Author: John Ingram

Adding Schwab to Focus List

Schwab is a vertically integrated custodian that has shown strong organic asset growth, earning revenue on deposits, low-cost Schwab ETFs, trading and advisor network.

  • Strong AUM growth: Schwab has averaged 6% organic core net new asset growth as retail clients and advisors are attracted to Schwab’s low cost trading and custody services.
  • Vertically integrated: Schwab earns revenue from spread on deposits, low-cost ETFs, advisor fees and trading.
  • Defensive: Deposit revenue should increase when stock markets falls as investors tend to increase cash holdings during periods of stress.
  • Return of capital to shareholders: Schwab is on the cusp of increasing excess capital which they plan to return to shareholders. Over the next year, management expects cap-ex growth to slow to 3-5% from current 6-7% growth.  Expect a 20%-30% payout ratio for dividends (1.7%) and management has approved a $4b share buyback which could amount to 4% to 5% of shares.

Here is the presentation: Schwab Initiation

Thanks,

John

GS on Trade

Hi,

Goldman Sachs published a good article today on trade and tariffs.  Many of the article’s points parallel the points in our recent Perspective “Tariff Man”.

  • Base case -0.5 in GDP, with all threatened tariffs at -1.3% GDP
  • Concern that Huawei  ban has solidified nationalist resentment against US
  • Tariff skirmishes has turned to a trade war

The article adds a lot of detail on other implications of trade war, one of which is higher prices.  They are expecting +.2% base case and up to +1.2% in PCE increase given all threats.

GS trade 3.0

Thanks,

John

 

Performance of large cap and core bond funds

Pete and I created performance charts for our US large cap funds as a group compared to iShares 500 index ETF (IVV) and for Core US Bond funds as a group against the iShares Barclays US Aggregate Bond ETF (AGG).  In our quarterly performance presentation we show performance of each vehicle and it was not clear that these funds as a group has performed well.

Here is a chart of performance of our US large cap funds against IVV going back to beginning of 2017:

US Large Cap Funds
A few observations from this chart:
1. Performance has been good especially considering only 22% of active managers beat the S&P 500 over the past 3 years.
2. Tracking error prior to the change in funds (9/28/18) was really low and was a main reason for the change
3. The funds as a group picked up 200 bips during the end of year downturn! The larger allocation to low vol has really helped.

I ran the same chart for our active bond managers against AGG – iShares Barclay US Aggregate ETF.

US Core Bond Funds

As you can see our collection of active bond managers has added value over iShares US Aggregate ETF.

Hopefully these charts help you explain the positive results to clients!

Thanks,

John

Income inequality

Ray Dalio, head of Bridgewater Associates, published a great article on income inequality.  The article links inequality to education and shows that the US lags developed countries in many categories.  Dalio shows that high rates of workers earning less than than their parents and falling standards of living have lead to voter mistrust and disenfranchised populations, which has clearly been themes that Trump has tapped. He concludes that American capitalism is at risk.

Why-and-How-Capitalism-Needs-To-Be-Reformed

Thanks,

John

Asset Allocation changes – 2/25/19

Hi,

Here is the summary of the changes to our portfolios from this morning’s meeting:

Reduce EAFE

  • Europe’s growth is slowing especially Germany’s
  • Country specific issues – Brexix and Italy
  • Concerns on trade – autos

Extend duration on bonds

  • Federal Reserve on hold after 9 rate increases
  • Inflation in check
  • Near end of cycle

Increase allocation to Emerging Market stocks

  • China enacting some stimulus
  • China taken steps to shore up banking system and confidence
  • External debts OK

Increase allocation to US stocks

  • Improved valuations
  • US consumption source of global demand
  • Expect any slowdown to be relatively mild

Here are the slides from this morning’s discussion: 022519 allocation changes RM