to taxation when received as income or as a result of a capital gain or loss. However, with no custodian to issue the appropriate tax reporting, investors have no mechanism to prove their cost basis if audited by the IRS. If you want to take a deep dive into the abyss of cryptocurrencies, Patrick O’Shaughnessy interviewed some of the leaders in the field over three episodes of a podcast titled Hash Power.
Everyone’s favorite investor Warren Buffett recently weighed in on the Bitcoin craze saying; “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.” Bitcoin is already down almost 40% from its December peak. It’s likely there will be many booms and busts as this technology, currency, dare we say “asset class” approaches maturity.
Fear and Greed
Despite all the statistics and fancy analysis we have today, the markets are a derivative of human emotion. Numerous studies prove that humans fail to act on logic and reason when money is involved in the decision making; especially if losing money is a possibility. There’s a great book detailing the history of market hysteria and bubbles beginning with the Tulip Mania in Holland in the 17th century. Extraordinary Popular Delusions and the Madness of Crowds is a fascinating but dense study of human greed and the “fear of missing out”. I suspect there’s a little of this happening with Bitcoin lately. In hindsight, there are always extraordinary investment options that could have been life changing. One of my favorites is holding Apple stock since it became public in 1980. But is there even one investor who managed to own it for the entire time-period? Everything looks easy in hindsight. Investors should keep their heads down, follow a disciplined strategy, rebalance periodically, and let time pass.
Remember these two? Tweedledum and Tweedledee are a great analogy for fear and greed. Both emotions are equally dangerous for investors.
All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. It should not be regarded as a complete analysis of the subjects discussed.
Information presented does not involve the rendering of personalized investment advice and should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Tax information is general in nature and should not be viewed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. There are no guarantees that an investor’s portfolio will match or outperform any particular benchmark. Index returns do not represent the performance of ThirtyNorth Investments, LLC, or its advisory clients.
ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
I continually write on fiduciary issues and am very amazed by the number of lawsuits still being initiated and settled. The trend is certainly not slowing down and fiduciaries, beware. Please note that even though the service provider’s name is often in the headlines, it is the plan fiduciaries that are being sued. Additionally, I notice that the size of the plans being sued are getting smaller, meaning no longer are just the mega-plans being targeted.
According to the Investment Company Institute (ICI), 401(k) plans held $5 .1 trillion in plan assets as of June 2017. With these dollars, it`s not difficult for plaintiff attorneys to be motivated to get creative with the types of suits being brought against fiduciaries. Many of the newer fiduciary breach suits against corporations, universities and plan providers involve poor decision-making for both the selection and monitoring of investment options and breaches in administrative decision-making. In addition, the suits go beyond just the use of expensive share classes and are now delving into investment strategy and sub-par performance. As a reminder, 401k) plan fiduciaries are subject to strict duties of prudence, loyalty and avoiding conflicts of interest and acts of self-dealing.
One recent case involves CenturyLink and their decision to utilize six different investment managers for their large cap fund (5 active and 1 passive). The fund was benchmarked to the Russell 1000 Stock Index and the suit alleges underperformance against the index for years. More on the case can be found here:
Another case involves Fujitsu and their decision-making regarding excessive recordkeeping expenses and their custom designed Target Date Funds. As a result of the suit filed on June 30th, 2016, Fujitsu decided to settle for $14 million citing the complexity and expense to litigate these types of cases. More on the case can be found here:
This suit is certainly not in style, as Gucci America Inc. is being charged for several fiduciary breaches. It is being alleged that their service provider, Transamerica Retirement Solutions, had included excessively expensive and proprietary investment options in Gucci`s $96 million 401(k) plan. The suit alleges that participants were assessed unreasonable administration expenses and that the plan retained high cost and poor performing investments. More on the suit can be found here:
Another important fact to the Gucci 401k) suit is that the plan assets are only $96 million, far less than the plans typically involved in these types of cases. This should serve as a warning to plan fiduciaries that regardless of your plan size, the fiduciary standards are uniform and applicable to ALL plan sponsors.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Jonathan Epsteinhttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngJonathan Epstein2017-12-20 13:47:162017-12-20 16:15:44What do Gucci, CenturyLink and Fujitsu have in common? Read On!
What are Multiple Employer Plans (MEPs)?
