Staying Connected During COVID-19 – Introduction to a new weekly webinar

Given the current global uncertainty, our advisory team will be hosting weekly webinars to share our take on the news, policy changes, the economy and potential opportunities. Our goal is to stay connected, ease some of your fears and ensure you feel informed and empowered with regards to your financial plan. To learn more about the webinar series, please see the below brief video from our CEO, Jeff Sarti by clicking the image below or the following link: https://vimeo.com/399004159

We look forward to seeing you on the webinar and addressing any concerns you have about the market and your investments.

 

A Personal Video Message to Our Clients from CEO, Jeff Sarti

As many of you know, we have an incredible team at Morton Capital, where we treat each other as family within our four walls and truly look out for one another. Please know that all of you are an extension of that. You are all an extended part of our family and are in our thoughts. Please know that we are here for you if you need anything.

Click the image below to watch this personal. video message from CEO, Jeff Sartiby or visit this link https://vimeo.com/398091805 

You can also read Jeff’s accompanying letter here.

 

Monitoring the Coronavirus

The coronavirus originated in the city of Wuhan, China, in December, and as of our writing this communication it has infected over 82,000 people resulting in 2,800 deaths. Up until the last week, global stock markets shrugged off concerns about a wider spread of the virus. However, an increase in reported cases outside of China in recent days has raised concerns about the potential for a global pandemic. This has resulted in a stock market correction around the world with the S&P 500 correcting over 10% in the last week.

There are a few main issues that are occupying our minds and that of global markets:

How contagious and dangerous is the virus?

  • While the absolute number of cases outside of China still remains small, the increased pace of reported cases is concerning. Korea, Iran, Italy and Japan are currently hot spots of particular concern. As we write this, the first coronavirus case in the United States that could not be linked to foreign travel was confirmed as well.
  • However, it appears that the growth of reported cases in China has slowed in recent days. If this data can be relied upon and the trend in China continues, this may demonstrate that human behavior (e.g., quarantines) can control transmission of the virus and perhaps the virus is not as contagious as was originally believed.
  • Early estimates of the death rate upon contraction of the virus are roughly 2%. As a point of comparison, the SARS outbreak in 2003 had a fatality rate of 9.6%.
  • To date, there have been no reported deaths in those aged nine years and younger, implying that very young children are not as susceptible to this virus.

How much can the virus hurt global economic growth?

  • Efforts to contain the virus have resulted in numerous factories, public sites and workplaces being closed both in China and now abroad.
  • This has caused and will continue to cause substantial business disruption across the globe. One example is Apple’s recent warning that they expect lower revenue growth due to the outbreak’s impact on iPhone manufacturing (they have numerous factories near the heart of the outbreak).
  • At around 20% of the global gross domestic product (GDP), China is the second-largest economy in the world. Estimates are that growth in China in 2020 will slow from pre-virus forecasts of 5% down to 3%. This should reduce global GDP growth by roughly 0.4% from forecasts of 2.9% to 2.5%. These estimates may be somewhat rosy depending upon how far the virus ultimately spreads.

Historically, financial markets have been somewhat resilient in the face of past epidemics. Short-term corrections in global stock markets have typically been followed by renewed uptrends within a few months. The concern, of course, is that the spread of this virus will be more aggressive than the spread of other viruses in recent decades. The most important question for investors is whether your portfolio is prepared for the potentially challenging environment ahead. While our portfolios are not immune to stock market corrections, our concerned view of the world and heightened exposure to alternatives should provide some insulation against market shocks. We prefer to be prepared in advance of unexpected market events such as this as opposed to reacting after the fact. In the face of short-term volatility, it is important to keep in mind the goals and financial plan that helped build your portfolio for the long term.

New Year’s Wishes

As 2019—and this decade—comes to an end, we at Morton Capital would like to thank you for allowing us to continue to be part of your story. And for those of you who just joined our community this year, we are excited to start our story together. As we look forward to the year ahead, we would like to take a moment to share with you some highlights of what we’ve been working on over the past year.


MC TEAM AND GROWTH

In 2019, we continued to focus on making our team even better through initiatives around hiring, team structure, and firm growth.

