3rd Quarter 2016



MARKET COMMENTARY - Fredric W. Williams

Tweedledee and Tweedledum…

While not intending to slight in any way the literary significance of Lewis Carroll’s 1871 children’s story (Through the Looking Glass), it appears a significant portion of the domestic electorate, irrespective of party affiliation, views their choices for president to be similar to the characters in the aforementioned nursery rhyme who battled over a “spoiled…nice new rattle”. Although not designed as a partisan comment, since we’re often dispassionate cynics regarding the politics of politics, it goes without saying that this year’s domestic elections have explored the extremes of uncharted territory within what has become uniquely our version of the democratic process. Had Confucius been able to time-travel into the midst of this campaign cycle, he likely would have smiled at the appropriateness of one of his numerous, and insightful, observations:

“Knowledge has never known to enter the head via an open mouth.”

This year’s first-half market volatility was fueled by a broad array of uncertainties – culminating with the late-June Brexit surprise that we discussed in this space last quarter. Stateside, the elephant (absent any particular party label) in the room was the outcome of the primaries leading up to this summer’s conventions. By early July, with the equity market’s recovery from the UK vote intact, and the political parties’ respective coronations a fait-accompli, the early 2016 investor fears were given a caffeine-blast of animal spirits as the domestic indices ascended to new highs in July, and then again in mid-August. But despite a “FANG”[1] resurgence during the 3rd quarter, the S&P Value Index (up 6.8% YTD) was still ahead of the S&P Growth Index (up 4.7%) as we entered 2016’s Q4 stretch run.

Investor angst often takes its lead from the media’s talking heads who attempt to justify their chair on the set with interpretations of events, and then projections as to their expected outcomes – a dynamic we’ve seen for eons. The aforementioned concern about Brexit’s “impact” being possibly one such example, the nearly forgotten stress around Grexit in 2015 being another,  as well as the often-cited propensity of the “dismal scientists” (aka economists) to have predicted 11 of the last 5 recessions – suggesting that prognosticators generate better “coverage” by feeding the fear (as opposed to greed) side of the investment equation.

Similarly, any type of uncertainty is the bane of the markets in general, and this year hasn’t lacked in providing more than an ample supply. In addition to fanning investor anxiety, this ambiguity has also caused companies to be a tad more reticent about putting pen to paper regarding what they see on the horizon.

“With third-quarter earnings season kicking off this week, investors have less insight than usual with regard to how the results might play out. That is because companies have been particularly tight-lipped ahead of the customary reporting period. By Bank of America Merrill Lynch’s count, only 21 S&P 500 companies issued earnings guidance in September, a record low for any month since 2000. That is one-third lower than the average for a typical September, which is usually a light month, and roughly one-fifth of the overall monthly average. It is also lower than the Septembers of prior presidential election cycles. In 2012, 31 companies gave guidance in that September, compared with 71 in 2008 and 135 in 2004.”  - WSJ 10/10/16

In a year not absent any potentially foreboding events, and after the sub-par relative performance of prudent investment strategies last year, it’s enlightening to see that thus far 2016 is featureing the resurgence of an “old standard”:

“…the return on a diversified portfolio this year is competitive with many major asset classes, and has restored (for now) some confidence in the age-old mantra of diversification being among the most prudent of investing strategies. Many on Wall Street, however, seem to be viewing that strength as a sign of weakness. No one knows the future (though that doesn’t stop many from proclaiming they do), and crises are always possible. But the decent performance of assets this year should be a sign that markets are stable and performing decently, rather than a harbinger of bad times ahead."

“Through the end of August, a basic diversified portfolio of 60% equities and 40% bonds returned nearly 7%. In truth, other than a bout of sharp up and down in January and early February, this year has been neither volatile nor uncertain. It has instead been steady and quietly strong. The last months may tell a different tale, but for now that’s where we are. Investors should take note: Esoteric strategies (such as those of many hedge funds, big bets, and lots of churning trades) garner attention but often fail in relation to simple diversification.”  - Z. Karabell, Barron’s 9/27/16

Interestingly enough, one of the laggards in the performance race this year have been hedge funds, which are only up (according to the Barclays Hedge Fund Index) a bit more than 3% thus far in 2016 – reminding one of an apropos Winston Churchill observation:

However beautiful the strategy, you should occasionally look at the results.”

