4 Reasons Putnam Investments is back in the Winner’s Circle

Contributed by: Jaclyn Jackson

During the first quarter of 2015, I had the pleasure of attending Putnam Investment’s Research Analyst Meeting.  Even though a giant snowstorm hit the area just days before, positive energy seemed to be bursting at the seams in Boston. Admittedly, the Patriots had just won the Super Bowl and the victory parade was the day before the conference started, but the positive feeling at Putnam Investments came from something else.  It came from a proud shift in company culture that helped propel the firm back into its rightful spot in the winner’s circle of investment companies.

Putnam’s Fall & Rise

Having had their reputation shattered in 2003 after Securities and Exchange Commission market timing and late trading investigation, Putnam’s net asset level plummeted dramatically through 2008.  Fighting to stop the bleeding, Putnam decided to completely revamp.  On the first day of the conference, I had a chance to listen to R. Jeffrey Orr (President and CEO of Power Financial Corporation) and Robert Reynolds (President and CEO of Putnam) discuss how they turned the company’s culture on its head.  I remember R. Jeffrey Orr saying that when he first came to Putnam, there was a “playing not to lose” attitude and his goal became to shift that to a “playing to win” attitude. 

The Changing Culture at Putnam

I was most impressed by the analysts’ panel.  In line with the changes Orr and Reynolds set out to accomplish, the analysts talked about how Putnam’s research culture evolved to become more entrepreneurial and team based.  These fundamental changes have improved fund performance and subsequently brought Putnam back to life.  Many factors helped make that change happen, but here are what I see as the top four reasons Putnam is back in the winner’s circle:

1. Shared Research: In the old company culture, credit analysts and equity analysts never crossed the aisle to work with each other.  Now, it is common for credit and equity analysts to combine research (as credit research often captures a perspective that differs from equity research performed on the same company and vice versa) to make better assessments of a company.
2. Personal Accountability: Each analyst constructs his/her own individual portfolio and is rewarded based on how well his/her portfolio performs.  In this way, analysts are acknowledged for all the good calls they make and not just the calls they make that the portfolio manager adapts to the fund portfolio.  This encourages good ideas, individual thinking, high conviction, and entrepreneurship. 
3. Different Compensation Structure: Putnam’s compensation structure differs from other companies in that, typically, analysts fight over a lump sum amount intended to be split among them. The traditional structure often pits researchers against each other; even if more than one person has a good year, only the best researcher is compensated.  Putnam’s structure allows everyone to be compensated for the choices they make in their individual portfolios; essentially, everyone can be rewarded when they make positive attributions.  Culturally, the compensation structure helps thought sharing and helps build comradery (provided analysts are no longer motivated to hoard good ideas).
4. Efficient Communication: Communication has improved between portfolio managers, analysts, and traders.  To start, everyone is centrally located - meaning you can physically see when someone is at their desk and consult with them as needed.  This informal meeting style has helped Putnam eradicate the long, formal meetings they once had.  Check-ins are shorter, but more frequent and have generated more time for everyone to fulfill their job responsibilities.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Jaclyn Jackson and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Are we Seeing Inflation or Deflation in the US Economy?

Contributed by: Jaclyn Jackson

The Fed has created investor concern by stumbling away from its hope of 2% inflation.  That concern has given rise to a polarizing inflation/deflation debate. With a fragile recovery at stake, the Fed struggles against overcoming persistently low inflation rates and losing the public’s faith.  At the same time, investors build their cases for inflation or deflation; each side posing strong arguments for why either threatens the US economy.   

Evidence of Deflation

Investors who find themselves in the deflation camp argue that fears that the European Central Bank’s bond buying program will make the euro less attractive and send investors flocking to rising currencies.  As a result, European growth will improve, but at the expense of growth in the US, Switzerland, and other countries with strong currencies.

Moreover, January 2015 marked the third month in a row that prices for goods declined, clearly discouraging hope of a healthy growing US economy.  With a -0.1% price decline in January, goods actually cost less than they did one year ago. Similar to 2009, deflation affects falling prices, consumer spending, and adds pressure to corporate profit margins, typically spawning wage reductions and increased unemployment.

Not to mention, some dispute whether quantitative easing even worked.  The Fed made huge bond purchases with the intention of increasing the money supply.  Ideally, central bank asset purchases should increase bank reserves and the money supply, resulting in increased lending by banks. However, in reality, banks were so panicked during the financial crisis that they held on to the excess money and did not lend. There can’t be inflation without lending.

