Money Matters Newsletter:
February 2, 2016
Why Bad Things Happen to Good Mutual Funds
The Investment View from Prescott, Arizona
One reason investors like mutual funds is that they come with built in professional investment managers. But most investors who expect their fund managers to protect them in declining markets like this one are likely to be disappointed. Let me explain:
The bear market decline that began in the year 2000 was a bad one. It ran for 3 years and eventually cost Index investors half of their savings.
In early 2001, I went to Denver to interview the managers of the Invesco family of mutual funds. While there, I had a private breakfast with Brian Hayward who managed the Invesco Telecommunications Fund. In 1999 it was the largest Telecom fund in the business with over $2 billion invested. In 2000 the fund lost 25%, and by February 2001, when we met, Hayward was looking like a scared rabbit and saying things like “This is going to be a really big decline”, and “We just don’t see the end of this decline anywhere yet.”
However, when I looked at his portfolio, Hayward was keeping the fund fully invested. I asked him why he had not been selling stocks so he could buy them back later at lower prices? To me, buying low and selling high is the basis of any successful investment plan.
I learned a great lesson that morning when Hayward looked at me like I had just fallen off the turnip truck and said, “When people invest in our fund, we assume that they want their money in telecom stocks. And we also assume that if they want their money in cash they will withdraw from the fund.”
Now, I ask you, how many times have you had your mutual fund company or adviser tell you “It’s time to sell our fund”? I’m guessing never, because they don’t get paid to tell you to sell and move to cash, yet that is exactly what you need to do at times to preserve your investment.
Fund managers are like limo drivers whose license (their prospectus) only allows them to drive at one speed in one lane. Even if they see a wreck happening right in front of them, fund managers have to keep driving at the same speed in the same lane until they pile into the wreck, taking your money with them. This is why even 5 Star funds can be a disaster to hold in declining markets.
Being an active manager, I know my limo comes with brakes and steering. When I see problems in our lane, I tap the brakes (selling investments) or pull into another lane and go around the wreck to get you safely to your destination.
This vast gulf in what investors expect and what mutual funds deliver exists in almost all mutual funds.
And this gap in service is what Hepburn Capital is in business to take care of for our clients. I watch every investment owned by my clients every day to decide whether to sell, buy more or just hold.
We may be at the cusp of another 52% decline like the S&P 500 Index experienced in 2000-2003, or a 56% decline like was had in 2007-09. If so, investors intent on just holding on through the decline may find that buy-and-hold investing is a young person’s strategy. Older workers or retirees simply don’t have time to wait for markets to recover. Holding onto your “good mutual fund” in a market like this could be very expensive in terms of both money lost and the time it takes to earn it back.
So, how lucky do you feel?
If you are a client of mine, don’t worry. I’ve got you covered.
If you are not yet a client, please call the office at (928) 778-4000 to talk about having me step in to provide full management of your investments. And if you have friends that complain about losses they are taking, please tell them to call me, too.
How to Foil Hackers
Internet security is a growing concern to everyone, and here at Hepburn Capital we take the security of your data very seriously and password security is at the heart of what we do to protect you. We have never had a problem with our Internet security and work hard to protect both us and you.
I had a good “ah-ha” about computer password security recently when a Microsoft consultant asked me which of these two passwords would protect me better from a hacker?
Z9#……….
R#makFnv&s6F
The first password, which actually has 13 characters, would take a super computer 195 times as long to crack as the second, 12 character example, despite its complexity. That was a good lesson for me. Bigger is better when it comes to passwords.
Hepburn Capital now uses 20-character complex passwords which begs the question, how on the earth does one remember 20 characters of gibberish?
My new favorite piece of software is a password program called LastPass that can generate and remember complex passwords for any number of your websites. A different password for each site will prevent a successful hacker from accessing more than one site with a stolen password list.
At Hepburn Capital we visit over 400 different sites, and now we only have to remember the main password for the LastPass program. We are no longer tempted to use overly simple passwords or reuse passwords over and over.
We pay for a professional version of LastPass, but there is also a free version that may suit your needs. Check it out at LastPass.com and quit writing passwords down where they can be found by a bad guy.
How Are The Markets Doing?
In the past week or so, the US stock markets finally began a long overdue bounce from a horrible decline in the markets. January was one of the worst months investors have faced since the financial collapse of 2007-09 – unless they were HCM clients, that is.
The S&P 500** stock index lost “only” 5.07% in January (-8.04% from the last peak on November 3rd). The average of 2268 Growth mutual funds in the Fast Track database fared even worse than the index, losing 9.38% since November 3rd after being down as much as 12.63% at one point.
We are currently enjoying a rally, but it feels like a dead cat bounce in a market that just dropped like a rock for 4 weeks straight.
I am looking at this bounce in the market as being a short term top within the context of a larger bear market downtrend. Bear markets wear down investors, because most rallies are short lived. Indications are that investors looking to buy a dip will likely find more dips down the road.
This market may be great for nimble traders, but is a treacherous place for investors trying to buy for the long term.
The price of oil has declined 70% from its $100+ per barrel prices of 2014, and may be trying to find a bottom around $30 these days. Although buying $2 gasoline feels good at the pump, don’t let that obscure the fact that a huge part of our economy depends on the energy industry, so this may be pushing the entire country into recession.
