Download MAR 2016 Your FP/CM Newsletter - Financial Partners Capital

Your FP/CM
Q1 2016
Dear Partners,
Welcome to our inaugural edition of “Your FPCM”. In addition to this new format for our periodic
communications, we hope you have also noticed our revamped logo and our redesigned website.
As you read through the following pages, we will be sharing our views on a variety of topics that we
hope you find interesting. We encourage you to reach out to us with feedback about the newsletter,
and if we can assist you in exploring any of the topics in greater detail.
Take a look at the “It’s Your Newsletter” section where there is a link to connect with us about topics
you’d like to see in future issues. As always, thank you for your continued confidence and support.
Your FP/CM Team
Table of Contents
What’s a Comprehensive Financial Plan? ............................................................................................. 2
PayPal’s Business Model ................................................................................................................................... 3
The Entrepreneurial Immigrant..................................................................................................................... 4
It’s Your Newsletter................................................................................................................................................ 4
Pharmaceutical Stocks & Presidential Elections ............................................................................. 5
Our Real Estate Portfolio .................................................................................................................................... 6
Key Investment Takeaways............................................................................................................................. 7
Investment “Balance Sheet” ............................................................................................................................ 8
Markets in Graphs… ................................................................................................................................................. 9
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What’s a Comprehensive Financial Plan?
VINCENT MARSDEN
Partner, Senior Vice President of Financial Planning
A comprehensive financial plan is a road map to
successfully guide you through the many
complex financial decisions that must be made
in an adult’s lifetime. The plan helps you to
clarify your long term goals, track and assess
your progress towards them, and understand
how and when you may need to fine-tune or
change course. It is in many ways analogous to
the way you plan your most important family
vacations.
trip is memorable (in all the best ways) for the
entire family.
In a similar fashion, financial planning helps you
to lay out a clear set of objectives, and how to
meet them over time. You begin with in-depth
discussions to establish your priorities and goals
in life, not only for yourselves and your loved
ones, but also in other areas that may interest
you, such as philanthropy and charitable giving.
Once your goals are set, you assess your
financial resources, to determine whether your
objectives are attainable, or if you need to
revise your expectations or rebalance your
plans. It leads to an analysis of the various
approaches available to you in areas such as
lifestyle funding, estate and gift tax planning;
insurance planning (from life to liability to longterm care);
alternative savings and assetprotection
vehicles;
and
appropriate
investment decisions to reflect your risk
tolerance and income needs..
In the case of a vacation you decide on a
destination that your whole family will enjoy;
you coordinate schedules, activities, and
responsibilities; you often work with a travel
professional to make sure that nothing is left to
chance; you plan for alternative activities when
the weather doesn’t cooperate, or if other
problems occur such as someone falling ill on
the trip. Planning is the key to ensuring that the
In addition, financial planning will help you….

Estimate and prepare for significant financial outlays, such as higher education, wedding
expenses, and health and elder-care.

Determine and maintain appropriate liquid reserves to allow you to get through periods of
high financial stress (such as a job loss, or a severe market downturn), without having to
dismantle your long-term financial plans.

Evaluate your estate planning and trust needs, so that assets will be distributed according to
your wishes, and to ensure you’ve taken the important steps of preparing or updating a will,
naming trustees and executors, deciding on guardians for minor children, establishing a
durable power of attorney, and examining beneficiary designations.
At FPCM, our financial planners not only work with you to develop a comprehensive long-term plan, we
also coordinate the work of your other professional advisers (attorneys, CPAs and insurance agents).
We work with you to actually implement the plan recommendations, and then monitor over time so that
appropriate adjustments can be made whenever they are needed.
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Financial Partners Capital Management
fpcm.net
PayPal’s Business Model
CHRISTOPHER CONWAY
Portfolio Manager
PayPal Holdings (ticker: PYPL) is one of the world's largest Internet payment companies, and is one of
FPCM’s holdings. While most of us have certainly heard of them (and many of us actually use their
services), we believe PayPal’s business model is frequently misunderstood by investors. We’d like to
share some of our insights about them with you.