Argument for Inflation

Conversely, investors in the inflation camp argue that the energy sector, especially cheap gas prices, is the primary driver of falling goods prices.  Moreover, they believe recent price stabilizing marks the beginning of increasing gas prices moving forward. Essentially, as gas prices rebound, the inflation figures should also put deflation worries to bed.

What’s more, if you exclude energy from consumer prices, staples such as food, shelter, and medical care have increased 1.9% from 2014.  When the most volatile categories like food and fuel are removed from the equation, core inflation is steady and up 1.6% from last January.  These numbers reflect the economy being more in line with the Fed’s 2% goal.

Despite looming worries, economists are still optimistic about the overall improvement of the US economy.  Many credit quantitative easing for keeping interest rates low, building job creation opportunities, and preventing the Great Recession from becoming the second Great Depression. However, it is also important to note that critics of quantitative easing say that a long-term effect could be high inflation.

The Verdict

This is not a black and white issue.  There are areas of inflation and deflation pulling the US economy in both directions.  We are watching bank stability, consumer spending, and credit to monitor the situation.  Yet, taking the glass half full perspective, investors can be comforted that the United States’ core inflation is key in differentiating the U.S. economy from more challenging economies like Japan and the Eurozone. 

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Jaclyn Jackson, Investment Research Associate and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Jaclyn Jackson, Investment Research Associate and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss.

Is a Market Correction Coming Soon?

Contributed by: Matthew E. Chope, CFP®

I’ve said before that I believe market corrections are as natural as the day is long. That’s why, in my last blog, I shared 3 steps to prepare for market volatility. But how do you know if the winds of market change are about to blow? These are some indicators I like to watch.

The Bigger Picture: The Fed & Price Ratios

Beyond the US equity markets, there is more going on behind the scenes that can come into play. In my opinion the Federal Reserve has been keeping money extremely cheap for an extended period of time.  The Fed wants to stimulate the economy and encourage job growth. Recently low inflation has allowed the Fed to stay on this path.  This works very well for the US treasury also since low interest rates keep the US Government balance sheet solvent and interest expenses manageable.  It has also allowed banks the time needed to replenish balance sheets and squeeze out the bad debt on their books. 

Earnings are usually necessary to allow equities to sustain long-term values.  Generally, the price of a security today is the sum of all future discounted cash flows into perpetuity.  When earnings are stable and getting better and money is cheap this allows for higher price multiples like we are seeing today.  We are at or near the highest price ratios ever witnessed in the US equity markets.  The following chart is measuring the price to many other gauges of earnings cash flow and book value over the last 65 years.  It’s not much different if you view it over the last 200 years.

Ratios of various equity valuations

We are at this point in history because of cheap money, cheap labor and now even cheap energy (which is more of a positive shock).  Money, Labor and energy are the 3 main expenses that go into every income statement of most companies in the country. The next two charts give a valuation of corporate equities values to nominal GDP (price of publicly traded companies/gross domestic product)  the important thing to see here is that the chart is indicating very high prices compared to output from a historical standpoint.

The next chart below is very similar depiction of valuation. Each point on the chart is the price of S&P 500 stocks at that point in time divided by the previous 10 years of earnings for the S&P 500.

Shiller P/E for the S&P 500 Chart

More Indicators to Watch

From a historical standpoint, these 3 expenses for companies are close to, if not at, the lowest they have been for a generation or two.  It’s hard to see how it can get much better. On top of that, we have moderate energy prices again.  That indicates that earnings should be fantastic (and they are), but what's next?  When the cost of money increases and labor costs rise again (as projected for later this year or early 2016 in the chart below) we could see the earnings improvements slow and possibly fall.  And what if there is any type of energy shock the other way (and there always is eventually)?

The following chart from GMO provides some understanding of the last 50 years of initial unemployment claims.  When initial claims are high, we are usually deep into a recession. When they are rising, we are usually entering a recession. And when they are near the level we see today, the labor force is beginning to tighten, which typically leads to wage inflation and motivates the fed to increase interest rates and slow the economy down from overheating.

This chart is initial claims for unemployment 1965 to present.

Winds of Change?

The wind, which has been blowing behind us for so long, has allowed us to feel confident, but it’s beginning to slow considerably from some of the indicators I watch.  Over the next year we could see the economic winds actually begin to blow at us.  On top of that some don’t see a lot of room for upside in US equities over the next 7 years as shown in the chart below.  Those at GMO have forecast for US equities to have negative returns after counting for inflation.  So, if you haven’t recently, now may be the time to review your portfolio allocation, time frame and risk tolerance with your advisor.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matthew Chope, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

3 Ways to Prepare for a Market Correction

Contributed by: Matthew E. Chope, CFP®

Markets need to correct from time to time – I believe it’s as natural as the day is long. We may even be past due. I attend a lot of conferences and lectures about everything related to finances, financial planning, investments and economics – All the fun stuff!  Well, fun to me.

