Invest for the future, not the past

Dan WilliamsDan Williams, CFA, CFP, Investment Analyst

A common movie plot device is giving the story’s protagonist the ability to redo the past and see what might have been. For example in “The Back To The Future” franchise we have Marty McFly shown the huge changes to the present or future based on a few changes in the past. Marty then gets to pick the better fork(s) in the road. Others, for example “Groundhog Day” and “Edge of Tomorrow”, give the protagonist the unlimited ability to replay a single day until he gets it perfect. Regardless of the specific parameters of the do-over mechanism, this is not the way life goes. We can learn from the past but we can never go back to relive it verbatim.

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Time travel is of course science fiction but the desire to try to rely heavily on what worked yesterday to plan today is very real. The problem is that the more we perfectly optimize for the past conditions and “fight the last war”, the more likely the rigidness of the perfect solution reached is not applicable to the future. During the 1930s, France built the perfect World War I military defense with the Maginot Line but found themselves outflanked very quickly by the new warfare of World War II. Similarly, at Brinker Capital, we come across strategies that are back-tested to show amazing results but a later review shows subsequent performance to be average at best.

For very good reason the disclaimer goes, “Past performance is not an indicator of future results”. Yet investors continue to chase returns and buy the investments today that they wish they had held yesterday. As asset allocators, our goal is to identify strategies with compelling advantages relevant to future performance rather than those that already have had their moment in the sun. This to say the goal is to identify the strategies that have a good chance to work well in the future and we should consider past performance only if it is helpful in projecting future performance. Sometimes past performance provides a proof of concept in the strategy’s investment process/philosophy. Other times the past performance are period specific and should hold little weight in the present allocation decision. Knowing the difference is easier said than done.

In this pursuit of separating the gold from the fool’s gold in investment strategies we find valuable insight in both quantitative and qualitative characteristics. The Brinker Capital Investment Team often does look at the historic performance and holding statistics of an investment manager. But we also evaluate the organization and the people in the organization. Does the organization put the investor first? Are the members of the investment team talented, experienced and trustworthy? Are there new relevant competitors in this area of the market? These things matter. This is all in addition to an evaluation of market conditions to suggest success in the asset class as a whole.

The recent arrival of a multitude of Smart Beta/Factor products to the marketplace is especially relevant to this discussion. These products are all well-supported with academic research and have attractive back-tested long-term returns. In theory, these grand returns could have been achieved had both the investment firms had the foresight to make these strategies available and investors had the foresight to invest in them. There is, however, reason for skepticism with using this past performance carte blanche for future investing.

  • First, this strong performance was achieved when investors were not widely aware of the ability of these factors to outperform. Going forward the widespread knowledge of these factors’ alpha potential could cause investors to flock to securities with these attributes causing these securities to become overpriced and leading to a significant muting of future performance.
  • Second, the conditions that these factors outperformed are market conditions of the past. This is to say, these factors may have worked over the past 25 years but may not work for the next 25 years. At the very least we have to consider the possibility that the desire to invest in these strong past performers is more driven by trying to redo the past rather than sound forward-looking investing.

This is not to say that all Smart Beta/Factor and strategies that use back-tests are doomed for failure but rather it is never as simple as doing today what worked yesterday. It would be equally thoughtless to eliminate any strong past performers as it would be to blindly chase them. Some of these factors I expect will show robustness and continue to do well into the future. Others may prove to have just been the result of statistical anomalies, past specific market conditions and data mining.

At Brinker Capital, we believe that strong active management can be found but that it takes a strong due diligence process to find them. It also takes patience and a forward-looking focus.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: Where markets go from here now that they’ve rallied post-election

Jeff Raupp, CFARaupp_Podcast_Graphic, Senior Vice President

On this week’s podcast (recorded February 17, 2017), Jeff discusses some measures that we think are important to look at to determine where markets go from here now that they’ve rallied post-election. Here are some quick hits before you have a listen:

 

  • Market expectations are that the new administration’s policies will be pro-business and pro-growth, which has been driving prices up.
  • We want to see indications that the growth is real, that earnings will eventually justify current valuations.
  • Corporate confidence measures have risen dramatically in the last two months.
  • The NFIB Small Business Optimism Index is the second highest its been in the last 30 years.

