Quarterly Insights Q2 2018

Quarterly Insights – Q2, 2018


The first half of 2018 has seen the return of volatility with somewhat uneven end results. While domestic equities (S&P 500 Index) rebounded somewhat in the second quarter, both developed international (MSCI EAFE) and especially emerging markets (MSCI EM Index) suffered losses. “Conservative” core bonds were only down small for the quarter, but are still at a meaningful loss for the year. From a high level, it appears that U.S. stocks are the positive outlier amongst these traditional asset classes. However, when you dig a little deeper, U.S. stocks are also showing signs of strain. Though the S&P 500 Index is up 2.7% for the year, the strong results of only a handful of stocks are masking the mixed performance of the rest. Specifically, if you remove the top 10 performing stocks for the year (most of which are in the technology sector), the S&P 500 would have a negative return. 

There are undoubtedly short-term positives in the economy today: the tax cuts have provided a pickup in economic growth and the labor market continues to be strong. However, the longer-term concerns are still there, including record-high debt (at the government, corporate and consumer levels), as we go into a cycle of increasing interest rates and inflation. 

The table below summarizes the second quarter and year-to-date (YTD) performance for selected indices. 

Index Q218 YTD Large U.S. Companies (S&P 500 Index) 



Small U.S. Companies (Russell 2000 Index) 



Developed Foreign Markets (MSCI EAFE Index) 



Emerging Foreign Markets (MSCI EM Index) 



Core U.S. Bonds (Barclays U.S. Aggregate Bond Index) 



Catastrophe Bonds (Swiss Re Global Cat Bond Index) 



Commodities (BBRG Commodity Index) 



Gold Spot (USD/Ounce) 



Hedge Funds (HFRI Fund of Funds Composite Index) 



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

Tariffs – A Historic Perspective

With talks of trade wars and tariffs taking center stage in the past few months, we thought it would be beneficial to provide a brief historic overview of tariffs, the rationale behind them, and whether or not they are effective policy tools. A tariff is simply a tax imposed by a nation on an imported good. This tax, in effect, increases the price of the imported good, thus giving the competing domestic good a relative price advantage. The first tariff ever levied by the U.S. government was the not-so-disguised Tariff Act of 1789. The primary objectives of the Act were to lower the U.S. debt load and to protect manufacturers. These were clearly stated in the Act:

Whereas it is necessary for that support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufacturers, that duties be laid on goods, wares and merchandise . . .”

While on the surface it may seem like tariffs should be pro-growth for the domestic economy, history has shown that it is not that simple. For example, the Tariff Act of 1930—known as the Smoot-Hawley Tariff—increased tariffs at unprecedented rates. The bill, which was signed into law by President Herbert Hoover over many protests from the economists at the time, was designed to protect the U.S. economy and encourage domestic spending. In retaliation, European countries imposed their own tariffs on U.S. goods. This resulted in a trade war that many believe was a major contributing factor leading to the Great Depression.

Are All Trade Deficits Bad? – Goods vs. Services

The current U.S. administration has used our trade deficit as the rationale for why tariffs are necessary to equalize global trade. The argument is that our large trade deficit reflects an uneven playing field in global production where we cannot compete with the subsidized, low-cost producers in countries like China. While there is some logic to this argument, again, it is not that simple. Trade imbalances are not necessarily a reflection of countries’ trade policies, but rather are impacted by a number of macroeconomic factors, such as the relative growth rates of countries, the relative values of currencies, as well as those countries’ savings and investment rates.

It is also important to put the U.S. trade deficit in context, both in terms of its size and nature. According to the Bureau of Economic Analysis, and as illustrated in the below chart, the latest monthly trade deficit figure was $46.2 billion, which translates roughly to only 2.9% of U.S. GDP (gross domestic product) on an annualized basis.

U.S. Trade Balance of Goods and Services vs. GDP – Source: Bloomberg

While all the talk has been of our goods deficit, there has been little focus on the positive part of the picture: namely, our rapidly increasing trade surplus in services. While the U.S. has a trade deficit in goods with numerous countries, it actually enjoys a trade surplus in services with many of those same countries. The chart below shows that this service surplus has more than tripled in the last two decades.

Source: U.S. Bureau of Economic Analysis, fred.stloiusfed.org

In fact, service industries now account for over 70% of U.S. jobs. The trend toward service exports reflects our strength as a country in areas such as finance, insurance, sales from intellectual property, and travel and transportation. The current emphasis on bringing back manufacturing jobs seems to be focusing more on fixing our weaknesses rather than capitalizing on our continually growing strength in these service sectors.

MC Client Commentary – July 2018 | 3

We Do Not Predict – We Prepare

The U.S. financial markets’ reaction to the proposed tariffs has so far been somewhat muted. The economic data and company earnings have been relatively strong, so perhaps the markets do not believe the uncertainty associated with these actions will lead to disruptions in the economy. The truth is that no one knows yet what the impact of these policies will be. Our concern is that, ultimately, no one wins in a trade war: global growth is the loser across the board.