  • We were named one of the Best Places to Work for Financial Advisors by Investment News. This list highlights the top 75 firms nationwide in the financial advice industry. We were chosen 2nd among firms our size and 16th overall.
  • We hired talented new people across several teams, including the advisory, financial planning, investment research and operations teams. New hires included:
    • Brian Standing, Esq. (Wealth Planner); Patrice Bening (Client Service Associate); Olivia Payne (Client Service Associate); Adam Bartkoski (Finance and HR Manager); Milan Pfeisinger (Research Analyst); Elana Yaffe (Paraplanner); Amber McBride (Paraplanner); Edward Garcia (Client Service Administrator); Chris Wahl (Client Service Administrator); Clarence Welton (Client Service Administrator); Austin Overholt (Private Investments Administrator); Benjamin Markman (Private Investments Administrator); and Kierstan Lewis (Administrative Assistant)
  • Two of our Wealth Advisors, Kevin Rex and Wade Calvert, became new partners in the firm.
  • We built out our internal team structure to create additional client support and to create new opportunities for team member career growth.
  • Through the hard work and dedication of our team, we were able to add just under 40 new client households to the MC community.
  • Two team members have welcomed beautiful baby girls Audriana (Kevin Rex) and Harlowe (Sarah Ellis) this year. Since sourcing young talent is always important, stay tuned for our 2041 year-end letter, as these girls’ names may appear amongst those hired!

EDUCATION AND ENHANCEMENT

Continuing to cultivate our team’s passion for education and to enhance our offering through technology, security, and leadership initiatives was also a focus over the past year.

  • Team members attended multiple conferences to stay at the forefront of our industry, network with thought leaders and enhance our financial planning and technological capabilities.
  • Our COO, Stacey McKinnon, spoke at 5 events this year, including at such leading conferences as Bob Veres’s Insider’s Forum in Nashville in September.

  • We worked to make our internal processes more efficient by introducing new CRM and workflow systems to improve your client experience
  • We continue to utilize multiple fraud prevention measures, such as verbal confirmations and dual-factor authentication when available, to protect our clients from increasingly sophisticated fraud attempts.
  • In August, we introduced our popular Financial Bites lunch series for clients in our downstairs suite, where advisors spoke about the basics of a number of financial planning topics to educate and empower attendees.

  • This year, Wealth Advisor and Senior Vice President Joseph Seetoo earned his CEPA (Certified Exit Planning AdvisorTM) designation, and Associate Wealth Advisor Sarah Ellis passed her Series 65 exam.
    • As part of our focus on education, many other team members are in the process of obtaining additional certifications in such areas as financial planning, investment research, private wealth management, and insurance.

INVESTMENT RESEARCH AND FINANCIAL PLANNING

We work diligently behind the scenes to source great investment opportunities for our clients. To give you a peek behind the curtain, this year:

  • We screened hundreds of new investment opportunities and performed nearly 90 more in-depth reviews, which included meetings and/or phone calls with fund managers.
  • Out of those 90 opportunities, we introduced 6 new strategies for client portfolios.
  • In addition to numerous site visits around Southern California, we also performed due diligence on various groups in New York, Texas and Kentucky.
  • We made three new additions (see above) to our investment research and operations teams.
  • We continued to augment our internal research with outsourced research, both from larger, more institutional groups (e.g., Capital Economics, Bloomberg, Goldman Sachs, JP Morgan, Dimensional Funds, GMO, Elliott Management, Litman Gregory) and from more niche authors as well.

Over the past year, we have refined and expanded our financial planning offering by:

  • Adding wealth and legacy planning as an additional component of our financial planning service. This additional service has been spearheaded by Wealth Planner Brian Standing, who has 12 years of estate planning and wealth transfer experience.
  • Making three new additions (see above) to our financial planning and wealth and legacy planning teams.
  • Completing 180 financial plans for our clients.
  • Holding 50 education sessions for our advisors, with the goal of enhancing our ability to provide you with advice in estate planning, insurance, tax strategies, and retirement planning.
  • Collaborating with clients’ other professional advisors, including estate attorneys, CPAs and insurance agents.

 

Looking back on all that we’ve accomplished over the last year, we are excited to see how our constant pursuit of knowledge and growth has been better able to help you, our clients, get the most life out of your wealth. We truly appreciate your continued confidence and wish you and your family a very happy new year.

See you in 2020!