Multiple Employer Plans (MEPs) have been around for decades, yet, many people have never heard of this type of retirement plan. A multiple employer plan is a plan maintained by two or more unrelated employers. MEPs are often coordinated via a trade or business association. For example, an MEP could be sponsored by a state dental association or a group of companies spread across the U.S. that share a common nexus, such as auto part manufacturers.
Why consider forming an MEP?
Let’s expand upon the concept of an auto manufacturer MEP. Taking advantage of economies of scale, each auto manufacturer that adopts into the MEP shares in the benefits of its collective structure. By pooling their investments, administration and governance structure, the MEP members could garner greater efficiencies and purchasing power. MEPs are formed to minimize costs while adding value-added services, typically offered at a premium to stand-alone retirement plans. Just as important, plan sponsors can often minimize their fiduciary liability by participating in an MEP.
What are some of the main benefits of MEPs?
Plan Costs – By participating in an MEP, plan sponsors can potentially benefit from a reduction in:
Administration – Employers can outsource many of the responsibilities associated with plan administration to the MEP sponsor. Some of these duties include:
Investments – Employers can benefit from the aggregate plan`s assets and by being able to outsource investment management responsibilities. Some of the benefits include:
Governance – Employers can outsource certain plan sponsor roles to the MEP
Though you may not have heard of an MEP, they are quite common in the corporate 401k space. They are also gaining popularity with legislators, who want to provide coverage for small businesses (regardless of a common nexus) that are not offering employees any type of vehicle for retirement savings. These are called “open” MEPs and a timely reference is the Retirement Enhancement Security Act (RESA) of 2018. Further, we are seeing higher education organizations create MEPs that are structured as a 403(b) plan rather than a 401(k). For example, 14 independent colleges in Virginia recently decided to create their own MEP to share in the outsourcing of education and advice, the monitoring of investments and fees, administration and fiduciary responsibilities.
MEPs come in all shapes and sizes and even offer sponsors flexibility with different plan designs. However, MEPs must adhere to certain plan qualification rules under IRC 401(a), such as with vesting, eligibility and distribution rules. In other words, some of the rules may apply to the aggregate plan while others to the adopting plan sponsor. Here is additional insight.
Hopefully, you now know a little more about Multiple Employer Plans and don’t confuse them with other plan types. Quite often, people mistakenly refer to them as Multiemployer Plans, which are those created for unrelated companies covered under a collective bargaining agreement. But, that is a whole other story.
For further information, please contact us at info@www.thirtynorth.com
1st Quarter 2018 Market Commentary
“What a long, strange trip it’s been” – Jerry Garcia, Bob Weir, Phil Lesh, and Robert Hunter
The US stock market burst energetically out of the gate in January. Fresh off double digit gains last year, the tech heavy NASDAQ index crossed 7,000 for the first time on January 3rd. At its peak on January 26th, the S&P 500 Index was up almost 7% in the first three weeks of the year. Nine trading days later, the market entered correction territory by dropping more than 10% from that peak. The remainder of the quarter was volatile, and half of the remaining trading days saw moves greater than 1.0% in the S&P 500 Index. The S&P 500 finished the quarter down -0.76%; a long, strange trip indeed.
For the quarter, International stocks, as measured by the MSCI EAFE Index, slumped along with the US, and were down -1.04%. Emerging market stocks, however, continued their leadership. The MSCI Emerging Market Index was up 1.42%. Continuing a trend from 2017, growth stocks led value stocks amongst large, mid, small and international stocks. Interest rates rose, and bonds prices suffered. The Bloomberg Barclays US Aggregate bond index was down -1.46%. International bonds provided a lift with the hedged Citi World Government Bond index up 1.50%. REITs were hurt by the prospect of rising interest rates and were down -6.66%. Finally, commodities were mixed with the Bloomberg Commodity index closing down slightly for the quarter.
A Tale of Two Styles: Growth and Value
Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved. Read more
Are We There Yet?
As we celebrate the Women Impact Strategy’s second anniversary in April, it’s a bit thrilling to reflect on all that has happened in this relatively short period of time.
We began with the seed of an idea in 2015:
If it is true that gender diversity in corporate leadership roles (directors and executives) produces better results, is there a related investment strategy that may be both financially rewarding and socially impactful?
Our own research, in addition to that of several others[1], concluded that the investment thesis was more than wishful thinking. The research found better stock performance over long periods of time (ten years) for public companies with higher numbers of women at the top. But looking in the rear view mirror has its limitations, and bringing an investment strategy to life in real time is … something else entirely.
So how is it going? Exciting on all fronts, for sure.