How is PayPal different than other payment companies?
PayPal is an online payment provider that
allows customers to digitally make payments to
online merchants. PayPal distinguishes itself
from
other
payment
companies
(Visa,
MasterCard, Amex) by providing a safer way to
make payments. PayPal serves as a “buffer”
between the customer and the merchant,
allowing the merchant to receive payments but
never gain access to the customer’s sensitive
financial information (credit card number, bank
account, etc.). This is in contrast to the typical
.

credit or debit card transaction in which the
merchant and several intermediaries all gain
access to a customer’s financial information
during any given transaction. As a result,
PayPal’s ability to provide safer payments has
helped drive strong customer demand and
loyalty. Their customers highly value safety,
especially when engaging in transactions with
merchants located in different countries or with
small, online merchants that lack an established
reputation.
Why do we own the stock?
We own PayPal stock because the company
has a strong competitive position, a good
balance sheet, high levels of profitability, and a
number of growth opportunities that help justify
a higher stock price. More specifically, PayPal
has strong brand-name recognition associated
with safe payments, positive network effects
from a critical mass of merchants and
customers using its service, and scale in
providing customer service, fraud protection
and regulatory compliance. In addition, the
company will continue to benefit from a
number of secular trends including the growth

in e-commerce and mobile-commerce, higher
levels of cross-border trade, and the relative
decline in the usage of cash in favor of digital
payments. Finally, the company believes that,
over the longer term, it can increase operating
margins and move even more profitably into
new but related markets such as person-toperson
payments
and
money
remittances. While the stock trades at a high
multiple to current earnings, we believe PayPal
will be able to capitalize on many of these
opportunities.
What are the risks with owning the stock?
The biggest risk in owning PayPal stock is that it
is trading at a high multiple to current earnings
and the multiple will contract if the company
does not effectively execute, fend off the
competition or capitalize on some of the growth
opportunities mentioned previously. At the
current stock price there is still some downside
protection if revenue growth slows, but the
company needs to perform well to generate
good returns for shareholders. In addition,
despite a strong competitive position, there is
clearly a risk that competitors will eventually
take market share. There are well established
payment competitors (Visa, MasterCard) and
new competitors (Google, Amazon, Apple)
attempting to replicate PayPal’s service
offering. While we take comfort from the fact
that PayPal continues to grow faster than these
players and maintain significant market share,
significant inroads by these competitors would
cause us to re-evaluate our position.
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Financial Partners Capital Management
fpcm.net
The Entrepreneurial Immigrant
ROBERTO VAINRUB, Ph.D.
Managing Director, Portfolio Manager
Our world is changing dramatically at the
macro-level.
Water is expected to be a
critically scarce resource, China is becoming the
largest economy on the planet, and the
products of knowledge-based economies are
proliferating in usage the world over. In the
midst of such major shifts, it’s easy for migration
trends to get overlooked. Yet, they will loom
large as individuals struggle to resolve the
political and economic challenges in their home
countries, and in their personal lives. Either for
necessity or for opportunity, people are leaving
their countries of origin to look for new horizons
and new possibilities.
What should we learn from the experiences of
these entrepreneurs during the cumbersome
process of striving for success beyond their
home frontiers? Probably the most significant
lesson
is
about
being
humble,
and
understanding that the new market is not
necessarily similar (and most likely is not) to the
one in which our success was originally
attained. Investing in knowledge acquisition and
market intelligence seems to be a very
productive strategy. Leveraging networks –
and creating them if they don’t exist – is a very
advisable move. Learning from the mistakes
others have made, and understanding both our
sustainable competitive advantage and our
liabilities, are also of vital importance.
As they become immigrants, these individuals
and families almost automatically become
entrepreneurs. This truth applies not only to
people, but also to family businesses. A
company looking for a new market in a foreign
country often does so to escape difficult market
conditions or to look for broader opportunities
not available at home. In such cases, the foreign
business ventures become a form of
entrepreneurship.
In the case of individuals, franchises can
sometimes constitute an efficient business
entry strategy. Piggybacking on the experience
of a franchised model may be less
economically attractive than a totally new startup or the acquisition of an existing stand-alone
company, but franchises can provide a more
familiar, less stressful and less risky business
model for immigrants.
Take the case of South America. The continent
has historically been marked by dynamic and
hostile environments, especially at the macro
level (political, economic and regulatory).
Researchers
have
found
that
such
environments reduce the degree of liberty for
organizations, and push family firms to seek out
adaptive strategies such as internationalization.
They implement these strategies by employing
the same entrepreneurial orientation, processes
and practices developed and followed by their
families’ previous generations of business
founders.
Other important issues to be managed are
personal and family affairs. These are just as
important as the career and business aspects of
successfully immigrating. The lessons to be
learned are strikingly similar. Be humble, seek
out advice, leverage your networks, study your
new environment and the new possibilities it
offers. Try to build your new life while keeping
your connections with your native land, and give
your new venture all the resources it requires as if going back home is not an option. In many
