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A Long March

by M. Burke Koonce, III

True to the proverb, March came in like a lion. As oil prices, interest rates, and geopolitical tensions each climbed higher, market volatility soared and asset prices fell. Fear was so ascendant that it caused the Fed to back away from plans to raise interest rates by 50 basis points and instead settle for just a quarter percentage point. And so, here we are at March’s end, and while the lions can still be heard roaring in the distance, there are some lambs stumbling around.

Amid all the tumult, major U.S. market indices finished the month higher. The S&P 500 finished March up 3.7 percent, while the Dow Jones finished up 2.5 percent and the tech-heavy NASDAQ closed up 3.5 percent (each on a total return basis). This rebound, in the face of perhaps the scariest geopolitical backdrop in more than a decade, is remarkable. After some indices flirted with bear market levels in February, defined by a decline of more than 20 percent, equity asset prices have rebounded strongly off the lows. While the first quarter of 2022 will go down as the first quarter of negative returns since the pandemic bear market, it felt a lot worse a few weeks ago than when it finished.

Curious Cross Currents

While the human tragedy in Ukraine is unspeakable, markets react to geopolitical events in curious ways. On February 24, news reports emerged that Russian forces had begun a “special military operation” in Eastern Ukraine. Immediately, global asset prices first fell, but then rallied hard by the close of that first day. After two additional weeks of market declines on frightening news and chilling forecasts about what had become an all-out war in Ukraine, and with oil having approached $124 per barrel, markets began to behave as if this conflict would have a more nuanced impact on the global economy, and accordingly, asset prices. There is an emerging view that some degree of higher energy costs will help prevent the economy from overheating and could convince central banks not to raise interest rates too rapidly. The yield on the 10-year Treasury, which had widened out to almost 2.5 percent (up almost 100 basis points YTD) has come back in slightly. After all, the cure for high prices is… high prices. The more bearish view is that high energy prices will further fuel inflationary forces even while the economy cools, bringing about a bout of stagflation, for which there is no easy monetary policy cure.

Speaking of monetary policy, it was just two months ago when Fed Chairman Jay Powell indicated that the Fed might be forced to raise rates more quickly to ensure inflation did not begin to impede employment. Fast forward to Powell’s remarks after the most recent Fed decision, and the tune has changed; the employment market is so hot that wage increases are increasingly seen as a bigger threat to price stability than higher prices stemming from supply chain issues. That’s another reason why baseline inflation expectations for the year have continued to creep higher. Just a month ago, the consensus forecast for U.S. CPI increase was about 5 percent—today it is above 6 percent, and the 5-year breakeven inflation rate has jumped from 2.8 percent to 3.4 percent. Yes, inflation is still widely expected to subside, but due to higher wages and higher energy costs, inflation seems likely to fall more gradually than was previously expected.

The trouble with easing inflation is that it feels like monetary tightening. Real interest rates are now at negative 4.0 percent (10-year treasury yields of 2.4% less core inflation of 6.4%). As inflation eventually subsides, the effect on real interest rates will be similar to what happens when the Fed raises rates. The market has been reacting to this tightening with volatility, especially among riskier, long-duration assets. Volatility peaked in early March, with growth stocks suffering significant losses. However, after the Fed slightly softened its stance in response to Ukraine, rates still moved higher but more gradually, and growth stocks staged a bit of a comeback. This is why we tend to view volatility spikes, all else equal, as bullish.

What’s Next?

While we have been keeping a close eye on events in Ukraine and on the broader markets in general, we have not made wholesale changes to portfolios. We believe that should the trend toward higher interest rates and higher inflation continue, value-tilted will be positioned well to outperform. That’s because portfolios with a value-tilt tend to perform relatively well in this kind of environment. Sectors such as financials and energy, which tend to be well-represented in value-oriented portfolios, benefit from these trends. Also, when earnings growth becomes more abundant, investors are less likely to chase pricey growth stocks in favor of value stocks that are also experiencing solid growth. Finally, higher rates tend to have an outsized impact on long-duration assets such as long-dated bonds and expensive growth stocks, because those future cash flows must be discounted back to the present at those higher interest rates.

Even though growth (Russell 2000 Growth Index) rallied in the latter half of March, bouncing more than 7 percent off its lows, value (Russell 2000 Value Index) did even better for the month and has outperformed growth by more than 1000 basis points so far this year.

While geopolitical turmoil is unsettling, it is a risk that has already been incorporated in our allocation models. While these specific risks are unpredictable, we know these events happen from time to time in the aggregate and accordingly they are already baked into longer-term expectations regarding overall risk and return.

While we will continue to monitor events in Ukraine and beyond, we do not anticipate much “trading” around the situation. We will maintain an eye toward rebalancing should circumstances warrant.

As always, we will continue to vigilantly monitor inflation, interest rates, geopolitical events and other market factors, and we thank you for your trust.

Burke is Trust Company’s Investment Strategist. Based in the Raleigh office, Burke works closely with the firm’s Chief Investment Officer helping develop investment strategy and communicating with clients.

Will the Next Domino Fall?

by Dan Tolomay, CFA

My sons like to play with dominoes. Specifically, they like to stand them up in rows, push the first one over, and then watch them fall one by one. The design, which is entertaining to devise and laborious to build, is satisfying to watch as it unfolds as planned. Things don’t always go as concocted, though. Sometimes a shaky hand sets the process off prematurely leading to an incomplete sequence. A fully deployed set of tiles may fail to deploy as was imagined. It’s an interesting analogy in today’s bond market. What seems like a clear sequence of events leads to assumptions about the future and how to react.

The pandemic has resulted in product shortages. The scarcity has pushed up prices. A lack of labor supply has caused employers to raise wages to entice workers to join their teams. These inflationary pressures have nudged up interest rates. Bond investors, who receive fixed payments, see the value of those payments eroded when prices rise. To adjust, they demand higher yields, which is achieved by paying lower bond prices.

At the same time, inflation forces the Federal Reserve into action to stabilize prices. The primary tool the Fed uses for this purpose is interest rate hikes. Increasing short-term rates provides an incentive to save and a disincentive to borrow and spend. The desired impact is to cool the economy down so that it doesn’t overheat.

For the three months ended February 2022, the 2-year US Treasury yield has increased 0.92% and the 10-year US Treasury has increased 0.40%. The bond market (as measured by Vanguard’s Total Bond Market Index fund) fell -4.26% during that time. With inflation still in the headlines and more potential increases in interest rates looming, what are prudent steps to take with a bond portfolio?

First, don’t just focus on the dominoes that failed. Look at what worked. The -4.26% return referenced above is only the price move. When income is included, the return improves to -2.48%.

