Category: Insights

Financial markets have shown signs of stabilization as the economy begins to re-open, and risk assets have staged a strong recovery off their March lows.  For example, the MSCI All Country World Index (global equity benchmark) has rallied approximately +38% from March 23rd through June 19th and now stands about -6% below its starting point for the year.

In terms of portfolio activity, we’ve been quite active this year, using market volatility to opportunistically rebalance portfolios while also implementing tax loss harvest trades where appropriate.  We recently trimmed back equity positions on strength, having added exposure to portfolios in March.  We also added an allocation to high yield credit in April. 

While there is early evidence that the economic recovery has begun, there also remains a wide range of potential outcomes on the path forward.  As a result, we maintain a slight defensive tilt in our tactical portfolio positioning with an elevated cash/short-term fixed income position as “dry powder.”  We also continue to target an underweight position in US equities while emphasizing high quality stocks.  New market cycles are often accompanied by a change in market leadership—and we believe non-US stocks, and emerging markets in particular, stand to benefit from attractive valuations.  We also recommend that investors continue to develop private equity/real estate investment programs by maintaining the pace of planned commitments.  New capital deployed during periods of economic disruption often generate significant upside. 

Please see the attached presentation that provides our assessment of the market backdrop and shares our views on portfolio strategy going forward.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the ‘‘CARES Act”). The legislation is in response to the Coronavirus (COVID-19) pandemic. The CARES Act is a massive stimulus bill which includes significant individual and business tax relief as well as small business lending programs and expanded unemployment benefits. The projected cost of the bill is over $2 trillion, of which about $500 billion is allocated to temporary relief from certain tax provisions. The individual and business tax changes will provide for immediate cash flow relief. In this summary, we will review selected individual and business tax provisions and review the small business lending provisions.

Please click here to read the summary. If you have questions, please reach out to an advisor at Colony Family Offices directly or call our main line at 704-285-7300.

Financial market volatility has escalated over the last few days, reflecting a great deal of uncertainty. With investing, we believe it’s particularly important to be aware of what we don’t know. One of our favorite quotes is credited to Mark Twain, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

In today’s environment, there are clearly far more unknowns than knowns. We don’t know when the coronavirus will be contained, therefore we don’t know what the ultimate economic impact will be. However, we do know that the measures taken to stem the spread of COVID-19 will have a major economic impact regardless of how widespread the illness becomes. We also know that financial markets have aggressively moved to price in this uncertainty, evidenced by the swift and furious sell-off in stocks and other risk asset classes. But we don’t know when markets will bottom. History suggests that it’s generally best to remain invested—and that markets will likely have already started to recover well before the news flow turns positive. And as painful as it feels in the short-run, after stocks experience declines of this magnitude, we know they become more attractive over the long-run—but that doesn’t mean they can’t fall further. Perhaps most importantly, we know that it’s critical to maintain a disciplined, long-term approach and to utilize a sound asset allocation framework to guide portfolio decisions.

Please see the attached presentation, providing an update on the recent market backdrop and sharing our perspective, including some thoughts on portfolio strategy (and activity generally being implemented across portfolios).

We’ve shared a couple of additional quotes below from our recent reading.

From Seth Klarman of Baupost Group: “While is it always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up and competition from other buyers will be much greater when the markets settle down and the economy begins to recover. Moreover, the price recovery from the bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better.”

From Ben Inker of GMO: “While there will be a severe short-term economic toll (whether it is officially a recession will depend on the length of the economic shutdown, which is unclear at the moment) resulting from COVID-19, we do not believe it will have an enduring impact on the fair value of global equity capital. The fair value of equity markets has been remarkably stable historically; the only events in our experience to truly impair it have been major wars, the Great Depression, and, for global banks, the 2008-2009 Global Financial Crisis (GFC). Most recessions, even deep ones, do not leave a lasting mark on the economy or the financial markets, nor have previous global pandemics.”