It goes without saying that there’s a lot more drama to unfold before this year gets closed out into the history books, which will therefore require that we stick to our macro discipline of focusing on global valuation and cash flow opportunities as they become available. This, by definition, requires a longer term vision that defers to facts, rather than emotions, and often means a contrarian approach to navigating the capital markets:

“Many investors prefer comfort, chasing what is popular and loved, rather than pursuing what is out of favor. The markets do not reward comfort. Whatever is newly expensive has two attributes: wonderful past returns and, in most cases, lousy future returns. Whatever is cheap became cheap by treating us badly in the past, but is priced to deliver superior returns. Successful contrarian investing requires us to live with discomfort, for being “wrong” and alone. But bargains do not exist in the absence of fear.”  - R. Arnott, Research Affiliates 2015

[1] Also known as Facebook, Amazon, Netflix and Google (which now goes by Alphabet)

Capital Markets Overview

Capital Markets Overview



At the root of the financial crisis were massive amounts of subprime and speculative debt.  Recovering from the over-leverage, built up over decades, would take more than just aggressive monetary policy, recovery would require time.  It’s been eight years since the depths of the great recession, and in that time the consumer has rebuilt.

As time has passed much progress has been made on the consumer side.  Take jobs for instance: in 2009, as the economic outlook was increasingly gloomy, companies scrambled to control costs and dramatically cut their work forces.  Between 2008 and 2010 private payrolls lost a net 8.8 million jobs and the unemployment rate doubled from 5% to 10%.  What has happened since?  From 2010 to the end of this quarter, a net 15.2 million jobs have been formed, far surpassing those lost during the recession.  More jobs mean more paychecks and a greater ability to pay bills, to save, and to spend discretionary income.  Homeowners have made an additional 96 mortgage payments, property values have recovered, and with interest rates near all-time lows many have taken the opportunity to refinance with better terms.  In addition, personal savings rates have tripled from a decade ago and leverage has been better managed.  Household debt payments, as a percentage of disposable income, is down to 10%, compared to 13.2% in late 2007. Adding icing to the cake, oil prices remain at discounted levels relative to recent highs, essentially the equivalent to a tax break for all Americans.  Between families building equity in their homes, and regaining control of their personal budgets, household balance sheets have improved dramatically.  The end result, household net worth is now 33% higher than it was pre-crisis.

The improvements in household balance sheets are good for the economy.   Considering that the consumer drives 2/3 of our economy, their behavior is critical to economic growth.   As people feel better off financially the “Wealth Effect” kicks in.  Individuals become more confident to go out and spend money.  One potential area for increased spending is housing.  During the recovery, housing starts have consistently picked up, but have yet to reach long-term averages leaving room for further expansion.  For those looking for a new home, according to BEA census bureau, affordability is near an all-time high.  When and if spending picks up specifically in housing remains to be seen.  However, if our economy continues to make modest improvements, the consumer, now on improved financial footing, appears well positioned to do their part.

SECTOR OVERVIEW - Richard "Chip: Harlow

It can be daunting to try and classify the world's businesses given that there are more than forty-five thousand publicly traded companies in the world. Each has unique assets, liabilities, and strategic goals.  Though there is no perfect method for classification, the Global Industry Classification Standard (GICS) is one of the more widely used methods. GICS breaks out the world’s companies into the eleven highest level categories, called “Sectors”. These eleven sectors are broken down further into 24 industry groups, 68 industries, and 157 sub industries. This method concentrates on grouping companies based on their primary business activity.

The eleven (11) sectors are: Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Healthcare, Financials, Real Estate, Information Technology, Telecommunication Services and Utilities.