Next, remember the dominoes don’t always fall as planned. The consensus view is that interest rates will continue to rise. This was the case on March 1, 2018, too. The market’s expectation was that rates would increase from the blue line to the red line in 3 years. What actually transpired can be seen in the gold line.

As the chart below demonstrates, sometimes the dominoes are the victim of a false start; the plan for the grand launch fizzles out abruptly. Looking back 15 years to the Financial Crisis, there are multiple examples of what was perceived at the time to surely be the bottom for interest rates. Yields rose some, then fell again – in some cases even lower.

The argument is not that rates won’t rise. They likely will; however, it’s impossible to know how much, how quickly, and exactly how different maturities will be impacted. Additionally, with the risk of further coronavirus variants, escalating geopolitical tensions in Ukraine, or some other unknown crisis, there remains the chance of a “flight to quality” event. Such an event would see flows into bonds, a rise in bond prices, and a drop in yields. Or, inflation could end up being transitory, which would reduce inflation expectations and allow the Fed to be less aggressive. This would cap yields and support bond prices.

A domino cascade may go awry but it’s still fun; there’s a silver lining. Assuming rates do rise, what does it mean for bonds? That too is a mixed bag. The bad news is that the principal value of a bond will fall. The good news is income will rise.

The extent of the price decline is determined by the bond’s duration, a measure of the timing of a bond’s cash flows and its sensitivity to interest rates. As a rule of thumb, a bond’s value will fall by its duration multiplied by the size of the rate increase. For example, a bond with a duration of 5 will decline by 5.0% for a 100 basis point (bp) or 1.00% jump in yields. (It’s important to note that – absent a default – the bond’s price will ultimately move to par at maturity.) Cash flows from interest payments and bond maturities can be reinvested at higher yields.

These forces can be seen at work in the examples below, which assume a 6.6 duration and a 1.4% beginning yield. The first set of illustrations assumes one-time jumps of 0.50% and 1.00% in yields. The second set shows annual hikes of 0.30% and 0.50%. As the price change rows show in the +1 year columns, there is a negative price change. The yield rows reflect the higher income starting at the same time, though.

One Time Shock to Rates

Annual Rate Shocks

As the tables and graphic above show, rising rates are not catastrophic for bonds. The higher income that comes with rate increases helps offset damage down by principal hits. Down bond markets and down stock markets vary widely in magnitude and frequency.

Don’t let fear of the tiles not falling your way lead to bad decisions or avoidance of the game altogether. As with the stock market, investors must resist the urge to try to sidestep danger via market timing. The temptation with bonds and rising rates is to get out, “wait until it’s over,” and get back in. This could mean going to cash or concentrating exposure in short-duration bonds. Doing so may protect principal but could lower income if rates stay low.

Whether managing dominoes or duration, a strategy is critical. How is Trust Company of the South managing the risk to bond values from higher rates?

(1)    Ensure that holdings match the time horizon – portfolios with short-term liquidity needs (< 6 months) are encouraged to utilize money market funds. These funds will hold their value and see yields increase as the Fed raises rates. Short-term bond funds, by contrast, will suffer price declines and have a deferred uptick in yield.

(2)    Shorten duration – as noted above, there is risk in consolidating all bond holdings into short-term bonds. Acknowledging the low level of rates and their likely move upward, our portfolio’s duration is marginally shorter than the benchmark.

(3)    Add credit exposure – bonds with higher yields are less sensitive to rate increases. Interest rate risk is exchanged for credit risk. Care is taken to keep the portfolio investment grade, which provides a ballast when the equity markets decline.

(4)    Diversify within markets – holding bonds with maturities across the yield curve mitigates the risk of a rate increase in a particular maturity.

(5)    Diversify across markets – international bond markets are influenced by local interest rate moves and inflation expectations. Such moves are not perfectly coordinated with the U.S. bond market. As a result, holding foreign bonds serves to hedge domestic interest rate risk.

The role that bonds play in a portfolio is to dampen volatility. For clients without the ability or willingness to tolerate volatility of an all-stock portfolio, bonds have a place in a long-term portfolio.

The best-designed waterfall of dominoes plays out perfectly in the creator’s mind. It seems so obvious that things will go exactly as planned and lead to an outcome where reality matches expectations. A mistake can quickly shatter that idyllic scenario. Similarly, making portfolio decisions based on perceived sure-things or consensus views feels comfortable at the time. It is only with perfect hindsight that it becomes clear what was off and why. Inflation, interest rates, and bond prices may all act as imagined. But, I wouldn’t count on it nor would I make a large wager on it. I’d get out the box of dominoes.

As Chief Investment Officer, Dan is responsible for developing Trust Company’s investment strategy and managing client portfolios.

When the Ride Gets Bumpy

by M. Burke Koonce, III

Last spring, my wife and I took our daughter to Disney World. We had been recently vaccinated and we were feeling empowered and brave. It helped that Disney was operating at 50 percent capacity—it was a luxury I will require for future visits. Anyway, as my daughter and I were exiting Space Mountain, my Apple watch started to vibrate and I saw I had a call coming in from 911. Startled, and a little out of breath, I answered, not really knowing what to expect. Turned out that our technological overlords had determined that based on the violent maneuvers and abrupt stopping, I might have been in a car accident, and they were calling to ask if I required assistance. I thanked them and told them I was just a middle-aged guy on a roller coaster and we all had a chuckle.

After January’s ride, I half expected my watch to start buzzing again today.

While the history books will show that the major market averages were lower for the month based on month-end pricing, they will not capture the mileage. Yes, January concluded with the Dow down 3.3 percent and S&P 500 down 5.3 percent, but those figures obscure the intra-month declines that landed the other major US index, the tech-heavy NASDAQ, well into correction territory, even though a furious rally these last two days enabled it to post just a 9 percent decline for the month.

For the majority of the overall market’s near two-year trip out of the COVID-19 crash of March 2020, the experience has been more akin to the Seven Dwarfs Mine Train than anything that would require a height minimum. That has changed. It was only three days ago that the Russell 2000 Growth Index had fallen 19 percent since year-end, a single percentage point from a bear market.

Almost right out of the gate, the markets had begun to behave differently than they had in months. Ironically, as COVID-19 finally appeared to be losing its grip on the U.S. economy, markets began to focus not on the virus, but on the side effects of the cure—not the vaccine, but the enormous fiscal and monetary stimulus intended to keep the economy afloat during the dark days of 2020 and early 2021.