Like a passenger in the back seat on a long car trip, we ask the question “Are we there yet?”. No indeed! We see progress, but we are clearly not at a defined destination. There is no magic number which allows anyone to check a box “Done”.
For the companies in which we invest, it’s about creating and sustaining a corporate culture which values the benefits of diversity. And that, like investing, is best done with a long term view.
Suzanne Mestayer
Footnotes:
[1] Credit Suisse Research Institute, “The CS Gender 3000: The Reward for Change”. September 2016, https://glg.it/assets/docs/csri-gender-3000.pdf
Hunt, V., Yee, L., Prince, S., and Dixon-Fyle, S., McKinsey & Company, “Delivering through diversity”. January 2018, https://www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity
[2] “total US-domiciled assets unders management using SRI strategies grew to $8.72 trillion at the start of 2016”, US SIF Foudantion Biennial Reprt on: US Sustainable, Responsible and Impact Investing Trends, 2016.
[3] Vittorio, A., “New York State Pension Fund to Protest All-Male Boards”, March 21, 2018, https://www.bna.com/new-york-state-n57982090156/.
Fink, L., “Annual Letter to CEOs: A Sense of Purpose”, https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter
The Biggest One Day Loss Ever…Really?
Tip Number 1 – First, although you may be watching the “financial” news or an “investing” expert on your local news, remember they are selling news first and foremost and shock value sells. I always remind myself to take what I hear with a grain of salt. Don’t get me wrong, I gather valuable information from the financial media. However, when, like on Monday, February 5th, I hear experts on the news discussing the fact that the Dow dropped the most ever in a day, I take pause. What does that really mean?
Once a drop in the Dow of 250 points seemed large, but is now only a 1% move. This may feel painful when you look at your account balance, but volatility of this nature is normal in the stock markets even if we haven’t experienced it in a while. As Blair duQuesnay, our Chief Investment Officer, reported Monday, February 5th, the 1,175 point drop, when measured in percentage terms, was not in the top 20 historical one day moves for the Dow (https://youtu.be/me7449asL_c). In addition, the Dow is comprised of 30 mega-cap industrial US companies. In today’s global world, this is a narrow list of companies used to measure a much larger universe of stock investment options.
While the Dow is a quick proxy to the markets that is discussed prolifically, for globally diverse investors with holdings in different asset classes including bonds and alternatives, a deeper dive is prudent on these days that are characterized in the press by fear and doom.
Tip Number 2 – This brings me to my second tip which is that you haven’t lost money in your account unless you sell. I often hear pundits on the news talking about how much the market lost in a day. The correct word, in my opinion, should be the amount the market declined. Then, it might be easier to remember that over the long-term, back to the 1920s, the market has been on a steady incline only temporarily slowed by short-term declines.
Yes, the value of an investment on a given day may go down or up, but it is the long-term that really matters. Historically, on average over the long-term, the stock market has gone up delivering positive returns in spite of days that get mischaracterized as the worst down day ever. If, in a moment of fear, you sell, then you have locked in the loss. However, if you hold for the long-term and achieve the expected growth, you should recover the temporary decline in value and more.
Owning a diversified portfolio that includes investments in different asset classes all over the world can effectively help manage the volatility of a portfolio as a whole when one asset class, like stocks, is suffering a temporary decline. I included the cartoon above hoping to make you laugh, but also because many investors feel the market ups and downs most acutely in their 401(k) accounts. Fear raises its ugly head here almost more than anywhere because we our retirement savings are at risk. However, taking an appropriate amount of risk in your investment accounts is paramount to achieving a successful retirement. This is why diversification is important to control the volatility while maintaining the right level of risk in your investment strategy. Remember, it is time in the market that matters not timing the market that is most likely to help prevent us from having to live off our belly fat in retirement.
4th Quarter 2017 Market Commentary
Stocks around the world posted double digit returns in 2017. On the heels of a healthy 2016, the current bull market trudged along triumphantly. In a Goldilocks scenario, volatility was conspicuously absent from the markets. There were only four days that the S&P 500 Index declined more than 1%, with the largest drawdown of 1.82% occurring on May 17th. Emerging markets saw the strongest returns with the MSCI Emerging Markets Index up 37.28% for the year. No, that’s not a typo.
