Category Archives: Client Letters

Q4 2017 Letter

January 2018

It is our custom each January to reflect on the year that has ended and look forward to what we aim to accomplish in the coming year. We are particularly reflective this year as we look back not only one year, but on our firm’s first decade in business. While many things have changed over 10 years, our core values and guiding principles remain the same.

When we founded the firm in the Fall of 2007, we intended to build something distinct and enduring. It started rather modestly, with some loyal client families and an unwavering commitment to serve them well. The young firm was tested early with the arrival of the Great Recession. We were able to navigate this difficult period by relying on sound time-tested principles, thoughtful strategies and discipline.

The firm grew organically over time, propelled by warm introductions and referrals from our clients. This organic growth enabled us to broaden and deepen our capabilities. One area where growth has been most beneficial is private investments. This includes private real estate, private debt, and private equity. These opportunities are often more nuanced and complex than opportunities in the public markets. Our continued growth allows us to be thorough in evaluating private investments and enhances our standing in negotiations with both current and potential private investment partners.

Another area where scale has been helpful is in the use of technology to provide an enhanced portfolio monitoring and reporting platform. Furthermore, we discuss investment opportunities on an almost daily basis, and our Investment Management Committee meets on a monthly schedule. We have rigorous due diligence processes in place to evaluate potential and existing investments. We work in teams to service each family relationship. We honor diversity of experience and opinion. All of this contributes to an enduring culture of service. The whole is indeed greater than the sum of the parts.

q4 2017Source: Federal Reserve Economic Database, S&P Dow Jones, and NHCO (latest available data)

As we look forward to 2018 and beyond, we will be following several trends and themes. One area of particular interest will be the Tax Cuts and Jobs Act of 2017. For a married couple, the estate tax exemption doubles from approximately $10.9 million to $22.4 million. The standard deduction nearly doubles from $12,700 to $24,000 under the new law. At the same time, State and Local tax deduction will now be limited to $10,000. We will be looking closely for planning opportunities and strategies that make sense in this new environment.

On the investment front, markets continue to advance while experiencing historically low levels of volatility. On some measures, this was the least volatile year in the stock market since 1965. The S&P 500 finished the year up 21.8% while international stocks were up 25.6% and emerging market stocks were up 37.3%. Economic growth has been strong and widespread. Corporate earnings have advanced both here and abroad. The S&P 500 has risen for 14 months in a row. Many analysts have been predicting a return of market volatility. So far, we have not seen it, but it would be naive to assume this environment will not change at some stage.

We continue to see potential in international and emerging markets for long-term investors. International markets are somewhat cheaper than domestic markets on some measures. Emerging markets will offer growth and diversification over long periods.

Markets have always been unpredictable and no one knows what the future holds. In light of this uncertainty, we will continue to be driven by our core values and time-tested principles. We will continue to focus on long-term strategic thinking. Planning carefully around expected cash flow requirements remains integral. Continued priorities will be to maintain globally diversified portfolios and be vigilant about the adverse impacts of taxes and fees, while rebalancing away from what is more expensive towards what is more attractively valued. We will continue to scour the public and private markets for attractive investment opportunities. These are the activities that have served our clients well over the years.

We are pleased to announce that Shelley Castaldi has joined the firm as Family Office Coordinator. Shelley is from London and holds a Bachelor of Science in Business & Financial Economics from the University of Leeds in the UK. She has previously worked in a variety of administrative roles. We are delighted to welcome Shelley to the team.

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, and we wish you a happy, healthy, and successful 2018.

Nicholas Hoffman & Co.

Q3 2017 Letter

October 2017

It continues to be a good year for equity investors across the board. The S&P 500 Index finished the quarter up 14.2% year to date, including reinvested dividends. The Russell 2000 Index of small and mid-cap stocks was up 10.9%, developed international stocks were up 20%, and emerging market stocks were up 27.8% over the same period.

Many of the themes we have written about recently remain in effect including slow but positive economic growth, low interest rates, subdued inflation, and low market volatility. In addition, the stock market continues to move higher, building on the second longest bull market advance in history. Central bank policy is garnering more attention now that the Federal Reserve has announced its intention to gradually reduce the size of its balance sheet, shifting from a policy of quantitative easing to a policy some have called quantitative tightening.

Prior to 2008, the Federal Reserve’s balance sheet had been modest and stable for many years. In response to the Great Financial Crisis, the Federal Reserve and other central banks embarked on a series of unconventional policies which included large scale asset purchases known as quantitative easing. In simple terms, quantitative easing works like this: a central bank creates money and uses it to purchase securities in the open market. Central bank purchases inject cash into the system and take tradeable securities out of the system. The supply of cash goes up and the supply of securities goes down. This is intended to provide liquidity, lower interest rates, and increase the price of financial assets creating a wealth effect that will in turn spur growth.

It took 100 years for the Fed’s balance sheet to reach $800 billion. From 2008 to 2014 it grew to $4.5 trillion. In other words, the Fed more than quintupled the size of its balance sheet in order to stimulate borrowing and spending. Similar actions have been taken by the European Central Bank (ECB) and the Bank of Japan. As a result, global central bank balance sheets have grown to a whopping $14 trillion. To put this in context, in order to blow through a trillion dollars in a single year you would have to find a way spend $1.9 million every minute (with no sleeping allowed).

In the era of quantitative easing, global central banks have been price insensitive buyers of mortgage and other asset-backed securities, government bonds, corporate debt, and even equity securities. The Fed now owns approximately 30% of all outstanding mortgage-backed securities as compared with none before the financial crisis. The ECB has purchased the bonds of Nestle, Unilever, Shell and other publicly traded companies due to a scarcity of government bonds. The Bank of Japan owns 40% of all Japanese government bonds and a remarkable 71% of all shares in Japan-listed ETFs.

Many believe these massive and unprecedented purchases have distorted financial markets. Interest rates are lower than in prior bull markets, credit spreads are tighter than usual, and equity prices are higher than they ever have been, except for a brief period leading up to the peak of the technology bubble in 2000. A recent cover story in The Economist describes it as “the bull market in everything” and asks “is it time to worry?” While investors can always find sources of worry, long stretches of high returns and low volatility can lull investors into forgetting that risk exists.

All investors should take note that the heady days of quantitative easing are coming to an end. The Federal Reserve is beginning to reduce its balance sheet by $10 billion a month, gradually increasing the pace to $50 billion a month next year. The ECB is expected to gradually reduce purchases from $90 billion a month to around $50 billion a month and then completely end purchases by the end of next year. The good news is that these moves have been well telegraphed in advance and markets have reacted favorably thus far. The pace is slow and gradual but it remains a fundamental shift in the environment that has been so supportive of risk assets globally. We will continue to monitor these developments closely.

q3 2017

Source: DoubleLine Funds

We are pleased to announce that Lloyd Flood has joined our firm. Lloyd brings three decades of experience working as a portfolio manager, trader, and financial analyst. He is a CFA charterholder and holds an undergraduate degree in Business Administration from Auburn University and an MBA from Mercer. We are delighted to welcome Lloyd to the team.

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.