Those treatments, coupled with persistent supply chain problems and an extraordinarily tight labor market, have resulted in price inflation not seen in this country since 1982. The Federal Reserve, having successfully achieved its stated goal of strengthening the job market, and then some, will now turn its focus to dampening inflation through a combination of reducing its ownership of financial assets and raising interest rates. Accordingly, the yield on the ten-year Treasury has jumped from 1.51 percent on New Year’s Eve to about 1.77 percent as of the end of January.

While markets had been expecting two rate increases in 2022, the markets are now anticipating five rate hikes before the end of the year. That’s a big difference, especially given how low rates have been, and markets quickly began to reprice assets based on that big difference.
Now, as a general rule, markets do not really like rising interest rates, especially markets for expensive assets such as “growth” stocks—you know, the kind of stocks that have been doing well for years. Investors pay more for “growth” stocks because of the promise of earnings growth that will yield big future profits for those companies. The trouble is, in an environment where we have rising interest rates (because of rising inflation) those future profits aren’t going to be worth as much. As a result, other less expensive stocks, of companies that already have strong earnings even if they’re not promising future trips to Mars, look that much more attractive. Intuitively, this makes sense, right? In an economy such as ours that’s chugging along quite nicely in which lots of companies are generating strong earnings, who wants to pay nosebleed multiples for discounted future earnings when we’re swimming in strong earnings today?

What happened in January was a giant rotation out of “growth” stocks and into “value” stocks. At one point, the Russell 2000 Value Index was outperforming the Russell 2000 Growth Index by more than 1000 basis points, or ten full percentage points in just 19 trading days.
Growth made up considerable ground during the last two trading days of the month to trail by slightly less than 8 percentage points, but that’s still a huge move.

Of course, while we as investors have had the luxury of enjoying a relatively smooth ride recently, it is actually perfectly normal for there to be a 10 percent drawdown; in fact, there’s one just about every year.

But what if this really is something more serious? What if this is an extended drawdown? That would be rare indeed—we’ve only had 12 drawdowns of more than 20 percent since 1946. They usually accompany recessions and yet American corporate balance sheets have perhaps never been stronger, but let’s just say for argument’s sake that this might be serious. What might it look like? Well, if monetary conditions tighten significantly, that’s almost certainly going to be harder on the more speculative areas of the market than the less speculative. The reality is that the Fed is going to beat down inflation, sooner or later. The trouble is, falling inflation feels a lot like rising interest rates, whether nominal rates rise or not. With the 10-year where it is and core CPI at 5.5 percent, that translates into a current real interest rate of negative 3.7 percent. As inflation subsides, it’s just hard to see how we even get back to a real interest rate of zero without some price volatility, particularly for long duration, pricier assets.

All that said, we are not in the market-predicting business. We are in the optimal long-term allocation business, with a tilt toward value (and small caps, and international, and profitable companies). Naturally, this positioning is unlikely to outperform markets when speculation and accommodative monetary policy is ascendant. However, the existence of markets such as this one, characterized by heightened volatility, is incorporated into our long-term view, and, so far anyway, the value-tilt is performing as one might expect.

One of my favorite Warren Buffett observations is that in the near-term the market is a voting machine, but in the long-term it is a weighing machine. Sooner or later, all companies must demonstrate the ability to generate earnings, not just promise it.

Because when the ride gets so bumpy that your watch starts to buzz, it will be the weight of the portfolio that counts, not the number of “likes” it has.

Burke is Trust Company’s Investment Strategist. Based in the Raleigh office, Burke works closely with the firm’s Chief Investment Officer helping develop investment strategy and communicating with clients.

A Toast To Mr. Scrooge

by M. Burke Koonce, III

For the past seven years, my daughter has played a role in a local production of Charles Dickens’ A Christmas Carol, the 1843 novella that to a striking degree laid the foundation for how Christmas is celebrated today. This particular production amplifies the comic undertones of the original and is highly contemporary, which is one reason it just celebrated its 48th year. I first saw it when I was in elementary school. For reference, my older child just returned home from his first semester in college. The one constant in the play, which is performed as a musical, is Ebenezer Scrooge, played by the show’s creator.

Scrooge, of course, is a mean-spirited miser, a misanthrope whose hard-heartedness and self-absorption take a terrible toll not just on himself, but on his community, beginning with his long-suffering employee Bob Cratchit and by extension, Mr. Cratchit’s family, which includes the disabled child Tiny Tim.

When I first saw the play, I was perhaps just slightly older than Tiny Tim. I remember fearing Scrooge but also laughing at his obvious flaws. As a daydreaming kid, I really didn’t need to be told not to waste my life working in pursuit of money and riches (how ridiculous!). I needed no encouragement to celebrate holidays, most especially one in which I stood to receive an abundance of toys and candy in exchange for vague promises of decent behavior. But I was shocked by the vision of Tiny Tim’s death. It truly left an impression. Children weren’t supposed to die.

Well, they weren’t supposed to die in Raleigh in the 1970s, but in London in the 1840s, well, there was no such implicit guarantee. As the agrarian economy of Great Britain gave way to the Industrial Revolution and the Victorian era, urban children living in horrific conditions was becoming increasingly common.  Dickens himself was forced into labor as a child after his father was imprisoned for indebtedness. But A Christmas Carol is not a mere harangue against child labor; instead, it poses bigger questions to Victorian England, and really, of course, to all of us: what kind of society are we? Who are we as a people? Are we, as my economics professors described us using an x and y axis, nothing more than labor and capital?

After all, when I returned to A Christmas Carol as an adult, I must admit that old Mr. Scrooge seemed a lot more sympathetic, perhaps even prophetic. Why, who among us truly enjoys the mad scramble up to Christmas Day? The overspending, overindulging, brazen commercialization, and creeping cynicism all seem to suggest Scrooge might have been onto something. Bah, humbug, indeed! Even the tendrils of Scrooge’s most contemptible notion, that society ought to seek to “decrease the world’s surplus population” seeks to take dark root.

However, the horror of Tiny Tim’s fate had not diminished. As a younger adult, with my own small children, watching this scene hit me harder than before. Every child fears death, but parents fear nothing more than the death of their children. I can hardly bring myself to write about it. Thus for me, the meaning of A Christmas Carol began to change, as all our lives do, from the story of my own dreams, to the story of my dreams for someone else.

Scrooge’s path to redemption begins with the Ghost of Christmas Past reminding him of the younger version of himself, one who loved and was loved, before he was hardened by time and allowed himself to be slowly consumed by ambition and avarice.

The ghost conjures a vision of Scrooge’s mentor, jolly Mr. Fezziwig, a successful merchant who might be English literature’s first example of someone who had achieved the optimum “work/life balance.” Victorian readers would have recognized Fezziwig as a character from a vanishing era, one in which wealthy landowners would open their houses to their tenant farmers for a lengthy Christmastime feast (sometimes even lasting, wait for it, twelve days).