When oil prices crash, normally prices begin to recover after 6 months or so. This crash has lasted three times that long and the after effects will last for years as small producers go bankrupt, jobs are lost, and debt defaults ripple through the economy.
What’s Going On In Your Portfolio?
As I mentioned elsewhere in this newsletter January was a really ugly month for stocks. Fortunately my strategies that Adapt to Changing Markets® saved you from those losses and by the end of January actually posted small gains for the year in your Shock Absorber Growth* portfolios. Tell your friends!
Our shock absorber investments (inverse funds that go up when the stock market goes down) worked well and actually produced gains for us during the steepest part of the decline before I sold and took our profits on them. Currently we have a lot of cash in the Shock Absorber Growth* portfolios as well as a small amount of inverse investments still in the portfolio.
Our Flexible Income* portfolios had a small loss in January, after six straight months of solid gains.
Blended portfolios also did much better than the market as a whole, with Adaptive Growth* portfolios (70% growth and 30% income in January) showing small gains in January. Adaptive Balance* portfolios (40% growth and 60% income in January) produced a fraction of a percent loss. To put that in perspective, that level of risk is about 1/10th of the risk most investors faced in January.
Due to the weakening market I have made another move to make our portfolios more conservative by changing the blend on Adaptive Growth* to only 60% stocks, and on Adaptive Balance* to only 30% stocks.
This calculation is designed to keep us on the right side of major market trends, which now are clearly down.
These are nervous times for investors without strategies to deal with a failing market, but Hepburn Capital clients don’t need to worry. I watch every investment you have with me, every day, to determine if it should be held onto or be sold and moved to cash, bonds or another investment.
I am your designated worrier. You go have fun.
Earn a Discount on Our Fees
Would you like to save hundreds of dollars every year? Simply refer family and friends to Hepburn Capital.
We give a “volume discount” based on the total amount of money we work with for a family or other grouping of clients, including friends. The higher the amount of assets being managed for the group, the lower the fee percentage becomes for everyone in that group.
Besides being one of the nicest things you can do for us (and them), mentioning Hepburn Capital to your friends can save you real money. The easiest way to introduce someone to our work is to forward our newsletter to them.
Thank you for your help and support.
College Classes Coming
Understanding Investments
You still have time to sign up for this Yavapai College class that begins tomorrow, Feb 3rd from 3:00-5:00 pm, and runs 3 consecutive Wednesdays through Feb 17th.
This course is designed to help investors become more confident about their financial decisions. In an easy-to-grasp format this class provides a broad knowledge of investments preferred by investors approaching or already in retirement. Learn the ins and outs of stocks, bonds, mutual funds, annuities and more. Topics include recognizing risk, controlling the tax impact of IRA withdrawals, avoiding common investment mistakes and simple risk-reducing strategies that anyone can use.
Call the college at 717-7755 to register for course # WS16-143. Tuition is $65.
Managing an Inheritance: Planning It, Getting It, and Keeping It
February 24th, 3:00-5:00 pm
If you plan to be on the receiving end of an inheritance from a parent or other loved one, planning is crucial if you hope to preserve your windfall, save on taxes and avoid family squabbles. This two hour discussion will guide you through the heart of complex issues, both emotional and financial, that beneficiaries face during the three phases of inheriting: planning your inheritance, receiving it, and making your life better because of it. Topics include: documents you may need, dealing with disability, the use of trusts, basic estate planning principals and protecting your new assets. Call Yavapai College at 717-7755 to enroll in course # WS16-145. Tuition is $45.
Scottsdale Office
If it is more convenient to meet with Will in Scottsdale, please call the office to schedule your appointment. 928-778-4000
Disclosure Documents Available
Hepburn Capital’s SEC form ADV Part II and our Privacy Policy have been updated and are now available on our company website, www.HepburnCapital.com.
There are no material changes being reported, and although we are required by law to make these documents available, you are not required to do anything with them . . . unless perhaps you are having trouble sleeping some night.
There, don’t you feel safer?
Our Spotlight Strategy
Future Technologies* is one of the underlying strategies that make up our Shock Absorber Growth* portfolios.
In Future Tech*, we strive to provide a high rate of capital appreciation using stocks and funds focused on emerging technologies.
The proprietary HCM Safety Net suite of indicators is used to warn of potential stock market declines, in which case stock market exposure may be quickly reduced or hedged using inverse funds.
Future Tech* has been a strong and consistent performer since its first inclusion in client portfolios in August of 2014, and now comprises 60% of our Shock Absorber Growth* portfolios.
Link to Shock Absorber Growth page on website
Click here to read more about Future Technologies.
Mental Floss
“I’m getting to that point where I’m afraid that being cremated may be my last hope for a smoking hot body.”
If you would like a current copy of our Privacy Policy or our SEC Form ADV, Part 2, you can find them at our website at www.hepburncapital.com/information/sec-form-adv/
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
Flexible Income
Adaptive Balance
Adaptive Growth
Shock Absorber Growth
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, an Arizona Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2015 William T. Hepburn. All rights reserved.
