Productivity, Inflation and the Path of Rates

"Last week, in line with expectations, the Federal Reserve hiked rates, freed itself from its "low-for-longer" forward guidance and lifted its "dot plot" a little higher. The European Central Bank also followed the script, confirming that it would end its quantitative easing purchases by the end of the year, subject to data supporting its inflation outlook - which it revised upwards. It is a good time to ask why markets have become so tentative in their inflation expectations, and what that implies about the length of this business cycle and the path of rates." Click here to learn more.

Source: Neuberger Berman

Meet Innovest's Newest Employee

Zach Heath joins Innovest as an Analyst Assistant. Zach graduated from UNC. Here are five fun facts about Zach:

1. Zach played baseball for 18 years, starting when he was four years old.

2. Zach graduated from the Monfort School of Business at the University of Northern Colorado. He earned a Bachelor of Science in finance.

3. Zach is and has always been a Colorado Rockies fan.

4. One item on Zach's bucket list is to be on Family Feud.

5. Zach has traveled all over the country playing baseball but has lived in Colorado all his life.

Zach Welcome.jpg

The Art of the "Ask": Six tactics frequently ignored by nonprofit fund developers & CEOs

"Most nonprofit board members and managers have acquired a measured of savvy when it comes to raising funds for their organizations. They have learned that building trust with current and prospective donors is the key to maintaining meaningful support." Click here to learn more ways to strengthen donor relationships and possibly increase contributions.

 

Source: Nonprofit Management

 

5 Simple Habits of Caring Managers

This article explores five key things successful managers do to inspire and motivate their team.

1. Seize every opportunity to rave about their team members.

2. Give them your undivided attention.

3. Coach them to course correct with love.

4. Initiate consistent professional development talks.

5. Believe in them.

Click here to read more.

Source: Customer Fanatix

Meet Innovest's Summer Interns

  Five Fun Facts about John   1. John has climbed eight 14'ers.  2. John is a self-taught swing and contemporary dancer.  3. John owns over 70 pairs of fun themed socks.  4. John started trading stocks when he was 12 after attending a Rich Dad Poor Dad seminar.  5. John went on a missions trip to Cuba over his Spring Break.   Five Fun Facts about Katie   1. Katie has a twin brother who is attending Creighton University.  2. Katie loves to go hiking with her family.  3. Katie learned how to make great macaroons at Sur La Table.  4. Katie attends Gonzaga University.  5. Katie enjoys doing paddle board yoga.

Five Fun Facts about John

1. John has climbed eight 14'ers.

2. John is a self-taught swing and contemporary dancer.

3. John owns over 70 pairs of fun themed socks.

4. John started trading stocks when he was 12 after attending a Rich Dad Poor Dad seminar.

5. John went on a missions trip to Cuba over his Spring Break.

Five Fun Facts about Katie

1. Katie has a twin brother who is attending Creighton University.

2. Katie loves to go hiking with her family.

3. Katie learned how to make great macaroons at Sur La Table.

4. Katie attends Gonzaga University.

5. Katie enjoys doing paddle board yoga.

Colorado Public Plan Coalition (CPPC) Annual Conference

The Colorado Public Plan Coalition (CPPC) is a 501c(6) nonprofit organization which provides education, networking opportunities for administrators of Colorado public plans, and powerful advocacy for public employee benefit plans. CPPC trains public plan trustees on their fiduciary responsibilities and Colorado laws affecting public plans. Innovest and its professionals have been directly involved in CPPC for more than 20 years. Wendy Dominguez, Innovest’s president and co-founder, served as the chair of the organization at its inception. More than 80 public sector plans attend the conference regularly. Innovest is a regular contributor and volunteer to the educational programs, delivering presentations on plan benchmarking, investing, fiduciary responsibility, and participant communication.

CPPC is an excellent resource for public plan sponsors. Please join us at CPPC’s annual conference from August 28 to 31 in Beaver Creek, Colorado. Click here to see the agenda for this year's conference and to register. CPE credits are being offered for the first time.

 

Timing Social Security: A (Very Personal) Review of Claiming Calculators

"Is there any financial decision more complicated, far-reaching and irrevocable than when to file for Social Security retirement benefits? There is an optimum filing strategy that will maximize lifetime benefits—and reduce longevity risk—for every individual or couple. But analyzing hundreds of scenarios to identify that strategy is dizzying." Click here to read more.

Source: Wealth Management.com

Avoid Emotional Investment Decisions

Authors: Chris Meyer, Innovest Vice President and Abigail Thomas, Innovest Lead Senior Analyst

Imagine waking up on Saturday morning in early April of 2016, ready for a sip of coffee and a quick look at how your investments performed during the previous quarter. Your eyes land on Harbor Capital Appreciation, your large cap growth fund. The performance numbers catch your attention, but not in a good way. The fund was down 5.49% in the first quarter, while the benchmark, the S&P 500 Growth Index, was up 0.53%. Instead of essentially breaking even with a low-cost index fund, you paid active management fees and lost about 5.5%, in one quarter? Harbor Capital Appreciation seemed like a poor investment. Surely you could have been invested in something better. You decide that you are going to call your advisor and discuss replacement options.

