January 2012 Commentary
Happy New Year from all of us at ChartMark! Wow, it was a great year if you like roller coaster rides. From traditional stock portfolio managers to alternative investment money managers 2011 turned out to be an extremely challenging year. In
this quarter's commentary I will review in some detail the financial markets for the past year and where we are now. As always, I'll also discuss our client portfolios and some financial planning and strategy.
Macro Review…The Grinding Period Continues
Overall investment returns for 2011 were obviously nowhere near the disasters they were during the heart of the financial crisis in 2008. However, average investors had to stomach extreme volatility just to be rewarded with flat to slightly negative
returns. As the year end review of the Wall Street Journal put it:
"Investors go into 2012 hunkered down, frustrated and skeptical…Gone are their expectations that European officials will provide a quick fix for the debt crisis. They also remain frustrated by a perceived lack of leadership among politicians in
the U.S. and elsewhere when it comes to making difficult decisions about fiscal and economic policies. The consternation reflects the world order since the financial crisis, as economies and markets remain reliant on extraordinary measures by central banks
to pump cash into the financial system."
During this commentary over the past couple of years I have referred to what I call the "Grinding Period." My term refers to the period of time during which de-leveraging takes place throughout the world economy. Paying down debt for corporations
can be fairly fast in that they can raise capital from equity investors and/or cut costs and simply retire their debt. Although dilutive for shareholders, the pain is sharp but quick, much like pulling off a band aid. However, for households (consumers), paying
down debt is difficult because they have to make sacrifices in their household budgets and reduce spending, thus slowly working their debt down. For governments (Europe and U.S.), de-leveraging can be a monumental and complicated task because politics has
a funny way of causing elected officials to become inept at debt reduction. Said differently, once citizens become dependent on government programs, they are unwilling or unable to let them go so it becomes nearly impossible to cut spending and get re-elected.
As if cutting spending weren't hard enough, the revenue coming into governments is simultaneously reduced to the degree that consumers stop spending and companies stop hiring…i.e. less taxes are paid. De-leveraging feeds on itself and takes a long time to
I go through the above explanation not to insult your intelligence, but rather to illustrate what I mean by the Grinding Period. Phase one (corporations) is mostly complete. Phase 2 (consumers) is well on its way as evidenced by the strong holiday
shopping period, but not yet complete until the housing and job markets stabilize. Phase 3 (governments) cannot even get started until the Europeans come to an agreement on sovereign debt re-financing (or default) and the U.S. completes the election cycle.
So how did the 2011 portion of the grinding period impact markets? As mentioned earlier, world financial markets were extremely volatile during the year as illustrated below. The numbers below represent the percentage move throughout the year from
bottom to top for the various asset classes and the corresponding year end return:
S&P 500 – 21% range of change from bottom to top, 2% actual annual return
DJIA – 20% range of change from bottom to top, 5% actual annual return
Gold – 43% range of change from bottom to top, 10% actual annual return
Crude Oil – 50% range of change from bottom to top, 8% annual return
Eurodollar – 15% range of change from bottom to top, - 7% actual annual return
Euro stocks – 35% range of change from bottom to top, - 11% actual annual return
Japanese stocks – 33% range of change from bottom to top, - 18% actual annual return
Chinese stocks – 39% range of change from bottom to top, - 21% actual annual return
In spite of all the volatility around the world, the broad stock market as evidenced by the S&P 500 was completely flat on a price basis when all the dust settled; in other words, a crazy ride to nowhere! The total return basically
reflected the dividend yield of approximately 2%. The 2011 numbers are an excellent example of the important distinction between actual return risk and price volatility. It is precisely because of this distinction that we here at ChartMark repeatedly address
the importance of a well thought out investment strategy rather than a reactionary strategy precipitated by news headlines.
To further prove my point, during 2011 while the market return was flat, the average stock mutual fund had a LOSS of 2.9%. Even the great Warren Buffet's Berkshire Hathaway lost 4.7% during 2011. Most hedge funds experienced even greater losses
as they trade more frequently. The point is that the more you react to headlines the more money you are likely to lose in volatile markets.
Core Portfolio Review
First let me remind everyone that we are active managers with the goal of providing equity like returns to our clients. As such we do make strategic changes to the portfolio both at the asset allocation level and the individual security level. However,
we focus on the performance of the underlying investment over the long run rather than what the headline of the day might be. Last spring we made a strategic decision to re-allocate a portion of our portfolio to alternative asset classes and to rebalance our
core companies to fit the investing backdrop. We also decided to NOT get caught up in trying to trade the extreme volatility of the markets. Our strategy paid off as our average client portfolio returned approximately 5.5% with a range from around 4.5% to
7.5% depending on individual allocation preferences.
We have now established a ten year track record in which our clients have outperformed the market by around 2% per year and in 70% of the individual years. We recognize the overall market returns have been much weaker than historical standards during
the past ten years. This particular decade included the dot com crash, 9/11 attacks and the 2008 financial crisis. Generating a positive return at all during this time period is fairly remarkable and we are pleased with the results of our strategy.
During the past quarter we made no major changes to the portfolio. Based on our outlook for continued choppiness in the markets, as global macro and election year political issues heat up, we will be carefully evaluating our allocations and each
of our positions.
Planning and Strategy
As discussed earlier, having a solid investment strategy means having the fortitude to NOT react to headlines and sharp market swings. The only way most investors can consistently stick to their strategy is to have conviction and confidence in it
for the long term. The only way to create such confidence is through a sound financial planning process in which goals are set, actions are taken and results are constantly updated and evaluated. To that end, all ChartMark clients have access to our VIP Program.
The program is a process whereby our clients meet with us once per quarter and create plans, execute actions and evaluate each aspect of their financial lives. We work through, on a priority basis, everything from budgeting to estate planning. As a result,
everyone who goes through the process always knows where they are, where they are headed and how they are going to get there. Each plan is customized and tailored based on individual priorities and everyone receives a written, one page mind map with access
to every supporting document at their fingertips. We have received great feedback from the program so far. Particularly rewarding to us is the level of confidence it gives our clients that they have a sound investment strategy based on disciplined decision
Calendar 2011 marked our 10th full year in business. We achieved this milestone for one reason, you, our clients. We thank you so much for the trust you place in us each day and look forward to working closely with you and your families long into
Mark S. Smith
President and CEO
ChartMark Investments, Inc.
*Please review your individual trade confirmation(s). Your quarter end specific holdings will be included on your individual statement(s). Past performance is no guarantee of future results. Any mention of securities in this publication
is neither an offer to sell nor a solicitation of an offer to buy any security.