Recently, I heard the presenter talk about this chart, the “S&P 500 Growth/Value index Ratio”.  He actually said the S&P 500 still has a ways to go - like 25% before it's at the same peak of 2000. My thought was: Why anyone would want to get back to the type of silliness we had in 2000? 

Three years ago I did not see excesses in the market valuations and most economic indicators were still getting better, and rightly so.  I believe today valuations are rich.

Economic Cycle in Extra Innings

Someone asked me recently what inning we’re in for this economic cycle. I responded: Probably the 13th inning! The average lifespan of a US economic cycle is 4.9 years and we are almost at our 6th year.  However, there may be time left. We could see the rest of this inning, maybe more, before a 10% downturn or more.  A 10% downturn is a very normal annual event, historically speaking. And we have not had a 10% downturn in the Dow or S&P 500 since the 3rd quarter of 2011 -- almost 3 ½ years.

3 Steps to Prepare for Volatility

At The Center, we strongly believe in a philosophy of investing, not attempting to time the market.  So I’m not here telling you this a market top.  No one is smart enough to do such a thing with any consistency and getting in and out can be more detrimental than staying put over the long haul. These are the 3 steps I suggest to my clients no matter the market cycle:

1. Make sure your long-term allocation is still appropriate

2. Double check that your time frame is correct for the investments in your portfolio

3. Review and consider your risk tolerance for those investments

If there is money you need in the next 12 months for a project or money invested for less than 5 years, discuss with your planner where to put this so that it has less volatility. In my next blog, I’ll take a look at the bigger picture and what to watch for signs of a potential downturn. 

Matthew E. Chope, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Matthew Chope, CFP® and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

View from the Morningstar Conference

 Nearly 2,000 people gathered at McCormack Place in Chicago this June.  The views of the Chicago skyline, while beautiful, were not the views I flew to Chicago to see.  Advisors, asset managers and press gather once a year at this conference to listen to some of the greatest minds in investing share their views of the markets and economies around the world.  This is one of my favorite conferences of the year. 

We heard from legendary investors including Michael Hasenstab, PIMCO's Bill Gross a.k.a. The Bond King, and AQR's Cliff Asness a.k.a. The Father of Momentum Investing.

Bill Gross: The New Neutral

Keynote speaker, 70-year-old Bill Gross did not disappoint.   Very aware that his image has been dinged in recent months with the departure of his heir apparent Mohammed El Erian, and subsequent departure of $50 billion of money flowing out of his flagship product, he took the stage wearing sunglasses and spent the first 10 minutes of his speech poking fun at himself while jokingly trying to brainwash the crowd and press Manchurian Candidate style.  All fun aside, he came to the conference to coin a new phrase the “New Neutral".  He is encouraging investors to look at interest rates from a different, more muted perspective.  What does this mean for investors?  Overall lower return expectations going forward for stocks and bonds.  This is an extension of PIMCO’s 2009 “New Normal” which stated that economic growth will be sluggish as it has been. 

Employment Outlook: Labor Shortages?

Bob Johnson, Morningstar's very own economist, predicted that next summer at this conference the hot topic of discussion will be labor shortages.  He explained that the unemployment rate remains high despite the extremely large amount of open requisitions for new job postings.  He argues that there is a mismatch in job skills causing the unemployment rate to stagnate despite companies needing to hire so many.  He goes on to explain that the Federal Reserve cannot fix this skill mismatch, only the private sector, corporations and individuals, can acquire the necessary skills needed to match people to the needed job openings.

International Opportunities

Emerging markets and Japan were hot topics of discussion.  "Go anywhere" Investment managers, with the world as their oyster, prefer to access emerging markets through companies domiciled in developed markets that derive most of their revenues by selling to emerging market consumers.  Japan was a hotly debated topic, with about half of the experts loving it and half not wanting to touch it with a 10-foot pole.

In addition to these larger investing and macro-economic themes, I also find value in speaking directly with portfolio managers about their investing processes and trying to discover new strategies that may be beneficial to our clients’ portfolios.  There is never a shortage of ideas after a few days spent at Morningstar listening and learning!