Over the intermediate term, asset performance is often driven largely by cyclical factors tied to the state of the economy such as corporate earnings, interest rates, and inflation. The business cycle, which encompasses the cyclical fluctuations in an economy over many months or a few years, can therefore be a critical determinant of equity market returns and the performance of equity sectors. Every business cycle is different in its own way but certain patterns have tended to repeat themselves over time. Those patterns have included different sectors assuming leadership in different economic phases due to structural shifts in the economy.  Just as a rising tide lifts all boats, the performance of stocks within a given sector tends to be highly-correlated. Our year-to-date 2016 highlights are below:


The Utilities sector has been one of the best performing sectors year-to-date (+13.09%) due to a combination of low interest rates and their defensive nature during a volatile market. The attractive yields have also attracted flows into shares. The sector has become much more correlated with bond prices in recent years and has the greatest sensitivity to long-term interest rates of any sector. Rising interest rates and valuation are current concerns.


The energy sector has improved in the most recent quarters as possible bottoms in natural gas and oil have been put in place. Recent performance has made this sector the top performing sector YTD (+16.04%).


Healthcare had been a laggard in the first part of 2016, but strength in Biotech and Medical devices has allowed the sector to rebound. At this point in the market cycle, healthcare normally does well, but political uncertainty will probably keep the sector in check until after November.

Evolution of Real Estate as the new 11th sector

In September 2016, real estate was elevated from an industry within the financial sector to its own individual sector, and now comprises around 3% of the S&P 500.  Most of the new sector will contain equity Real Estate Investment Trusts (REITs), which historically have provided liquid and diversified property exposure, attractive dividend yields, and competitive long-term rates of total return.

Being cognizant of the relative strength of each sector is an important piece of data that is utilized as part of Old Port’s research discipline within our Portfolio management process. We will continue to highlight appropriate sectors going forward. 



Not-For-Profits Not-Immune to Retirement Plan Lawsuits

The 401(k) plan has always been a group plan governed under an ERISA plan document.  Not so for 403(b) plans. 

For years, the 403(b) was an individual contract-based plan.  An employee could set up their own account and sometimes their contribution was matched, sometimes there was a discretionary 401(a) employer contribution, sometimes nothing.  These individual 403(b) accounts were offered by employers as a non-profit version of the 401(k), and were offered through a provider/record keeper.  It was up to the individual (versus the employer) to properly show the contribution on their tax filings.  Basically the primary difference between the 403(b) and 401(k) boiled down to who offered them (non-profit versus for-profit) and type of contract (individual versus group).

As time passed, more participants - particularly those in influential decision-making positions - had their non-retirement plan assets managed by a broker or investment advisor.  Many of these advisors were “recommended” as options to manage participant 403(b) assets.  Thinking unlimited choice was good; some 403(b) plans had over 20 outside providers for their participants to choose from.  Eventually consolidation occurs.  The one provider, group contract concept of 401(k) plans started to take hold.

After the “Great Recession” of 2008/2009, the Department of Labor made it mandatory for retirement plan providers to disclose their fees in a consistent and transparent basis.  Plan participants and plan sponsors of 401(k) and 403(b) retirement plans were the recipients of the disclosures.  Lawyers noticed these disclosures.

Since then, several large ($1 billion+) corporate 401(k) plans have the target of class-action lawsuits that primarily focused on fees.  In particular, they focused on costs borne by participants related to mutual fund expenses, and questioned why the least expensive (to participants) available share classes were not being utilized.

A St. Louis law firm – Schlichter Bogard & Denton – has been the primary instigator / proponent of 401(k) plan class-action lawsuits.  Recently the firm began targeting large 403(b) plans ($3 billion+) of universities – Duke, Vanderbilt, MIT, Yale, Penn, Hopkins and NYU.  Schlichter’s strategy holds out index funds, particularly those from Vanguard Funds, as the optimal, lowest cost funds for participants; this creates an active vs. passive management debate.

