2019 Q2 Review
“Today’s heresy becomes tomorrow’s orthodoxy.”
It seems more like a gross understatement when Robert Shiller says, “Economics is not an exact science.” Sure, there are plenty of theories, studies, and lots of data to support the latest prediction model of the latest soon to be great economic guru, but economics doesn’t really have a set of fundamental laws that exist in the large stable environments of true sciences. Both necessary to be called an exact science. Physics is an exact science. Economic models are as close as it gets, and they execute under a series of laws that originate from other sciences. Economics is the business of prediction, and mostly about predicting human behaviors, either individually or collectively. The prediction process seems much akin to the lever pulling antics of the Wizard of Oz. Try one thing and see what happens and if that doesn’t work try something else. But no where in economics will you find anything that remotely resembles the exactness of Newton’s Law of Gravity. We’re now on another frantic pace of lever pulling, looking for short-term solutions that will pacify markets at the risk of jeopardizing long-term outcomes. In an economy that has been consistent and growing, the masters of money have dramatically changed monetary policy over the past few months for reasons that are not quite clear. Being data dependent doesn’t seem to be the modus operandi, touted so adamantly for so long. There’s a new narrative being built around falling consumer confidence and inverted yield curves. Neither with predictive power being suggested, nor the backing of any laws of science.
Review of 2nd Quarter
May performance was disappointing for our equity holdings, but overall the quarter rebounded to have positive gains. With the SPX down over 6.5% in May, the month’s negative performance was to be expected. Only three of the funds we held in SCI experienced a loss greater than the SPX and one of these was comprised mostly of foreign holdings. Overexposure to bonds in our least aggressive portfolios moderated the sell-off in equities and had surprisingly stable performance throughout the quarter. A large rally in June recouped most, if not all, of the equity losses we experienced in May. Bonds also held up and all models showed significant gains for the month. No matter which type of investment you choose, mutual funds, index funds, individual stocks, etc., all have a large exposure to market beta. This is unavoidable in a long only strategy, but this exposure is more than compensated during market rallies. In July, June’s rally faded, and volatility gained an edge as the month progressed. Markets are fickle and subject to herding behavior. Whether it was the Fed becoming unexpectedly submissive to the whims of markets, or market participant apathy, July’s late sell-off set the tone for August and perhaps for the rest of the year. For the quarter ending July 31st, portfolio outcomes ranged from a 1.39% return on NAV, to a 3.11% return on NAV.
3rd Quarter Re-balance
The re-balance done on August 1st was the result of the consistent and disciplined process we have used since the beginning of Salt Creek Investors (SCI). Our research and analytics produced eight new funds to our portfolios. Our primary goal each quarter is to produce portfolios consistent with the client’s objectives. We strive to accomplish this objective by diversifying our exposure to the various factors that exist in fixed income and equity markets. We then select those managers with the best probability of producing alpha and the lowest probability of capturing losses. All this within the context of high exposure to various assigned asset classes. Statistical measures of the new models are similar to last quarter’s numbers. The new quarter has portfolio yields ranging from 1.22% (Aggressive Growth) to 2.75% (Conservative). Expenses are something we continue to monitor and are mindful of the need to keep at a minimum. For the new (3rd) quarter we have expense ratios ranging from 0.43% (Conservative) to 0.80% (Aggressive Growth). Also worth noting is that this quarter’s re-balance kept most of the best performing funds from the previous quarter (six out of seven).
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