PORTFOLIO UPDATE – SEPTEMBER 2020
In the latter part of July, our third party asset management firm Wilde Capital Management increased its conviction in risk assets across our asset allocation portfolios in recognition of the confluence of the early stages of economic recovery, the effects of massive amounts of fiscal and monetary stimulus, and the disruptive changes rippling through society as a byproduct of the coronavirus pandemic which we believe are unlocking a new wave of innovation and growth in how and where we live, work, eat, learn and recreate. From a portfolio manager’s perspective, it is always good to be right, but as in all other things it is possible to have too much of a good thing. The second half of the Summer saw a blistering rally in stocks, particularly technology and new-economy stocks, that picked up as though the market had not broken in February and March. And now, in early September, with a strong rally particularly in technology-oriented stocks in our pocket, we have made the decision to establish a modest underweight to risk by reducing US equity ownership and increasing cash holdings.
We could debate whether or not the rally was too much, but we fully agree it was too quick. Many of our technical charts were signaling that the market was getting ahead of itself, and some trusted voices to whom we listen were saying stocks were pricing in 2021 or even 2022 growth already. In more sane times success begets success and the march higher might continue unabated, but election season is never sane. We do not need to handicap this election outcome to know the process is rife with uncertainty given the polarized population, a Summer of tears in our social fabric, and an election process that could leave us wondering on outcomes for days or even weeks. It is often our experience that the market can find a way to deploy capital and grow if conditions are known, even if conditions are known to be poor. It is a machine for identifying and pricing risk and discounting results. When uncertainty is rampant though, about the only thing we can count on is directionless volatility.
The last several trading sessions prior to today manifested those concerns, again sooner and more abruptly and steeply than we anticipated. On today’s rally, we seized the positive price movement as our opportunity to take a step back in terms of market risk, settling into a modest underweight of equity risk relative to our benchmarks, and an increase in cash. Within our Core and Disciplined Yield series, we lowered exposure to a group of equity ETFs to achieve the targeted underweight in aggregate terms as well as sector/industry and style. We also effectively eliminated exposure to convertible securities within our bond allocation because of the equity-like downside risk they present. For our ESG series, we reduced holdings in a broad-based ESG equity index ETF.
As stated in our August month-end newsletter, the situation is neither all risk nor all reward. There are challenges, not the least of which is the still unsolved COVID-19 pandemic and its effects on employment, local businesses, education, housing and evictions, mobility and of course fragile public health systems. We have discussed numerous times that we have to hold two ideas at the same time, the first being that Main Street is hurting, and the second that Wall Street is prospering. Trillions of dollars in stimulus have inflated asset prices at the same time that unemployment, housing insecurity and food insecurity remain at troublingly high levels. The noise of the election season will pass and the real story for the market’s continued stability and growth will be whether the currency of higher stock prices and more lending capital will filter down through all levels of the real economy and re-establish small businesses and home-grown jobs to fulfill the possibilities record high equity prices promise.
DISCLOSURES
Conscious Capital Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
It is important to remember that there are risks inherent in any investment and that there is no assurance that any money manager, fund, asset class, style, index or strategy will provide positive performance over time.
Diversification and strategic asset allocation do not guarantee a profit nor protect against a loss in declining markets. All investments are subject to risk, including the loss of principal.
The information contained herein is based upon the data available as of the date of this document and is subject to change at any time without notice.
Portfolios that invest in fixed income securities are subject to several general risks, including interest rate risk, credit risk, the risk of issuer default, liquidity risk and market risk. These risks can affect a security’s price and yield to varying degrees, depending upon the nature of the instrument, and may occur from fluctuations in interest rates, a change to an issuer’s individual situation or industry, or events in the financial markets. In general, a bond’s yield is inversely related to its price. Bonds can lose their value as interest rates rise and an investor can lose principal. If sold prior to maturity, fixed income securities are subject to gains/losses based on the level of interest rates, market conditions and the credit quality of the issuer.
Foreign investments are subject to risks not ordinarily associated with domestic investments, such as currency, economic and political risks, and may follow different accounting standards than domestic investments. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems that can be expected to have less stability than those of more developed countries. These securities may be less liquid and more volatile than investments in U.S. and longer-established non-U.S. markets.
An investment in small/mid-capitalization companies involves greater risk and price volatility than an investment in securities of larger capitalization, more established companies. Such securities may have limited marketability and the firms may have more limited product lines, markets and financial resources than larger, more established companies.
Portfolios that invest in real estate investment trusts (REITs) are subject to many of the risks associated with direct real estate ownership and, as such, may be adversely affected by declines in real estate values and general and local economic conditions.
Portfolios that invest a significant portion of assets in one sector, issuer, geographical area or industry, or in related industries, may involve greater risks, including greater potential for volatility, than more diversified portfolios.
Important Disclosures: Exchange-Traded Funds
Exchange-traded funds (ETFs) are investment vehicles that are legally classified as open-end investment companies or unit investment trusts (UITs), but differ from traditional open-end investment companies or UITs. ETF shares are bought and sold at market price (not net asset value) and are not individually redeemed from the fund. This can result in the fund trading at a premium or discount to its net asset value, which will affect an investor’s value. Shares of certain ETFs have no or limited voting rights. ETFs are subject to risks similar to those of stocks.
ETFs included in portfolios may charge additional fees and expenses in addition to the advisory fee charged for the Selected Portfolio. These additional fees and expenses are disclosed in the respective fund/note prospectus. For complete details, please refer to the prospectus.
For additional information regarding advisory fees, please refer to the Fee Summary and/or Fee Detail pages (if included with this report) and the program sponsor’s/each co-sponsor’s Form ADV Part 2, Wrap Fee Brochure or other disclosure documents, which may be obtained through your advisor.
Certain ETFs have elected to be treated as partnerships for federal, state and local income tax purposes. Accordingly, investors in such ETFs will be taxed as a beneficial owner of an interest in a partnership. Tax information for such ETFs will be reported to investors on an IRS schedule K-1. Investors should consult with their tax advisors in determining the tax consequences of any investment, including the application of state, local or other tax laws and the possible effects of changes in federal or other tax laws.