In thinking about what may happen financially and economically over the next several years, we realize that much depends on how countries and their citizens react to medical issues. For perspective, Marcel Proust wrote in 1913: “For, medicine being a compendium of the successive and contradictory mistakes of doctors, even when we call in the best of them the chances are that we may be staking our hopes on some medical theory that will be proved false in a few years. So that to believe in medicine would be utter madness, were it not still a greater madness not to believe in it, for from this accumulation of errors a few valid theories have emerged in the long run.”
More current (2020) is the news from Sweden that “two thirds of deaths [from Covid-19] have been among those over age 80 and 97% never received intensive care treatment.” The rationing of medical resources appears to be alive in socialized health care systems.
And lastly, a note on the statistical analysis of operational data. An inflation rate of 4% or higher may make up for “inflation that has been running at 2% or less” according to the Fed; however, “managing on averages” is problematic because “one may become blind to what happens in the tails of the distribution.” “Applying the Fed’s logic, if I show up an hour early for an airplane flight today, it’s OK if I show up an hour late next time. On average, I’m on time.” If allowed to function, the give-and-take of the free market may allow these truths and perspectives to benefit us all. Or, if not, the result will likely be mismanagement.
Beware of Being on Autopilot
A business associate who now works mostly remotely for a large firm recently commented that his retirement and other savings are invested in low-cost exchange traded funds (ETFs). His plan is on autopilot. Of course, in a larger sense, “autopilot” is what Boeing thought they had with the problematic Maneuvering Characteristics Augmentation System for their 737 Max aircraft. “The mystery is why the organization (Boeing) let the change (made by Boeing engineers for, perhaps, a narrow reason) flow through without examining every likely or unlikely effect.” In a narrow sense, as ETFs grow in popularity and in “flavors,” the risks become more evident. In the passive category, “many sober investors have a surprising degree of exposure (to meme stocks) through index funds.”
As ETFs evolve in the active management direction, they are picking up some of the same issues facing mutual funds. “About a third of all active ETFs are marked as having a medium to high risk of closure.” On performance, “two thirds of large-cap managers of mutual funds have fallen short of their benchmarks this year (2021). While roughly 10% of 371 US active EFTs with full year performance are beating the S&P 500.” Pooled vehicles also have the disadvantage of not being able to use tax-loss selling. A recent article tried to quantify the advantage that tax-loss selling can bring to a separately managed account, not available to those invested in pooled investment vehicles, such as ETFs and mutual funds, whether active or passive. Using data from 1930 on and “extensive simulations,” the authors calculated that tax-loss selling improves an equity portfolio return by 110 to 140 basis points annually. The difference in the fee paid for a passive ETF and a separately managed account at Woodstock is a fraction of this difference, even before the benefits of knowing what you own and that you actually own it are included.
Highs and Lows
As in any year, there were some highs and some lows at Woodstock. Our highs this past year include the health of our staff and the performance they have wrought for our clients. Woodstock ends 2021 with performance generally beating our benchmark and assets under management at $1 billion. Our lows include the surprise retirement of a portfolio manager and our failure to complete the Massachusetts registration of a portfolio manager who recently joined us. We’ve paid a price for each of these low points but neither persuades us that we’re approaching investment management in the wrong way. The old adage in the investment world is that the company goes down the elevator every night and, also, we believe in firm, although fair and reasonable, regulation. Your portfolio manager is aware of all these matters and either I or they will be available to answer any question that you may have about these issues.
We know that you are the most valuable business development tool that we have. Your referral of a friend, colleague or family member to us is the most important way that we grow. We thank you for your support and want you to know that we are dedicated to serving your best interest.
William H. Darling, Chairman & CEO