Investment Insights Podcast: The dreaded yield curve inversion


Andrew Goins
, CFA, Investment Manager

On this week’s podcast (recorded September 24, 2018), Andrew discusses the probability of future Fed rate hikes and the potential impact of the yield curve.

Quick hits:

  • The more highly anticipated event will be the release of the Beige Book following this weeks meetings, which covers everything discussed and includes the widely followed dot plot.
  • We’ve been dealing with a very flat yield curve for much of this year.
  • Everyone is watching closely for the dreaded yield curve inversion, which has been an ominous sign for impending recessions historically.
  • While the curve remains flat, but positively sloped, and with the weight of the evidence leaning positive, our portfolios remain overweight to equities.

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

investment podcast (2)

This is not a recommendation for Facebook, Amazon, Apple, Netflix and Google. These securities are shown for illustrative purposes only.

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.

Don’t be trapped in the past

Williams 150x150Dan Williams, CFA, CFPInvestment Analyst

Just over 10 years ago on September 15, 2008, Lehman Brothers filed for bankruptcy shocking the global financial markets. In retrospect, the collapse trajectory was there for all to see with the shock being more attributed to people’s reliance on things staying the same than any new data. This clinging to the past was so strong that a postmortem analysis showed that Lehman Brothers employees, the very people who were the insiders to see the company’s problems, were shown to have kept buying stock. Many believed, both insiders and the public, that the stock was a compelling value as they anchored their valuation toward the stock high of $86.18 in February 2007. When the end finally did come for Lehman it was a long time coming based on the data stream but felt abrupt based on our ability to process the new reality. When a character in Ernest Hemingway’s novel “The Sun Also Rises” was asked how he went bankrupt he said, “Two ways, gradually and then suddenly.”

Not all individual stock downturns lead to a rapid collapse or even a permanent lower price range. Still, this anchoring to past prices is prevalent enough for investors to frequently be told to fear “value traps.” A value trap is a stock which looks cheap based on previous stock prices, but an analysis of future prospects show that the underlying stock’s fortunes have significantly and potentially permanently changed for the worse.

The fact that companies’ future prospects are always changing is a sign of a dynamic economy that through creative destruction increasingly improves the products for the consumers of an economy. Much has been made of the disruptive Amazon effect that through making the purchasing of products easier as the one-stop shop for online shopping has crushed traditional brick and mortar businesses and other smaller online retailers. It is bad for those businesses left behind but the consumers win.

This lesson of unreasonably expecting things to remain the same holds meaning outside of just the financial markets. In George Friedman’s 2009 book “The Next 100 Years” he opens by taking a quick survey of the way of things at 20-year intervals starting at 1900. He notes that in 1900, London was the capital of the world and Europe was at peace with great prosperity, in 1920 Europe was torn apart by an agonizing war, in 1940 Germany had reemerged to dominate Europe, in 1960 Germany was crushed and the United States and the Soviet Union were the superpowers, in 1980 the United States had been defeated in war by tiny communist nation North Vietnam showing communism was on the rise, and finally in 2000 the Soviet Union had collapsed with a United States hegemony being the state of the world. If I would take license to write his 2020 view, it would talk of the global uneasiness of a China on the rise to legitimately challenge the United States as an economic and political power.

What is clear is that things change and failing to try to at least look around the next corner is akin to walking backward. Just because you have not walked into a wall yet is a poor reason to expect an unending clear path. Our role as the investors of capital attributes special importance to forward thinking but it is a lesson for all to learn.

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.

Password potato chips

Jim O’Hara, CISM, CISSP, CEH, Information Security Officer

Passwords are like potato chips.  You can’t (and shouldn’t) have just one.

A new trend is developing in phishing and email extortion tactics. Attackers are including the potential victims’ passwords in the messages sent. Why would they do this?

If you’re the target of this attack, you’ll typically receive a message from someone claiming they’ve compromised your computer and have obtained a list of your website usernames and passwords.  The message will contain a set of credentials to a site you’ve used, which were valid at some point. You’ll also be threatened with some sort of undesirable consequence unless an online payment is made. By including valid credentials in the extortion message, the attacker is hoping to instill fear and doubt in your mind, prompting you to take immediate action.

But how did the attacker obtain your credentials?

When a website is compromised, the attacker typically mines the site for useful information, including the login credentials of the site’s users. The attacker knows that people tend to be lazy when it comes to passwords, and there’s a good chance one site’s credentials will work for other sites the user visits. These collections of stolen usernames and passwords are constantly being bought and sold online, and eventually, make their way into the hands of an extortionist. It’s likely the credentials in the email you receive will have been stolen quite some time ago, and in many cases are no longer valid. If you use the same password for more than one website, it will be impossible for you to determine which of the sites you visit was compromised.