Bond returns were more muted with the Barclays US Aggregate Bond Index finishing the year up 3.54%. International and emerging market bonds also outpaced returns on domestic bonds, aided by a weaker US dollar. Short-term interest rates continued to rise, while long-term rates held steady. The 2 Year Treasury began the year at 1.20% and finished at 1.89% while the 10-Year Treasury barely budged from 2.45% to 2.40%. Oil seemed to break out of the $45 – $55 range it has traded in since mid 2016. West Texas Intermediate (WTI) finished the year at $60.46 per barrel.
Tax Overhaul
On December 22, President Trump signed into law the Tax Cut and Jobs Act of 2017. While the law makes many tweaks to individual taxes, the major changes affect US corporations. The maximum corporate tax rate of 35% drops to a flat rate of 21%. This is combined with the elimination of the alternative minimum tax (AMT) for corporations. Sadly, the AMT elimination for individuals was scrapped in conference negotiations, but the threshold for qualifying for AMT jumps to $500,000 for individuals and $1,000,000 for married couples.[1] In addition to lowering the corporate tax rate, the law allows corporations to bring back cash from overseas and pay a one-time 15.5% repatriation tax rate. This could be a potential boon for the tech industry, as Apple, Microsoft, Cisco Systems, and Google (Alphabet) have $483 billion in cash parked overseas.[2]
Most investors speculate that smaller companies, that conduct most of their business domestically, will benefit the most from the tax changes. However, companies carrying deferred tax assets on their balance sheet will have to recognize a reduction in value of that asset. Further, limits to the deductibility of interest could hinder companies with large amounts of debt.[3] Corporations lauded the changes, with many well-known names announcing one-time bonuses, minimum wage hikes, or increased 401(k) matching for their employees. More time is needed to digest the final implications of the tax changes. Companies reporting year-end earnings will offer the next clues.
Market Valuations
Since the low in March 2009, the S&P 500 Index is up over 430% on a cumulative, total return basis. Investors seem nervous that the market is being overvalued. There are many metrics for attempting to quantify whether or not the market is over or undervalued. Each metric has its merits and each has its flaws. The forward price-earnings (P/E) ratio of the S&P 500 Index is 18.2 times earnings. This is higher than the 25-year average of 16.0 times earnings but below the 1999 peak of more than 24 times earnings. The Shiller price-earnings ratio (CAPE) is currently 32.4, well above the 25-year average of 26.4. The price-to-book ratio (P/B), a more stable valuation measure, is currently 3.1 for the S&P 500 Index versus a 25-year average of 2.9.[4] By all measures, the market value is higher than historical average but not approaching any records.
One crucial factor in considering price-earnings ratios is the denominator, earnings. Third quarter 2017 earnings for the S&P 500 Index were $31.32 per share, an all-time record.[5] Consensus analyst estimates call for the next four quarters of earnings to break this record. If earnings are growing, future projections for PE ratios may not be as rich as predicted. While short-term distractions such as politics, geopolitical tensions, commodity booms and busts, natural disasters, and war move markets in the short-run, the underlying factor for valuation of stocks is corporate earnings. From this perspective, the growth in the markets seems reasonable.
The S&P 500 Index has reached 188 new all-time highs since March 2013. There were 61 new all-time highs in 2017 alone. This statistic tends to make investors nervous. However, historically the stock market has made many new highs to get to today. Try to remember your experience investing during the 1980’s and 90’s. Dare we hope to be in the midst of a similar experience?
Bitcoin
Cryptocurrencies and Bitcoin dominated the financial news cycle when the price of one Bitcoin turned parabolic and climbed to more than $19,000. Let me preface this segment by saying that we have no expertise in cryptocurrencies and understand them only slightly better than the average person. However, the topic is now commonly broached in our client meetings and conversations. What we know is that the technology underlying cryptocurrencies, known as blockchain, could lead to extraordinary advances in the ease of transacting in financial markets. This has led large financial firms such as Fidelity Investments and Goldman Sachs to invest in research for the application of blockchain in financial transactions.
Before you are tempted to download the Coinbase app and start trading Bitcoin, Ethereum, or Litecoin, consider that these instruments lack some of the most basic protections to be considered “investments”. For example, there is no method of custody for cryptocurrencies. A custodian is a financial institution that holds investment assets in safe keeping and communicates the value of your holdings via regular statements. Further, the IRS issued guidance in March 2014, that cryptocurrencies are considered property and subject to taxation when received as income or as a result of a capital gain or loss. However, with no custodian to issue the appropriate tax reporting, investors have no mechanism to prove their cost basis if audited by the IRS. If you want to take a deep dive into the abyss of cryptocurrencies, Patrick O’Shaughnessy interviewed some of the leaders in the field over three episodes of a podcast titled Hash Power.