With the primary difference between 403(b) plans and 401(k) plans being contract type, group contract 401(k) plans are the easiest for the plan sponsor to maintain. The sponsor only has to submit payroll contributions to one vendor/provider and fund changes are easily accomplished.  With 403(b) plans originally being set up on an individual contract basis, often with multiple providers, payroll contributions had to be split among the various providers.  This made the typical 401(k) plan less expensive to administer than the typical 403(b) plan.  Also, due to the individual contract issue, the 403(b) marketplace has fewer providers than the 401(k) marketplace, and provider costs for a 403(b) plans are higher than a 401(k) plan with comparable employees and assets.

As far as the class-action lawsuits go, the focus of the 403(b) complaints is slightly different than the focus of the 401(k) lawsuits.  The targeted university plans listed above all exhibit these characteristics:

  • Very large plans (> $3 billion in assets = larger fee amounts)
  • More than one provider (up to five = no bulk buying power)
  • Too many investment options (up to 440 choices = too confusing)
  • Non-institutional funds used (retail/retirement shares = too expensive)

Based on those parameters, all 403(b) plan sponsors should pay careful attention to their providers and fund menus:  keep available investment options under twenty; use institutional share class funds; use one provider.  Lastly, provide comprehensive education.  It is easy to do, you just have to know where to look - and OPA’s Fiduciary Consultants can help in that process.



Planning For Aging in Place…

Continuing care retirement communities (CCRC) offer another choice of living options for seniors.  CCRCs have become popular over the last decade or so.  CCRCs offer at least three levels of care with one campus providing space and arrangements for independent living, assisted living and skilled nursing care as residents age.

Independent living-

Independent living arrangements in a CCRC would typically consist of cottage living units, apartments or condominiums, townhouses etc. depending on the facility.  Most campuses come with a wealth of amenities:  a gym, multiple pools, a clubhouse, dining room, outdoor recreation and depending on the state, possibly a golf course.  Social events and outings are common place.  This facilitates an active lifestyle for seniors.

Assisted Living-

Similar to a normal assisted living facility, the same services are extended in CCRC.   Typically, this means help with meals, transportation and entertainment.  For those with more extensive needs, assisted living may mean help with daily living such as hygiene, dressing, transferring and may include medication and paying bills.

Nursing Home-

Most CCRCs will be equipped with extensive nursing home facilities.  They may differ in the extent of services offered but generally would have rehabilitation centers, dementia and Alzheimer’s care, and 24 hour skilled nursing care.  Some CCRCs may have hospice centers for end of life and partnerships with hospitals for acute care as well. 

Why the popularity-

As you can imagine, the thought of you or your loved ones being taken care of all in one place could be very reassuring.  Reasons people like the CCRC include:

  • Seniors do not want to be a burden on loved ones and CCRCs can alleviate that concern by providing the types of care listed above all in one place.
  • Maintenance of the residence, from mowing and shoveling, all taken care of. 
  • Social activities and the recreational aspect.

Entry Fees and Types of Contracts-

Cost is one of the biggest barriers of CCRC entry for many.  CCRCs normally have an entry fee and a monthly maintenance fee.  Generally there are three types of contracts.

  • Extensive or Life Contracts- The most expensive because they generally include the unlimited assisted living and health services (can run into high six figures)
  • Modified Contracts- Some health services are offered but as residents needs change so would the monthly fees.
  • Fee-for-Service Contracts- Residents pay for health care costs separately.  Normally this is the least expensive but can be quite costly if those services are needed.  

Though not for all, CCRCs could be an option for some.  Some may look at them at the start of retirement for the social aspects, while others further on in retirement may look for stability of place.



“Change is the law of life. And those who look only to the past or present are certain to miss the future.”  - John F. Kennedy

Discussion of international trade has become one of the most heated issues in this year’s presidential campaign, although in primitive terms that bear little resemblance to the complex reality of the topic. Trade is discussed as if it is a zero-sum game that is ‘won’ by exporting more than we import, even if that means slapping tariffs on foreign goods. The experience of the 1930s should have made clear the costs of such isolationist policies. Integrated global trade agreements are under the gun, held accountable for the loss of jobs in the manufacturing sector, when it is actually just one of many factors.

