April 2023
INVESTMENT OVERVIEW
As clients and investors have been reading our quarterly investment reports over the last 5 quarters know, our main focus and the focus of the markets has been on the Federal Reserve’s rate hikes to fight inflation. Our view is that the Federal Reserve has made several huge policy errors in the last few years, which magnify some of the horrible decisions made by the Federal Reserve after the 2008 market crash, such as keeping interest rates at zero far too long. We cannot emphasize enough how much the Fed’s actions affects markets, the global economy and investors’ money. After the great recession, the Federal Reserve dropped the federal funds rate to zero to spur economic growth – but they left rates at or near zero far too long when they should have gradually raised them to “normal” rates. Instead, the Fed created an entire business cycle built on free capital, then when it was clear that the economy was reemerging from Covid and inflation was becoming a big problem, the Fed told us that inflation was transitory and not a big concern. However, they suddenly realized they were wrong in late 2021 and announced rates would rise – to a whopping 2%. But by early 2022, the Fed abandoned the 2% terminal rate and raised interest rates from zero at the fastest pace in U.S. history. The cascading effect has been a quickly decelerating economy, big declines in stocks, historic declines in the bond market and as the Fed wanted, rapidly declining inflation. But despite all the negativity in the headlines, the first quarter of 2023 has been fantastic for investors and we’ll take a look at why, and what we hope for the rest of 2023.
There are several reasons that stocks have begun a significant rebound this year. The market is always forward looking and as we’ve predicted, the economic weakness created by the Federal Reserve’s rate hikes will likely become an official recession and the Fed’s response 100% of the time is to pause rate hikes, then to reduce rates. As economic indicators have shown weakness and recent bank failures alarm investors, it’s likely that the Fed is close to pausing rates. If data continues to show recessionary conditions, it’s possible that the Fed could reduce rates this year or next, and the market finds that to be extremely bullish for the next few years. Also, because high interest rates have caused dramatic declines in growth and tech stocks, a market expecting the end of rate hikes has caused a big 2023 rally in growth and tech stocks so far. Through the first 3 months of the year each of our stock and fixed income strategies has grown well.
Our Global Equity strategy has gained 27.77%, our Blended Equity strategy has gained 27.41%, our U.S. Equity strategy has gained 17.60%, and our Diversified Growth and Conservative Growth strategies have gained 14.57% and 11.81% respectively year to date. Our Conservative Income and Municipal strategy have also gained 9.10% and 4.26% respectively. All of these performance figures are net of fees.
Going forward, we continue to place little faith in the Federal Reserve and given the Fed’s past wrong predictions concerning the economy, the trajectory of inflation or even of their own rate hikes, we remain concerned that the Fed will continue to overreact and overshoot, likely leading to a weaker economy than the Fed expects. In fact, the Fed just released minutes from their March meeting and they now expect that the banking crisis from Q1 will lead to a recession this year. These meeting minutes show that the Fed is willing to cause a recession in order to bring down inflation, even though inflation is receding quickly. So we continue to believe that the Federal Reserve is the biggest threat to the market and the economy. However, it’s also possible that the worst of the damage in the market is over because as we’ve discussed the market is looking forward to lower interest rates in the future.
With regard to clients’ portfolios and our investment strategies, we are making few if any changes so far this year to existing holdings in our equity strategies. In our Blended, Global and U.S. Equity strategies, the collection of individual stocks are being held because the businesses themselves are still excellent, in great financial condition and we expect these businesses to adjust to the higher interest rate environment by focusing more on profits and less on growth. After more than a decade of the Fed’s low rates, growth was incentivized at any cost. But with a new regime where profits are being emphasized far more because the cost of capital is so high, the best businesses are the ones who are able to transition their cost structures and have pricing power. These companies may need a few quarters to complete this transition, leading to layoffs now, but likely big profits in the near future. Many of the younger companies our clients’ are invested in fit this situation and the others are established dominant players in their industries, hence our confidence in the existing holdings. In fact, many of the stocks that did the worst last year have already gained more than 50% this year.
We are however adding more of a dividend focus to our equity strategies going forward, now that yields and interest rates are higher. We should expect and plan for interest rates to remain higher for the next decade than they were during the last and we’re doing this by adding two ETFs that have a fantastic growth and dividend track record and they both have very low volatility. These are the Schwab Dividend Equity ETF and the Health Care Select SPDR ETF. Both of these funds have grown well over 200% in the last 10 years, much of that due to dividend reinvestment, but both are also more stable historically than the S&P 500 Index. A statistic called Beta measure how volatile an investment is in relation to the overall market, and these funds have Beta of .82 and .71 respectively, meaning they’re significantly less volatile than the rest of the stock market. Adding high dividend, low volatility investments like this to our clients’ portfolios provides a great combination of growth stocks and dividend stocks.
