Quarter 1, 2015 Investment Brief

It has always been our goal to communicate our strategies to you in a clear and relevant manner.  Hopefully you have had this sense as we have interacted in meetings, over the phone or via email.  In recent years, we have included comments with your quarterly reports to explain our market-related thoughts.  These “Investment Briefs” have been just that – an attempt to convey an aspect of our investment philosophy on a single page.  

We are aware that many of our clients would like a more robust defense of our value-oriented strategy, especially given the performance of our mutual funds over the past few years.  In the coming weeks, we will be posting blog entries that will provide a more detailed treatment of pertinent investment topics. 

We have redoubled our efforts to make sure our approach is sensible.  This exercise has helped to identify several questions that should be considered, no matter which investment style one ultimately adopts:

What is the current state of the world?

The investment landscape today is characterized by extraordinary fiscal and monetary policy within developed nations.  Debt continues to mount while interest rates remain extremely low.  Given central bank intervention, how confident can we be that interest rates and stock prices accurately reflect reality?

Is now a good time to buy an index fund?

Consider the following observations: By many standards, the US stock market in aggregate is fully, if not over-valued.  Profit margins are at peak levels and may face headwinds going forward.  Academic studies have confirmed that high government debt levels often portend weak economic growth.  With these headwinds, will the US market indexes continue to generate mid-teen returns, or is it reasonable to expect something lower?

If not indexing, what strategy?

As opposed to owning the entire market via an index fund, we believe it is as important as ever to have managers who selectively build portfolios company by company, incorporating a margin of safety into their purchase decisions.  This particular style has lagged since the financial crisis, but that does not mean it has definitively failed.  That said, what kind of temperament is required of the value investor, and should success be defined over 1, 3, and 5-year periods or over 7, 10, and 15-year periods?

Our aim in writing about these topics is to help you see the merit in staying the course.  We do not believe it is advantageous to abandon value investing in favor of indexing after a long bull market run.  Please check out our blog at www.northwestfinancial.net/blog and let us know your thoughts.

Aaron Pettersen, CFA, CFP®