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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/359501802 

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

Mid Quarter Newsletter – September 2019

Interest Rate Movements – How to Make Sense of Them?

At its July meeting, the U.S. Federal Reserve (Fed) lowered interest rates for the first time since December 2008. Officially, the Fed’s reasoning was that it was worried about inflation not hitting the desired 2% goal. But unofficially? They may have instead caved to market forces, political pressures and global trade tensions. Since then, interest rates on U.S. government bonds have fallen across the board, with the 30-year U.S. Treasury falling below 2% for the first time ever.

With all the talk of interest rates in the news, it can be easy to lose sight of what they actually are: simply the cost of borrowing money. In normal environments, interest rates are decided by the supply and demand for money. However, the Fed also has a hand in things—it sets the short-term rates at which banks can borrow either from each other or the Fed. When those interest rates rise, the rates that banks charge their customers for a loan (for providing a mortgage or starting a business, for instance) typically go up too. In theory, the rates that banks can pay their deposit customers should also rise, though miraculously that upward adjustment can sometimes lag pretty meaningfully behind any actual rate increases.  

Below, we take a more detailed look at how rising or falling interest rates generally affect us all, from consumers to corporations to the economy. 

So how do lower interest rates affect investors’ portfolios and financial goals? Many savers are being punished with the lower income that results from the Fed’s move to lower rates. Since yields on most bonds are so low in the current environment, otherwise conservative investors often have to move into riskier asset classes (like stocks) to try to maintain their income levels as interest rates decline. Rather than play that game, Morton Capital has elected to seek out strategies that are somewhat agnostic to moves in interest rates. Even though the future return prospects for traditional bonds just got a bit bleaker, we are fortunate to have other tools at our disposal to earn investors what we feel is attractive income without undue risk. 

Wealth and Legacy Planning – New MC Service

When Lon Morton first founded the company, he was driven by the desire to help people. In our business, helping others can take many forms, and over the years, many of you have experienced our broadened array of services to help meet this vision. This includes collaborating with you to define what it looks like to enjoy your wealth, sourcing investment opportunities to protect your wealth, and designing financial plans to organize your wealth. To further enhance our capabilities, we’ve added Brian Standing to the team, who has 12 years of experience as a wealth and legacy planner. His role is to have estate planning discussions with our clients as an additional component of our financial planning service. 

We recognize that estate planning can be emotionally daunting and time-consuming, and that it’s often difficult to ensure all the pieces of your financial life are organized in the way you want. In many cases, we’ve been a part of our clients’ lives for decades and personally understand family dynamics (such as the best way to have conversations with your children about wealth), values and intentions. This is why our advisors are now partnering with Brian to align your financial plan with your estate plan and ensure your wealth is transitioned according to your wishes.

We’re excited about this new offering and hope that you, our clients, will be too. At Morton Capital, we have a goal of empowering our clients to enjoy their wealth by organizing and simplifying their financial life. We believe this new offering should do just that. Please reach out to your advisory team if you would like to schedule a wealth and legacy consultation.

Welcome Brian and Adam

Brian Standing, Esq.
Wealth Planner

Brian Standing joined Morton Capital as a Wealth Planner in June 2019. From 2007 to 2019, Brian worked in private law practice in the area of estate planning and taxation. He received his JD from Southwestern Law School and earned his undergraduate degree from Loyola Marymount University. Brian is certified as a specialist in estate planning, trust and probate law by the State Bar of California’s Board of Legal Specialization. Outside of work, Brian enjoys spending time with his wife and three kids.

Adam Bartkoski
Finance and HR Manager

Adam joined Morton Capital in April 2019 as the Finance and HR Manager. He has almost 20 years of experience in financial services, including roles at Fidelity Investments and Fiduciary Network. Adam also spent two years as a volunteer with the Peace Corps, serving as a teacher for a school in Kharkiv, Ukraine. He earned a Bachelor of Arts degree in history from Texas A&M University.

Financial Bites Lunch Series

A few weeks ago, we kicked off our Financial Bites lunch series. This complimentary series covers the basics on a number of financial planning topics, such as investments, estate planning and long-term care. If you weren’t able to join us for our Retirement Planning session, we encourage you to attend one of the other six sessions over the next several months. 

Our next lunch, on budgeting, on Friday, September 20, 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. 

You can RSVP to any of these events by visiting mortoncapital.com/financialbites.

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

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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.

Quarterly Insights – 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

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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.

Senior Vice President, Joseph Seetoo, recognized as a finalist in the 2018 Trusted Advisors Awards by San Fernando Valley Business Journal.

Congratulations to Senior Vice President Joseph Seetoo, on his becoming a finalist for the San Fernando Valley Business Journal’s Trusted Advisors Awards. This annual event honors attorneys, accountants, business bankers, insurance professionals and wealth managers in the greater San Fernando Valley region for their commitment to high quality client service and overall excellence.