With regard to our fixed income investment strategies, we are actually making changes for many clients due to the historically bad bond market crash. Bonds crashed from the summer of 2020 and finally bottomed in October 2022. This crash was due to the record interest rate hike pace, but made even worse because interest rates were at or near zero for more than a decade after the 2008 recession. Bonds issued during the period from 2009 through 2021 collapsed in value because newly issued bonds have much higher yields and thus investors dumped the low yield bonds. It became apparent just how serious this problem is when big banks such at SVB and Signature Bank failed in March. One of the reasons they failed, in addition to poor asset management, is because these banks – like all others – partially meet capital requirements by holding treasury bonds. When these bonds are held to maturity, the banks experience no losses. But if the banks need to sell assets to raise capital, as SVB did, the banks must sell the low yield bonds on the open market at big losses. It is said the Fed usually raises interest rates until something breaks and clearly areas of the market like real estate and the banks are breaking now.
The bond market crash wiped away so many years of returns that if long-term bond funds achieve rates of return between 4% and 5%, which is slightly above historical trends, it will still take close to a decade for most bond funds to get back to their 2020 highs. So for many of our clients, we are selling long-term bond funds in exchange for dividend paying, low volatility substitutes like the Schwab dividend ETF and Health Care Select ETF mentioned above. Owners of individual bonds, if held to maturity, won’t suffer losses just like the banks. But like banks that need to raise capital, if investors must liquidate before maturity, even individual bonds can and likely will be sold at a loss if they had low yields when issued.
Going forward, predicting the direction of the market is impossible as always, but we would not be surprised if this big rebound in stocks continues as the market sees high interest rates in the rearview mirror and lower rates ahead. If this happens it’s likely that the stock market in the U.S. could do well or remain stable even if the economy gets worse. We hope that if data continues to show slowing inflation and economic growth, the Fed will do the right thing by pausing rate hikes and eventually reducing rates to historical norms. We believe this would lead to a stable economy and a rebound in areas of the economy that have been hurt the worst.
Overview: The Healthcare Select Sector SPDR is a diversified ETF that includes healthcare companies such as UnitedHealth Group, Johnson & Johnson, Merck & Co, Pfizer, and many other large, stable companies that often have high growth potential due to the high growth rate of the healthcare industry. The ETF also pays dividends on a quarterly basis, providing consistent cash flows for reinvesting. The healthcare industry in the United States has been one of the most resilient industries during troubled economic times, which we are now in.
Financial Highlights: Since 2008 XLV has increased in price from $32 per share to $125.60, showing the potential of capital appreciation over time. Over the last 10 years XLV has gained 184.08% in price, but with a total return of 232.67% because of dividends. Because the fund invests in companies that can do well regardless of economic conditions, the fund is far less volatile than the U.S. stock market, but has outperformed the U.S. stock market after accounting for dividends. This makes the fund an ideal holding to improve returns, while reducing volatility. Source: seekingalpha.com.
Investment Thesis: ECM purchased XLV in order to provide stability to our client’s accounts and for the potential of capital appreciation of the shares. The healthcare industry has been one of the best sectors to invest in over the past couple decades because much of the healthcare industry can grow and operate profitability even during recessions. Because healthcare spending tends not to fluctuate with the economy, the industry has also provided stable growth, which is very important during these modern, more volatile markets. The healthcare industry is forecast to grow between 13-15% and is currently valued at about $810 Billion. ECM believes that XLV will be a great long-term investment and should help our clients’ accounts grow in value.
Overview: The Schwab U.S Dividend Equity ETF is an Exchange Traded Fund that track the Dow Jones U.S. Dividend 100 Index. The dividend index tracking system Schwab uses has created a fund that invests in stable but growing dividend champions, many of which have deep moats to their businesses. This Schwab ETF has become one our firm’s largest holdings because of the high quality of the companies in the fund, the stability the fund has provided and the significant dividend income it creates. Through our research, we feel that SCHD provides one of the largest, safest dividend yields while also providing the safety and dividend security that so many other ETFs cannot. Many high yield funds offer high yields because the stock prices of the underlying companies has crashed. SCHD however is invested in high quality businesses that have seen significant appreciation in share price over time.
