A Core principle of the Park + Elm’s Investment Strategy is investing efficiently, and adding value by analyzing and reducing portfolio expenses. We focus on partnering with firms that value those same principles, in order to deliver a cost efficient, research based portfolio for our clients.

It’s been a great 2017, and we are thankful to be partners with two respected organizations that announced fee reductions in January. As a fiduciary, we continuously analyze the cost of building a portfolio, and work with these partners to add value through reducing expenses. Charles Schwab and Dimensional Fund Advisors have both announced cost cutting adjustments for 2017.

Charles Schwab, Inc.
Charles Schwab, the brokerage firm that custodies our firm’s assets, has significantly cut expenses on several of its open-ended index funds, announcing a reduction to the same level as their equivalent ETF’s. We currently use both Schwab open-ended index funds, as well as the equivalent ETF’s, so this directly affects the value of our portfolios.

Additionally and most importantly, the lowest expense ratio would apply to all investors, whether they invested $1 or $1 million. In normal industry practice, institutions with $1 million or more to spend get significantly lower expense ratios than individuals with $500 to invest. Schwab’s lower expenses will start March 1.

Schwab will also reduce standard online equity and ETF trade commissions from $8.95 to $6.95, which, Schwab says, is lower than those charged by Fidelity, TD Ameritrade, E*Trade and Vanguard. The lower commission rates start Friday, Feb. 3.

Dimensional Fund Advisors
Dimensional Funds also announced a reduction in expense caps and investment management fees for 2017 relating to 10 of their mutual funds. Dimensional Funds are the building blocks of our portfolios, and have been a preferred partner of Park + Elm for 16 years. Dimensional’s foundation is based upon investing practically and EFFICIENTLY, and they continuously evaluate investment management fees and overall expenses. Dimensional Funds have had a long history of low-expenses and turnover in their funds, which is a core reason for our long-term partnership. As of January 1, 2017, expense cap reductions were already effective, and management fee reductions will be effective February 28, 2017.

This is a BIG deal. This will positively affect our portfolio values, and, long-term, can make an impactful difference in retirement. Investing in equity markets can be risky and volatile, but expenses are one controllable aspect of an investment strategy. These efforts also confirm that Park + Elm, Charles Schwab and DFA are working to give clients the best products, in the most efficient way.

This report features world capital market performance and a timeline of events for the past quarter and the past year. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets.

The report also illustrates the impact of globally diversified portfolios and features a quarterly topic.

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QUARTERLY AND ANNUAL MARKET REVIEW

It’s not enough to diversify by security. Deeper diversification involves geographic and asset class diversity. Holding a global portfolio helps to lower concentration in individual securities and increase diversification.

Over long periods of time, investors can benefit from consistent exposure in their portfolios to both US and non-US equities. While both asset classes offer the potential to earn positive expected returns in the long term, they may perform quite differently over shorter cycles. The performance of different countries and asset classes will vary over time, and there is no reliable evidence that performance can be predicted in advance. An approach to equity investing that uses the global opportunity set available to investors can provide both diversification benefits as well as potentially higher expected returns.

The global equity market is large and represents a world of investment opportunities. Nearly half of the investment opportunities in global equity markets lie outside the United States. Non US stocks including developed and emerging markets, account for 47% of world market cap and represent more than 10,000 companies in over 40 countries. A portfolio investing solely within the US would not be exposed to the performance of those markets.

However, when Americans talk about the stock market, they’re generally referring to the Standard & Poor’s 500 index or the Dow Jones industrial average. But these indices represent only one part of the available investing universe. The total U.S. stock market makes up only about 53% of global market capitalization. Yet, on average, U.S. mutual fund investors possess a home bias, with a disproportionate amount of their portfolio invested in the United States. If their portfolios were balanced according to world market capitalization, about half of their assets would reside in non-U.S. stocks. This “home bias” leads to less diversification, and as a result, greater volatility with lower returns.

It’s well know that concentrating in one stock exposes you to unnecessary risks, and diversifying can reduce the impact of any one company’s performance on your wealth. From year to year, you never know which markets will outperform, and attempting to identify future winners is a guessing game. Diversification improves the odds of holding the best performers, and by holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.

Put very simply, DIVERSIFICATION:

·         Helps you capture what global markets offer

·         Reduces risks that have no expected return

·         May prevent you from missing opportunity

·         Smooths out some of the bumps

·         Helps take the guesswork out of investing

There is no single perfect portfolio. There are an infinite number of possibilities for allocation based on the needs and risk profile of each individual. The most important question investors should ask… “IS MY PORTFOLIO GLOBALLY DIVERSIFIED?”

