Part of sleeping well at night, if you are invested in the financial markets, is trying to control or set limits on those elements of the financial markets that you can control: expenses and ownership. Being invested through a separately managed account (SMA) allows the portfolio manager to essentially eliminate the fee from consideration by using the tools of asset allocation and tax loss selling that minimizes taxes from recognized capital gains, to allow almost 100% of the annual gain in a portfolio to remain in the portfolio.
What will 2021 bring? Two thousand twenty was a crazy year, and the S&P 500 Index returned 18.4%, having appreciated 31.5% in the prior year. The equity benchmark’s strong 2020 performance included the rapid, steep bear market brought about by COVID-19, followed by an equally dramatic recovery. The market started reaching new highs again by August and continued to reach new highs through year-end. If the pandemic can’t cause more lasting damage to stock prices, can anything?
Socially responsible investing (SRI). Integrating environmental, social, and governance (ESG) factors in the investment process. Applying principles for responsible investing (PRI) to investment decisions. Sustainable. Green. Ethical. Impact investing. These terms are all part of the socially conscious investment jargon getting a lot of “airtime” in the news media, particularly in financial circles. The goal for all of these investment styles is essentially the same, to produce a positive investment return and a positive impact on society and the environment.
Some tax advisers are worried that the “golden age of gifting” may be ending soon after 2020. The phrase “tax exempt gifting” refers to the different tax status of lifetime gifts (gift taxes are only based on the gift amount received) compared to inheritances (where the full value of the transfer at death is subject to the estate tax, if any, including the funds which will be used to pay the estate tax). The three tiers of tax-exempt gifting, in order of importance, begin with the $15,000 annual exclusion gift to anyone, which is always tax free and also paperwork free, if the spousal consent is not sought.
Julie Phippen, an Executive Administrative Assistant at Agawam Trust and Management Company (an affiliate providing estate and trust administration services for Woodstock), noticed a need while traveling in Zimbabwe and ended up establishing a 501(c)(3) nonprofit organization to meet that need. Sewpportive Friends began in 2016 with the mission of empowering women in Africa by providing healthy, handmade feminine care products and the education to enable women to produce their own. Just as a small pebble tossed into a pond sends out far-reaching ripples, Sewpportive Friends has expanded to touch more lives in the US and Africa.
Woodstock Corporation, a private wealth management and financial services firm based in Boston, MA, welcomes Benjamin G. Dawson as a senior vice president and portfolio manager. Dawson is rejoining Woodstock after 22 years as a co-founder and managing director of the registered investment advisory firm Alpha Windward LLC, where he led the Blue Chip Growth investment strategy, which focused on building portfolios of growth-oriented companies with sustainable growth rates, strategic competitive advantages, and leadership positions. “Ben’s approach very much echoes the Woodstock philosophy. We’re looking forward to comparing notes and working together for the benefit of all our clients,” says Adrian G. Davies, President, Woodstock Corporation.
We feel we should be clear: there is volatility to be worried about. An article on “accounting for survivorship” sought to explain the survivorship bias in looking at US international dominance when measuring “country-specific real equity market returns” from 1900 to 2019. As the Morningstar article points out, in 1900 the United Kingdom dominated the world equity market with a 25% share, while Germany, France and the United States held roughly 15% shares each. As we pointed out last quarter (see QMP Summer 2020), by 2020 the United States accounted for almost 55% of the world equity market itself. The authors of the article rightly point out that for equity markets in Germany, Russia and Japan, “being on the losing side of a world war or two, the overthrowing of capitalism or just prolonged poor market performance would have wiped out the capital investors.” Certainly.
US equity markets had a good third quarter (+8.9%) despite a rough (-3.8%) month of September. July and August were strong, driven primarily by the notion that much of our economy can function even with part of it disabled by a pandemic. Many of the same stocks that drove the market in April, May and June continued their strong performance, though the highest flyers suffered more in September. Volatility was up in September, with 17 of the 21 trading days showing a spread between the daily high and low of greater than 1%; two of those days had a spread in excess of 3 percent.
Will the Tax Bite Ease?
The day-to-day quest to lower the bite of taxes continues. Examination rates for the IRS now defy logic. For all individual returns the examination rate for tax year 2018 was 0.15 percent. For income over $100,000, progressing by categories to income over $10 million, the examination rate varied from 0.05% to 0.03% annually. This is where the money is. For incomes of zero, yes, that’s right, zero, the examination rate was 0.31 percent. Fraud, particularly regarding the earned income tax credit (EITC), causes the focus. Using the tax code for social engineering rather than collecting money does skew the system. Some other things require attention, but don’t get it.
Sometimes investment professionals offer this rather generic description of how they work: “we’re not market timers.” The kernel of truth is that it is very hard to make two good decisions regarding first, when to get out of the market and then second, when to get back in. Some stocks in the growth category are secular growth stocks, where “innovation can carry companies to growth almost independently of the economic or business cycle.” On the other hand, value stocks, besides needing those two above-mentioned good decisions, “need an economic outlook conceptual framework over a multi-year forward time period to begin positing economic growth.”