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Third Quarter 2014 Newsletter

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Watch What They Do, Not What They Say

October 08, 2014

High school football is in full gear. But for the best players -- those who will be receiving major college scholarships for their prowess on the gridiron, the journey is all but over. For the seniors, it started two or three years ago. During that time, these teenagers have been making grown men (coaches) kowtow – calling, texting, visiting their high schools and homes, and begging these youngsters to visit their universities and hopefully commit to their team. But the coaches are not the only ones. High school recruiting is big business. At least four national online recruiting sites, many connected with university alumni and major television sports outlets, cover these recruits, rating them with numbers and stars to signify their skill level and predicting their college choice. Rabid college football fans hang onto every word from both these adolescent stars and the “analysts” that cover them. Vibrant message boards debate the value of the players and the likelihood they will end up on certain college teams.

With all this hoopla and publicity, it is easy to see why many of these young players develop a high opinion of themselves, and also do their best to keep their choices secret. As long as it remains undisclosed, the attention continues. Consequently, it is not unusual for players to take a very long time to “publicly” decide, even when their “private” decision had been made much earlier. Ardent recruiting fans have developed rules for cutting through the superficial public information. Their most important rule is “Watch what they do, not what they say.”

Recruits may say things that are meaningfully different than what they are actually thinking or have already decided. Fans will go to extreme lengths to attempt to decipher the true intentions of the players. For instance, they will keep exact records of how many visits are made to any school, as well as monitor hundreds of Twitter, Facebook or Instagram accounts to see if a recruit tips their hand via tweets, messages or pictures. They will even interrogate friends, high school coaches and family members of the players, hoping to get a hidden piece of evidence which will point to the final answer. If you are thinking this is all rather creepy, you would be correct.

High school recruiting isn’t the only industry where the “Watch what they do, not what they say” slogan comes in handy. You are probably guessing that the financial world needs it too, and you would again be correct. There are many instances where this rule comes in handy, and below we’ve listed three of them:

Brokerage firms devotion to their clients

What they say: Every TV commercial and print ad talks about how devoted the broker is to their client and how interested they are in their client’s financial welfare.


What they do: When President Obama signed the Dodd-Frank financial reform law in 2010, the SEC was given authority to write regulations that would require all brokers/bankers to become fiduciaries, and only act in the best interest of their clients. The brokerage firms have done everything in their power to stop this reform, and keep intact their much diluted suitability standard of care. They have stalled all attempts at ever having to become fiduciaries and most insiders doubt the SEC will ever be able to ensure all advisors are held under the same fiduciary standard. If the broker-dealer industry really wanted to do what was paramount for their clients, they would jump at the chance to legally do what was in their best interest. But they don’t. DHG Wealth Advisors is a registered investment advisor and serves clients as a fiduciary, broker-dealers are not. Watch what they do, not what they say.

Hedge funds are extremely popular with institutional investors

What they say: You can barely pick up a financial periodical or turn on CNBC without hearing about the pervasiveness of hedge fund investing with institutions.

What they do: More and more major institutions are acting like DHG Wealth Advisors and determining that hedge funds are not worth the cost. The latest to make this assessment and rid their portfolios of all hedge fund investments is the largest public employee pension fund in the U.S. – California Public Employees Retirement System (CalPERS). In a statement, they said,”CalPERS will take risk only where we have a strong belief we will be rewarded for it.”* Financial Times “Investors lose that loving feeling for hedge funds” 09/21/2014 CalPERS is only the latest in a growing list of institutions that have decided that the high cost, complexity and questionable persistence of returns are simply not worth it. The next time you read some incredible story about a hedge fund that has tripled its value in one year, and feel you would like to join the “big guys” and own one, just remember to watch what they do.

Active mutual fund managers think their portfolios are great investments

What they say: Most mutual funds advertisements describe the incredible management abilities and performance of their fund.

What they do: Research performed by Morningstar showed that 45% of core equity and 66% of core bond mutual funds had zero manager ownership.* US News and World Report “Look for Fund Managers Who Eat Their Own Cooking” 10/31/12 Over the years, this DHGWA quarterly report has outlined the many different research sources that confirm the general inability of most actively managed funds to consistently out perform their benchmarks. But when the fund’s management themselves refuse to own the fund, what is that saying to the shareholders? Watch what they do, not what they say.

The next time you hear or read someone saying something that they want you to believe, whether they are a teen football phenom or seemingly wise Wall-Streeter, make sure you also pay attention to what they do. Like the clichés say: talk is cheap (and often wrong), and actions speak louder than words.

Third Quarter 2014 Asset Class Returns

THIRD QUARTER 2014 ASSET CLASS PERFORMANCE

For the first time since the summer of 2012, we have experienced a negative quarter in the large majority of equity asset classes. It is almost welcomed, as markets that get overly frothy tend to correct too quickly and too deeply. This pullback may take longer than just one quarter, but after experiencing the lengthy string of positive quarterly returns it seems reasonable to expect a consolidation that takes a bit longer. Large Cap was the only major class that eked out a positive return, while Small Caps throughout the world experienced the worst correction. Interest rates stayed dormant, which allowed bonds to keep their y-t-d returns intact. Since the beginning of the year, equities in Large Cap US, global Real Estate and Emerging Markets have been in the black. Most other equity asset classes were pushed into negative y-t-d returns due to their weak 3rd quarter.

As has been the case for the last 5 years, there are plenty of reasons to be fearful about owning stocks. Putin continues to test international resolve in Ukraine and elsewhere. Syria and ISIS trade death by beheadings and other terrorist moves against daily bombing sorties by an ever-growing coalition of nations. Throw in the growing concern of Ebola and there is more than enough to keep the heart palpitating. Economically, the US continues to mosey along with modest growth. Employment is gently improving, capital spending is also slowly increasing. The Fed has almost entirely stopped the artificial stimulus, and surprisingly there appears to be absolutely no increase in interest rates or inflation. The US dollar is appreciating thanks to a combination of the Fed’s behavior and the fact that we are still in a better economic position than those countries that deal in Euros or Yen. The bottom line, which admittedly is a bit of a broken record, has to do with corporate earnings. If companies can continue to grow their bottom line even when the Fed is no longer keeping rates artificially low, then the higher market valuations we are experiencing will be less dangerous. There appears to be no inflation or natural reason for rates to have a meaningful increase at the moment. In fact, some economists think that the fed may have to start lowering rates again just to keep the economy from dipping towards a standstill.

To a long term investor, this information is interesting, but it will not involve making wholesale changes to your portfolio. Sometimes the market will self-correct, as seen in the 3rd quarter, and sometimes we will need to rebalance your portfolio if an asset class gets too far ahead or behind its desired weighting. Either way, the goal is to keep the risk of your portfolio static and not get caught up in the bliss of a roaring bull market run up or depressing bear plunge.

Historically, the third quarter is the toughest for the market, and the fourth is often one of the stronger periods with a Santa Claus and/or year-end rally. We’ll meet back here right after the New Year and see what occurred. In the meantime, take it easy on the Halloween candy, the Thanksgiving turkey and all the other Christmas/Hanukkah treats, and get outdoors to enjoy the beautiful change of seasons.

Sincerely,

Frederick F. Kramer IV, JD
Chief Investment Officer
Dixon Hughes Goodman Wealth Advisors LLC