Volatility continues.  Stocks and other risk asset classes fell sharply on Monday as a price war for oil and the ongoing coronavirus fallout rattled financial markets.  Stock trading was briefly halted for the first time since 1997 after a tumultuous selloff triggered an automatic curb on trading.  Oil prices recorded their biggest one-day decline since the first Gulf War in 1991 after Saudi Arabian state oil giant Aramco cut prices as part of an aggressive campaign to snatch some of Russia’s market share.  Interestingly, Monday also marked the 11^th anniversary of the closing low of the S&P 500 Index during the Global Financial Crisis—or the start of the longest running stock bull-market in history.

After Tuesday’s almost 5% gain, the broad global equity market (MSCI All Country World Index) is about -15% below the all-time high from less than 20 days ago and down about -12% on a year-to-date basis.  “Safe haven” demand has driven down bond yields, resulting in positive returns from investment grade fixed income.  At this point, the 10-year Treasury note yields less than 0.75%.  Financial markets are clearly pricing in the increased odds of an economic recession.            

Obviously the coronavirus outbreak has caused a lot of uncertainty, and we’ve reached out over the last few weeks to share some perspective (see attached).  Although it goes along with investing, we acknowledge that experiencing volatility is uncomfortable.  From a long-term perspective, history suggests that it’s best to generally hold the course and remain invested to avoid missing the market’s eventual upturn.  Particularly during times like these, we rely on a thoughtfully-constructed asset allocation strategy—each portfolio has one based on objectives and risk tolerance, and typically includes a mix of both defensive and growth-oriented assets.  Importantly, it’s the asset allocation strategy that provides a framework for making rebalancing decisions and tactical portfolio adjustments.

From a tactical perspective, over the last couple of years we’ve maintained a slight defensive tilt in portfolio positioning with an underweight to equities (US stocks in particular) on valuations.  As a result, we actively rebalanced portfolios throughout 2019 by trimming equity positions.  Although stock prices are now lower and valuations somewhat improved, we don’t think equities have become cheap enough to become aggressive buyers or to move to an overweight position.  However, we do believe the recent market backdrop has presented some opportunities to take action in portfolio strategy. 

• First, the sharp decline in bond yields has resulted in strong performance from investment grade fixed income securities.  And given the now reduced pick-up in yield relative to cash, we are moving forward with trimming positions (by about 2-4% across most portfolios) and taking some gains from high quality bond allocations. 

• Given the recent weakness in risk assets, portfolios are now generally below our tactical target weights to equities.  Therefore, we also plan to start gradually adding back exposure (by about 1.5%-2% across most portfolios).  In order to help fund these purchases and raise additional “dry powder,” we recently exited the small allocation to bank loans.

• Finally, while most portfolios still have embedded unrealized gains, we are opportunistically looking through positions within each portfolio to harvest tax losses (while simultaneously purchasing similar positions to maintain targeted exposures).

Please don’t hesitate to contact us with questions or if you’d like to further discuss.

Fears surrounding the coronavirus have rattled financial markets after a surge of cases outside of China were reported over the weekend, prompting concerns about new pockets of infection in Italy, Iran, and South Korea.  Volatility spiked while stocks and other risk asset categories declined.  The broad global equity market (MSCI All Country World Index) fell almost -3.5% on Monday and is down about -2.0% today (as of this writing).  “Safe haven” assets, such as investment grade bonds and gold, moved higher.  The yield on the 10-year Treasury hit an all-time low of 1.31%.

• First, we must acknowledge that no one knows with certainty how the coronavirus outbreak will play out or how bad it will eventually get.  But it’s clear that there will at least be a large negative short-term impact on China’s economy and spillover effects on other countries with closer economic and trade ties to China.

• We assume that there will be a material negative impact on corporate profits in the near-term as businesses deal with supply and demand disruptions resulting from this health scare. Yet, this is likely a one-time impact over the next couple of quarters and should not have a permanent effect on future earnings potential.

• Over the intermediate term (next 3-5 years), our expectation has been for lower-than-average positive returns from most asset categories along with higher volatility.  Acknowledging that there is a great deal of uncertainty, this remains our base case view.