After all, it turns out Scrooge wasn’t born a monster. We learn he was sent off to boarding school at a young age by a distant father and not allowed to return home during the holidays. Little by little, he deviated from the model of the happily married and generous Fezziwig toward something wretched, but not until the Ghost of Christmas Present shows Scrooge the projected fate of Tiny Tim does the scope of his error begin to dawn on him. By the time the Ghost of Christmas Future delivers the vision of Scrooge’s own lonely, miserable death, we already know someone is about to have a change of heart.

This year, my children are much older than Tiny Tim was in that terrible vision. I even made it through that terrible scene without a tear, which for me is an extraordinary achievement. But I did not make it through the whole play. The one that finally got me (spoiler alert) was after Scrooge’s Christmas morning conversion when he becomes as a “second father” to Tiny Tim, promising to cure Tim’s lameness. These were tears of joy and hope, mixed with a few of salty resolve, because this was the recognition that we will all eventually die, that we must each contemplate our own legacy and that we can only hope that our worldly works will leave a positive mark.

Yes, somewhere between elementary school and AARP eligibility, the Scrooge miracle occurred for me just as it occurred for him. Call it humility, self-awareness, the Golden Rule, or a Commandment, the meaning of Christmas managed to penetrate my brain, even if just for a few days. Truly, what matters more than the ducats we accumulate is what we do with them, how we spend our time, and how we treat each other.

As Scrooge’s nephew said, “I always thought of Christmas time as a good time; a kind, forgiving, charitable, pleasant time; when men and women seem by consent to open their shut-up hearts freely, and to think of people below them as if they were really fellow-passengers to the grave, and not another race of creatures bound on other journeys.”

So, just as Bob Cratchit proposed, even before Scrooge was redeemed, here’s to Mr. Scrooge, the founder of our feast. For he is us, and we are him, and we will always be in each other’s company until we leave this earth.

And of course, as Tiny Tim said:

God bless us, every one!

October Surprise

by M. Burke Koonce, III

October. The name of the month conjures particularly vivid imagery. Autumn leaves whispering in the trees and crunching underfoot. Clear, cool nights with spectacular sunsets. Playoff baseball. And of course, fears not just of goblins but of financial market mischief.

More than any other month, investors associate October with spectacular market sell-offs, as evidenced in the wave of concerned emails and phone calls financial advisors begin receiving shortly after Labor Day. Of course, this is not without reason. Some of the biggest drawdowns in history have occurred beneath the Hunter’s Moon. In 2008, the market fell 17 percent. In 1987, it swooned 22 percent. The market declined 20 percent in 1929. But as my colleague Dan Tolomay pointed out last month, October is actually not a particularly scary month in terms of historical returns. Going back to 1928, October has delivered positive returns more often than not. While October does have a higher-than-average standard deviation, it is not the highest (August!). In terms of range of returns, October doesn’t even crack the top half. Finally, of all the “black swan” market returns that have occurred since 1928, October brings just slightly more than random chance would predict.

Now, markets are made up of human beings, and human beings experience fear, so the market isn’t always going to be a fun place. But last month was a perfect example of why trying to time the market is more difficult than bobbing for apples, and perhaps an even less profitable exercise. Markets soared in October. The S&P 500 was up almost 7 percent. The Dow Jones climbed almost 6 percent, and the NASDAQ rose slightly more than 7 percent. Those numbers are closer to historical annual average returns than monthly returns. If you had gotten spooked out of the market last month, you would have missed the best monthly return since last November, when the world was reacting to news of COVID-19 vaccines and the beginning of the end of the pandemic.

This is not to say there aren’t real problems with the U.S. and global economies. Inflation is beginning to look persistently high, fed by labor shortages and supply chain problems. The delta variant of COVID-19 continues to circulate, and wealth inequities are fostering growing social unrest around the world. But fear is the fuel that drives markets higher, not lower. After all, if there were no fear in the marketplace, there would be nowhere to go but down.

Over time, liquid markets are brutally efficient, and fear gets priced in quickly; the result is that market returns tend to run away from consensus not towards consensus—after all, that’s what makes returns possible. As Dan said last month, ‘rather than panic or prepare for an autumn decline, enjoy the beautiful weather.” I would only offer that while the weather outside won’t always be beautiful, and returns will rarely be as pleasing as they were last month, the key is to not get distracted by your emotions or short-term thinking and let the magic of compounding continue to work in your favor. No witch’s spell is more powerful than that.

Boo or Boon?

by Dan Tolomay, CFA

Darkness arrives sooner these days. The air is cooler. Our neighborhood is slowly populating with ghosts and skeletons. It is not just trick-or-treaters doing the frightening. October has been a scary month for the stock market. In 2008, the S&P 500 fell -17%. In 1929, the S&P 500 fell -20%. And, in 1987, the S&P 500 fell -22%. Should these extreme monthly returns cause us to fear the month of Halloween in the equity market? We looked at the S&P 500 back to 1928.

How volatile is the tenth month of the year? There are a few ways to answer that question. One is the range of returns (the highest minus the lowest). As noted above, the worst October was 1987 at -22%. The best October was in 1974 at +16%. So, the range of returns for the month has been 38%. Is this the widest? No. April, which experienced -20% in 1932 and +34% in 1933, is the standout. The narrowest? January, -9% in 2009 and +13% in 1987, holds that title. October is #7.

A second volatility measure is standard deviation. This calculation describes how much dispersion there has been around the average of a data set. The average October return has been 0.44%, and the month has had the second highest standard deviation at 6.06%. The most volatile month by this definition is August with an average return of 0.70% and a standard deviation of 6.11%. February has been the most docile month with an average return of -0.11% and a standard deviation of 4.26%.

As an aside, should we avoid February with its negative average return? No. Averages can be skewed by extreme observations (aka outliers). It is more useful to look at the median or midpoint of the data. This value has the same number of data points below and above it. The median return for February is 0.27%.

How often has October delivered a negative return? Forty one percent of the time. The worst success rate has been in September with 54% of observations negative. The best chance of a positive return historically has come in December when just 26% of years had negative returns.

So, is April the worst because its return range is the widest? Is August, which has the highest standard deviation to be feared? Or is September the bogeyman with the lowest historical success rate?

Volatility cuts both ways, but the focus tends to be on the downside. April has had a wide range of returns. The market was down -20% in 1932; but, trying to sidestep a potential repeat in 1933 would have foregone the +34% monthly return.