This is why it’s so important to maintain unique passwords for each account you have. Yes, it takes a bit more effort to maintain separate passwords, but the additional protection is well worth the effort.

Tips to protect yourself: 

  • Never use the same password for more than one website. To keep track of multiple passwords, consider storing them in a password-protected spreadsheet.
  • Change your passwords from time to time. Especially for email accounts, or other accounts which don’t employ multi-factor authentication.
  • Never use public computers to access sensitive accounts. Even if you direct the browser to not save your credentials, the machine could be compromised in other ways designed to capture your credentials regardless.

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

A crash course in financial maturity: 4 lessons for children going off to college

beaman 150 x 150Noreen D. BeamanChief Executive Officer

As a certified public accountant, I enjoy being organized and find it helps maximize my productivity during the day. Not only does organization benefit my professional life, but it also helps in my personal life, particularly when it comes to discussing financial readiness with my children. As I think back on the financial maturity fundamentals I imparted on my two daughters – one who completed law school and the other who’s completing her graduate degree – I find myself in a familiar position as I focus on my son who is a junior in high school and will be leaving for college in two short years. Below are some of the items on my financial maturity list that may help cover the basics as others face a similar situation.

1. Use resources wisely 

As simple as it sounds, insist that your child knows and makes good use of the resources at his or her disposal. For example, if you’ve bought a dining plan there should be limited spending on food outside the dining plan. Your child should regard credit at the campus store or library/print center as limited resources that only get replenished when wisely used.

2. Be choosy with checking 

Encourage your child to do some research and find the best banking option. According to NerdWallet, a student-focused checking account can save students an average of $110 or more in fees each year, when compared to the most basic account available to the general public. Your child should pay attention to the conditions that allow for the waiver of such fees. For example, some college checking accounts will waive the monthly fee as long as the student maintains a minimum balance, receives regular deposits, or links to a parent’s checking account. Have your child take notice of the banks which are most prominent on campus and those that have easy-to-access branch locations. If your child chooses a bank that does not have a local presence, make sure he or she is aware of how quickly service charges for out of network ATMs can eat into their account. 

3. Credit scores matter 

Your child needs to know the importance of building good credit, as future landlords, employers, and banks will use that score to determine eligibility for housing, jobs, and loans. Building good credit is a process that often starts in college.

Students with little or no credit history can often obtain credit if they are able to provide proof of capacity to repay debt, or if they have a co-signer, who can bear the financial responsibility for the debt.

If your child is going to get a credit card, make sure he or she knows to pay the full balance each month, and on time. They should also be advised only to make a purchase on credit if they know how to pay for it when the bill comes due. You should have a conversation about the importance of building a positive credit history to pave the way for future financial transactions. Additionally, they should understand that your credit score, as a co-signer, is at risk if they abuse the card privileges. 

4. Know where it’s going

Set the expectation with your child that when you ask where all the money is going, they have an answer. Encourage your child to download a free app, like Mint, to easily track and monitor spending and stay on top of account balances. Explain that tools such as Mint help increase awareness and lead to better financial decision-making.

There are only 940 Saturday’s between a child’s birth and leaving for college so enjoy the last few days, months, or years before they start the next chapter of their lives.

We at Brinker Capital believe goals are personal, so solutions should be too. Learn more about Brinker Capital and our investment solutions at BrinkerCapital.com.

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.

Considering the use of benchmarks

Williams 150x150Dan Williams, CFA, CFPInvestment Analyst

A common, yet hard to answer, question for clients is “how are my investments doing?” By definition, the answer lies with benchmarks as a frame of reference but the semantics of their proper use often proves to be a stumbling block. Do you use a single broad index such as the S&P 500? Do you look at a risk equivalent blend of multiple broad indexes? Do you just look at the absolute return number? Additionally, do you look over the quarter, the year, or the decade of performance? Often the best way to properly use benchmarks is drilling down the context and the intent of this seemingly simple question.

This is to say, if the question is to assess how an investment portfolio is performing in the context of the current market environment, a blended benchmark of the neutral weights of a portfolio over a short time period is best. This is to say if you are looking at a large cap growth stock fund, you could look at the Russell 1000 Growth Index over the past quarter or year. If you wanted to judge a moderate risk portfolio with a neutral weight of 60% equity and 40% fixed income, you would turn to a blended benchmark of the same risk level over a similar period of time. However, while this shows how the portfolio is relatively performing currently, this comparison will serve as a poor judge of the true skill of the portfolio managers. Market conditions in the short-term favor different styles of investing over others. These preferences wax and wane over time with skilled managers proving their worth through the long-term of multiple market environments rather through every market environment.