While we cannot predict where the financial markets will end up for the year, we do expect more episodic volatility in response to this type of political uncertainty. The reality is that we cannot structure our client portfolios to be immune from this volatility or any future dislocation that may result. What we can do, however, is evaluate risk and overweight those asset classes where we feel we are best being paid for the risk we are taking. Whenever possible, we look to incorporate investments with the ability to generate returns that are not solely reliant upon economic growth or low interest rates for their success. The more varied the drivers of returns in a portfolio, the better we sleep at night.

Please do not hesitate to contact your Morton wealth advisory team if you have any questions or would like to discuss your portfolio 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 as of the date indicated and such views 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 Management (MCM) 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 and has not independently verified the accuracy or completeness of such information. Predictions, projections and forecasts contained herein may not be indicative of actual future events and are subject to change without notice.

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 03-29-2018 through 06-29-2018 and the 2018 year-to-date returns are from 12-29-2017 through 06-29-2018. Performance shown does not reflect the deduction of any fees. 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.

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.

Mid Quarter Newsletter June 2018

Why You Should Care About Rising Interest Rates

Recently, you’ve likely been seeing headlines that breathlessly wonder whether the Federal Reserve will increase interest rates at their next meeting. With what many consider a relatively strong economic environment and higher inflationary expectations, most agree that the Fed will raise rates at least another two times in 2018.

While there are countless ways higher rates may impact the broader economy, individuals will start to feel the impact as well. As a consumer, if you go to buy a car or use any other form of credit, higher rates will affect any loans you take out. If you have an adjustable rate mortgage (ARM), rising interest rates could cause your monthly payments to increase meaningfully.

Individual investors, especially those with more traditional allocations, will also feel the impact in their investment portfolios. Simple bond math states that interest rates and bond prices move in opposite directions. So a holder of a “risk-free” 10-year Treasury bond has lost 2.8% in value in five short months since the beginning of the year . . . not so “risk-free” after all!

Over the last several years at Morton Capital, we’ve consistently reduced our weightings to fixed income strategies that have exposure to rising interest rates, so our bond portfolios look VERY different from those of other traditional wealth managers. When investing in bonds, others point to the fact that traditional bonds have posted positive and predictable returns for decades on end. After all, what has worked in the past should work going forward, right? However, interest rates have been in a steady decline since 1981, so many investment professionals were still napping in their cribs when rates last rose and have little idea of the potential risk lurking in many bond strategies. When considering this risk to traditional bonds, we think it’s crucial to spend the time searching for alternative bond substitutes that can generate predictable returns, even in a rising rate environment. Just because we haven’t seen rising rates for 30+ years, doesn’t mean the next 30 years will look the same.

Welcome Dan and Leah

Dan Charoenrath
Director of Client Operations

As the Director of Client Operations, Dan manages our Account Servicing Team. Prior to joining Morton Capital, he spent five years managing multiple units for Peets Coffee and Tea, overseeing all locations from San Luis Obispo County through Ventura County. He earned his Bachelor of Arts degree in philosophy from the University of California, Santa Barbara, in 2004.



Leah Loewenthal
Portfolio Analyst

Leah began her career in the financial industry in 2013 after graduating from California Polytechnic State University, San Luis Obispo, with a Bachelor of Science degree in animal science. As a portfolio analyst, she provides excellent operational, administrative and client support. She enjoys traveling, being outdoors and coaching youth basketball. She holds Series 7 and Series 66 licenses.

Planning for Incapacity

If you have parents of a certain age, you’ve likely had to start having those uncomfortable conversations about how they and the rest of the family will handle their affairs as they age. At what point should they stop driving? Should they consider downsizing to a more manageable home? What are their preferences if they need help with their personal care? While thinking about these issues regarding your parents is uncomfortable enough, have you also started thinking about your own incapacity plan? No one wants to think about the day they no longer have the ability to make rational, coherent choices, but being proactive will ensure you have a say in your lifestyle even if you can no longer make day-to-day decisions.

According to the Alzheimer’s Association, Alzheimer’s accounts for most cases of dementia and affects an estimated 5.5 million people age 65 and older. Other common causes of dementia include strokes, abnormal brain chemistry, and Parkinson’s disease. Some of the warning signs of dementia include memory loss that disrupts daily life, difficulty completing familiar tasks at home or work, confusion with time or place, new problems with words in speaking or writing, and changes in mood or personality.

So how can you plan for the possibility of dementia or other incapacitating disability? Be proactive by identifying someone you trust to make decisions for you when you can’t, and to serve as a resource for your advisors and other professionals. You can use the following form to add a “trusted contact” to your Schwab or Fidelity accounts – simply complete and sign the form and return it to Morton Capital. Encourage your parents to do this as well. Take the time now to make sure you have a durable power of attorney for your financial affairs and an advance health care directive, and revisit any directives you have already to ensure they are still consistent with your wishes.

If there’s someone you would like us to contact in case you begin showing signs of incapacity, reach out to your advisory team and let us know. Introduce this person to other trusted professionals in your life as well. Unfortunately, if you don’t make your incapacity choices yourself, someone else will get to decide who will make those choices for you.