For Jeff’s full insight, click here to listen to the audio recording.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Inflation is back

Dressel2Ryan Dressel, Investment Analyst

For the better part of the past five years, inflation growth rates in developed economies have barely budged, hovering below 1.5%. Coming out of the global financial crisis, global gross domestic product (GDP) growth was stuck below its long term average of 3% from 2011 to 2015. This extended period of low growth kept inflationary factors at depressed levels. In particular, tightened credit markets and low confidence in the broad economy had the most adverse effects on inflation. These factors limited both businesses and consumers from spending more, driving prices higher. Furthermore, the end of a decade-long commodity cycle kept input costs at extremely low levels.

Source: The World Bank

Source: The World Bank

Recently however, economic signs of life indicate that inflation is on the verge of returning to normal levels. The price of oil has rebounded off of its lowest point since 2008. The housing market is healthy. Purchases of consumer durable goods such as automobiles surged 11% over the past year. And, according to FactSet Research Systems, wages have begun to rise as the labor force has regained traction after massive displacements caused by the global financial crisis. These economic data points have led the U.S. Consumer Price Index (CPI) to rise 2.1% in the 12 months through December 2016, the largest increase since June 2014. Additionally, inflation accelerated for the fifth consecutive month.

Source: FactSet Research Systems

Source: FactSet Research Systems

Additional factors have also raised inflation expectations in 2017 and beyond. Fed Chair Janet Yellen has long-held a position of allowing inflation to run past its 2% target in order to reverse the negative effects of the great recession. Proposed policies of President Donald J. Trump are expected to further drive inflation rates higher. President Trump is expected to push for up to $1 trillion from Congress to upgrade infrastructure, introduce major tax cuts, de-regulate industry, and implement a number of protectionist trade policies in the coming year. These factors are all expected to drive inflation higher.

Outside the U.S., other signs are surfacing as well. The Eurozone recorded a 1.8% rise in consumer prices (YoY) in January, despite a turbulent Brexit vote and plummeting currencies. Factory prices in China are rising and wages in Japan have risen to their highest levels since 2010.

Why should investors care about inflation?

  • Rising inflation positively impacts borrowers of existing debt (if real interest rates are negative), producers that experience prices rising faster than costs, and workers with strong wage bargaining power.
  • Adversely, inflation negatively impacts workers with low wage bargaining power (including fixed incomes), lenders, businesses with high wage pressures, and investors whose returns cannot outpace inflation over the long term.

How can investors prepare?

Investors should remain invested in a diversified portfolio over a reasonably long period of time in order to protect and grow purchasing power to sustain their standard of living in the future. Brinker Capital is committed to helping investors create the purchasing power needed to pay for personal, financial or lifestyle goals.

For 30 years, Brinker Capital has provided investment solutions based on ideas generated from listening to the needs of advisors and investors. From being a pioneer of multi-asset class investments to using behavioral finance to manage the emotions of investing, our disciplined approach is the key to helping clients achieve better outcomes.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: A quick review of January markets

Leigh Lowman, Investment Manager

On this week’s podcast (recorded February 10, 2017), Leigh provides a review of January markets. Quick hits:

  • Markets were overall off to a good start in 2017 as risk assets posted modest gains for the month.
  • The S&P 500 was up 1.9% for the month.
  • International equities were also a positive as economic data in the European Union pointed to signs of a modest recovery.
  • Fixed income ended the month slightly positive.
  • Overall, we remain positive on risk assets over the intermediate term as we find a number of factors currently supportive of the economy and markets.

For Leigh’s full insights, click here to listen to the audio recording.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: The 4th best in terms of return, and the 2nd longest in terms of duration

Hart_Podcast_338x284Chris Hart, Senior Vice President

On this week’s podcast (recorded February 3, 2017), Chris talks about the recent choppiness of the markets and how most major averages continue to trade near their highs.