Considering the use of benchmarks

As such, if the question is instead to evaluate the skill of a portfolio manager, the answer requires a much more rigorous analysis. You would like to see skill over various market environments and not just the current market environment. Accordingly, one of the many statistics that we look at is the percent of rolling 36-month periods that a strategy has outperformed its market benchmark. It is unreasonable to expect a strategy to outperform all such 3-year periods but a skilled manager should hope to do so more often than not. Additionally, looking at 7-year or longer time horizons provide a clearer view of how a manager faired after the dust has settled over one or more market cycles. As always looking at past performance only provides evidence of past skill and not necessarily future skill. The complete manager due diligence process extends beyond the numbers and requires additional work with regards to the qualitative characteristics of the managers and their organization.

A final way for this question to be asked is what should be most meaningful to the client. Specifically, how are the investments doing with regards to accomplishing the clients’ financial goals? Here we leave the market-based indexes behind and instead look to the absolute return numbers to determine if purchasing power is growing at a pace consistent with the investments savings goals. The time horizon of the evaluation should be consistent with the time horizon of the goal. In practice, a conservative portfolio that strives to deliver 3-5% a year for a goal that is 3-4 years away, should be evaluated by whether after 3-4 years if this return mandate is met. Similarly, an aggressive portfolio that strives to deliver 7-9% for a goal that is more than 10 years in the future should be evaluated over a period of at least 10 years against this return mandate. These return mandates could be further tweaked to be a spread in excess of inflation or a risk-free rate as clients’ goals are best defined as a growth in purchasing power rather than just a raw performance number.

It is clear that there is no one right way to tell clients how their investments are doing. Hopefully though helping clients define their “how are my investments doing” question can improve the relevance of the benchmarks and time horizons used to give an answer.

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.

Memorial Day: In honor of our heroes

beaman 150 x 150Noreen D. BeamanChief Executive Officer

For more than 150 years, our nation has observed the Memorial Day holiday — a day designated to remember the sacrifice made by those who gave their lives defending our freedoms and the safety of our nation. Across the country this weekend, we will honor all our veterans and their commitment to safeguarding our security.

On this Memorial Day, let us be mindful of our heroes — taking a moment to recognize with appreciation and respect our nation’s champions. I ask that you take time to gratefully remember, appreciate, and honor both the service and the ones who provided it.

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Getting your investments up to bat

Williams 150x150Dan Williams, CFA, CFPInvestment Analyst

With spring comes my favorite time of the year. Yes, the weather improves and the days get longer. However, for me, it is baseball season and corresponding fantasy baseball season that excites me. Baseball more than the other major sports is a game of statistics. It is engineered to be a series of one on one duels between a hitter and a pitcher such that individual contributions can be isolated. However, much like investing, a focus on the short-term and randomness leads even the most astute into a false knowledge of skill, and it is only through long-term analysis can truer knowledge be gained.

Consider a single at-bat between a hitter and a pitcher. The outcome is going to be a hit, an out, or a walk. If a hit occurs, especially if a home run, it is assumed that at least at that moment the hitter is very good and the pitcher is very bad. If an out occurs it is assumed the reverse. If a walk occurs the hitter has managed the least favorable of the positive outcomes and the pitcher has let the least unfavorable of negative outcomes happen. There is additional analysis that can be taken into the semantics of these three outcomes but the point remains that we have a data point of an individual success or failure. Similarly, in investing over the course of a quarter or year of performance of an investment fund we have an outperformance, underperformance, or an approximate market return relative to the corresponding benchmark and again additional stats can be gleaned from the performance such as standard deviation, upside capture, or attribution by sector selection vs. security selection.

In both cases after a short time period, a game for a hitter/starting pitcher or a quarter of performance for an investment fund, the temptation is very strong to extrapolate the just observed outcomes into the future. A successful hitter could have been lucky or was going against a poor pitcher (or a good pitcher who was having an off day). Similarly, an investment fund could have made a few lucky stock picks or was in a market environment that simply worked well with the strategy’s style of investing.

getting your investments up to bat

So does this mean we ignore the statistics of the short-term? That is, of course, foolish as the short-term is what happens as we build the data for the long-term. We always want to know what happened as it helps guide us to what will happen. It is simply wise to temper the conclusions we can draw from data over short periods. It is also humbling to know that even with ample data that can provide very close to proof of past greatness, it can never be fully relied on to provide future insight. At this point, I would say we have enough data to say Babe Ruth was a very good baseball player. However, he has been dead for about 70 years (so he is in a bit of a slump) and even if we through the miracle of science could resurrect a 30-year-old Babe Ruth, it is not a certainty he would achieve the same greatness in today’s baseball landscape. Similarly, an investment fund or strategy type that achieved great success over the long-term in the past may not achieve it in the future.

