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Tealwood Reports
October, 2016
Volume 29, Issue 4
A Time for Strategy
Year-to-date 2016 has been the year of the dividend and yield-oriented securities. This tailwind has made for
constructive performance for our strategies focused on dividend paying stocks. Even so, we are careful about not
getting carried away with short-term results. Experienced investors know that earnings and quality are what are most
durable, and losing focus of what is most durable is counterproductive.
Election season tends to make for tactical
IS TH ERE AN EL EC TORAL C O RREL ATION ?
Th e B i g g er Tr en d O u t w ei g h s t h e E l ec t o r a l R ea ct i o n
thinking. So much of the news cycle is consumed
by politics that it seems like everything gets
colored by the binary “yes or no” and “it-all-getsdecided-in-November” mentality. We took a look
at the November and annual results in postelection years over the past two decades to help
illustrate the point.
Election Year November S&P 500 In d ex Return
32.11%
27.18%
9.80%
8.72%
7.56%
4.0 5%
The market does not pivot around Presidential
elections. Rather, it performs inside a long-term
trend correlated to the economic cycle which
overrides the short-term, event-driven result.
Our strategy incorporates a focus on being
informed by the long-term connections between
the economic cycle and the marketplace for both
risk and reward.
Nov-Oct One-Year S&P 500 Index Return
0.58%
-7.18%
-19.40%
-24.90%
1996/1997
2000/2001
2004/2005
2008/2009
2012/2013
The one-month election impact suggests investors are better served by understanding the status of the long-term
trend rather than attempting to time the market around the first Tuesday in November. So what are we to understand
about the long-term trend now?
There is a time to focus on offense and a time to focus on defense. The time to focus on offense is in the expansion
phase of the economic cycle and the time to become more defensive is in the contraction phase. Though we are seven
and a half years into this expansion (and expansions average around eight years in duration), to date the economic
data has not indicated an increased risk of recession. We do not see it as time to adjust strategy to assume a more
defensive position.
Continue to page 2
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A Time for Strategy (Continued from Page 1)
How you are invested is now as important as whether
you are invested. The following chart shows the S&P 500
Index in quartiles by Price-to-Earnings (PE) ratio. The lesser
three quartiles fall into a range that is unremarkable by
historical standards. The first quartile, with an average PE
ratio of nearly 50X forward earnings estimates, stands out
as both expensive and a risk factor! A valuation correction
would come as little surprise and it would
disproportionately impact these much more expensive
stocks. Our strategy is to focus on value and quality, and to
select away from this valuation risk. One need only
remember the year 2000 as a frame of reference.
The market rode the Tech boom to historically rich valuations in 1999. In the first quarter of 2000, the S&P 500
Index traded at 32X earnings and the Tech Sector traded for 100X earnings. That year saw the Tech bubble burst, with
the S&P 500 Index falling by over 10% and the technology-heavy NASDAQ Index declining by 40%. No, that was not a
recession year. Focusing on our valuation discipline has helped performance be constructive during high valuation
market episodes. Our performance goal is: better returns via better risk management over the cycle. We remain
confident we are appropriately positioned to serve this objective.
Tealwood Highlights
Special Events
Tealwood was proud to co-sponsor Iris Hond’s concerts at the Dakota Jazz
Club and PatrickMartin3 in September, where the Dutch pianist made her
American debut. Classically trained, Ms. Hond is now composing and singing her
own “progressive classical” music with legendary composer/producer Patrick
Leonard (Madonna, Pink Floyd, Leonard Cohen). Visit her website at
www.irishond.nl. You can also listen to her emotional— and beautiful — tribute
to Prince on YouTube.com.
New Additions—It’s a girl and a boy!
Congratulations to colleague Steve Richter and his wife, Catherine,
on the birth of their twins! A warm welcome to Sienna (pictured on the right)
and Jack (on the left), who were born on July 18th. All are healthy and well,
and the new family is delighting in the joys this busy time brings. Sleep will
come later! We look forward to seeing Sienna and Jack grow as part of our
Tealwood family.