Quick hits:

  • From an equity perspective, markets have been unsteady recently given uncertainty surrounding the new administration’s policy implementation and agenda which have stirred up more volatility.
  • We believe there is room to move higher because there are not too many traditional indictors that are flashing red at this point in time.
  • Developed markets and emerging markets have posted slight declines recently, but EM rebounded form a weak 4Q and is outperforming developed markets year to date in 2017.
  • The aggregate bond index has performed in line with high yield recently, but High yield remains well ahead of the aggregate index year to date.
  • Overall, we believe the opportunity ahead for risk assets in 2017 is positive, but we remain mindful of increasing macro and geopolitical uncertainties.

For the rest of Chris’s insight, click here to listen to the audio recording.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast: While we feel the weight of the evidence leans positive, risks remain

magnotta_headshot_2016Amy Magnotta, CFASenior Investment Manager, Brinker Capital

On this podcast (recorded January 31, 2017), Amy discusses Brinker’s outlook over the short-term and intermediate-term.

  • The recent actions of President Trump have resulted in an increase in short-term political risk.
  • As we’ve seen before, new presidents typically struggle to get their footing early on in their administration and equities tend to be weaker in February as a consequence.
  • Because of the short-term impact of the negative headlines, Trump may have to spend down some of his political capital now, which could impact his ability to get his full agenda passed in the future.
  • Our view remains constructive on risk assets in the intermediate term.

Click here to listen to the full podcast.

Source: Brinker Capital. Views expressed are for informational purposes only. Holdings subject to change. Not all asset classes referenced in this material may be represented in your portfolio. Indices are unmanaged and an investor cannot invest directly in an index. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Brinker Capital Inc., a Registered Investment Advisor.

New year, new solutions

Noreen D. BeamanNoreen D. Beaman, Chief Executive Officer

There are few traditions as optimistic in spirit as resolution setting. While losing weight, enjoying life more, and living a healthier lifestyle typically top the resolutions charts, many Americans seek to create better financial outcomes in the upcoming year. The GoBankingRates.com 2017 Financial Resolutions Survey listed ‘save more, spend less,’ at the top of the list of financial resolutions, followed by paying down debt and increase income.

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If you aim to create better financial outcomes in the upcoming year, and beyond, here are five steps to bring you closer to your goal:

  1. Look within. The more you know about investment principles and the long-term historical record of the market, the better outcomes you can expect to achieve. Making your investment education a priority is proven to make a significant difference in outcomes. The American Association of Individual Investors (AAII) found that investing knowledge enhances risk-adjusted returns by at least 1.3% annually. Over 30 years, the improved portfolio performance can lead to up to 25% greater wealth.
  2. Control what matters most. What matters even more than picking the right stock, is controlling the impulses and biases that prove self-destructive, like trying to time the market or trusting your gut. For better investment outcomes, you must know your emotional triggers and come up with strategies to defuse them from sabotaging your success.
  3. Think purchasing power. Purchasing power is the most common objective and destination of a long-term investment strategy. It is the experience most investors want. Investors know they like the lifestyle they now enjoy and want to do what is needed to keep that lifestyle in the long-term. To do so, you must appreciate multi-asset class diversification and accept market volatility to increase future purchasing power.
  4. Benchmark against your goals, not market indices. Instead of looking to the Dow Industrial Average to gauge the adequacy of your performance, look to your goals. Personal benchmarking motivates positive savings behavior and helps you tune out the noise of the markets. Don’t allow yourself to get bogged down, nor hyped up, by the current buzz. Instead, let personal goals and the long-term historical market record guide your decisions.
  5. Stack the deck. By working with a trusted advisor who provides behavioral coaching, you stack the deck in your favor. Research has found that when an advisor applies behavioral coaching, performance increases from 2-3% per year. In times of uncertainty and market volatility, which you are bound to encounter, your advisor will help you stick to your financial resolutions.

