Monthly Archives: November 2017

Will Low Costs Eventually Carry a High Cost?

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November 27, 2017

As investment professionals, we are very mindful of the expenses paid for holding particular investments. In recent years regulators, academics, and the media have heralded the advantages of keeping investment costs low through passive, index-based investing.  Active management, which compensates a team to select securities, has been criticized. The evidence is pretty compelling.  Over recent years few active managers have beaten the market after fees.

S&P Indices publishes a scorecard comparing active manager returns versus their benchmarks.  Through June 2017, 83% of large cap US equity active managers underperformed the five year returns of the S&P 500 index after fees.  Strong recent equity returns may have played some part in this underperformance since there is evidence to suggest that active management does better in bear markets.  Part of active management’s strength in bear markets stems from managers holding cash in their portfolios, which provides some insulation from a downturn.  More importantly, active managers can deviate from market weightings, opting to own less of the market’s recent winners, or none at all.  If enthusiasm for those “winners” wanes, and their share prices slide, the managers’ holdings in other parts of the market may prove less sensitive to retreating returns.

Our firm has supported the use of some low-cost, passive investment vehicles for exposure to certain market segments such as large US Cap. The simple fact is that active managers have to produce higher before-fee returns in order to justify their higher fees.  Any fee drag from underperforming active managers can have wealth-reducing consequences.  However index based investors need to recognize that during challenging market stretches the indices will simply follow the market down. Over the long term this should be of little consequence provided that the investor is prepared to follow their strategic plan, and not succumb to the emotions which can lead to selling when prices are low.

The average American investor is of course a person with human behaviors and tendencies.  Social science research shows that centuries of survival experience have wired humans to weigh losses more heavily than gains.  Instincts kick in when perceived threats arise, making corrective action feel like the only acceptable option.  When the market-tracking indices begin to fall, at what point will the fear reflex of a given investor cause him or her to sell, and will this point be near the market bottom? When markets turn down, it takes fortitude to follow the instinct-defying advice of Warren Buffett: “Don’t do something, just sit there.”

Retirement plans and robotic investment services have increasingly emphasized passive investing. This has made sense during times when returns are high. Moreover the visible risk is currently low, as evidenced by a recent WSJ observation that 67 consecutive days had passed without a 1% up or down move in the Dow.  However we cannot help but be concerned that there are a lot of index holding investors out there who do not have a long term strategy to provide a bulwark against rash decisions during a market sell off.  Whenever it arrives, the next major downturn will test how well the average investor can resist cutting their index based equity exposure at the worst possible time.

Cam Simonds

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Shopping Madness

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November 20, 2017

As the holiday season approaches, so does the time for our annual shopping binge. Whether we are big online shoppers, or prefer traditional brick and mortar stores, there is no denying that we spend a lot more money during the last six weeks of the calendar year.

Black Friday is the official kickoff of the holiday buying season in the United States. From that day through the end of the year, retailers generate somewhere between 30-40% of their annual revenue. Moreover, according to the National Retail Federation, over 136 million Americans are expected to shop during this Thanksgiving weekend alone. The days between Thanksgiving and Cyber Monday capture 20% of all holiday online shopping.

Given such large figures it is tempting to conclude that Black Friday and Cyber Monday are the world’s biggest shopping days of the year. Such a conclusion would be wrong. The award for the biggest one day spending splurge each year is now firmly in the hands of the Chinese.

You might have heard of “Singles Day” in China. This day is celebrated annually on November 11th. The “tradition” was started as recently as the 1990s as an anti-Valentine’s day for bachelor university students.  From such bizarre beginnings, Singles Day has morphed into a shopping extravaganza, with the considerable help of Alibaba, China’s equivalent of Amazon. To put the numbers in context, the 2017 Singles Day sales for Alibaba alone were $25.4 billion. This compares with combined Black Friday and Cyber Monday sales in 2016 of $6.79 billion.

What makes Singles Day for consumers so special? Well, it is not just about the 140,000 brands and 15 million products offered, it is also the enjoyment of the entertainment provided. Shoppers can use interactive apps to download raffle tickets, coupons, and gift certificates, and watch “See Now, Buy Now” fashion shows. This year’s festival included a star-studded gala with Nicole Kidman and Pharrell Williams. All this takes place in order to increase the excitement and expectation for the sales to begin. Daniel Zhang, CEO of Alibaba Group Holdings, has expressed his desire to take the event to even greater heights, including the possibility of expanding the gala beyond China’s borders. Singles Day is being re-branded as 11.11 Global Shopping Day, and looks set to remain comfortably the biggest shopping day on Earth.

The rapid growth of Singles Day is further proof of two clear trends relating to China. First, the continued rise of the Chinese economy. At current rates of growth, China’s economy will overtake that of the US in size by 2028. Second, China has developed a generation of consumers with views more associated with people in market based economies than in a country run by a communist party.

With all this talk of consumerism I must remind myself that the time we get to spend with our loved ones is far more important than anything money can buy. From our small NHCO family to yours, have a wonderful and blissful Thanksgiving.

Nirvanna Silva

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