Why Do I Think This Way?

You pause long enough to eat breakfast before making the call, which allows your emotion to subside a bit. Reflecting for a moment, you ask yourself: Why the immediate, emotional reaction to last quarter’s poor performance? Because you are human. Our decisions are often influenced by the subconscious biases that swirl around beneath our conscious reason. Some of those cognitive biases can help explain why it is so easy to make a snap judgment when confronted with an investment loss.

Paying Too Much Attention to Recent Pain

People tend to experience the emotional pain of negative events, including investment losses, twice as strongly as they experience positive emotions from good events, like investment gains. To state the principle conversely, a positive experience creates about half the amount of emotional impact as a negative one. Paired with human tendency to allow emotions to influence decisions, it’s a recipe for less-than-rational decisions.

These tendencies are a central feature of Kahneman and Tversky’s 1979 prospect theory, which argues that people derive utility, or satisfaction, from changes in wealth, rather than from absolute levels. A simple example illustrates the concept: A person given the choice between 1) receiving $20 and 2) receiving $40 then immediately losing $20, will typically choose the former. That is true even though each situation results in the person having $20; the loss involved in situation two makes it much less appealing.

Another obstacle to investing rationally stems from the human tendency to give more weight to events that occurred recently as compared to events in the more distant past. Despite many past quarters outperforming most large cap growth managers, Harbor Capital Appreciation’s recent performance had been poor, which could have resulted in our human brains judging the investment as an overall poor performer.

These recent, painful experiences are sometimes distracting from other highly relevant data points. Here, investors may have trouble seeing past recent poor performance despite understanding that performance is only one of many factors that should bear on selecting a mutual fund. After all, investors ought to give great weight to qualitative measures of investment process, style, and personnel, along with the fund’s historical performance.

What Happens if I Act on These Tendencies?

Typically, reacting to recent underperformance is a recipe for mediocre investment results. A 2008 study examined the behaviors of 3,400 retirement plan sponsors between 1994 and 2003, specifically focusing on 8,755 manager hiring decisions1. The study showed that fired managers tended to outperform their replacements during the three years after the change, even when their historical returns outpaced the fired manager over the previous three years.

What Should I Focus on Instead?

First, remember every fund will underperform for periods of time. The reasons can vary from market cycle, to the fund’s investment decisions taking time to play out, to the manager’s unique style simply being out of favor. Diversification—investing in several different asset classes— typically results in a mix of investments outperforming and underperforming in all market environments. This fund diversification normally lowers the portfolio’s volatility, reducing the shock that any one market factor can have on the portfolio.

Second, consider both quantitative and qualitative measures when monitoring an investment. At Innovest, we pay close attention to the fund’s investment style and strategy, the manager’s experience and credentials, and the overall organization structure and governance. When we score an investment highly in these categories, it means that we have conviction that the necessary pieces are in place for the investment manager to execute a thoughtful and proven strategy that will achieve the fund’s stated goals. Paired with the quantitative measures of the fund’s size, performance, and costs, these qualitative criteria provide a robust picture of an investment and its suitability for your portfolio.

So, when should performance be an issue? When the underperformance is inconsistent with the investment manager’s process or style, or is the result of a significant process or personnel change, an investor should closely examine the merits of changing managers.

Returning to our Harbor Capital Appreciation example, the underperformance relative to the index experienced in the first half of 2016 was not inconsistent with the established investment process, was not the result of a change to fund management and was not a problem warranting manager replacement. Changing funds would have been a mistake.

In fact, if you avoided the pitfalls described above and remained invested, you would have been rewarded with a total return of 22.77%, 2.27% in excess of the S&P 500 Growth Index return of 20.50%, for the period April 2016 through June 2017. Qualitatively, the same investment team has continued to employ the same investment strategy. This includes a willingness to significantly overweight sectors that the team expects to outperform.

To be clear, this example does not prove that every underperforming fund will have an incredible upswing in the following year. Nonetheless, we believe focusing on short-term performance can distract investors from more meaningful factors and lead to suboptimal investment decisions.

1 Goyal, Amit, and Sunial Wahal. “The Selection and Termination of Investment Management Firms by Plan Sponsors.” THE JOURNAL OF FINANCE, LXIII, no. 4, Aug. 2008, pp. 1805–1847.

Source: Innovest

Leadership with Heart

Innovest CEO Richard Todd was recently a guest on the Leadership with Heart Podcast. In this episode, Rich shares his views and his experience on empowering others, continuous improvement as a leader, servant leadership and viewing roles as a vocation instead of a career.

"The best way to get somebody's attention and lead them, is to serve them." - Rich Todd

Click here to listen to the podcast.

Source: Leadership with Heart