Financial Highlights: SCHD has a current yield of 3.73% and some of the largest holdings include Abbvie Inc, Merck & Co, Pepsico, UPS and Verizon. Like the XLV ETF discussed above, SCHD also has high ESG ratings according to Morningstar.com. These are mature companies and have stable cash flows capable of facilitating the dividend payout and often have a steadily increasing dividend payouts. Coca-Cola, for example, has raised their quarterly dividend over 11 years from $0.255 in 2012 to $0.46 in March of 2023. (https://www.streetinsider.com/dividend_history.php?q=ko). SCHD also offers capital appreciation in addition to the dividends it pays out. SCHD’s ETF price has grown 132.60% in the last 10 years, but including dividends, the total returns have been 216.29%. Source: seekingalpha.com.
Investment Thesis: We purchased SCHD to provide stability to our investment models and also increase the amount of cash that our clients receive. The increased cash flows help to reduce the amount of stock that needs to be sold for distributions or fees, thereby increasing performance for our clients. The other benefit of increased cash inflows is that there is usually new money available to purchase more investments for our clients, helping them to grow their portfolio over time. We believe that SCHD is a great investment for the times we are in with inflation at high levels and interest rates rising due to the actions of the Federal Reserve. SCHD also has very volatility, with a beta of just 0.82 – meaning the fund is significantly less volatile than the U.S. stock market overall.
Disclaimer/Disclosure
The purpose of this newsletter is to explain what is happening with our investment strategies and our current views on the markets. We do not sell our investment report and it is intended only as a communication device. The information in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance or guarantee that the securities discussed herein will remain in an account’s portfolio at the time this report is received. The securities discussed do not represent an account’s entire portfolio and may only represent a small percentage of an account’s portfolio. It should not be assumed that any of the securities discussed were or will prove to be profitable, or that the investment recommendations or decisions ECM makes in the future will be profitable or will equal the investment performance of the securities discussed herein.
ECM uses certain proprietary databases, formulas and devices in its investment decision process. The use of these devices does not change the possibility of loss inherent in all investment decisions.
Contact Us
For questions regarding fees, risks, or other questions, please visit our website at www.ebertcapital.com or contact us directly and we will be happy to assist you.
Ebert Capital Management Inc.
530 F Street
Eureka, CA 95501
Telephone: (707) 407-3813
Toll-free Fax: (855) 407-3815
Email: info@ebertcapital.com
Our Diversified Growth strategy seeks to achieve growth from investing in diversified equity ETFs with exposure to the Nasdaq innovators, the software industry and emerging technologies. The desired holding period is long term. The composite creation date is 01/01/2017. Returns are presented net and gross of actual management fees paid. Fees are described on the last page of this report and apply to all composites managed by Ebert Capital Management Inc. ECM’s account inclusion policy is the first full month or the end of the month in which the account is fully invested. The composite contains both taxable and nontaxable accounts. The returns of the individual portfolios within the composite are time-weighted, use trade date accounting, are based upon monthly portfolio valuations, and include partially backtested data. The composite returns are asset-weighted based upon the beginning period market values calculated in U.S. dollars. The composite contained fewer than 1% of non fee-paying accounts at the end of each year. The performance presented from 01/01/2017 through 12/31/2021 is backtested performance of a model portfolio with the same securities allocations as found in actual client accounts and ECM’s management fee was imputed at the highest level of our fee schedule, 1.5% annually, during this period. The performance results from 01/01/2017 through 12/31/2021 are hypothetical and not based on the performance of actual client accounts. Backtests were performed at portfoliovisualizer.com.
Our Conservative Growth strategy seeks to achieve growth with reduced volatility from investing a mix of equity and fixed income ETFs. The equity ETFs tilt towards sectors with exposure to emerging technologies and the fixed income part of the portfolio focuses on income and low volatility. The desired holding period is long term. The composite creation date is 01/01/2017. Returns are presented net and gross of actual management fees paid. Fees are described on the last page of this report and apply to all composites managed by Ebert Capital Management Inc. ECM’s account inclusion policy is the first full month or the end of the month in which the account is fully invested. The composite contains both taxable and nontaxable accounts. The returns of the individual portfolios within the composite are time-weighted, use trade date accounting, are based upon monthly portfolio valuations, and include partially backtested data. The composite returns are asset-weighted based upon the beginning period market values calculated in U.S. dollars. The composite contained fewer than 1% of non fee-paying accounts at the end of each year. The performance presented from 01/01/2017 through 12/31/2021 is backtested performance of a model portfolio with the same securities allocations as found in actual client accounts and ECM’s management fee was imputed at the highest level of our fee schedule, 1.5% annually, during this period. The performance results from 01/01/2017 through 12/31/2021 are hypothetical and not based on the performance of actual client accounts. Backtests were performed at portfoliovisualizer.com.