So where does this leave us? The recognition of great skill recognized solely in the short-term is unreliable and the great confidence we can achieve through the very long-term analysis thereof is not very useful. This leaves us striving for the middle ground. We look at performance data of at least a few market cycles and we additionally gain extra insight through qualitative data by talking to our investment managers and understanding the how of what they do. Through this process, we strive to send the right people up to bat and hopefully, we deliver more winning than losing seasons.

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.

Introducing Brinker Capital RIA Services

Marino_R 150 x 150Roddy Marino, CIMAExecutive Vice President
National Accounts & Distribution

For 30 years, Brinker Capital has helped advisors provide better outcomes for their clients. Building on that track record, we are thrilled to announce the launch of Brinker Capital RIA Services. This recently established division focuses on better serving RIAs, who are experiencing rapid growth by bringing together like-minded partners, a fully-digital platform, and a team of experienced professionals to support the business.

In the video below, Brendan McConnell, Chief Operating Officer, discusses Brinker Capital RIA Services with Matt Ackerman of InvestmentNews and the reasons behind the launch.

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To learn more about Brinker Capital RIA Services, register for a webinar on Wednesday, February 21 at 4 PM ET. Frank Pizzichillo, Managing Director, RIA Platform Services, and I will discuss the guided and open-architecture investment solutions; multi-custodial flexibility; proposal and reporting technology; and the dedicated support team.

Brinker Capital is a privately held investment management firm with $21.7 billion in assets under management (as of December 31, 2017). For 30 years, Brinker Capital’s purpose has been to deliver an institutional multi-asset class investment experience to individual clients. Brinker Capital’s highly strategic, disciplined approach has provided investors the potential to achieve their long-term goals while controlling risk. With a focus on wealth creation and management, Brinker Capital serves financial advisors and their clients by providing high-quality investment manager due diligence, asset allocation, portfolio construction, and client communication services.

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.

A Bitcoin primer

Dressel 150 x 150Ryan Dressel, Investment Analyst

There is a famous scene in Seinfeld, where outspoken character George Costanza pitches a TV studio executive “a show about nothing.” When pressed to elaborate, he simply re-iterates “nothing!… that’s the show!” I jokingly refer to this scene when people ask about Bitcoin, and if it’s a good investment. The parallels to “nothing” are plentiful: Bitcoin is not tangible, it is hard to find, nobody is responsible for its success or failure, and the buyers and sellers in the marketplace are untraceable ghosts. If the above is true, how can one explain Bitcoin’s meteoric rise in price and press coverage?! The price of one Bitcoin has risen from approximately $1,000 to $13,600 over the past year. The number of searches for Bitcoin on Google has exploded by 4,200% since July.

What is Bitcoin and why are people so interested in it?

Bitcoin is one of many digital currencies that have gained popularity since 2009. It has no value by itself; it only has value because an ever-growing community of Bitcoin adopters have agreed to trade goods and services in exchange for a higher amount of the digital currency, to which the community has trusted each other to do the same. This basic concept is no different than the use of fiat currencies such as the US dollar or the British pound. But that’s where the similarities end.

Today’s fiat currencies are managed by central banks around the world. The US dollar is regulated by the Federal Reserve, the Yen is regulated by the Bank of Japan, and the Pound Sterling is regulated by the Bank of England, to name a few. Conversely, Bitcoin is autonomously managed within an open source network of computers known as “blockchain.” Think of blockchain as a community of referees that allow two parties to make an exchange. The rules that the referees use to enforce an exchange can be reviewed by anyone that is part of a network. Every transaction prior to the one being made must be reviewed before it can take place, hence the term “blockchain,” which is intended to make the network more secure with each transaction.

To visualize the application of blockchain, think about a transaction at a farmer’s market. If you use a dollar to buy a vegetable, the farmer puts his faith in you to truthfully hand over a dollar that can be used to buy other goods & services and assumes it is not fake and that you won’t just steal his vegetable. On the other end of the transaction, you put your faith in the farmer that his product has all the properties of a vegetable as advertised, and does not contain defects such as poisonous pesticides. Additionally, nobody but you and the farmer knew that transaction occurred and nobody reviewed the accuracy of the exchange except you and the farmer.