cases, it isn’t!
It’s Your Newsletter
MAUREEN MATAMOROS
Editor, Financial Planning Advisor
We hope you are enjoying this first edition of “Your FPCM”. As the newsletter name suggests, we want the
publication to be useful for you. So, while you are reading, please think about other topics you’d like us to
address in future issues. A few ideas already proposed include: Should I convert my traditional IRA to a
Roth?; Is it always better to defer taxes?; How do I decide on proper asset allocations in my portfolio?; Can
you provide me with tips on pre-immigration planning?. Please send your thoughts and ideas to:
[email protected]. We look forward to hearing from you!
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Financial Partners Capital Management
fpcm.net
Pharmaceutical Stocks & Presidential Elections
AMIT FRIEDLANDER
Research Analyst
As we review our FPCM investments in the pharma sector and reflect on the increased political rhetoric
surrounding drug prices, we thought it might be helpful to examine how pharma stocks have done over
multiple presidential cycles. This is neither an endorsement nor a rejection of any political party,
candidate, or ideology, but rather, an investment analysis exercise.
Chart 1 shows the stock market performance of a group of the largest pharmaceutical companies,
including such names as Johnson & Johnson, Pfizer, and Merck, relative to that of the broader stock
market. We can see that a spike in pharma stock outperformance or underperformance often occurs
during the year before or after a US presidential election. Indeed, as can be seen on chart 2, pharma
stock volatility also tends to spike during the year before or after an election:
Chart 1
Chart 2
What can we learn from this exercise?
As fundamentals-driven investors, we assess the value of individual pharma companies based on their
drug portfolios, drug pipelines, capital allocation, and other key business drivers. The uncertainty that
surrounds presidential elections, and the stock market volatility that results from this uncertainty, can
create windows of opportunity to buy or sell the pharma companies we have decided to follow at
attractive prices, generating solid returns in the process.
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Financial Partners Capital Management
fpcm.net
Our Real Estate Portfolio
CRAIG GIVENTER, CFA
Partner, Managing Director, Portfolio Manager
In 2011, FPCM launched a new venture, a
platform to invest directly in professionally
managed commercial real estate. Since the
introduction of our “Real Estate Portfolio”,
clients who qualify as “accredited” investors
have had the ability to build a long-term,
diversified sub-portfolio of directly-held real
estate.
underlying properties, they are illiquid until the
properties are sold.)
As the famous saying goes, “it’s better to be
lucky than smart”, and FPCM’s Real Estate
Portfolio started at a near-perfect time. The US
economy had begun to climb out of the “Great
Recession” of 2008 – 2009, and US real estate
had started to recover from depression-like
conditions caused by the toxic combination of
too much debt used to purchase properties and
the overbuilding of residential and commercial
properties to meet speculative demand. The
backdrop of the nascent economic recovery, a
hiatus in the construction of new real estate
properties, high vacancy rates, and stressed
financial conditions for many property owners
and tenants, created a very attractive
environment for buying real estate.
FPCM works closely with third-party real estate
asset and property managers and, over the past
few years, we have invested in multifamily
housing, parking garages, commercial buildings,
and triple-net leases. We are total-return real
estate investors, and as such, we seek out a
combination of current income and capital
appreciation over the life of the investments.
(As these investments are direct holdings in
As the charts below show, capitalization rates (a property’s net income divided by the purchase price)
and capitalization rate spreads (the capitalization rate minus the 10-year US Treasury rate) stood at
cycle-high levels during the early part of this decade.
Historical 10-Year Treasury and Cap Rates
Historical Spreads between 10-Year Treasury and Caps
Beginning in 2011, the real estate sector started
experiencing “tailwinds” after the ”headwinds” of
the “Great Recession” abated. Capitalization
rates started to fall and spreads began to
decline. Nationally, improving rent trends and
rising occupancy levels drove a strong recovery
in real estate fundamentals.
By early 2015, the panorama had changed
enough that we shifted to become more of a
st
real-estate seller than a buyer. From the 1
st
quarter of 2015 to the 1 quarter of 2016, we
have sold 4 properties for every new real estate
investment, and our focus has been more on
protecting our investment position, by
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Financial Partners Capital Management
fpcm.net
participating in more preferred and junior debt
positions rather than solely in the equity of a
property’s purchase. We have also declined to
participate in more transactions than we have in
the past, as we are cognizant that economic
cycles (and recessions) still exist and that
certain areas of the US are experiencing minibubbles in real estate. Market conditions are
starting to move in our direction as capitalization
spreads are starting to increase and credit
conditions for real estate purchases are starting
to tighten.
FPCM will continue to seek out attractive
opportunities, as part of our clients’ investing
directly in real estate. The diversification, tax
efficiency, inflationary hedge, and total return
potential offered by investing directly allows us
to offer our “accredited” clients direct exposure
to this asset class within their existing FPCM
investment portfolio. If you’d like to learn more,
please contact us.
Key Investment Takeaways

We believe the recent market downturn was just a continuation of the last August’s correction, and
most likely a pullback within a “secular bull market”.

The probability of a recession has increased but it is still relatively low.

We are past the trough in credit spreads for the cycle. Credit risk has increased over the past few
months as a result of lower oil & commodity prices, lower economic growth and rising pressure on
emerging market currencies.