-Your Morton Team

Financial Bites – Tax Planning for Individuals Video and Update

Tax Planning for Individuals, the third event in our new Financial Bites lunch series, was a huge hit. In this session, our advisors explained why tax planning is vital to a healthy financial life and how to put money back in your own wallet. Thank you to all our attendees as well as our outstanding wealth advisors, Bryce Snell and Wade Calvert, who presented.

Click on the above image or visit this link to watch our tax planning session: https://vimeo.com/mortoncapital/fbtaxplanning

We hope you find this video valuable. Please feel free to share this link with family and friends and on your social media channels. Any feedback you have would be extremely valuable to our team, including any recommendations of topics you would like us to present on in the future. Financial Bites is a complimentary series and our upcoming sessions are filling up fast, so we encourage you to RSVP soon. Click on the link below to view all sessions and RSVP today!

https://mortoncapital.com/financialbites

We hope to see you soon and thank you for your continued support of Morton Capital.

The MC Team

Financial Bites – Budgeting Session Video and Update

The second event in our new Financial Bites lunch series, Budgeting, went off without a hitch. In this session, our advisors honed in on the keys to a successful budget and how to get your financial footing. Thank you to all our attendees as well as our phenomenal wealth advisors, Joe Seetoo and Celia Meagher, who presented.

Our goal is to make this information clear and accessible to everyone. This session focuses on the importance of checking your financial pulse – everything from what savings/spending strategies you should use to the importance of maintaining a good credit score.

Click on the above image or visit this link to watch our budgeting session: https://vimeo.com/mortoncapital/fbbudgeting

We hope you find this video valuable. Please feel free to share this link with family and friends and on your social media channels. Any feedback you have would be extremely valuable to our team, including any recommendations of topics you would like us to present on in the future. Financial Bites is a complimentary series and our upcoming sessions are filling up fast, so we encourage you to RSVP soon. Click on the link below to view all sessions and RSVP today!

https://mortoncapital.com/financialbites

We hope to see you soon and thank you for your continued support of Morton Capital.

The MC Team

Financial Bites – Retirement Planning Session Video and Update

Recently we hosted the first event in our new Financial Bites lunch series. The session focused on retirement planning and was an incredible success. We are grateful to everyone who attended and to our outstanding wealth advisors, Chris Galeski and Chelsea Watson, who presented.

Clients often come to us asking, “How much do I need to save for retirement?” This session addressed this question by focusing on smarter ways to save, how to more efficiently invest those savings, and how to balance your normal expenses with future costs.

Click on the above image or visit this link to watch our Retirement Planning session: https://vimeo.com/mortoncapital/fbretirementplanning

We hope you enjoy this video of the event. Please feel free to share this link with family and friends and on your social media channels. Any feedback you have would be extremely valuable to our team, including any recommendations of topics you would like us to present on in the future. Financial Bites is a complimentary series and our upcoming sessions are filling up fast, so we encourage you to RSVP soon. Click on the link below to view all sessions and RSVP today!

https://mortoncapital.com/financialbites

We hope to see you soon and thank you for your continued support of Morton Capital.

The MC Team

Quarterly Commentary – Q2 2019

One for the Record Books

The current U.S. economic expansion is now officially the longest in history, having just entered its 121st month. Shortly after the end of the second quarter, stock markets also hit all-time record highs. These milestones are juxtaposed against another less thrilling record: the current economic expansion has also been the weakest recovery since World War II.

While it is impossible to know how long the current expansion will last, economic data is flashing warning signs. Growth was already on course to slow this year as the fiscal stimulus boost associated with last year’s tax cuts has faded. The bigger drag, however, is stemming from the U.S. administration’s erratic trade policies, which has introduced further uncertainty in business investments.

History of U.S. Economic Expansions

Source:  National Bureau of Economic Research & Bloomberg

Synchronized Asset Class Appreciation

All asset classes, both risky and more conservative, surprisingly, have rallied strongly in the first half of the year.  This rally has occurred against a backdrop where global economic growth has slowed, trade tensions have persisted, large tech companies have faced regulatory scrutiny, and financial market distortions have deepened.  As we pointed out in our first-quarter client commentary, the most obvious explanation for the appreciation of asset classes across-the-board has to do with central banks’ renewed willingness to cut interest rates, thus raising virtually all asset class valuations.