In the past, August has had the most noise around its average return of 0.70%. That noise comes from below and above average returns. Returns that come in unexpectedly above the expectations are not “risky”. August accounted for 1 of the 20 worst monthly returns (-15% in 1998) and 3 of the 20 best monthly returns (+11% in 1933, +12% in 1982, and +39% in 1932).

Lastly, simply looking at success rates doesn’t factor in the magnitude of returns. A month could post several small negative returns, which would make it seem “risky”, but missing the rare strong positive month could do more damage.

An extreme data point, sometimes known as a “black swan” event, can be defined as an observation beyond two standard deviations. Statistics tells us that approximately 4.5% of observations should meet this criterion. The average of all the months is 0.63% and the standard deviation is 5.37%. The expectation would be that 95.5% of observations would lie between 0.63% +/- (5.37%)(2) or -10.11% to +11.38%.

In fact, 49 of 1,125 observations (4.4%) meet black swan criteria. Six of the 49 (or 12%) occurred in Octobers. On this basis, October should be no scarier than March and less frightening than September. Interestingly, October is only a bit more volatile than random chance (1/12) would predict.

Assume now that October does produce a negative black swan event (as it inevitably will again sometime in the future), how long has the market needed to recover in the past? On average, a recovery from an October loss took 87 months! The median recovery time was 21 months (see above for average vs. median). The data is skewed by the 297 months it took to recover from October 1929. The fastest recovery from an October crash was 8 months (after October 1932).

The data shows that trying to use a calendar to forecast market returns won’t be productive. Investment theory has long noted this. At Trust Company of the South, market efficiency is part of the philosophy. This is the concept that security prices reflect publicly available information. The history of the S&P 500 is readily available to almost anyone. As such, trying to use this data to one’s advantage to predict a market move will be fruitless. Any value from that information has already been considered in security prices and investors’ expectations. Rather than panic or prepare for an autumn decline, enjoy the beautiful weather, and decorate for Halloween.

Legislative Update: Estate Planning Action To Take Now

by Westray Veasey, J.D.

Last week, the House Ways and Means Committee released its first draft of the “Build Back Better” legislation.  The revenue component of the bill includes several tax law changes which, if enacted, could have significant estate planning implications.  Below is a summary of the most significant estate planning-related components in the proposed legislation.

Reduction in the Estate and Gift Tax Exemption

Under the Tax Cuts and Jobs Act of 2017 (“TCJA”), the exemption against estate, gift and generation-skipping transfer (“GST”) tax was increased from $5 million per person to $10 million per person, indexed for inflation ($11.7 million for 2021). Under TCJA, this increase in the exemption amount sunsets after December 31, 2025.  The current draft of the bill eliminates the increase beginning on January 1, 2022, meaning that for gifts or estates on or after that date, the exemption amount is back to $5 million, indexed for inflation (approximately $6 million for 2022). Clients who want to take advantage of the current $11.7 million exemption should consider making lifetime gifts using as much of the increased exemption amount as possible before the end of 2021.  Be aware that any such gifts must exceed the “base” exemption amount of $6 million in order to use any of the increased exemption amount.  Exemption is used from the bottom up, so while a gift of $6 million or less will at least get any future appreciation on that gifted amount out of the transferor’s taxable estate, it will not be taking advantage of any of the additional $5.7 million of exemption currently available through the end of the year.

Elimination of Intentionally Defective Grantor Trusts

Under current law, a person can establish and fund a trust, known as an intentionally defective grantor trust (“IDGT”), where the trust assets are excluded from his or her taxable estate but are treated as owned by grantor for income tax purposes.  As a result, with an IDGT, the grantor can enter into transactions with the trust, such as sales, loans or asset swaps, with no income tax consequences.  In addition, the grantor pays the tax on the trust’s income, effectively making additional “tax free” gifts to the trust and allowing the trust assets to grow income tax-free outside of the grantor’s estate.  Under the current draft of the bill, new rules will apply with respect to grantor trusts that are signed after enactment of the legislation as well as for post-enactment contributions to and transactions with existing grantor trusts.  These new rules provide that the grantor trust assets will be included in the grantor’s taxable estate, distributions from them will be treated as taxable gifts, and transactions between the grantor and the trust will trigger income tax.  Many common estate planning techniques are IDGTs, including grantor retained annuity trusts (“GRATs”), spousal lifetime access trusts (“SLATs”) and irrevocable life insurance trusts (“ILITs”).  Clients could have a very small window to establish IDGTs or to add additional funds to existing ones in order to lock in the existing favorable tax treatment.

Elimination of Valuation Discounts for Family Entity Interests

Under current law, the gift tax value of a minority interest in a family entity (LLC, corporation or partnership) can be discounted off of its proportionate share of the value of the entity’s underlying assets due to the interest being unmarketable and lacking in control.  As proposed under the draft bill, for interests in family entities transferred on or after the date of enactment, no such valuation discount will be allowed to the extent the entity’s assets include publicly-traded securities, non-operating cash or other passive, non-business assets.  Clients may have a limited window to establish and transfer family entities holding passive investments at a discounted value.

There will likely be changes to these estate planning related components as the bill makes its way through Congress.  However, you should consider them with your estate and tax advisory team as soon as possible in case there are tax savings strategies you should implement before they may be eliminated, possibly as soon as date of enactment.

Severe Blue

by M. Burke Koonce, III

I went to dinner last week with a friend who was on his way to New York to see one of the last performances of Bruce Springsteen’s run at the St. James Theater on Broadway. I was jealous. I haven’t been to New York City since before COVID-19, and seeing “The Boss” in such a small venue would be amazing. All week I’ve been thinking about New York and hearing Springsteen’s voice in my head. And finally, this morning, it was here. The 20th anniversary of 9/11.

One of the cruel legacies of the terrorist attacks of that day is that it was such an unusually beautiful day. I remember walking to the subway that morning and gazing up at the sky that was a color that pilots refer to as “severe blue,” associated with strong high pressure, bright sunshine, and just a touch of wind. So for the last 20 years, on the first truly beautiful day in September, I have thought at least for a few moments of something truly terrible.

I was just 30 years old, closer to my children’s ages today than my own, working as an analyst at Merrill Lynch on Vesey Street, one block from the World Trade Center. I had walked through the North Tower at about 8:15 AM, about half an hour before the first plane hit and a little more than two hours before the building collapsed. I don’t believe my own life was ever in real danger; after evacuating my building, I had made my way several blocks up the West Side Highway before the towers fell. But I watched the North Tower fall and it was only then, when I saw nothing behind it, that I realized the South Tower was already gone.