Throughout history, many of the greatest advancements in finance have come from Academia. Our investment philosophy has been shaped by decades of research by leading academics. We structure portfolios on the principles that markets are efficient; that returns are determined by asset allocation decisions, and that portfolios can be structured around dimensions of expected returns identified through academic research. It is through our strategic partnership with Dimensional Fund Advisors, a leading global investment firm that has been translating academic research into practical investment solutions since 1981,  that we can pursue dimensions of higher expected returns through advanced portfolio design, management, and trading. 

Much of what we have learned about expected returns in the equity and fixed income markets can be summarized in these dimensions.

1. Stocks have higher expected returns than bonds – it has been well documented over time that stocks outperform bonds, and that risk = reward
2. Among stocks, expected return differences are largely driven by company size – small companies have higher expected returns than large companies.
3. Relative price – low relative price “value” companies have higher expected returns than high relative price “growth companies.
4. Profitability – companies with high profitability have higher expected returns than companies with low profitability.

Since 1981, Dimensional has incorporated rigorous academic research on the capital markets into the design, management, and trading of clients’ portfolios. Some of the major milestones in academic research shown in the chart below have had a profound effect on our investment philosophy.

Our enduring philosophy and deep working relationships with Dimensional and the academic community underpin our approach to investing. Over a long period of time, Academics have been able to identify dimensions of higher expected returns, and with Dimensional, we can structure portfolios around these dimensions in a very cost-effective manner.

Information provided by Dimensional Fund Advisors LP.

US size premium: Dimensional US Small Cap Index minus S&P 500 Index. US relative price premium: Fama/French US Value Index minus Fama/French US Growth Index. US profitability premium: Dimensional US High Profitability Index minus Dimensional US Low Profitability Index. Dev. ex US size premium: Dimensional Intl. Small Cap Index minus MSCI World ex USA Index (gross div.). Dev. ex US relative price premium: Fama/French International Value index minus Fama/French International Growth Index. Dev. ex US profitability premium: Dimensional International High Profitability Index minus Dimensional International Low Profitability Index. Emerging Markets size premium: Dimensional Emerging Markets Small Cap Index minus MSCI Emerging Markets Index (gross div.). Emerging Markets relative price premium: Fama/French Emerging Markets Value Index minus Fama/French Emerging Markets Growth Index. Emerging Markets profitability premium: Dimensional Emerging Markets High Profitability Index minus Dimensional Emerging Markets Low Profitability Index. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. See “Index Descriptions” for descriptions of Dimensional and Fama/French index data. Dimensional Fund Advisors LP. The S&P data is provided by Standard & Poor’s Index Services Group. MSCI data © MSCI 2016, all rights reserved.

Education planning is a complex issue. A disciplined approach to saving and investing can help remove some of the uncertainty from the planning process. With the increasing price tag of higher education, talking to your advisor about investment vehicles for college is crucial.

Check out this in depth look by Dimensional Fund Advisors at planning for higher education, and contact us if you want to know more about the significant benefits of funding a 529 before the December 31st deadline.

Back to School

Making investment decisions based on the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome will likely be the result of random luck. At worst, it can lead to costly mistakes. This presentation takes a historical look at how major US, international developed, and emerging markets indices have performed during or after a US presidential election.

Market Returns During an Election Year

The financial markets have rewarded long-term investors. People expect a positive return on the capital they supply, and historically, the equity and bond markets throughout the world have provided growth of wealth that has more than offset inflation. Companies compete with each other for investment capital, and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect greater returns without bearing greater risk. The chart above shows how the growth of $1 is affected by the level of risk an investor is willing to take. It also shows that any level of risk taken has historically outpaced inflation.

Many investors and investment managers strive to beat the market by taking advantage of pricing “mistakes” and attempting to predict the future. Too often, this proves costly and futile, due to holding the wrong securities at the wrong time, meanwhile, markets are succeeding. Instead of allowing the media to sway you into making impulsive and reactive decisions about your investments, or gambling on hunches, why not let the markets work for you?

When you try to outwit the market, you compete with the collective knowledge of all investors. By harnessing the market’s power, you put their knowledge to work in your portfolio. Markets integrate the combined knowledge of all participants, and enables competition among those who voluntarily agree to transact. We believe that all of this powerful information drives security prices to fair value, and that differences in performance are largely attributed to asset allocation decisions, and differences in average risk.

We know that investing in the market means taking risks. We also know that not investing means taking risks, because your money today will buy less in the future. We want investors to incorporate the vast, complex network of information, expectations, and human behavior that we believe markets reflect, into their portfolio design. This powerful view of market equilibrium has profound investment implications.

This report features world capital market performance and a timeline of events for the past quarter. It begins with a global overview, then features the returns of stock and bond asset classes in the US and international markets.

The report also illustrates the performance of globally diversified portfolios and features a quarterly topic: Presidential Elections and the Stock Market.

Quarterly Market Review