At the award ceremony, hosted on August 9thpublisher Charles Crumpley commented “This event helps to recognize the importance of the relationships they have developed with their clients as they guide them through this complex business environment,” Crumpley said in his opening remarks. “Everyone understands that in these industries, professionals have to help their clients comply with rules and regulations. But it is those rare individuals who do that but also combine market knowledge with superior service to help their clients thrive and achieve. And many of them go way above and make significant contributions to our community.”

We are incredibly proud of Joseph and his relentless pursuit of excellence in both client service, and as a leader within our team. In 2017 Joseph was also awarded the Wealth Management – Trail Blazer Award by the San Fernando Valley Business Journal.

Read more here

Disclosures:

San Fernando Valley Business Journal (“SFVBJ”) Trusted Advisors is an independent listing produced annually by the SFVBJ. The award is based on data provided by individual advisors and their firms. Only advisors who submitted information are included for consideration, and investment returns are not a component of the rankings. The award is based upon a recipient’s application and not upon any qualitative and quantitative criteria relating specifically to one’s position as an investment advisor. As such, the award is not representative of any one client’s experience. This award does not evaluate the quality of services provided to clients and is not indicative of the investment advisor’s future performance. Neither the RIA firms nor their employees pay a fee to the SFVBJ in exchange for inclusion in the Trusted Advisors awards.

Joe Seetoo (Podcast) – The Realities of Selling your Business in a Zero Interest Rate Environment

Joe Seetoo is a Partner and Vice President with Morton Capital Management – a Registered Investment Advisor managing about $1.6 bn in assets under management as of June 30, 2016. As a Certified Financial Planner and Chartered Financial Analyst, Mr. Seetoo has 17 years of experience in developing investment strategies for affluent business owners and high net worth families.
Questions Answered:
1. Why is it important for business owners to do financial planning prior to selling their business?
2. Your firm has a niche in identifying alternative investment strategies – why is that?
3. How can business owners (or any investor) generate sufficient income in Zero interest rate environment after they
sell their businesses?

Disclosures:
Morton Capital Management ($1.6 billion in assets under management (“AUM”) as of June 30, 2016) is registered with the SEC under the Investment Advisers Act of 1940. SEC registration should not be interpreted to mean that Morton Capital or its personnel has been sponsored, recommended or approved, or that Morton Capital’s or its personnel’s abilities or qualifications have been passed upon, by the United States or any agency or office thereof.

The alternative investment opportunities discussed may only be available to eligible clients and involve a high degree of risk. Opportunities for withdrawal/redemption and transferability of interests/shares will be limited, so investors may not have access to capital when it is needed. Additionally, the fees and expenses charged on these investments may be higher than those of other investments.

Barron’s rankings are based on data provided by individual advisors and their firms. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors’ practices. Only firms that submit information are considered.

Past results are no guarantee of future results. Inherent in all investments is the possibility of a loss.

Jeffrey Sarti Featured in Forbes article on How to Invest Your Money In Q4

September’s stock market sell off either created tremendous opportunities to put money to work at lower prices or alerted active investors to position their portfolios defensively for a deeper correction. To find out how you should invest your money in the fourth quarter,  I assembled a panel of Barron’s-ranked financial advisors to share their best mutual fund or exchange-traded fund picks. This elite group is hailed as the top 1% in their field. Barron’s evaluates financial advisors based on their assets under management, annual revenues, years of experience, client retention, charitable contributions and regulatory records.

5. Tocqueville Gold Fund (TGLDX)

by Jeffrey Sarti

The recent bout of stock market volatility across the globe was just the excuse the Federal Reserve needed to refrain from raising interest rates.  However, we believe the collective “wisdom” to agonize over a meager quarter-point hike is typical of the short-term mindset of the investing public.

Read the full article

The Case for Gold in an Uncertain World

gold barIn this position paper, we will discuss our rationale for instituting a position in gold across our clients’ portfolios. There are many opposing viewpoints about owning gold in a diversified portfolio. We will look to address these countering points of view and explore how the current macro landscape makes the rationale for owning gold more compelling than it has been for quite some time. Specifically, we will discuss:

  • Opportunity cost of owning gold – Investors often shun gold in favor of assets with a positive expected return, namely stocks and bonds. However, stocks are trading near all-time high valuations and yields on traditional bonds are anemic, making alternative investment opportunities such as gold more attractive on a relative basis.
  • Traditional diversification is broken – Historically, stocks and bonds have behaved differently from one another and have therefore acted as efficient diversifiers when combined in a portfolio. However, in recent years, the data has shown that stocks and bonds have become more highly correlated with one another. Gold, on the other hand, has displayed a low correlation to both stocks and bonds over extended periods of time.
  • Gold as a store of value – Gold is the one global currency that cannot be created out of thin air in this age of undisciplined money printing. All currencies are susceptible to debasement by central banks looking to stimulate their debt-ridden economies through easy monetary policies. Unlike most paper currencies, gold has maintained its value over long time periods.

We understand that this positioning may not be popular as traditional assets continue their march upward with the support of central banks. However, with the expensive nature of traditional stocks and bonds, coupled with the heightened risks of currency debasement and possible inflation, we believe that a modest allocation to gold can act as a meaningful hedge over time.

Read the full position paper here