• Therefore, we continue to advocate a slight defensive posture with an elevated cash/short-term fixed income position as “dry powder.”  We recommend maintaining a slight underweight to global equities overall, with a modest tilt towards more reasonably priced international and emerging markets stocks.

Click here to read our market commentary regarding the coronavirus outbreak.

There were no significant tax legislative changes during 2019 except that Congress and the President approved a $426 billion bipartisan tax cuts package addressing tax extenders, retirement savings and various technical corrections to the 2017 Tax Cuts and Jobs Act the week before Christmas. The tax provisions were part of a broader year-end government spending bill to avoid another government shutdown. The two most notable tax legislative provisions are summarized below and some of the most relevant highlights are discussed in more detail throughout this memorandum:

• The retroactive and current renewal of over two dozen temporary tax breaks known as tax extenders, which have expired or are soon-to-be expired, spanning from 2017 to 2019. Generally, the renewed tax breaks are extended through 2020 and some are extended until 2022;
• The “Setting Every Community Up for Retirement Enhancement” bill (HR 1994) (“Secure Act”), which makes sweeping changes to retirement savings and employer retirement contribution provisions.

Please click here to read our 2019 Year-End Tax Planning Summary.

Choosing a trustee is one of the most important decisions people make when they decide to create a trust. Who they select depends on a variety of factors, including the purpose and complexity of the trust, how long it’s designed to last and the powers they plan to give to the trustee. The best trustees have the fiduciary experience, investment knowledge, and diplomatic skills to negotiate complex family dynamics. Above all, they should have practical judgment and time to give the trust as much attention as it requires. For most, the threshold question is whether to appoint an institutional trustee, individual trustee or both. Whether an institutional trustee has a national or state trust charter is no longer a material consideration in choosing an institutional trustee. Many are not aware that state-chartered trust companies may offer trustee services to beneficiaries that reside in all 50 states as long as the principal place of administration of its trust activities occurs within its home state’s borders.

Click here to read more.

Volatility spiked early last week after President Trump upended the expectation for an imminent trade agreement. After concluding that the Chinese were reneging on terms they had agreed to during earlier bargaining rounds, Trump opted to more than double tariffs on $200 billion in Chinese imports. This tariff increase to 25% from 10% took effect on Friday. The Trump  Administration also began the process of expanding tariffs to cover an additional $300 billion in imports, leaving almost no products from China entering the U.S. without incurring a tax. In retaliation, the Chinese government yesterday announced plans to impose tariffs ranging from 5% to 25% on 5,140 U.S. products worth about $60 billion. It said the tariffs will take effect on
June 1st.

Click here to read our market commentary regarding U.S. and China Trade Negotiations.

In late March, part of the U.S. Treasury yield curve “inverted” for the first time since 2007.  Specifically, the yield on the 3-month Treasury note rose above the yield on the 10-year Treasury bond. Over the last several months, there has been a lot of angst about the potential risk of an inversion and what it might signal about the health of the economy. Historically, yield curve inversions have been a fairly reliable predictor of economic slowdowns. In fact, every recession since 1957 has been preceded by an inverted curve. Yet, there have been multiple instances where the curve has inverted without a recession. We believe the current inversion will prove to be another exception to the rule.

In our view, the economy remains in decent shape and the risk of an imminent recession is still relatively low as technical factors have largely contributed to the recent inversion.  The attached Market Brief provides further insight from our Investment Team.

Final regulations governing the selection, designation and power of partnership representatives were issued on August 6, 2018. On December 21, 2018, the Treasury and the IRS issued final regulations addressing other aspects of IRS partnership audits. If your family owns a family limited partnership or other entity taxed as a partnership, such as a limited liability company (or an S corporation that has made an election to be taxed as a partnership), these rules could apply to you and may necessitate changes to existing organizational documents.

Partnerships and limited liability companies that have not yet reviewed their agreements should take steps now to comply with the new rules and regulations or risk compliance issues should they be selected for audit. Furthermore, partnerships and limited liability companies should take steps now to identify a partnership representative.

Please click here to read our helpful reminders for companies on the status of the new partnership audit rules and regulations now that 2018 has come and gone.