At this point, there’s not much I can say that most people don’t already know about September 11, 2001. Of course, we were paralyzed by shock and fear for days, frightened about what new terrors might emerge. Men with machine guns guarded street corners, fighter planes patrolled the skies, and the acrid odor of burnt metal hung in the air all over the city. But what’s interesting to me now is that my most vivid memories of the weeks that followed the existential threat of 9/11 are not of horror but joy. Every gathering, every dinner with friends, was a full-on reunion. Every opportunity to be together was a treasured experience. That autumn in New York, as we shuddered at every low flying plane and struggled to navigate the city without the Twin Towers, was one of the happiest periods of my life.

That’s the great irony of suffering—its gift is the gift of empathy, of shared human experience. Few of us would choose to endure something like a terrorist attack, or a global pandemic, but to experience it is to come into possession of something valuable.

As we saw in the case of 9/11 and later in the COVID-19 free-fall in March 2020, these episodes of extreme fear tend to be fleeting. Why? Because of what drives us as humans. It’s easy to forget that when we talk about markets and economies that what we are really describing are human beings. We have become so accustomed to the extraordinary resiliency and power of a market economy in a free society that it’s difficult to observe on a daily basis. However, when we are faced with true trauma, that power is on full display. The economy adjusts, markets reset, and free people around the world to rediscover joy in their lives. This is made possible by the universal motivation of millions of people around the globe to live their lives and grow their families and pursue their dreams. In the early hours, it looks like hope, and eventually, it even resembles greed. But the truth is it’s just the human spirit.

After 9/11 markets fell sharply, with the Dow Jones down 14 percent for the week after the market finally opened again on September 17. However, by early October, markets had fully recovered. Last year, markets collapsed as COVID-19 fears spread, but if you blinked you might have missed the shortest bear market in U.S. history.

Since 9/11, the S&P 500 has advanced 4.3x. The Dow is also up almost 4x. The tech-heavy NASDAQ, juiced by collapsing interest rates, is officially a 10-bagger. Similarly, since the low in March 2020, the broad market has effectively doubled. The markets have come a long way, to be sure, but naysayers still abound. The VIX Index, which measures volatility or “fear” in the financial markets, has been creeping steadily higher, fueled by factors such as the Delta variant. This fear is to be welcomed by investors. Historically, it does not last.

There has been a lot of virtual ink spilled this week about how after 9/11 nothing was ever quite the same. There may be some truth to that as it relates to certain aspects of our lives that were forcibly modified by circumstances. I certainly feel like it was a turning point in my own life. Over the next two years, I lost my father, became one, and left New York. But the events of 9/11 didn’t directly cause any of these things; it’s just what I remember about my life before I could tell it was changing.

The fact is, our lives are always changing; they were changing on September 10, 2001, and they were changing on March 22, 2020. As individuals, we are not equipped to see this. Humans, unlike markets, are spectacularly inefficient. Only in the fullness of time, in the collective wisdom of human experience, as expressed in markets and other public forums, can we trace our progress. Individual humans change, but the human experience, not so much. There are thousands of 30-year-olds working in Lower Manhattan today—certainly more now than there were in 2001. They’re just different 30-year-olds, doing what 30-year-olds did in 2001 and 1901, and 1801.

This country is an extraordinary wealth creation machine. It’s far from perfect and it’s certainly not fair. And in the future, there will be hideous terrorist attacks and terrible diseases and tragedies we cannot even contemplate. But these episodes do nothing more than increase the efforts of people who want to improve their lives and build better futures for themselves and their families, people who yearn to breathe free. The way to bet is with them. With us.

“I believe that man will not merely endure: he will prevail. He is immortal, not because he alone among creatures has an inexhaustible voice, but because he has a soul, a spirit capable of compassion and sacrifice and endurance.”  — William Faulkner

Burke is the firm’s Investment Strategist. Based in the Raleigh office, Burke works closely with the firm’s Chief Investment Officer helping develop investment strategy and communicating with clients.

Cyber Threats: Prevention is Key

by Lindsey Stetson, CFP®

Websites and smart devices have increased in sophistication, allowing us to perform personal and financial tasks from the palm of our hands. The pandemic has caused many of us to leverage virtual options, either out of safety concerns or convenience. We can order groceries, meet with our doctors, and purchase cars in our pajamas. While our new e-lifestyle has led to more efficiency in our lives, we must acknowledge that it has created an additional way to become targets of criminals.

How Common are Cyber Attacks?

A Clark School study at the University of Maryland determined that cyber-attacks occur on average every 39 seconds which affect 1 in 3 Americans every year. This nearly constant rate of attacks means our guards can never be down. Hackers are waiting for the opportunity to steal our personal information, banking information, and anything else they can use to profit.

Who Does Cybercrime Hurt the Most?

While we hear about companies being attacked – remember the gas shortage caused by the Colonial Pipeline ransomware attack in May of 2021? – it’s average consumers who are hurt the most. The preferred victims of cybercriminals are 60+ years old but anyone can fall prey.

How Can You Stay Safe?

Do not click on links or open attachments in unsolicited emails or texts.

Phishing emails often attempt to mimic organizations or people you know. Even if you know the sender, study the email address, the wording used in the body of the email, and hover the mouse over links to confirm the destination before proceeding. Verify that the email or text is legitimate by asking the person who sent the message to you. Clicking on links and opening attachments may install malware on your device which can steal your information or even hijack your computer.

Be wary of urgent requests

Criminals know that stress can affect how we make decisions. By creating a rushed situation, they know that people are less likely to follow processes and procedures. A popular tactic is to impersonate a utility company claiming that your bill is overdue and without immediate payment, your gas/water/electricity will be shut off. Another popular one is to pose as the IRS and claim that your debt must be settled immediately. The IRS and utility companies will never call or email you out of the blue and you do not have to give any personal information to anyone calling or emailing you.

Use strong, unique passwords

Using the same password across multiple websites increases your vulnerability to attack. Passwords should be long, contain unique characters, numbers, and upper- and lower-case letters. Don’t use easy to guess words like pet names, middle names or birthdates. These are clues that can be gleaned from social media posts. Encrypted password managers can be useful, so you only need to remember a single password. Enabling multi-factor authentication when available also makes it more challenging for someone else to log in as you.

Keep systems and software updated

Keeping your software (including a reliable anti-virus product) updated will ensure that you have the most current security features to keep you protected. You should update the operating systems and browsers on your computers, tablets, smartphones, etc. regularly.

Keep personal information secure

Documents containing your personal information should be shredded rather than thrown away. When in doubt, shred it! Store sensitive documents like tax returns in a secure location and do not email documents, such as bank statements, without encryption. Make sure your phone has a passcode or face scan enabled for access.

