Category Archives: Client Letters

Q2 2017 Quarterly Letter

August 2017

It has been a good year for equity investors across the board. All but four of the world’s thirty leading stock indexes were positive in the first half, an occurrence not seen since 2009.  International stocks outperformed domestic stocks for the second consecutive quarter. The S&P 500 was up 3.1% in the second quarter while developed international stocks were up 6.1%, and emerging market stocks were up 6.3%. For the year-to-date period, the S&P 500 was up 9.3%, while developed international equities and emerging market equities were up 13.8% and 18.4% respectively.

One phrase we are hearing more often in calls with analysts and managers is “synchronized global expansion.”  Corporate earnings have picked up, not only in the U.S. but also in Europe and Asia. Global manufacturing surveys are pointing to continued broad-based growth at home and abroad. Moreover, central bank policy remains broadly accommodative, at least for now. All these factors contributed to an unusually strong and broad-based rally for global equities during the first half of the year.

q2 letter

Source: American Funds

We are beginning the earnings season which kicked off in July and runs through August. Analysts are expecting earnings growth of 6.4% for the second quarter and 9.8% for all of 2017. We will be watching earnings closely and listening for forward guidance to see if companies are raising or lowering their expectations. Early indications in this regard are positive.

We will also be monitoring developments around central bank policy. The Fed has continued raising U.S. short-term interest rates, most recently raising them another 25 basis points in June, while the European Central Bank and the Bank of Japan have begun to contemplate reducing their stimulative policies abroad. It will be interesting to see how equity markets respond as the environment shifts away from central bank easing and towards policy normalization. Thus far, confidence in central bankers remains high causing very little volatility in equity markets. Longer term, a shift towards tighter policy could be a headwind for equities, but we see little evidence of that at present.

Another intriguing trend is the shrinking number of public companies.  Over the past 20 years through 2016, the number of publicly listed US companies has fallen by about half.  One reason has been corporate consolidation through merger activity, enabled by companies being able to borrow at low interest rates.  Another contributing factor is decreased initial public offering volume, with fewer companies taking on the regulatory burden of becoming a public company.  Facing a slimmer public market opportunity set, we continue to think globally and devote energy to sourcing high quality opportunities in the private markets.  When suitable, we think that exposure to nonpublic companies can be additive to client portfolios.

Investors continue to debate the elevated levels of the equity markets. The combination of strong corporate earnings, steady and thoughtful normalization by central banks, and the shrinking supply of public companies, offers bright fundamentals for stock investors. At some point a pull back is almost inevitable. The test will be whether such a pull back undermines the market’s confidence and optimism.

We are pleased to present our new quarterly reporting format which you will find enclosed with this letter. Improved reporting has been a strategic focus for us as we have worked to convert years of historical data into a new system that will enhance our analysis and reporting capabilities. We look forward to discussing the new format with you soon.

We are delighted to be working with two interns this summer. Muhozi Aimable is a rising Senior at the University of Georgia where he studies Finance and competes in Division 1 SEC cross country and track and field events. Muhozi moved to the states in 2011 from Malawi.  Zach Scott is a rising Junior at Rhodes College studying Economics and Spanish. Zach hails from Boulder, Colorado and will be studying abroad in Madrid in the Fall.

Finally, we are humbled with a sense of profound gratitude as we continue to celebrate our first ten years in business. We have endeavored to create something unique and very special here at Nicholas Hoffman & Co. None of this would have been possible except for the extraordinary families we have been so fortunate to work with over the years.

As always, we welcome your thoughts, and appreciate the confidence you have placed in our firm.  We are grateful for the opportunity to work with you and your family.

Nicholas Hoffman and Co.

Q1 2017 Quarterly Letter

April 2017

The first quarter of 2017 was a good one for equity performance across the board.  The S&P 500 was up 6.1%, small cap stocks were up 2.5%, and the technology heavy NASDAQ index was up 9.8%.  Foreign stocks performed even better with the MSCI EAFE Index of developed international stocks up 7.3%, and the MSCI Emerging Markets index up 11.5%. Bonds were the laggards by comparison, with the Barclays Aggregate bond index up only 0.8% over the same period.

Despite all the talk of heightened political uncertainty, volatility continues to be unusually restrained in the markets.  For the quarter, the VIX Volatility Index experienced its second lowest quarterly average on record, and the Dow Jones Industrial Average experienced its lowest average daily change since 1965.  This has been an extended period of exceptionally low volatility.

Towards the end of the quarter we saw a rotation out of sectors expected to benefit from increased fiscal spending, decreased regulation, and reduced corporate taxes.  Financials and industrials, for example, lost some of their post election momentum, while more growth oriented sectors like technology that rely more on non-US revenues regained leadership.  Apple, the world’s most valuable company with a market cap of  $759 billion, was up nearly 25% in the quarter while Goldman Sachs was down -3.8% over the same period.

Over the past few months international stocks from developed countries performed better than US domestic stocks, and emerging markets performed even better still.  This could be the beginning stages of a longer-term shift toward more favorable international performance.  As you can see in the long-term chart below, domestic and international stocks were somewhat correlated for a very long period of time.  In recent years, there has been a significant divergence as investor preference for the perceived safety of domestic stocks has led them to surge ahead while international stocks have lagged.q1 17

Source: Fidelity Investments

We think this wide divergence is unlikely to be permanent. Over time, we expect the gap to close as international stocks in both the developed and emerging markets begin to perform relatively better than domestic stocks, and the two markets begin to converge again.  Of course, even if our expectations on convergence are correct there is still great uncertainty about timing.  Most likely it will be measured in years rather than months, and it will proceed in fits and starts rather than in a straight line.  Nevertheless, we believe the current environment presents a potential opportunity in overseas equity markets.

Using Nobel Laureate Robert Shiller’s valuation method, international stocks are 36% below their long-term average value while U.S. stocks are 81% above their long-term average value. This disparity is what’s driving the divergence between domestic and international stock performance.  Over time we would expect these markets to move toward their long-term averages.  Even a partial “reversion to the mean” could produce a relative tailwind for international stocks and a relative headwind for domestics.

On administrative matters, we have enclosed an explanation of material changes to our ADV Brochure filed in February, and a separate letter which highlights several issues relating to the custody of assets at Schwab.  Please let us know if you would like a copy of the full ADV Brochure.  Also, please let us know promptly of any significant change in your financial circumstances that would require revisiting your investment objectives or re-evaluating the management of your assets.

We are delighted to announce that Michael Masters has become an equity partner in the firm bringing the total number of partners to seven.

2017 marks the tenth anniversary of our firm! We feel a profound sense of gratitude as we begin to celebrate our first ten years in business.  We are very thankful for the wonderful families we have been so fortunate to work with over the past decade.  We remain committed to building an organization that will provide enduring value to the families we serve, and the communities in which we live for generations to come.  Without you, this would not be possible.

As always, we welcome your thoughts, and appreciate the confidence you have placed in our firm. We are grateful for the opportunity to work with you and your family.

Nicholas Hoffman & Co.