Q2 Commentary

By Nick Fisher, Portfolio Manager


Not a lot changed in the 2nd quarter since our Q1 letter. What has changed is the market’s perception of global trade. This has undoubtedly impacted the trading narrative around the US Dollar and consequently commodities and emerging market stocks, the very assets we are most excited about. The fickle nature of “Mr. Market” often allows us the opportunity to buy when prices are down, as we maintain our value discipline. As Warren Buffett says, when prices go down we should get excited (and buy more), but we often do the opposite. We view this current downturn in emerging market stocks as a major boon to prospective 10-year returns.

Last quarter we discussed the 5 longer-term issues we thought were important.

  1. Expensive US stocks
  2. Monetary policy is in the tightening phase
  3. Yield curve continues to flatten meaning short-term rates are climbing and long-term rates on bonds are static
  4. FANG/FAAMG[1] stocks continue to account for most of market returns
  5. Trading and market action does not look favorable for the market as a whole

All of this warrants a cautious stance. (See last quarter’s newsletter)

This quarter I would add a sixth: real estate is softening. New home starts are down 39% and new home sales are down 22%, while the Case-Schiller home price index shows decelerating home price gains. Anecdotally, we have heard from homebuilders who are struggling with labor and material prices and home affordability continues to be a problem with higher mortgage rates. As we have written previously, real estate is a huge part of our economy and is one of the best leading indicators of economic growth. As a result, we will be paying close attention to future real estate numbers to confirm a concerning trend.

Portfolio Update


The biggest driver of performance (or lack there of) in our portfolios has been the rebound in the US dollar starting in late April. This has been a double-edged sword with both positive and negative effects on our portfolios.

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The value of the dollars we hold in portfolios have increased (in the chart above), however the value of the commodities and emerging markets we hold have decreased (see chart below).

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Since we value our portfolios in dollars and our clients can only spend dollars, we don’t get much credit for the rise in the dollar (as it pertains to performance especially). We do however benefit when we use our more valuable dollars to buy that which has become cheaper (ie. emerging market stocks). And we did just that at opportunistic prices late in the 2nd quarter (see chart above).

The justification to own more emerging market stocks in this environment is purely because of their low prices. This chart clearly shows the “cheapness” of emerging markets (blue line) relative to large US stocks (black line).

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The P/E[2] of the MSCI Emerging Market index is significantly below the US based S&P 500 index. With cheaper valuations in emerging market stocks, we can expect much better returns over the next 10 years compared to the growth heavy US based portfolios that most investors are primarily invested in.

Fixed Income

One final note regarding our portfolios, we sold the Janus Unconstrained Bond Fund (ticker symbol: JUCIX). This fund was acquired to provide interest rate yield with very little exposure to rising interest rates. In retrospect, this strategy was tantamount to picking up pennies in front of a steamroller. The income was simply not worth the risk. This risk came from many of the idiosyncratic positions such as owning Italian government debt and shorting German government debt (Bunds). To be sure, this may prove to be a good trade but we felt it was time to decrease the risk exposure from this investment. We consequently allocated additional resources to our best ideas, which provide a much better return for the given level of risk.

The investment environment continues to be challenging. Over the next couple years, we expect significant market volatility and we expect many opportunities to deploy investment capital at favorable valuations. It is during times like these when your relationship with an advisor is most valuable. Whether it be helping understand the many psychological biases we all have that can influence decision-making, or sound tax management (and others), a good advisor is worth their weight in gold. We look forward to navigating these uncertain times alongside you.

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Nick Fisher



1 FANG/FAAMG: Facebook, Amazon, Netflix, Alphabet/Google, Microsoft

2 The P/E is the price to earnings ratio which is a common ratio used to determine the cheapness/expense of an asset. Higher P/E ratios indicate more expensive assets and vice versa for cheap ones.