The first half of the year saw a historic policy U-turn from a well-advertised “policy normalization” to a significantly more dovish stance by the U.S. Federal Reserve, which has also been adopted by the other three major central banks (European Central Bank, Bank of Japan and People’s Bank of China).  While history will tell the tale of the record-breaking U.S. economy and stock markets, it may fail to show how reliant financial markets have become on extraordinary accommodative monetary policies (i.e., zero or negative interest rates and multiple rounds of quantitative easing, or money printing) from the central banks.  The table below summarizes the second-quarter and year-to-date (YTD) performance for selected indices.

Source: Bloomberg. Please see important disclosures at the end of this commentary.

“History May Not Repeat Itself, But It Often Rhymes”1

Over the past decade, financial market participants have become conditioned to associate extraordinary monetary policies and central bank liquidity with higher asset prices.  This has in turn led to heightened speculation, as reflected in the surge of recent IPOs with negative earnings and the increasing number of “zombie companies” (companies whose interest expenses are larger than their earnings) in the market.  The result has been tremendous asset price inflation and steep valuations as prices have well outpaced the fundamentals.

Most investors are familiar with the concept of P/E (price-to-earnings) ratios as a reflection of stock market valuations.  When a stock goes up in price, it either does so as a result of improving fundamentals (i.e., increasing earnings) or based upon investor sentiment or expectations.  If the latter is the case, that stock is said to appreciate because of multiple, or P/E, expansion.  As illustrated in the chart below, in the current stagnant earnings growth environment, P/E ratio expansion has accounted for 92% of the year-to-date rally in the U.S. equity market.  Goldman Sachs research indicates that P/E expansion has also been responsible for nearly 30% of the bull market return since March of 2009.

____________________

1 Attributed to Mark Twain

S&P 500 Price Return Attribution

Source:  FactSet, Goldman Sachs Investment Research

Given the headwinds mentioned above, it is unreasonable to expect either earnings growth or multiple expansion to continue at such a pace, which suggests that investors cannot expect such strong returns over the next several years. In our opinion, central bank liquidity, low interest rates and passive investing in mega-cap U.S. growth stocks have pulled forward future investment returns.  We concede that no one can accurately predict the timing of an economic recession or stock market decline.  What we can do, however, is identify environments where investors face heightened risks and adjust our portfolios accordingly.  If equity market valuations revert to historical norms, investors who are only relying on traditional assets to meet their goals may face a very challenging path forward.  Our approach is to mix in strategies that exhibit less dependence on global economic growth in an attempt to provide more consistent returns for our clients in an otherwise uncertain world.

Please do not hesitate to contact your Morton Capital wealth advisory team if you have any questions or would like to review your portfolio or financial plan in more detail.  As always, we appreciate your continued confidence and trust.

Morton Capital Investment Team

____________________________________________

Disclosure Update

MCM recently filed an amendment to its Form ADV Brochure with the Securities and Exchange Commission to reflect some material changes since our last filing in March. Please click the link for a full copy of the amended ADV Brochure:
https://mortoncapital.egnyte.com/dl/vn7uYGXjaY.

This commentary is mailed quarterly to our clients and friends and is for information purposes only.  This document should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class, and should not be considered investment advice. This memorandum expresses the views of the author and are subject to change without notice. All information contained herein is current only as of the earlier of the date hereof and the date on which it is delivered by Morton Capital (MC) to the intended recipient, or such other date indicated with respect to specific information. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information. Any performance information contained herein is for illustrative purposes only.

Certain private investment opportunities discussed herein may only be available to eligible clients and can only be made after careful review and completion of applicable offering documents. Private investments are speculative and involve a high degree of risk.

The indices referenced in this document are provided to allow for comparison to well-known and widely recognized asset classes and asset class categories. Q2 returns shown are from 03-31-2019 through 06-28-2019 and the year-to-date returns are from 12/31/2018 through 06-28-2018.  Index returns shown do not reflect the deduction of any fees or expenses. The volatility of the benchmarks may be materially different from the performance of MC.  In addition, MC’s recommendations may differ significantly from the securities that comprise the benchmarks.  Indices are unmanaged, and an investment cannot be made directly in an index.