Page 3
New Technology Enhancements
In an ever more connected world we recognize the importance
of enhancing the ways we communicate with our clients, including
via mobile devices on demand. As part of our commitment to
providing our clients with the very best when it comes to service and
technology, we are excited to announce a change in our portfolio
management software. This new program is considered to be one of
the very best portfolio management platforms in the industry.
Many new resources will be added, including improved analytics, more efficient trading, enhanced reporting tools,
and a private secure portal where clients can access details about their accounts via any connected device. We look
forward to completing the conversion, and we believe this technology change will have a meaningful positive impact
for Tealwood and our clients for years to come.
Private Investment Counsel — How is it Different?
All of us at Tealwood are inspired by creating lifetime success for our clients
through our distinctive discipline as dedicated, rational investors. We do this
by aligning ourselves with clients. Alignment is built into Tealwood’s DNA —
from the way we structure our firm, to the people and processes we employ
in the service of realizing productive, long-term relationships and results.
Some ways we see Private Investment Counsel as being meaningful include:
Being seated on the same side of the table from the start
▪
▪
As fiduciaries, we always place clients’ interests first, and as an
independent, employee-owned firm, we maintain the freedom and
flexibility to act in our clients’ best interests — partnership focused, not
product driven.
As a fee-based firm, we succeed when our clients succeed.
Striving for a deeper connection and quality of relationship
▪
▪
We engage clients in a highly collaborative, customized and communicative
experience to achieve their investment goals—connecting assets to
purpose.
We have developed a team that is reliable, responsive, and service
focused; a holistic approach that includes acting as a resource and creating
connections in other areas of clients’ lives, financial or otherwise.
Strategic investing
▪
We see ourselves as business investors, placing an emphasis on highquality companies. With our selectivity and conviction, we believe our
concentrated and low-turnover portfolios are positioned for superior
performance.
Page 4
Upcoming Events
Private Strategy Briefings
These 1-hour briefings highlight current market insights, economic trends and research, and portfolio specifics.
Thursday
Thursday
Thursday
October 20
November 17
December 15
Noon — 1:00 p.m.
Noon — 1:00 p.m.
Noon — 1:00 p.m.
At Tealwood
At Tealwood
At Tealwood
Luncheon
Luncheon
Luncheon
Tealwood Annual Investor Conference Recap
2016: The Election and the Marketplace
Our Annual Investor Conference for clients and friends of the firm was held at the Minnesota Viking’s new
home, The U.S. Bank Stadium on September 22nd. We hosted a panel comprised of Brian Belski, chief strategist for
BMO Harris and Dave Kansas, formerly a Wall Street Journal columnist and now with Minnesota Public Radio, and
moderated by Tealwood’s CIO, Charlie Mahar. The panel addressed issues relating to “The Election and the
Marketplace.” A full house filled the FMP Club at the stadium and the event was a rousing success. Takeaways from
the panel included:
▪
Remember that the experts were wrong about the Brexit vote, so
do not get too comfortable about election prognosticians from
experts about anything being obvious or inevitable.
▪
Politics are the tail; the economy is the dog. Don’t let the
political tail wag the investment dog.
▪
The financial news cycle is overly focused on interest rates and
the storyline that the Fed is on a path to raise rates. However,
small and gradual increases in the Fed Funds rate are unlikely
to be much of a disruptive factor for earnings. Don’t get caught
up in short-term tactics, losing sight of longer term strategy.
▪
Dividend paying stocks, and dividend growing companies in
the U.S. offer meaningful opportunity in this slower growth,
lower interest rate environment.
Brian Belski is the Chief Investment
Strategist and Managing Director at
BMO Capital Markets. His group
produces several investment strategy
publications focused on both the U.S.
and Canadian equity markets.
Dave Kansas, COO for MPR, previously
with The Wall Street Journal as
European markets editor and chief
markets commentator. Author of
several books on investing, including
The End of Wall Street as We Know It.
Tealwood’s 2017 Annual Conference will include a celebration of Tealwood’s 30th Anniversary. We are already looking
forward to seeing you there!
To RSVP for any of our events: [email protected] or 612.340.0181.
Tealwood Asset Management
120 South Sixth Street, Suite 1900, Minneapolis, MN 55402
612.340.0181 www.tealwood.com
Newsletter data sourced from S&P Capital IQ, 9/30/2016.