Our Global Equity strategy invests in companies with at least 50% of revenues outside the U.S. or significant operations outside the U.S. The desired holding period is long term. This strategy is benchmarked to the S&P 500 Index. The composite creation date is 10/01/2019. Returns are presented net and gross of actual management fees paid. Fees are described on the last page of this report and apply to all composites managed by Ebert Capital Management Inc. ECM’s account inclusion policy is the first full month or the end of the month in which the account is fully invested. The composite contains both taxable and nontaxable accounts. The returns of the individual portfolios within the composite are time-weighted, use trade date accounting, are based upon monthly portfolio valuations, and include the reinvestment of all earnings as of the payment date. The composite returns are asset-weighted based upon the beginning period market values calculated in U.S. dollars. The composite contained fewer than 1% of non fee-paying accounts at the end of each year.
Our U.S. Equity strategy invests in U.S. companies or companies with most a majority of operations and revenues coming from the U.S. The desired holding period is long term. This strategy is benchmarked to the S&P 500 Index. The composite creation date is 10/01/2019. Returns are presented net and gross of actual management fees paid. Fees are described on the last page of this report and apply to all composites managed by Ebert Capital Management Inc. ECM’s account inclusion policy is the first full month or the end of the month in which the account is fully invested. The composite contains both taxable and nontaxable accounts. The returns of the individual portfolios within the composite are time-weighted, use trade date accounting, are based upon monthly portfolio valuations, and include the reinvestment of all earnings as of the payment date. The composite returns are asset-weighted based upon the beginning period market values calculated in U.S. dollars. Three-year ex post standard deviation for composite and benchmark is not present if 36 monthly returns are unavailable. A dispersion measure is not shown when there are five or fewer accounts in the composite for the entire year. The internal dispersion is calculated using the asset-weighted standard deviation of annual net returns of those portfolios that were included in the composite. The composite contained fewer than 1% of non fee-paying accounts at the end of each year.
Our Blended Equity Strategy is composed of a mix of stocks and ETFs from our other investment strategies. The purpose of this strategy is to hold our firm’s most favored holdings from all our investment strategies. The desired holding period is long term, hopefully perpetually. The strategy is benchmarked to the S&P 500 Index. The composite creation date is 10/01/2019. Returns are presented net and gross of actual management fees paid. Fees are described on the last page of this report and apply to all composites managed by Ebert Capital Management Inc. ECM’s account inclusion policy is the first full month or the end of the month in which the account is fully invested. The composite contains both taxable and nontaxable accounts. The returns of the individual portfolios within the composite are time-weighted, use trade date accounting, are based upon monthly portfolio valuations, and include the reinvestment of all earnings as of the payment date. The composite returns are asset-weighted based upon the beginning period market values calculated in U.S. dollars. The composite contained fewer than 1% of non fee-paying accounts at the end of each year.
The Conservative Income Strategy consists of all accounts that hold bond ETFs selected with the aim of providing principal protection and income using low-cost bond index ETFs of varying maturity and bond quality and a small allocation to stocks. The strategy is benchmarked to the Barclays Capital U.S. Aggregate Bond Index. The composite creation date is 8/1/2011. Returns are presented net and gross of actual management fees paid. Fees are described on the last page of this report and apply to all composites managed by Ebert Capital Management Inc. ECM’s account inclusion policy is the first full month or the end of the month in which the account is fully invested. The composite contains both taxable and nontaxable accounts. The returns of the individual portfolios within the composite are time-weighted, use trade date accounting, are based upon monthly portfolio valuations, and include the reinvestment of all earnings as of the payment date. The composite returns are asset-weighted based upon the beginning period market values calculated in U.S. dollars. The Benchmark for the composite is the Barclays Capital U.S. Aggregate Bond Index, presented in U.S. dollars. The composite contained fewer than 1% of non fee-paying accounts at the end of each year.
Ebert Capital Management Inc. (ECM) is an independent, fee-only registered investment adviser. Ebert Capital Management claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Ebert Capital Management has been independently verified for the periods Dec 1, 2010 through December 31, 2019. The verification report is available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report.
GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Policies for valuing portfolios, calculating performance, preparing GIPS Reports, and a list of composite descriptions are available upon request.
Past performance does not guarantee future results. Performance data quoted represents past performance. Current performance may be lower or higher than the performance data quoted. Past performance of markets, strategies, composites, or any individual securities is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s portfolio. Investment in the above referenced model composite is subject to investment risks, including, without limitation: market risk, interest rate risk, management style risk, business risk, sector risk, and other risks related to equity securities. There are no assurances that a portfolio will match or outperform any particular benchmark. Historical performance results for benchmarks, such as investment indices and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, which would have the effect of decreasing historical performance results.
Standard Tiered Fee Schedule for all composites.