Mid Quarter Newsletter Q2 2017

Our Legacy of Stewardship

In reflecting on Lon’s rich legacy, no part of his work was more important to him than being the trusted steward of his clients’ financial futures. Stewardship is defined as the responsible management of something entrusted to one’s care. It is a position we hold in the highest regard. Beyond our charge of helping clients with financial planning and investments, our most important role is to be a trusted partner available to you and your family for any questions or needs.

Prior to Lon’s passing, he shared with clients that he was excited to unveil the updated brand and image for Morton Capital. Over the next few months we will be completing the project we started with Lon, including the below video on our stewardship philosophy. This is one of a series of five videos and outlines how we see our role as your trusted steward.

How Is Your Financial Professional Getting Paid?

Back in 1983, when Lon founded Morton Capital, the financial investment landscape largely revolved around selling products. The more products financial professionals sold you, the more commissions (read: money) they made. Charging only a single fee based on a client’s assets under management (AUM) was extremely rare, if unheard of. However, Lon saw early on that the only way to truly align himself with clients’ best interests was to be paid for his objective advice and not based upon how many products he was able to sell to them.

Today, it is much more common for advisors to be “fee-only” as opposed to charging commissions.  The challenge with the “fee-only” title, though, is that it may not tell the full story. For instance, an advisor at a brokerage firm may not directly receive commissions, but that individual may still be incentivized to make money for the firm as opposed to their clients. Brokerage firms are notorious for making fees in a myriad of ways, and in many instances, clients can’t see these fees anywhere on their statements. In a Wall Street Journal article published in 2014, it was found that individual investors trading $100,000 in municipal bonds over the course of one month paid brokers an average “spread,” or markup, of 1.73%, or $1,730. In today’s low-interest-rate environment, this could amount to an entire year’s worth of interest. Brokers could also be getting kickbacks from mutual fund companies to recommend their funds to clients. Again, these incentives don’t show up anywhere on client statements, but the concern is that those funds were selected based on the broker’s compensation rather than solely on their appropriateness for clients.

It’s essential to understand how financial professionals are paid in order to find out what factors could be guiding their decision-making. At Morton, we don’t get paid incentives for recommending any of our investments to you. Paramount to our process is getting to know you and your needs and goals first, then making recommendations based solely on what we believe is best for you. Just as Lon envisioned when he decided to create an advisory firm all those years ago, this approach puts the focus back where it belongs: on the best interests of the client.

ETFs and the Illusion of Diversification

With the recent proliferation of ETFs (exchange-traded funds, or vehicles that track indices or a basket of assets), investors are better able to get instant diversification and cost effectively purchase hundreds of stocks in one fell swoop. However, as ETFs have grown as a percentage of total stock market ownership, an unexpected result has emerged; namely, a positive feedback loop has developed as individual stocks now move up and down in lockstep fashion. This makes sense-when you buy an ETF that tracks the S&P 500, you are effectively purchasing all 500 stocks in the S&P index instantaneously, pushing all of their prices up at the same time. Similarly, when you sell that ETF, you are selling all 500 stocks simultaneously, pushing all stock prices down. No surprise that the correlation amongst stocks has moved up meaningfully in recent years. Just when you thought you “won” the diversification game by buying that ETF, you now simply own a bunch of stocks that move up and down together. This behavior will be further exacerbated in a nasty market environment (think 2008) as investors at large will sell their ETFs at a push of a keyboard button, thereby selling thousands of individual stocks in unison.

The age-old solution to diversifying beyond stocks is to add bonds to your portfolio mix. After all, bonds typically behave well during periods of stock market volatility. However, while the last 30+ years have seen falling interest rates and rising bond prices, our concern is that the next 30 years may be a mirror image, with rising rates and poor bond performance. In future stock market dislocations, we believe bonds may not act as the ballast in the portfolio that they were in the past.

Given the heightened political uncertainty in the developed world, coupled with extremely high valuations across most asset classes, we strongly believe an alternative approach toward diversification is essential. Morton Capital is a thought leader in this realm, having taken a unique approach toward diversification for decades. Fundamentally, most traditional asset classes are exposed to three main factors: 1) valuations (we live in a world of expensive valuations); 2) GDP growth (growth around the world is stagnant); and 3) interest rates (trading at all-time historical lows). It may sound counterintuitive, but we seek (rather than avoid) risk exposure to other areas of the economy to curate a well-diversified portfolio. In other words, we crave exposure to asset classes that will behave differently than stocks and bonds in a variety of market environments. Examples include exposure to reinsurance (natural disasters), alternative lending, and gold. Additional examples, where applicable for clients who can access illiquid vehicles, are private lending, real estate, and royalty streams. While investors at large are extremely complacent, as evidenced by very low volatility levels in the global markets, complacency is one risk that we aggressively seek to avoid as we are never satisfied in our search for truly alternative sources of return.

Information contained herein is for educational purposes only and does not constitute an offer to sell or solicitation to buy any security. Some alternative investment opportunities discussed may only be available to eligible clients and involve a high degree of risk. Additionally, the fees and expenses charged on these investments may be higher than those of other investments. Any investment strategy involves the risk of loss of capital. Past performance does not guarantee future results.