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Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in wellestablished foreign markets. Investing involves risk and investors may incur a profit or a loss. Bob Johnson, Michael Hasenstab, Bill Gross, Cliff Asness are independent of Raymond James. Any opinions are those named herein and not necessarily those of RJFS or Raymond James. C14-022058

Raymond James Alternative Investment Conferences

 Risk seemed to be the word on everyone’s lips at two recent Raymond James conferences. In early April, Portfolio Manager Angela Palacios attended a conference in New York dedicated to alternative investment. She attended sessions where experts spoke on topics including Venture Capital, Real Estate, and Managed Futures. The goal of many of these investment options is to seek to reduce overall portfolio risk over time. Because volatility has been very low over the past few years, investors have ignored some of these risk-mitigating investing options, leaving them behind the flashier equity market returns. Angela’s take-away from the conference:

This is precisely the time to be reminded why these alternatives are an important aspect of all portfolios.”

Center Partner Matthew Chope attended another Raymond James conference in April. The Las Vegas alternative investment conference echoed the theme of risk management. Matt attended sessions that broadened his knowledge about mitigating risk by adding specialized securities to portfolios. Matt said the strategy comes with challenges:

We want to find ways to mitigate risk without impacting long-term returns. I came back looking for ways to implement these ideas for our clients on a case-by-case basis.”

With a vigilant eye on the ever-changing landscape of investing, The Center team is committed to staying at the forefront of the latest strategies and then putting them to work for our clients.

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Alternative investments are available only to those who meet specific suitability requirements, including minimum net worth tests. Please review any offering materials carefully, and consult with your tax advisor or accountant prior to investing, There are special risks involved with alternative investments, including investment strategies, and different regulatory and reporting requirements. There can be no assurance that any investment will meet its performance objective. Futures trading is speculative, leveraged, and involves substantial risks. Investing involves risk and there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss. C14-013296

Happy St. Patrick's Day!

 

Happy St. Patrick's Day from everyone at The Center!

Research Trip to Wall Street

In April, Dan Boyce and Melissa Joy joined a small group of financial planners for three days visiting Wall Street Firms. With an exclusive group of 30 participants from around the country, discussions were highly interactive. The main focus of the meetings was on Asset Allocation and Portfolio Construction in today’s market environment. Main sessions were held at Blackrock, JP Morgan Asset Management, and Goldman Sachs Asset Management.

The low interest rate environment and future return scenarios for bonds was an enduring theme across firms. It was interesting to see different strategies and perspectives based upon individual firms. Perhaps not surprisingly, the European debt crisis was also a dominant topic. We also always find value of being able to “look under the hood” of financial firms on their turf.

In addition to the larger group meeting, Melissa visited portfolio managers at IVA and American Century. Intellectual curiosity is a cornerstone of our research process and an important component to our investment committee decisions is hands-on due diligence. One of the highlights of the trip was sharing ideas with other financial planners and wealth management firms. We value insights from our peers and are always open to new ideas.

Center Team Attends Invitation-only Raymond James Investment Conference

Angela Palacios, Melissa Joy, and Tim Wyman. The three headed to St. Petersburg, Florida January 25^th and 26^th to attend the Portfolio Manager Group investment conference. Top industry experts talked portfolio monitoring, analyzing risk in portfolios, and even about the current political environment’s impact on investments.

“It is very energizing spending time with a group of peers and sharing ideas,” Angela said of the conference. “It provides valuable insight into how to better serve our clients.  Also, it is always a great opportunity to hear from economists and money managers in person as this is key to our investment decision process.”

Melissa and Tim joined the experts at the podium, sharing The Center’s processes in the portfolio monitoring space. Tim explained the history of The Center’s Investment Process and Melissa detailed ten tips for monitoring investments for clients. The audience was particularly interested in learning about our Due Diligence Questionnaire, which is a pre-requisite for investment in our model portfolios. Our investment communication process and firm-wide investment strategy were also well-received.

The advisors at the conference are part of an ongoing Institute of Investment Management Consulting group (IIMC) that was formed last year.  The goal of the IIMC is to provide institutional quality education for investment management. 

Learning from peers and sharing with others puts our process to the test. By that standard, our trip was an overwhelming success. And, coming from Michigan, the weather wasn’t half bad either.

Clients and Friends: Please Join Us

WHAT: 2012 Financial Planning & Investment Opportunities FOR: Clients and Friends of The Center Clients are encouraged to bring a guest WHEN: Offered at two convenient times. Please choose which time works best for you! Tuesday, February 14th, 10:30 am - noon Wednesday, February 15th, 7:00 pm - 8:30 pm WHERE: Bloomfield Twp Public Library 1099 Lone Pine Road, Bloomfield Hills, MI 48302 www.btpl.org CONTACT INFORMATION: Gerri Harmer at (248) 948-7900 or Gerri.Harmer@CenterFinPlan.com www.CenterFinPlan.com

Register Online Now! Register for: Tuesday, February 14th Register for: Wednesday, February 15th