The bear market in commodities and energy is in a late-stage. We believe oil prices below $50-60
are unsustainable in the long-term.

Political and geo-political risks are high and could have a meaningful impact on markets.

Although we think it is too early to call for the end of the correction, we will buy opportunistically
during this consolidation phase. We will favor high quality companies with durable business models,
high free cash flow yields, high net cash and/or low debt levels, positive earnings revisions, and
some degree of relative price momentum.

As usual, it will take some time for the market to sort out the current situation. Rallies are likely to be
short lived for a while. We are planning to be opportunistic and patient, as always, keeping an eye on
your long-term objectives.
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Financial Partners Capital Management
fpcm.net
Investment “Balance Sheet”
AARON COHEN, Ph.D.
Partner, President, Portfolio Manager,
POSITIVES



CONCERNS
Slow growth might be exactly what the
developed economies need and can sustain at
this time: keep inflation tame, keep pressure on
consumers and the government to de-leverage,
increase savings, force firms to remain efficient,
keep speculative tendencies in check.
Except for the risk of serious external shocks, it is
difficult to foresee another deep recession at this
time because the typical down-levers (capital
expenditure, auto production, housing, excess
leverage) are not over-extended.
Given the current slow-growth global
environment, central banks are unlikely to tighten
monetary policy aggressively over the next 2
years.

U.S. consumer spending should continue to grow
thanks to increasing employment, a recovery in
U.S. household wealth, and the end of consumer
de-leveraging.

Economic growth in Europe and in Japan, while
still lackluster, has improved.

Short-term tailwinds for the economy: (1)
employment growth; (2) low interest rates; (3) less
restrictive fiscal policy; (3) availability of credit; (4)
pent-up demand in key areas such as capital
spending and housing; (5) low inflation and
energy prices.

The rate of inflation is expected to remain low in
the short- and medium-term.

U.S. Corporate balance sheets are in good shape.
Free cash flow is plentiful, return-on-capital is
high, and leverage is low.

The global economy, and in particular
manufacturing, has slowed over the past 18
months..

The Federal Reserve has reversed policy with
the December hike, with the expectation of
further increases over the course of the next
couple of years, albeit at a moderate pace.

The Chinese economy has slowed down
considerably over the past 3-4 years,
accelerating the decline in commodity
markets, and slowing down emerging
economies.

The U.S. dollar strength has put pressure on
the US industrial sector, and emerging market
currencies.

Higher leverage and the drop in oil and
commodity prices are putting some emerging
economies in a difficult position.

Inflationary expectations are extremely low.
Even a random increase in headline inflation
figures could scare the markets and put
significant pressure on monetary authorities.

Lower productivity, the aging of the
population in the developed economies, and
low labor participation are important longterm headwinds for global economic growth.

Geo-political risks continue to increase across
the globe.

Political “Populism”, on the rise worldwide,
could have major long-term economic
consequences.

Valuation: Equity valuations are, at best, at fair
levels.
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Financial Partners Capital Management
fpcm.net
Markets in Graphs…
Important variables to watch right now
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Financial Partners Capital Management
fpcm.net
We hope you enjoyed this first periodic publication. Please send us your thoughts, ideas and questions
to: [email protected]. We look forward to hearing from you!
Thank you for your continued confidence and support.
Financial Partners Capital Management
150 East 52nd Street, New York, NY 10022
20900 N.E. 30th Avenue, Suite 517Aventura, FL 33180
t 646-277-7310 | t 305-921-4740 | f 646-277-7315 | fpcm.net | LinkedIn
This newsletter might contain forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from the results described in the
forward-looking statements. The information contained herein is for illustrative purposes only and should not be considered an offer to sell or a solicitation of any offer to buy
interests in any particular investment. The inclusion of real estate properties discussed herein should not be perceived as investment recommendations and may no longer be
held. Opinions and estimates expressed herein reflect the current judgment of Financial Partners Capital Management (FPCM), and are based on information obtained from
sources, which are believed to be reliable, but FPCM does not offer any guarantees as to its accuracy or completeness. Nor are they intended as a forecast or guarantee of
future results. The information is not necessarily updated on a regular basis; when it is, the date of the change(s) will be noted. In addition, opinions and estimates are subject
to change without notice. FPCM, its officers, directors, employees, customers, or affiliates may have a position, long or short, in the securities mentioned herein and/or related
securities, and from time to time may increase or decrease such position or take a contra position. FPCM may have other relationships with any company mentioned in this
commentary. Past performance is not a guarantee of future results. No future or current client should assume that the future performance of any specific investment,
strategy or product referred to directly or indirectly will be profitable or equal to any corresponding indicated performance levels. Reproduction without written permission is
prohibited.
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Financial Partners Capital Management
fpcm.net