Everyone’s favorite investor Warren Buffett recently weighed in on the Bitcoin craze saying; “In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.” Bitcoin is already down almost 40% from its December peak. It’s likely there will be many booms and busts as this technology, currency, dare we say “asset class” approaches maturity.
Fear and Greed
Despite all the statistics and fancy analysis we have today, the markets are a derivative of human emotion. Numerous studies prove that humans fail to act on logic and reason when money is involved in the decision making; especially if losing money is a possibility. There’s a great book detailing the history of market hysteria and bubbles beginning with the Tulip Mania in Holland in the 17th century. Extraordinary Popular Delusions and the Madness of Crowds is a fascinating but dense study of human greed and the “fear of missing out”. I suspect there’s a little of this happening with Bitcoin lately. In hindsight, there are always extraordinary investment options that could have been life changing. One of my favorites is holding Apple stock since it became public in 1980. But is there even one investor who managed to own it for the entire time-period? Everything looks easy in hindsight. Investors should keep their heads down, follow a disciplined strategy, rebalance periodically, and let time pass.
Remember these two? Tweedledum and Tweedledee are a great analogy for fear and greed. Both emotions are equally dangerous for investors.
January 2018
Footnotes:
[1] Kitces, M. “Individual Tax Planning Under the Tax Cuts and Jobs Act of 2017”. December, 18, 2017. https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/
[2] Meisler, L. “The 50 Largest Stashes of Cash Companies Keep Overseas”. June, 13, 2017. https://www.bloomberg.com/graphics/2017-overseas-profits/
[3] Blomberg BNA, Tax Reform Watch; https://www.bna.com/2017-corporate-tax/
[4] JPMorgan Q1 2018: Guide to the Markets, slide 5, https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets
[5] JPMorgan Q1 2018: Guide to the Markets, slide 7, https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/guide-to-the-markets
Disclosures:
What do Gucci, CenturyLink and Fujitsu have in common? Read On!
I continually write on fiduciary issues and am very amazed by the number of lawsuits still being initiated and settled. The trend is certainly not slowing down and fiduciaries, beware. Please note that even though the service provider’s name is often in the headlines, it is the plan fiduciaries that are being sued. Additionally, I notice that the size of the plans being sued are getting smaller, meaning no longer are just the mega-plans being targeted.
According to the Investment Company Institute (ICI), 401(k) plans held $5 .1 trillion in plan assets as of June 2017. With these dollars, it`s not difficult for plaintiff attorneys to be motivated to get creative with the types of suits being brought against fiduciaries. Many of the newer fiduciary breach suits against corporations, universities and plan providers involve poor decision-making for both the selection and monitoring of investment options and breaches in administrative decision-making. In addition, the suits go beyond just the use of expensive share classes and are now delving into investment strategy and sub-par performance. As a reminder, 401k) plan fiduciaries are subject to strict duties of prudence, loyalty and avoiding conflicts of interest and acts of self-dealing.
One recent case involves CenturyLink and their decision to utilize six different investment managers for their large cap fund (5 active and 1 passive). The fund was benchmarked to the Russell 1000 Stock Index and the suit alleges underperformance against the index for years. More on the case can be found here:
Birse v. CenturyLink, Inc et al
Another case involves Fujitsu and their decision-making regarding excessive recordkeeping expenses and their custom designed Target Date Funds. As a result of the suit filed on June 30th, 2016, Fujitsu decided to settle for $14 million citing the complexity and expense to litigate these types of cases. More on the case can be found here:
Johnson et al v. Fujitsu Technology and Business of America, Inc. et al
This suit is certainly not in style, as Gucci America Inc. is being charged for several fiduciary breaches. It is being alleged that their service provider, Transamerica Retirement Solutions, had included excessively expensive and proprietary investment options in Gucci`s $96 million 401(k) plan. The suit alleges that participants were assessed unreasonable administration expenses and that the plan retained high cost and poor performing investments. More on the suit can be found here:
Gucci Gulp? Another Excessive Fee Suit Filed
Another important fact to the Gucci 401k) suit is that the plan assets are only $96 million, far less than the plans typically involved in these types of cases. This should serve as a warning to plan fiduciaries that regardless of your plan size, the fiduciary standards are uniform and applicable to ALL plan sponsors.