What if You Become a Victim?

Change your passwords

This is a no-brainer, but if you get hacked or have a data breach you should immediately change all of your passwords.

Monitor your accounts and credit reports

It’s important to pay extra attention to your account activity after a data breach. You can sign up for text alerts on your bank and credit card activity and you should check your statements closely. Check your credit reports for anything suspicious. It is possible to freeze your credit, which prevents any new credit accounts from being opened in your name. The drawback to this is that you are unable to apply for new credit too until the freeze is lifted.

Alert your financial institutions

Notifying relevant institutions of the data compromise allows them to be extra alert and scrutinize suspicious requests regarding your accounts. Trust Company of the South has several standard security measures in place for high-risk requests such as wire transfers and address changes but letting us know of the issue allows us to monitor for larger-scale data breaches across our clients.

Cybercriminals will always be innovative with their attacks but taking the above measures will go a long way in protecting you and your family.

The Great Charlie Watts

by M. Burke Koonce, III

News of the death of Rolling Stones drummer Charlie Watts upended the music world this week. Tributes poured in from fellow occupants of the rock and roll pantheon—Sir Paul McCartney, Ringo Starr, Sir Elton John to name a few—as perhaps this was the most significant rock and roll death since George Harrison was lost to cancer almost 20 years ago. When guitar great Eddie Van Halen died last year, I was surprised and pleased the New York Times ran an obituary. For Charlie Watts, it would have been unthinkable if there had not been one. Charlie Watts was a Stone.

That’s why for me this has been more than a mere upending. I loved Van Halen just about as much as anyone my age, but I am a Stones freak. This has been like the passing of an old friend because, even without knowing him personally, he was one.

He was the most relatable of the Stones, by far. One could dream about being able to move like Mick Jagger, party like Keith Richards or play guitar like Ron Wood or Mick Taylor, but only in the same way one can dream of dunking a basketball like Michael Jordan (for me, an impossibility). It was a little easier to dream about being a seemingly normal person like Charlie seemed to be on stage with the Glimmer Twins—a well-dressed guy playing repurposed jazz while all hell broke loose around him. In virtually every Stones concert I attended, and there were many, there was a moment in which Jagger would do or say something so preposterous that Watts would just shake his head and grin. And in every single Stones show, when Mick introduced him as “Mister Chaaarlie Wattssssss!” the crowd responded with thunderous applause, offering up thanks for being the adult in the room, above the madness, keeping the time, and really, keeping the train on the track. It wasn’t so much that he was above it all, it was that his presence, his cool, allowed it all to happen.

He was the son of a truck driver and a homemaker, born in war-torn London in 1941. First trained as a graphic artist, he came under the spell of Charlie Parker and jazz and became a sought-after drummer in the London rhythm and blues club scene in the early 1960s. When Stones founders Jagger, Richards and Brian Jones finally scraped enough money together to pay him, he joined the band and moved into a flat with them.  Can one imagine what living in that place must have been like? Not just playing but living with The Rolling Stones? I don’t think there are too many people that could have done that and not gone insane, no matter how much fun it might have been.

My other favorite Charlie, Charlie Munger of Berkshire Hathaway fame, is fond of saying that temperament is more important than intelligence when it comes to investing. Maybe the same is true for rock and roll? I wonder what kind of investor Charlie Watts might have been. Well, actually, one doesn’t have to wonder—the man did pretty well for himself.

In addition to being one of three members of the Stones who appeared on every one of 30 albums (10 #1s) across 58 years, he also collected fine automobiles (although he did not drive), drum kits, and was a well-known breeder of Arabian horses. He also remained married to the same woman, Shirley Ann Shepherd, from 1964 until his death. While great timing can make both a drummer and an investor look good, perhaps it’s patience that counts even more.

There’s a great interview with Watts in the 1990 Stones documentary 25 x 5, in which he is asked about being in The Rolling Stones for 25 years. “It’s absurd,” he said with a wry smile. “Work five years and 20 years hanging around.”

He also once said he didn’t expect the Stones would last more than three weeks, which became three months, which became three years, which is when he stopped counting. Paul Tudor Jones might have said it this way: let your winners win.

If that’s not the life of an investor, I don’t know what is. Being prepared, showing up and paying attention are all part of the job, but what really counts is the way one performs perhaps one in every five years. Every once in a while, the world will appear to veer off its axis, and the way an investor responds to the world during these episodes will be the difference between success and failure.

Charlie did this through his natural temperament but also through his attention to his craft and his continued curiosity about it. Multiple tributes this week mentioned his childlike awe of the work of not just his jazz heroes Parker and Duke Ellington but of his open-mindedness. He didn’t even like rock until Keith Richards made him listen to Elvis Presley again, and he spent decades reaching out to musicians in cities he was touring. He also knew what he was good at—jazz and swing rhythms—and made his band better by being himself instead of pretending to be John Bonham or Keith Moon (both of whom he happened to outlive by 48 years). Charlie wasn’t perfect; ironically, after his rowdy bandmates had begun to calm down in their forties, he began to develop his own problems with drugs and alcohol, but after an intervention by Keith Richards (I mean, really?) he went cold turkey. He had the self-awareness to see he had made a mistake and the discipline to correct it.

He also did it with style. While Mick and Keith paraded around in boas, Charlie sported Saville Row suits. Reportedly, he owned hundreds of them.

I have no idea if Charlie Watts ever bought a single share of stock in his life but based on the evidence, he was a man of great patience and of near-imperturbable temperament, who took a long-term view and tended toward quality. He was capable of recognizing great talent and willing to put his skills to work in a way that would benefit the group, though he insisted on getting paid and once knocked his famous lead singer out when he was annoyed. He probably would have been successful at a lot of things but being a pretty good investor doesn’t sound like a stretch.

When Van Halen died, there was an element of sadness about a life cut relatively short. Watts was 80 and had lived an extraordinary life. In this case, I suppose I just mourn the passing of time. I miss the cassettes on which I first heard the Stones. I miss the lazy afternoons and sometimes raucous evenings listening to him hammer away on Gimme Shelter and Midnight Rambler. It makes me sad to think I’ll never hear him play live again. But when I think about how much he enriched my life through his music, it makes me smile. Like Red said in The Shawshank Redemption, “I guess I just miss my friend.”

RIP Charlie. Watts that is.

Burke is the firm’s Investment Strategist. Based in the Raleigh office, Burke works closely with the firm’s Chief Investment Officer helping develop investment strategy and communicating with clients.