Indices:

Past performance is not indicative of future results.  All investments involve risk including the loss of principal. Details on MC’s advisory services, fees and investment strategies, including a summary of risks surrounding the strategies, can be found in our Form ADV Part 2A. A copy may be obtained at www.adviserinfo.sec.gov.

Mid Quarter Newsletter May 2019

The Return of Trade Tensions

It’s hard to believe that it’s been over a year since President Trump launched us into a trade war with China. (We first delved into this issue in our second quarter 2018 client letter here.) While it appeared that progress was being made in negotiations toward the end of 2018, the recent breakdown in trade talks and escalation in tensions once again has this topic dominating news cycles.

As a quick reminder, a tariff is a tax specifically related to imports and exports that encourages consumers to buy less of the taxed good (whose price has now risen) and more of a cheaper, untaxed alternative. Effectively, a government imposes tariffs to try and benefit domestic producers by making imported goods relatively more expensive. There is much debate, however, regarding whether or not domestic producers truly benefit—for example,  U.S. farmers are actually among those most likely to suffer from the tariffs imposed to date.

Why are tariffs and the ominous-sounding trade war such big news? From all the hubbub, you might expect this to be a disaster for economic growth. The reality, however, is that the broad economy isn’t expected to take a big hit, even if the situation continues to escalate. Capital Economics estimates that the drag on the U.S. and China’s gross domestic product (GDP) will be minimal: around 0.4% for China, and 0.1-0.2% for the U.S. The effects, however, may be harsher on confidence and on financial markets. The uncertainty surrounding the tariffs and the lack of visibility regarding future escalations may cause businesses worldwide to limit investments and encourage consumers to become more cautious with their spending.

Free trade has been a major boost to global growth over the last several decades, with exports accounting for roughly 23% of the global GDP. Protectionist policies in the U.S. and abroad may threaten global growth going forward. Still, as precarious as the situation sounds, it’s only one of many uncertainties facing markets going forward. It’s important for investors to remain disciplined in their approach and stick to their financial plans, even when news cycles get a little feisty.

Welcome Olivia and Elana

Olivia Payne, Client Service Administrator

Olivia joined Morton Capital in April 2019. She brings with her 7 years of customer service experience in retail and social services. Olivia is originally from Georgia, where she attended the University of Georgia and obtained her degree in human development and family science. She is passionate about helping people make choices to improve their lives and learning as much as she can along the way. Olivia enjoys traveling and experiencing the different ways in which other cultures choose to enjoy life.

Elana Yaffe, Paraplanner

Elana Yaffe joined Morton Capital in February 2019 as a Paraplanner, where she collaborates with the advisory team to analyze and prepare financial plans. Prior to Morton Capital, she worked at Merrill Lynch as a seasonal client associate and at American Financial Network as a Paraplanner. Elana graduated with a degree in retailing and consumer sciences from the University of Arizona. She loves to travel, watch sports, and play with animals, especially with her shihtzu, Brandy, and boxer, Sunshine.

Meet the MC Team

Say Hello to Audriana Rex!

Kevin Rex, one of our Lead Wealth Advisors, and his wife, Nicole, welcomed their third child, Audriana, on April 12, a beautiful and healthy baby girl. A big congratulations to their growing family!

Best Places to Work for Financial Advisors Award

We are proud to announce we were named one of the Best Places to Work for Financial Advisors by InvestmentNews. This list highlights the top 75 firms nationwide in the financial advice industry. We were chosen 2nd among firms our size and 16th overall for our commitment to creating a firm culture that encourages idea-sharing and empowers employees to get the most life out of their career. Thank you to our amazing team for making Morton Capital a great place to work every day.

Read the full article by Investment News here

Be Careful Out There: Cybersecurity Tips

By Eric Selter, Chief Compliance Officer

As Elmer Fudd would say: “You should be vewy, vewy afwaid.”

Cybersecurity is a huge topic today. And it should be. The fraudsters are smart and persistent. If they put half as much time into doing good things as they do thinking up ways to steal your information, the world would be a much better place.

Recently, the Morton Capital team sat in on a cybersecurity seminar. Here are some important takeaways that we wanted to share:

* Your data is out there. Don’t think it’s not! Fraudsters can easily buy your personal data on the dark web. Have you ever used Yelp? Believe it or not, there are Yelp ratings for fraudsters on the dark web—that’s how prevalent it has become. Features like two-factor authentication, DocuSign, secure email links and other advanced security tools are useful in helping to prevent some of the more basic security breaches.