For 30 years, Brinker Capital has provided investment solutions based on ideas generated from listening to the needs of advisors and investors. From being a pioneer of multi-asset class investments to using behavioral finance to manage the emotions of investing, our disciplined investment approach is the key to helping investors achieve better outcomes.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

 

Investment Insights Podcast: On the eve of Donald Trump’s inauguration…

Goins_PodcastAndrew Goins, Investment Manager

On this week’s podcast (recorded January 19, 2017), Andrew discusses Donald Trump’s impact on the markets over the last few months and how he’s influenced our outlook going forward. Quick hits:

  • After an initial reaction of fear, Trump’s victory quickly brought about a new hope for U.S. economic growth.
  • But, as we are all aware, markets move based on expectations, and have history of getting ahead of itself.
  • We are confident that higher volatility across markets and interest rates will likely continue as investors cling to Trump’s every word.
  • The currencies of India, Mexico, and Russia are all undervalued to the tune of 25-45%.
  • Despite all of these uncertainties and higher expected volatility, we believe risk assets will continue to outperform, but the move won’t be linear.

For Andrew’s full insights, click here to listen to the audio recording.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Brinker Capital at FSI OneVoice 2017 in San Francisco

Noreen D. BeamanNoreen D. Beaman, Chief Executive Officer

Brinker Capital is proud to be a Premier Sponsor of the Financial Services Institute’s OneVoice 2017 conference in San Francisco, California for the fourth year. This annual gathering provides meaningful education and networking opportunities for members of the independent broker-dealers we serve.

In this atmosphere of uncertainty and opportunity, a significant portion of this year’s agenda is focused on the DOL Fiduciary Rule and its implications to our business. As an industry, we are all facing challenges to address this new rule and need this opportunity to collaborate to find the best solutions for our businesses.

For 30 years, Brinker Capital has acted as an ERISA 3(38) fiduciary to serve in the best interests of our clients. Brinker Capital’s purpose since 1987 has been to implement the ideas of diversification through multi-asset class investing with a disciplined investment approach. By continually enhancing and applying these principles, we strive to deliver better outcomes for financial advisors and their clients.

Brinker Capital is pleased to be a part of a pre-conference workshop on Monday, January 23 that focuses on helping women advance leadership roles within our industry. We will also participate in session tracks that impact our business in the year ahead. On Tuesday, January 24 at 8:00 am, Roddy Marino, EVP of National Accounts and Distribution, will be on a panel discussing the impact of the DOL Fiduciary Rule on independent firms’ fee-based platforms. On Tuesday at 1:30 pm, Avery Cook, SVP of Managed Products and Solutions, will share insights on comprehensive due diligence practices for independent firms. And, as part of the CEO Track on Tuesday at 9:30 am, I will be moderating the “Shifting Sands of Revenue in a Post-DOL World” panel discussion with guests David Canter, EVP of Practice Management and Consulting at Fidelity Clearing & Custody Solutions, Lori Hardwick, COO of Pershing and Susan S. Krawczyk, Partner at Sutherland Asbill & Brennan LLP.

Follow FSI and the event on social media: @FSIwashington #OneVoice17

Thanks for the opportunity FSI, we’re looking forward to a great event!

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Investment Insights Podcast: Five things that I learned this week

Rosenberger_PodcastAndrew Rosenberger, CFA, Senior Investment Manager

On this week’s podcast (recorded January 13, 2017), Andy discusses some of the facts, figures, and interesting tidbits we come across. Quick hits:

  • Families will spend an average of $233,610 per child, from birth through the age of 17.
  • The World Economic Forum’s top five risks are 1) Extreme weather events 2) Large-scale involuntary migration 3) Major natural disasters 4) Large-scale terrorist attacks and 5) Massive incident of data fraud or theft.
  • Student loan debt now tops $1.4 trillion dollars.
  • The currencies of India, Mexico, and Russia are all undervalued to the tune of 25-45%.
  • U.S. oil production is now beginning to increase again.

For Andy’s full insights, click here to listen to the audio recording.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.