Conversely, a digitalized farmer’s market transaction using blockchain would be reviewed by every computer that is part of a network (consisting of digital farmers and digital vegetable buyers). The predefined rules of the blockchain are also reviewed to ensure that all qualifications are met by both parties before one item is exchanged for another. If any criteria are not met, the exchange will not occur. After all criteria have been met, each party is rewarded their contractual obligation. This technology can be used to exchange Bitcoin, as well as a seemingly infinite amount of applications involving two or more parties i.e. physical property exchange or even corporate mergers.

blockchain 2Graphic Source: Thomson Reuters

Why adopters love blockchain

The primary benefit of blockchain technology is that it breaks down the barriers of trust, allowing any two parties to transact directly with each other without the need for a third-party to broker a deal. This creates transparency that we simply do not have today. Our third-party brokers take many forms, ranging from banks to cashiers, to Facebook, to Lawyers. These intermediaries act as agents of two or more parties, but you cannot see every message, transaction, or exchange that happens within them. Blockchain provides complete transparency for all to see.

In the example of the farmer’s market exchange, the dollar that was used to buy a vegetable is an example of a central repository holding information. The dollar had a state-sponsored (US government) serial number on it that is part of a taxable transaction. In the case of Bitcoin, no third-party owns the record, there is no third-party manipulating the data or supply of a good or currency. Cryptocurrencies rely on this benefit and offer additional benefits such as the ability to make transfers without geographic limitation, the finality of settlement, lower transaction costs compared to other forms of payment, and the ability to publicly verify transactions.

Today’s fiat currencies are also underpinned by central banks, tax systems, judicial systems, militaries, and any number of other connections to a governing body. The freedom from these agencies is very enticing to Bitcoin users. In areas outside of the developed world, this technology could be life changing due to corrupt governments manipulating currencies or transactions.

Buyer beware

History has shown that innovation and competition are great for markets and consumers. If credit cards weren’t accepted, we’d still be using paper and coins to make purchases. Prior to paper and coins, different societies used items such as beaver pelts or stone carvings as currency. Without currency, one would have had to travel great distances to make physical exchanges with their personal items of value.   Despite the innovative allure of Bitcoin, it is important to recognize its shortcomings as well.

To date, no cryptocurrencies have been registered with the SEC, whose stated mission is to protect investors, maintain fair, orderly, and efficient markets, and to facilitate capital formation. As such, no licenses are required to sell Bitcoin, which makes the cryptocurrency market subject to volatile market manipulation and scams such as scalping, “pump and dump,” and other types of fraudulent schemes.[1]

Cryptocurrencies such as Bitcoin are not backed by any government body, and thus are not regulated and could be subject to illicit transactions. Buyers and sellers remain anonymous, which holds nobody liable if a transaction fails on either side (Kim Jong Un has even been linked to the marketplace[2]). The ability to exchange Bitcoin for traditional currency is subject to change at any time, without notice. Cryptocurrency networks are also subject to malware and hacking.

Even though the number of exchange platforms is emerging, it is still not very easy to trade Bitcoins for goods and services. Bitcoin and other cryptocurrencies are also extremely volatile, which displaces one of the most important features of fiat currency: a stable store of value. How can buyers and sellers expect to make a transaction if the exchange rate of Bitcoin changes substantially every 2 minutes?

Despite the innovative advances in blockchain, it is important to remember that the technology is in its infancy. Both improvements and loopholes are being added every day. Bitcoin shares features of a currency, commodity, or a security, but is nothing more than a figment of our human imagination. One might say it’s a show about nothing!

[1] https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11
[2] http://money.cnn.com/2017/12/12/technology/north-korea-bitcoin-hoard/index.html

 

Thank You, Veterans

beaman 150 x 150Noreen D. BeamanChief Executive Officer

Tomorrow, we recognize those who have sacrificed careers, time with loved ones, and even their lives to serve our country. Please take a moment out of your busy Saturday to attend a Veterans Day event in your area, or simply say thank you to those who are currently serving or have served in the military.

On this Veterans Day, we say thank you to the veterans in our Brinker Capital family: Chuck Widger, Tom Daley, Jimmy Dever, Jay O’Brien, Jim O’Hara, Jeff Raupp, and Bill Talbot.

For additional ways to give back to Veterans, click here.

Brinker Capital, Inc., a Registered Investment Advisor