From the Portfolio Management Team
The Synopsis
As the second half of the year surges on, so does world economic activity, particularly in countries that have rolled out vaccinations to large portions of their population. As economies like the US, Eurozone and UK continue to open (or re-open) up, we expect strong economic activity to persist thanks to enhanced demand and the prolonged impact of massive fiscal and monetary stimulus.
Despite higher inflation and continued signs of upward pressure on prices, both the Fed and financial markets indicate that the uptick in inflation will be temporary. How temporary? That’s a question we have been discussing both internally and with external market strategists.
Overall, we remain optimistic—although perhaps more cautiously than thus far in 2021. Sustained inflation and ultimately rising interest rates, the continued recovery of the US labor market, persistent disruptions to global supply chains, and unexpected COVID concerns remain on our radar as biggest risks we foresee. But despite attention-grabbing headlines, we also think these risks will remain muted in terms of long-term effect, short of information we don’t currently have. We believe diversification helps us play both offense and defense in all markets, but we particularly believe diversification among asset types, countries, and sectors while retaining a firm grasp on what we own is paramount as we continue to navigate the COVID recovery and what lies ahead for global economies and financial markets.
Our Investment Advisory Board
Every quarter, we bring together a panel of money management experts—portfolio managers, analysts and economists who represent large institutions—to serve as an advisory board to us. We convene via Zoom for a live and lively hour-long conversation about the markets, biggest risks, biggest opportunities and how to optimize client portfolios given the viewpoints.
We hosted our most recent meeting on September 22. External participants included Brad Neuman, CFA® of Alger, Eric Hundahl, CFA® of BNY Mellon and Ben Caron, CFA® of Virtus Investments. All are seasoned institutional strategists with decades of experience and deep insights from their respective firm’s research departments.
Our key take-aways from the meeting include:
- Economic growth in the US is likely to remain strong for the foreseeable future.
- Domestic stock prices are elevated, in which there are multiple main points:
can and should remain elevated
- Top active management should outperform passive investing (i.e., we are light on benchmark ETFs in
favor of our active mutual fund managers)
- International markets may offer greater investment potential thanks to relative valuations
- Inflation is showing signs that it is not as “transitory” as the Fed claimed it would be just a few months ago, but the board and their firms hold that inflation will ultimately cool by 2023 to a sustained 2 to 2.5% and, as such, interest rates are apt to remain low, climbing only at a slow pace.
- Despite the claim by one of our strategists that nobody should own bonds in today’s environment, and the counter by the other two that bonds always have a place in a balanced portfolio, we maintain our position of short duration and broad diversification in our fixed income portfolios.
Socially Responsible Investing
There are several acronyms to describe investing with a clear purpose toward social and/or environmental good. The two primary acronyms are SRI and ESG (standing for, respectively, “socially responsible investing” and “environmental, social, governance”). While we can help you build a specific SRI/ESG portfolio, it is worth noting a shift in the financial industry toward acknowledging and rewarding companies that are ‘doing the right things’ in regard to social welfare. Many of the mutual fund and third-party managers we use in our client portfolios employ SRI/ESG scoring mechanisms in their investment analyses. Part of the shift in mindset is toward the belief that those companies with the strongest growth prospects are mindful and purposeful about their social and economic impacts—therefore, more and more investment managers are employing SRI/ESG factors in their investment analysis process. If you would like to learn more about any of the above then please contact us for further discussion.
Cryptocurrencies
We don’t aim to make our newsletter a long or controversial read, but with cryptocurrencies such as Bitcoin receiving enhanced attention and substantial debate by intelligent people taking opposite sides, we want to at least touch on the topic.
Are cryptocurrencies real? Should I invest in them? Why is anyone investing in cryptocurrencies?
If you’ve asked yourself any of these questions then you’re not alone. Cryptocurrencies are real and have real money invested in them. Although cryptocurrencies have existed for many years, we still view them as speculative. They’re not an asset class we currently consider for our model portfolios for a variety of reasons…for one, we don’t have a way to adequately analyze them. Unlike corporations that produce goods and services and subsequently have revenue, profits, and growth projections, cryptos don’t produce anything. They are a “currency” without an originating or backing government. They are also incredibly volatile.
So how do we value a cryptocurrency?
We cannot other than to speculate what another investor will be willing to pay for it in the future, and we do not have a model for that. While we understand the allure, excitement…perhaps an illusion of participating in something cutting-edge…we also see an abundance of potential risks inherent to cryptocurrencies and that has thus far kept them out of our portfolios.
Reminder of the Cerro Pacific Client Portal & App
We have a client portal as well as a corresponding mobile app to help you monitor and track your accounts no matter where you are. If you’re not yet signed up and would like to then please contact us.
If you already have portal access but haven't downloaded the app, you may find us in the app store (search for "Cerro Pacific Wealth Advisors") or by clicking on the appropriate icon at the bottom of any one of our webpages. www.cerrowealth.com
Quarterly Reports
Third quarter portfolio reports have been uploaded to your client portal. If you have not received it or wish to have a copy sent to you (via email or hard copy in the mail) then please email or call us at (805) 457-3300.
In Personal News
Our family is expanding! In August, Meredith married her significant other of 6 years, travelling with a small group of family & friends to Oaxaca, Mexico for the nuptials. A couple of weeks later, Lyle welcomed a daughter-in-law as he and his wife hosted their son’s wedding in their Avila Valley backyard. Later this month, Lyle’s daughter is getting married in Arizona where she & her fiancé reside.
Outside of the office, Brianna is hard at work remodeling the log cabin home on her Creston ranch. She hopes to have the remodel complete right around the time she celebrates her daughter’s first birthday (this weekend!).
Jenni is happy to have all three of her children back in school. Right before the school year commenced, her family took a road trip to several national parks, pulling a camp trailer and enjoying an abundance of family time on the road while seeing the sights.
Both of Dan’s sons are back at college after remote learning. Colin continues at Whitman College as a senior with a Biology focus while Duncan is on campus for the first time at Pitzer College (part of the Claremont Colleges) and running on their cross-country team. Linda and Dan took a recent trip to Lisbon, Portugal to celebrate (or mourn) the empty nest.
Thank You
Cerro Pacific Wealth Advisors will celebrate our one-year anniversary on October 16. As we reflect back on the last 12 months, we cannot overstate our gratitude for you. Thank you for continuing to trust us with your financial well-being. We have and will continue to try our best every day to earn your business and your trust.
This report is provided for informational purposes only, is not an offer or solicitation to buy or sell securities, and should not be relied upon to make any investment decisions. This material is not a replacement for your statement or communications with your advisory team. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal. Please contact us at 805-457-3300 at your earliest convenience with any questions regarding this report. Copyright © 2021 Cerro Pacific Wealth Advisors, All rights reserved.