* It’s not just you they’re after. While individuals continue to be targets, the fraudsters are now coming after businesses too in order to mine the data they collect from their clients. Have you heard the financial expression, “Cash is king?” Now, data is KING!

* Prevention is key! Some debate the value of credit protection and monitoring services, but any potential alert that someone has opened an account in your name could help you nip fraud in the bud. One example of how to protect yourself: go to your mobile carrier’s website and change your settings so that any call forwarding must be done from your phone and not via their website, which can be hacked.A typical scheme that cybersecurity firms often see, which illustrates the depth of the potential fraud, goes like this: Fraudsters hack your email and see you’re in the process of buying a house (who doesn’t have dozens of emails back and forth with their realtor or escrow officer?). Since they can tell you’ve already warned us that you’ll need some cash for the closing, they send us an email that provides wire instructions to a fake account. Without verbal verification on both sides (you verbally verifying the escrow wire instructions with a trusted escrow officer; us verbally confirming the information with you), money can easily be lost forever.

To safeguard our clients against this common type of fraud, Morton Capital will continue to verbally verify and confirm all new money transfer requests. We know this extra step may be a hassle, but it’s for all of our protection. It’s better to spend some time up front preventing transfer fraud than trying to recover funds after they’ve transferred out. At the risk of dating myself, I’ll end with the line that Captain Esterhaus from Hill Street Blues would say at the start of every shift: LET’S BE CAREFUL OUT THERE!

 

GET THE MOST LIFE OUT OF YOUR WEALTH (SM)

 

Quarterly Commentary – Q1 2019

Federal Reserve to the Rescue

How would you expect the stock market to perform in a country experiencing slowing GDP growth, disappointing retail sales and a negative corporate earnings outlook?  There is a wide range of possible answers, but the most obvious choice certainly would not be that stocks would experience their best quarterly performance in a decade.  Yet that is exactly what occurred with the U.S. stock market (S&P 500 Index), up 13.7% in the first quarter.  To add to the perplexity, this stellar performance comes on the heels of a fourth-quarter rout in stocks, where major indices declined almost 20% from their peaks.  When looking to the economic fundamentals for answers, they do not appear to be either weak or strong enough to warrant these kinds of drastic moves.

So if the economic data was neither bad nor good enough to result in such sharp swings, what was the culprit?  The below chart shows the stock market’s recent performance against the backdrop of the Federal Reserve’s (“Fed”) drastic change in interest rate policy:

Based on how the stock market reacted to comments made by the Fed, the clear conclusion is that the stock market has become dependent upon low interest rates (i.e., low borrowing costs) to drive it higher.  When rates rose sharply in the fourth quarter, the market swooned, only to recover when the Fed made a U-turn on policy following weaker than expected

economic data.  Instead of the planned, steady increases in interest rates, the Fed is now promising to be more “patient” with interest rate increases.  While it seems counterintuitive, we are in an environment where bad economic news is perceived as a positive sign for stocks since

it will give Fed policymakers an excuse to keep interest rates lower for longer.  Lower interest rates mean cheaper borrowing costs for companies and consequently higher profits.

Investor Whipsaw

While we normally summarize index performance in a table format, we feel that the below bar chart comparing the performance in Q4 2018 to Q1 2019 better illustrates the recent whipsaw that investors have experienced across most major asset classes:

This information is for illustrative purposes only and not indicative of any investment.  Past performance is no guarantee of future results.  All indexes are unmanaged, and an investment cannot be made directly in an index. Index returns do not include fees and expenses. Please see disclosures at end of this commentary for general definitions of indices.

Given the strong recovery in stocks in the first quarter, stock valuations have skyrocketed back up to near all-time highs.  The below chart looks at the average price-to-sales ratio, which compares a company’s stock price to its revenue, for stocks in the S&P 500 Index. It clearly indicates how expensive stocks have become.

