March 2020
Investment Overview
With the coronavirus wreaking havoc on societies, healthcare systems and economies worldwide we decided to write our quarterly investment report a little early to address issues investors are very concerned about. As this is being written, the Coronavirus has led to a global pandemic that is changing the way people in virtually every country live their daily lives. There is little historical context for a pandemic of this magnitude. And as confirmed cases of COVID-19 rise, stock markets have crashed in historic fashion. At the moment, the U.S. and foreign stock market have declined nearly 40% from recent highs. This puts the current bear market among the worst all-time. This is also only the 4th time since the Great Depression the U.S. stock market has suffered bear markets in consecutive years – with last year’s trade war induced bear market and this one erasing a half decade of market returns.
Despite seriously scary headlines about impending economic and health doom, this crisis had a beginning and it will have an end. And for our clients specifically there is a silver lining – the new investment strategies we launched last year were specifically designed to withstand black swan events like this. There are businesses and sectors that will not recover, but thankfully the new investment strategies we launched last year are made up of companies with monopolies in their industries and these companies will survive and thrive when this panic subsides.
The current market selloff has no historical precedent – this is the fastest forming bear market in history and March is already the most volatile month in market history. The global panic is sparing almost no investment category at the moment, but as this crisis continues the market will be better at sorting out the winners and losers. We are confident the businesses we’ve invested in will be among the winners. The stocks selected for our new strategies were chosen because we see them as recession resistant, dominant and monopolistic companies. We chose business models with little to no exposure to tariffs – which are still in place and which
U.S. companies pay, not China. We chose businesses with recurring revenue models that could continue bringing in revenue and remaining highly profitable even with shock events like the current one. We chose businesses who provide services that for the most part can’t be turned off or won’t be. Companies like Microsoft, Google, Visa, Mastercard and Centene have revenue sources that can’t be “turned off” the same way as companies in the Energy, Automotive, Retail or Travel industries. The stark difference in the business models we’ve invested in versus other industries most exposed to a downturn means that while a small group of powerful companies achieve record profitability, many other industries will see a mass die-off event.
For example, analysts expect Microsoft to achieve record revenues and earnings this year – as are many of the companies we’ve invested in – because Microsoft’s subscription-based business is unlikely to see large scale cancellations for its operating systems and online cloud storage business.
On the opposite end of the spectrum, many businesses whose success is tied to a commodity, customers being physically present or who sell a product that is more of a luxury than a necessity will likely have big problems.
Even with a global recession, Visa and Mastercard have 95% market share in the credit card processing business and consumers are still buying – they’re just buying from home.
Visa and Mastercard also don’t lend money, but use their credit card network for revenues and thus have no credit risk exposure. Google still maintains a monopoly in its advertising and search engine business and is the 3rd largest cloud storage provider with Google Cloud. Even during this economic collapse – Wall Street analysts expect Google to grow revenues at 17% over last year. Centene, which is the largest Obamacare insurer in the Country, is very unlikely to see a decline in revenues during a healthcare panic and may even see an increase in Americans seeking low cost health insurance. Most of the stocks we own have a similar “necessity” to their service and we don’t own stocks in any businesses that will actually shut down the way restaurants, retail stores and automotive factories currently are.
Another example is Adobe Inc., which we wrote about in our last quarterly investment report, and announced record earnings and revenues on March 12th. Adobe CEO Shantanu Narayen said the company is having no problem with staff working from home and he expects little to no disruption in the digital creative content business due to the pandemic.
So while it’s true that a recession hurts everyone in some ways – it’s clear the pain will not be equally distributed. The Coronavirus is so unique but its already clear that businesses requiring consumers to travel, have face to face contact or make large purchases such as homes and vehicles will suffer the most. By contrast, the stocks in our portfolios rely far more on a digital presence and recurring revenues from small subscription fees that are unlikely to be canceled, even during this “shelter in home” period. Some of the companies we own will see some slowdown in growth and all are experiencing a decline in share price currently, but they will survive and likely reach new highs in 2021.
Sadly, many American businesses may disappear by summertime because so many are literally bringing no revenue during the national shutdown. It’s widely expected that without a bailout, most U.S. airlines will go bankrupt within months. Nationwide, it’s widely expected that privately owned retail shops, restaurants, and similar businesses could go out of business in months. The Energy industry is about to experience a wave of bankruptcies unlike anything seen before. Manufacturing companies, including giants like Ford and GM, are preparing for doomsday scenarios. Few business models are able to withstand months with no revenues.
When we re-engineered our investment strategies last Fall, we specifically wanted to avoid businesses that exhibited these characteristics. Recurring revenue service businesses with products and services deemed “essential” are far less exposed to the problems many businesses will face because revenues will still be coming in during a Coronavirus shutdown, even if business in general is depressed due to the global recession.
We are likely already in a recession and may be headed for worse. But thankfully we took action in making our portfolios as recession resistant as possible months before this pandemic started. The Dow Jones has lost almost 5 years of gains thus far and the small cap stock index is at its lowest point since 2013. But the bounce back in share prices of the best companies is likely to rebound very quickly even if the weaker businesses recover slowly, if at all.
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.
Our U.S. Equity strategy invests in U.S companies with significant competitive advantages, barriers to entry, preferably a recurring revenue model, and tends to perform well during market selloffs. We only select the most dominant companies in their field. The desired holding period is long term, hopefully perpetually. This strategy consists of U.S. stocks only and is benchmarked to the S&P 500 Index. The U.S Equity Strategy consists of all accounts that hold U.S. stocks of any market capitalization above $50 million. 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.
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, 2013. 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.
Our Global Equity strategy invests in companies with at least 50% of revenues outside the U.S. The strategy invests in companies with significant competitive advantages, barriers to entry, preferably a recurring revenue model, and tends to perform well during market selloffs. We only select the most dominant companies in their field. The desired holding period is long term, hopefully perpetually. This strategy consists of U.S Stocks with revenues of 50% or greater coming from outside the U.S and non-U.S. stocks and is benchmarked to the MSCI ACWI (All Country World) 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.
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, 2013. 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.
Our Blended Equity Strategy is composed of a mix of our U.S. Equity investments and our Global Equity investments. The purpose of this strategy is to hold stocks of high quality companies that maintain significant competitive advantages over their peers, barriers to entry, preferably with a recurring revenue model, and tends to perform well during market downturns. We only select the most dominant companies in their field. The desired holding period is long term, hopefully perpetually. The strategy is benchmarked to the MSCI ACWI. 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.
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, 2013. 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.
The Conservative Income strategy composite creation & inception date is 8/1/2011. 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 composite creation date was 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.
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, 2013. 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. The composite contained fewer than 1% of non-fee paying accounts at the end of each year.
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 Fee Schedule for all composites.
Assets Under Management ($)
Annual Fee (%)
First $250,000
1.50%
Next $250,000
1.25%
Next $500,000
1.00%
Next $1,000,000
0.75%
Over $2,000,000
0.50%