2014 Investment Review

Investment results are in for the 2014 calendar year and I want to take a few minutes to update you on the performance of various asset classes, our portfolios, and look forward to the year ahead.

Before I dive into that, I want to take a moment to thank you. During 2014, Precedent Asset Management experienced dramatic growth — portfolio assets increased over 35%, and I am serving and advising an increasing number of families and institutions.

In addition to our core business of comprehensive asset management, I became a founding member of an association of firms dedicated to providing families with financial planning services for a flat monthly fee and no minimum asset requirements — a first in the world of finance. This has opened our doors to young professionals, physicians and business owners that are seeking independent advice without product sales, but have not yet achieved high levels of investable assets.

It is an exciting time to be a CFP, and I am grateful for many new clients, and even more so to those of you that have placed your confidence in me for nearly two decades. Thank you!

It has been a busy start to the new year — a byproduct of renewed attention to financial matters by many clients as we enter 2015 (i.e. New Year resolutions). If you haven’t already, I encourage you to schedule a financial planning review meeting with me for the coming months by visiting https://precedentam.com/schedule/. These meetings are a great opportunity to check progress toward your goals and set an agenda of planning work for the rest of the year.

2014 Asset Class Returns

2014 proved to be a challenging year for most global markets, with assets in the United States being one of the few exceptions. The highest asset class returns for 2014 were found in long U.S. Treasury Bonds and Real Estate, both of which returned right around 27% for the year. Followed by intermediate Treasuries and U.S. stocks, which earned 14.5% and 13% respectively.

At the opposite end of the return spectrum, commodities declined by over 33%.

Stock returns varied widely depending on the size, region and sector. The broadest index that measures U.S. and global stocks, the MSCI All Country World Index, returned a little over 4%. While emerging markets and pure international stocks declined over 2% and nearly 5% respectively.

The following lists each of the primary asset classes and the index total return for 2014:

Asset ClassReturn
20+ Year Treasury Bond27.48%
U.S. Real Estate27.24%
10-20 Year Treasury Bond14.53%
Core S&P Total U.S. Stock Market13.08%
National AMT-Free Muni Bond8.92%
Core U.S. Aggregate Bond5.97%
Core S&P U.S. Small-Cap5.76%
MSCI ACWI (U.S. and Global Stocks)4.16%
TIPS Bond (Inflation-Protected Bonds)3.64%
MSCI Emerging Markets-2.19%
MSCI EAFE (International Stocks)-4.90%
S&P GSCI Commodity-Indexed Trust-33.06%
Source: Barclays Capital
Precedent AM Portfolios

As you may recall from the mid-year update, our core portfolios entered the second half of 2014 positioned for a continued environment of falling interest rates and moderate stock market returns. And if you’ve been around a while, you know I haven’t owned any commodities for many years.

The net result versus our blended index was solid outperformance. We entirely missed the disaster in commodities and benefited from modest exposure to both real estate and Treasuries. While a heavier U.S. stock allocation would have helped even more, the additional risk was not justified in my view, and our stock selection methodology produced returns well above the indexes in both the U.S. and international markets — more than compensating for the stock underweight.

Precedent AM Portfolio Total Return
Moderate Growth 6.51%
Tax-Managed Moderate Growth 6.70%
Blended Index (60/40 ACWI/US AGG) 4.88%
Moderate 6.78%
Tax-Managed Moderate 7.13%
Blended Index (50/50 ACWI/US AGG) 5.07%

Returns calculated by Morningstar

I have clients with more aggressive and more conservative investment strategies, and many new clients that are in the portfolio build-out stage, but the above models cover the vast majority of the core assets I manage. The quarterly performance reports that are being mailed out next week will provide the calculated return for each of your specific accounts and unique strategies.

Looking Ahead

The major themes we follow in our investment approach — long-term historical valuation levels, relative asset class valuation, credit leveraging/deleveraging cycles, and market momentum — do not change frequently. The positioning below is largely consistent with our economic and market update in July, 2014.

  • Following our 2014 mid-year discussion, I have completed the removal of high yield bonds from our core portfolios given the expected negative returns for this asset class. Since a significant portion of high yield debt in recent years has been issued to oil producers, the risk of negative returns has further increased due to falling oil prices and corresponding cash flow problems.
  • The upward momentum in real estate has continued, and for now we are letting that allocation rise. Real estate is also a key component of our long-term inflation protection for clients.
  • We continue to be in an economic debt-deflationary cycle, and U.S. interest rates are among the highest within developed countries (hard to imagine given how low our rates are!). Our U.S. Treasury allocations remain in place to capitalize on falling interest rates, and also to provide critical protection from the risk of falling stock prices.
  • Prices for many commodities have fallen dramatically (down over 56% since 2006!) and may be nearing attractive prices. I’ll be watching key measures of the global economic slowdown and for price momentum turn positive before adding this allocation to our core strategies. While it’s tempting to buy assets just because they have fallen dramatically, it is dangerous to try and catch a proverbial falling knife.

Finally, there are many exciting enhancements coming to our services in 2015 that I am eager to share with you.

After rolling out the client portal in early 2014 (https://precedentam.com/client-portal/), I will be enhancing this online technology with a fully electronic process for new clients to get started with financial planning and portfolio management — no more mountains of paperwork.

Two new investment portfolios are being launched to complement our core balanced allocations. These include a Multi-Asset Strategy for clients that want to reduce downside risk during high valuations, and expanding our lineup of Personal Indexes.

The Personal Indexes already in use include fixed income “ladders” for more conservative portfolios, and direct-ownership stock indexes for clients in high income tax brackets that need highly tax-efficient exposure to the broad stock market. A new Personal Index is being created for clients that wish to express their values in the stock market — an approach called socially responsible investing (SRI) or sustainable investing. This personal portfolio will reflect the environmental, social, corporate governance, and other ethical values shared by many of my clients, and that are already being applied in numerous custom client portfolios.

Like the Multi-Asset Strategy and other Personal Index portfolios, this new SRI model will be used to complement our core investment strategies.

We are also working on initiatives to help me focus exclusively on communicating with clients, financial planning, research and investment management. My colleagues and I are on a mission to transform the financial planning industry, create a first-class experience for anyone who asks for our help, and to continue delivering planning and investment solutions that have historically been reserved for the ultra-wealthy.

Thank you for the opportunity to serve you and your family or organization!