Going for the Silver

by Dan Tolomay, CFA

After a one-year delay due to the pandemic, the Summer Olympics are here! While things will not be exactly the same due to lingering health safety concerns, one thing will remain – national pride. Spectators around the globe will tune in to cheer on their country hoping to hear their national anthem and see their athletes take the top spot on the podium. Close your eyes and you can hear the celebratory chant, “U-S-A! U-S-A! U-S-A!”.

While a gold medal is every Olympic athlete’s goal, there is no shame in taking home silver hardware. Also, spectators often find themselves pulling for an international underdog or a foreign athlete with an inspiring story. In short, it is okay if the U.S. is not on top every time. The same is true in the investment world.

Consider the situation where the United States has bested the rest of the globe for eight of the past ten years. America’s dominance fuels optimism of additional success. Why would anyone bet against the U.S.? This describes 2021; but, global investors found themselves in that exact position at the beginning of 1999. The United States had prevailed in 80% of the prior ten years. The MSCI United States index had posted an 18.9% annualized return. The MSCI World ex USA index, by comparison, delivered only 5.6%. Who needed the other countries? U.S. investors.

Over the next nine years, the U.S. would outpace foreign shares only two times. The MSCI All Country World ex USA index generated 9.2% on average per year versus 2.8% for the MSCI United States index.

The debate is bigger than domestic versus international, though. This is because the geographic allocation decision is not mutually exclusive. It is not a matter of USA or the rest of the world. In Olympic parlance, it’s not “gold or bust”. A globally allocated (U.S. and foreign) portfolio would have been more diversified than one holding all American or all international names. When U.S. shares dominated 1989-1998, a global portfolio would have returned 10.7%; and, when shares abroad were on top from 1999-2007, an all-world allocation would have provided 6.0%. In both cases, the global portfolio trailed the leader but outpaced the laggard. This is how diversification works.

It would be wonderful to know in advance which area will outperform and load up on exposure. Of course, we cannot predict, so a focused bet could also go awry. Spreading the allocation around acknowledges two things: (1) some assets will perform better than others and (2) it is impossible to know which ones. The prudent steps to take in this scenario, respectively, are to have exposure to all assets and not allocate too much to any single asset.

Looking at country level data, an interesting dynamic can be observed. During the U.S.’s strong 1989-1998 performance, it was the top performing country only once in 1991. (It also came in last in 1993.) Similarly, from 2011-2020, another period where international lagged, American shares were on top… zero times. The best placement achieved during that period was fifth in 2011. The upshot is that there is usually a better performing market outside the United States. Having broad international exposure ensures that this return is captured.

Another takeaway from the above tables is the range of returns. The returns generated by other countries are both widely varied and independent from those produced by the U.S. Again, this is a sign of diversification working. It is desirable to have a portfolio of assets that do not move in lockstep. Having all the components move up together at the same time sounds great; however, the flip side would likely be true as well. Diversification forgoes the chance to be fully exposed to the top performer but also eliminates the risk of having a full weighting to the worst player.

Pulling for your country during the Olympic games is part of the experience. So, too, is the realization that you “can’t win ‘em all”. Global diversification admits that your country will not always take the gold. Having broad exposure, however, means that you will have some allocation to first place. Conversely, by not being all-in on one country, you’ll never come in last. Rather than going for the gold and risk taking home bronze, go for the silver.

As Chief Investment Officer, Dan is responsible for developing Trust Company’s investment strategy and managing client portfolios.

Look to Higher Ed for Higher Returns

by William Smith, CFP®

Is your email inbox cluttered with offers to magically cure a host of problems? One popped up last weekend promising to fix my slice in 15 swings. I simply needed to mimic PGA TOUR pro Rory McIlroy’s swing plane. No mention of the thousands of hours Rory has invested developing his craft, nor a nod to his rare natural talent. Nope, that’s all, just 15 swings. Although skeptical about this offer, I do believe that by following the best practices of high achievers in any field, we can improve our performance.

For struggling investors, is there a model to emulate? One that would increase their chances of keeping it in the fairway? Turns out there is.

Many of the investment industry’s leading professionals, our Rory McIlroys, manage the endowment assets of our nation’s top colleges and universities. Endowments of all sizes share a common goal: to provide a current income to support today’s priorities and invest for growth to fund tomorrow’s initiatives. They do this by establishing a “spending policy”, a percentage of the portfolio that’s available to be distributed currently, and positioning their investments to achieve a return that offsets the effects of inflation, “preserving purchasing power.” Yale University’s Nobel Prize-winning professor James Tobin eloquently described this challenge, “the trustees of endowed institutions are the guardians of the future against the claims of the present. Their task is to preserve equity among generations.”

Professor Tobin’s job description for university trustees would well suit investors wishing to draw from their portfolios to support their current lifestyles while hoping to leave a legacy for their children, grandchildren, or a favorite charity.

Were we able to study how endowments allocate their investments and set spending percentages, that might offer valuable perspective. Thanks to the folks at TIAA and NACUBO (the National Association of College and University Business Officers) who publish an annual survey, we have that information readily available.

The 2020 NACUBO-TIAA Study of Endowments covering the year ending June 30, 2020 had 705 of the nation’s top endowed institutions participate. Representing more than $600 billion in assets, managers from the likes of Harvard, Princeton and Yale, along with those closer to home from UNC Chapel Hill, Duke and Elon, all reported how their investments were allocated, how much they withdrew from their portfolios, what rate of return they achieved, along with a multitude of other data.

The portfolios of the smaller funds ($100 million and below) typically allocated their assets roughly 70% to global equities and 30% to fixed income, a shift from 60% / 40% years ago due to a decade’s long stretch of low interest rates. This cohort of endowments realized net average annual returns of 7.5% over the past 25 years. Further, they spent roughly 4.5% of their portfolios annually over that timeframe, leaving 3% net growth, enough to outpace inflation – their primary goal. These results would likely garner a passing grade in Professor Tobin’s book.

With this reference, we can model these university endowments to improve outcomes in our personal portfolios. If you’re uncertain whether you have the proper asset allocation or if you’re spending more than your portfolio can support, we would recommend an in-depth consultation with your advisor. However, a CliffsNotes summary plan might read:

1. Set a broadly diversified asset allocation you can tolerate and maintain, especially through market corrections.
2. Consider spending no more than 4.5% of your portfolio each year.
3. Rebalance when market forces cause your allocation to drift from target.

Following these 3 steps will most certainly increase the likelihood of your having a successful investment experience.

If only fixing your slice was that easy.

Bill serves as President and Chief Executive Officer of the firm as well as Chairman of the Board.  Based in the Greensboro office, he oversees client relationships, assists in new business development efforts, and works directly with many of Trust Company’s not-for-profit clients.