The American economy has seen cycles come and go. The technology boom and the real estate bubble are the most recent examples. The global economy also sees waves of fundamental change. A recent study by economists at Deutsche Bank analyzes the current economic period, one they see beginning in the 1980s. In the ensuing 30 years, there has been an almost a perfect storm of factors that have driven the economic integration of countries.

China rejoined the global economy, the Soviet Union fell and India emerged as an economic force. As those economies grew, emerging nations became part of the supply chain and developed domestic marketplaces. More than a billion workers entered the global labor market. This produced lower labor costs and increased productivity. Americans saw their choice of products expand as prices declined. The lower prices on basic goods especially benefitted lower-income households. The proliferation of cheap (mostly Chinese) products meant the end of domestic manufacturers. The furniture industry left North Carolina. Auto parts plants left Detroit. Textile production disappeared.

The Deutsche Bank report sees the current economic cycle drawing to an end. Globalization and productivity growth are at their limits. The global economy is facing a secular change as it moves from globalization and the rapid expansion of the pre-financial crisis years towards a steadier, far less exciting economy. The implications are an environment of subdued growth and dwindling global trade. China has been hit with a major slowdown as they struggle to create a consumer class. The country also has to deal with the debt it created to fuel its rapid growth. In response, China has been aggressively devaluing Yuan, a short term solution that creates tensions with its trade partners and further damages trade.

The argument that trade deals caused the disappearance of the American blue collar worker ignores the role of technology. In recent years, a small but growing group of companies have moved their manufacturing back to the U.S. to reduce the total cost of ownership, which includes the cost of producing, delivering and servicing products. They see the benefit of moving manufacturing facilities nearer to the end user. The savings from shorter supply lines can offset paying higher wages.

What has not returned is large numbers of factory jobs. The plants being built here are heavily automated and employ a small fraction of the workers they would have a generation ago while increasing production. The movement toward automation and data exchange in manufacturing has been termed the fourth industrial revolution or “Industry 4.0.” Its effects are startling. Since the recession ended in 2009, manufacturing output — the value of all the goods that U.S. factories produce, adjusted for inflation — has risen by more than 20 percent. But manufacturing employment is up just 5 percent.

That is the future of manufacturing. The cost/benefits cannot be ignored. Protectionist trade policies will not reverse that trend. The work force will be forced to adapt, which they will. David Abney, the CEO at United Parcel Service, summed up the current climate, “Now that we’re in this 2% growth range in the U.S. and less than that in other countries, people are clinging more to the past and thinking more how to protect versus embracing the future.”




Steve Eddy – Was recently asked to join the Board of Directors for Lift360, formerly The Institute for Civic Leadership, ( http://www.lift360.org/ ).  Based in Portland, Maine, Lift360 is a nonprofit organization dedicated to strengthening leaders, organizations, and communities throughout New England. Lift360’s purpose is to unlock potential and build capacity through their 360-degree approach to purposeful leadership, collaboration and creative problem solving.

Benefit – In June a local business, Cumberland County Scooters, suffered a devastating fire. After taking the summer to rebuild they plan to reopen in December and Old Port Advisors, along with a number of other local business, will be holding a celebration and benefit Saturday October 23rd from 11:00 AM to 2:00 PM in Monument Square in front of Sisters Gourmet Deli (http://www.sistersgourmetdeli.com/). Additional information can be found at: https://www.facebook.com/events/694015964079997/

Events – As we move toward the holiday season, we will be making more focused contributions of manpower and financial resources to a number of community and cultural organizations that OPA team members are involved with. This will be integrated with the new biennial scheduling of our holiday open house, along with the adoption of an annual client appreciation seminar and reception. Look for details in the next issue of Viewpoints


Old Port Advisors was founded more than 20 years ago as Investment Management & Consulting Group (IMCG), with a vision to create a boutique independent investment management firm centered on the best interests of our clients. Our principles were simple and still ground us today: a values-driven, personalized, collaborative, and strategic approach to investing, wealth management, and fiduciary consulting. We changed our name to embark on the next 20 years, but our leadership and our calling remain. We’re excited to build on our past experience and success to deliver on our promise of building a secure future for our clients.