Source: Bloomberg. P/S Ratio: Market Value per Share / Sales per Share

Yield Environment

With stock valuations disconnected from the fundamentals and bond yields back down in the basement, where can investors find returns with reasonable levels of risk?  In our fourth quarter client communication, we discussed our core beliefs as they pertain to managing our clients’ portfolios.  When evaluating a new opportunity, these beliefs revolve around risk management (properly evaluating the risk/return tradeoff), true diversification (finding drivers of return that are significantly different than what we already own), and adequate cash flow, especially in the current low-interest-rate environment.  These tenets hold firm not only during the market volatility of the fourth-quarter, but even in strong recovery periods like early 2019, when investor “FOMO” (fear of missing out) is naturally at its strongest.

In recent years, these beliefs have steered us toward opportunities in the private lending space, specifically in cash-flow-focused assets with adequate collateral.  We recently approved a new strategy in this space that looks to provide capital for social infrastructure projects related to private nonprofits, 501(c)(3) organizations and other entities authorized to issue private activity and tax-exempt bonds.  Consistent with our thesis in other private lending strategies, this strategy takes advantage of the supply/demand imbalance in the marketplace for creditworthy loans.  The regulatory and market changes in the aftermath of the financial crisis have created a capital shortage in these segments of the market, and, consequently, those willing to lend in the space can command higher yields and stronger collateral and controls.  Examples of these market segments include:

 Source:  Tortoise

There are meaningful demographic trends supporting growth in these segments, which disconnects them somewhat from the performance of the broader economy.  Therefore, we believe these segments of the market are relatively recession-proof and unaffected by stock and bond market dynamics, making them particularly attractive in the current environment.  The social nature of the projects also allows them to qualify for tax-exempt status in most cases, and the fund manager expects the majority of the income generated to be federally tax-free.

While the majority of funds in the private lending space are private vehicles, this strategy will be offered in a mutual fund structure where there are quarterly liquidity windows as opposed to daily liquidity.  The less liquid nature of the strategy is what allows investors to capture the illiquidity premium associated with investing in these private securities.  Investors are essentially trading market exposure and risk for illiquidity risk.  We find this tradeoff to be attractive in the current market environment and feel that it makes a lot of sense for certain client portfolios where some level of illiquidity is appropriate for long-term investing.

Please do not hesitate to contact your Morton Capital wealth advisory team if you have any questions or would like to review your portfolio or financial plan in more detail.  As always, we appreciate your continued confidence and trust.

 

Morton Capital Investment Team

_________________________________________________________________

Disclosures:  This commentary is mailed quarterly to our clients and friends and is for information purposes only.  This document should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class, and should not be considered investment advice. This memorandum expresses the views of the author and are subject to change without notice. All information contained herein is current only as of the earlier of the date hereof and the date on which it is delivered by Morton Capital (MC) to the intended recipient, or such other date indicated with respect to specific information. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information. Any performance information contained herein is for illustrative purposes only.

Certain private investment opportunities discussed herein may only be available to eligible clients and can only be made after careful review and completion of applicable offering documents. Private investments are speculative and involve a high degree of risk.

The indices referenced in this document are provided to allow for comparison to well-known and widely recognized asset classes and asset class categories. Q1 returns shown are from 12-31-2018 through 03-31-2019 and the Q4 2018 returns are from 09/28/2018 through 12-31-2018.  Index returns shown do not reflect the deduction of any fees or expenses. The volatility of the benchmarks may be materially different from the performance of MCM.  In addition, MCM’s recommendations may differ significantly from the securities that comprise the benchmarks.  Indices are unmanaged, and an investment cannot be made directly in an index.

  Indices:

U.S Large Co Stocks: S&P 500 Index                                              U.S. Gov’t 1-3 Yr Bond: Barclays U.S. 1-3 Yr Treasury Bond Index

U.S. Small Co. Stocks: Russell 2000 Index                                    Commodities: Bloomberg Commodity Index

Developed Int’l Stocks: MSCI EAFE Index                                     Emerging Market Int’l Stocks MSCI EM Index

U.S. Bonds: Barclays U.S. Aggregate Bond Index                        US Large Value: Russell 1000 Value Index

U.S. Large Growth: Russell 1000 Growth Index

Past performance is not indicative of future results.  All investments involve risk including the loss of principal. Details on MCM’s advisory services, fees and investment strategies, including a summary of risks surrounding the strategies, can be found in our Form ADV Part 2A. A copy may be obtained at www.adviserinfo.sec.gov.