The original idea behind the “Page One” article in our Quarterly Market Perspectives (QMP) was to explain why our clients should be at Woodstock and not some other investment firm. One of our portfolio managers, Tom Stakem, says he wants to read something that he can’t find elsewhere. A recent article in the WSJ described good opinion writing as “impressive with its enterprise, originality, passion, boldness, depth, flair or wit.”[1] We try. We also borrow ideas and attribute them extensively. We keep in mind the line often attributed to Oscar Wilde: “Plagiarism is the sincerest form of flattery.”
Woodstock has finished 2024 and the last almost 20 years at the top of its game. We began subjecting our performance to the Global Investment Performance Standards (GIPS) in 2005. This year we will have a verified twenty-year record. Our Growth Composite has covered over 80% of assets under management for the whole 20 years and has a benchmark for portfolio accounts of 80% S&P 500 in an 80-20 model (the 20% component is the iShares Core US Aggregate Bond ETF). We also compare our stand-alone equity performance to the S&P 500.
We will let you know when verified performance results for 2024 are available. Prior years are already available.
Struggles for Venture Capital
We’ve been following the venture capital industry’s turn to the secondary markets. Along with net asset value loans (NAV loans)[2] and negative cash flows for the last two years,[3] the industry is looking for creative ways to return capital to investors when their markets turn illiquid. These secondary sales/purchases are themselves being repackaged by larger firms for sale to wealthy investors.[4] Some of these investments “have been sitting in the portfolios of other firms for longer than the typical five-year time frame.” While usually referring to a plunging stock price for a marketable security, the phrase “trying to catch a falling knife” might apply here. As an alternative to bringing these assets into the public market, within the general partner/limited partner venture capital world, secondary offerings may be more of a negotiated deal between “partners” involving valuation adjustments and fee adjustments between knowledgeable parties where their original deal did not go as planned.[5]
What do venture capital insiders think about 2025? “The likely emphasis on government efficiency and lower regulation will spur growth, exits and investment.”[6] Does “lower regulation” seem likely? Some issues need clarification because of confusion within the financial services industry. For example, on environmental, social, governance (ESG) rules, a federal judge in Missouri permanently enjoined the Missouri Securities Division from enforcing rules having the effect of restricting the use of ESG criteria in investments offered to the public.[7] Conversely, a federal judge in Texas recently ruled that American Airlines “violated its legal responsibility in managing employees’ retirement assets by encouraging environmentally and socially responsible investing in its 401(K) plan.”[8] The wrinkle here is that the airline was faulted for violating their Duty of Loyalty (there may have been a commission paid), not their Duty of Prudence (the “Prudent Man” rule).
Rules to Review
The right approach might be to “look around the globe. When governments put a thumb on the investing scale or pick corporate winners and losers, investors and the economy suffer.”[9] Another likely candidate for review is the fiduciary rule, applied to retirement assets. The US Department of Labor’s Retirement Security Rule is currently under a court-ordered stay. Started under the Obama administration and modified in the first Trump administration, it attempts to apply a modified fiduciary rule to broker-dealers. As we’ve pointed out before, the commission structure of broker-dealers[10] is incompatible with a fiduciary standard by definition (see QMP Spring 2021).
A recent article discussed the need for companies providing wealth management services to the merely “rich,” those with investable assets of $10 million or less, to reach “scale.”[11] Scale is measured by the pre-tax profit margin of the wealth management service provider. Only a few very large banks meet the criteria. The rest will have a very tough go, the article concludes. A confusing attribute of these large banks is that all of them are dually registered as both investment advisors (under a fiduciary standard) and as broker-dealers (with a commission structure). Is size compatible with a fiduciary standard?[12] Registered investment advisors (RIAs) “are increasingly following a pattern of market concentration that’s already in place at the brokerages.” The “bulking up” provides better services in “tax, trusts, estates, customer communications, portfolio management and, yes, insurance.” And, of course, the provider needs to offer a wide range of investment options. “If you’re not willing to take private equity or another form of capital, are you comfortable that you can fulfill your fiduciary obligations to your clients without it?”
At Woodstock, our answer is “Absolutely, yes!” We understand private equity as an investment. We know the pitfalls. We remain focused on high-quality US stocks for a reason. We already provide the above-mentioned “better services,” except for insurance. We plan to maintain adherence to a fiduciary standard as a solely registered investment adviser. And we have an almost 20-year performance record that some of our competitors, both large and small, would envy.
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
Adrian G. Davies, CFA — President