The document provides an overview of Elmwood Wealth Management's quarterly insights for April 2013. It discusses several challenges facing investors including slowing economic growth rates compared to the previous year. It also notes that corporate profit margins remain high but may be pressured if companies increase spending. The document summarizes Elmwood's investment strategies in various themes like the U.S. energy resurgence and total return equity investing. It concludes by reaffirming Elmwood's commitment to serving clients' needs.

1. Quarterly
Insights:
April
2013
Elmwood
Wealth Management We Build and Preserve Wealth
The Year over Year Dilemma
Bob Gillooly, CFA
The U.S. stock market has improved markedly in the
past few months. Numerous political and economic
uncertainties in the world have been alleviated, and this
has translated into an increase in investor confidence.
The ‘easy money’ has thus been made, and now we
move into a period where investors will crunch the hard
numbers.
The challenge here is that we are still growing, but at a
slower rate compared to last year. The chart at right is a
good example. It shows that employment is still clearly
growing in 2013, but it is not growing as fast as it was
last year. In other words, the absolute or total number
of jobs we are creating right now is high, but if you
measure it on a relative basis to last year, the rate at Employment
is
growing,
but
at
a
slower
rate
which we are improving is slowing. This may seem like
we are nit picking, and we are, but the stock market nit
picks as well. Momentum is an important driver for the restrain earnings growth near term and thus take some
market and it is worth noting that there is some momentum out of the stock market.
evidence of a slowing growth rate at hand.
Our Investment Strategy
The same challenge applies to individual companies. In
the 3rd quarter of 2010, year over year earnings growth Though there have been many positive developments
was a robust 35%. Last quarter, year over year earnings of late, short-term investment risk has risen above our
growth slowed to the low single digits. Growth is still comfort levels. We have been reducing high volatility
positive, but it is another example of how the rate of stocks in favor of those with more stability. We are
improvement is slowing. also reducing foreign emerging market exposure,
mostly through a reduction of investments in China.
Corporate profit margins remain at very high levels, This will further reduce high risk, high reward
historically speaking. Higher profits mean higher situations. In the intermediate term, we remain
earnings, and that has been a powerful driver for stocks positive and feel there are ample opportunities for
the past few years. One of the ways companies have investors. We are particularly interested in building up
achieved these high profit margins has been from a additional exposure in the health care and energy
general lack of spending on both capital improvements sectors, as we have little doubt these areas will become
and hiring. Spending more money on new machinery an increasingly larger part of our economy. In the last
and new employees is clearly what our economy wants few years, corrections in the market have typically
and needs, but nevertheless it does have a short-term lasted two to four months. We have no reason to
negative effect on margins and profitability. This is a believe at present it will be any different this time
positive development, but it is another factor that may around.
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2. Quarterly
Insights:
April
2013
Elmwood
Wealth Management We Build and Preserve Wealth
Cash Creep: The Unwelcome Anchor
Steve Caltagirone
Many financial advisors consider cash to be a vital tool
in the ongoing management of an investment portfolio.
In periods of economic illness, the philosophy of “Cash
is King” is often adopted across both corporate balance
sheets and investment portfolios. During a correction
or deeper bear market, cash can serve as a shock
absorber, shielding a portfolio from greater levels of
downside exposure. Just the opposite, when economic
skies clear and financial markets rally, cash can quickly
take on the form of an unwanted anchor, preventing a
portfolio from realizing its full potential.
Throughout a given market cycle, it isn’t uncommon to
find an advisor holding cash balances that range as high
as 10-20% of a portfolio’s total asset value. Surprisingly,
higher cash weightings are not always dictated by the
fear of a looming downturn in the market. The routine
practice of portfolio adjustments can often lead to the But what if those blue skies aren’t apparent for six
accumulation of higher cash balances, otherwise known months or even a year? With the assortment of highly
as cash creep. If not monitored frequently, portfolio liquid, inexpensive fixed income products throughout
cash creep can and will transition from a short-term the marketplace today, advisors have numerous
active decision to a long-term portfolio strategy. In the options for finding better alternatives to cash. The
process, valuable income is left on the table.
fixed income universe provides numerous choices for
stable, low risk yields in excess of what is currently
Cash used to play a meaningful role in the growth of a
offered in the cash market. At Elmwood, we believe
diversified, multi-asset class portfolio. As the chart at
cash should be kept to a minimum throughout all
right illustrates, that role diminished quickly when the
market conditions*. The fixed income universe
global financial crises hit full stride in 2008. In
simply provides too many choices for stable, low risk
response to the crises, interest rates on cash quickly
yields in excess of what is currently offered in the cash
plummeted to the 0 – 0.25% level. Four years later,
market.
this rate remains intact with every indication it will
continue into 2014. When advisors allow cash levels to We encourage clients to regularly monitor cash
drift higher in today’s environment, they are essentially balances in portfolios outside of our management.
betting on a pending fall in the market. After all, a 0- Portfolio cash creep can settle in quietly, but quickly.
0.25% return can only beat negative returns in the Ensure that your portfolio is not dragging an
market. There simply isn’t room for any other unwelcome anchor for an unusually long period of
competing positive returns. In addition to providing time.
clients’ peace of mind, advisors often hold higher cash
balances in anticipation of sunnier skies ahead. *Assumes a minimal need for portfolio income or expenses.
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3. Quarterly
Insights:
April
2013
Elmwood
Wealth Management We Build and Preserve Wealth
Does Your Retirement Plan Address the Cost
of Healthcare?
Shannon S. Lemon, CFP®
Most of us will spend our entire lives saving for
retirement. As the date draws near, a great deal of
planning will go into trying to figure out where to live,
how time is spent, when retirement actually begins, and
which resources will ultimately be used. What few
people actually think about and plan for is the cost of
healthcare; it is usually not a driving factor or a
consideration in their retirement planning.
The cost can be shocking. As seen in the chart, the
Employee Benefit Research Institute “EBRI” estimates
that men retiring in 2012, at age 65, will need
$185,000, to have a 90 percent chance of having
enough money to cover health care expenses (excluding Source:
JP
Morgan
long-term care) in retirement. For women, the cost is
even more substantial at $210,000. Medicare only
covers 60 percent of the cost of health care services; my family? Knowing what health risks are present can
most retirees pay for a supplemental plan. With the help act as a guide to determine how much additional
annual cost of healthcare increasing at a rate of 5-7 health care costs you may encounter in retirement.
percent per year, the total cost can be astonishing.
What are my Medicare options, what does Medicare
Ultimately, it does not make sense to talk about
cover and what is the cost? Knowing what is covered
retirement savings without talking about health care
with basic Medicare (Part B) will help determine the
expenses.
type of supplemental policy (Part C) you may need or
Here are some questions that should be discussed when want. What is the basic coverage for the prescription
you are considering retirement: drug plan (Part D)?
How do my current benefits work? When I retire, does When should I begin taking Social Security? Does it
my spouse/partner or I have any retiree health make sense to begin taking it early, at retirement age,
insurance? or at age 70?
If I retire before age 65, what will I do for my healthcare How many years will I be in retirement? Upon
coverage? Will I have another source of health care retiring at age 65, men on average will live another 18
insurance from a spouse/partner or use Cobra or some years and women will live another 20 years.
other plan to bridge the gap until I am eligible for Should I consider long-term care insurance?
Medicare?
If you haven’t asked the questions or know the
How is my health? What is the health history of answers, it may be time to update your plan.
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4. Quarterly
Insights:
April
2013
Elmwood
Wealth Management We Build and Preserve Wealth
Investment Theme:
U.S. Energy Resurgence – Not Elmwood’s Strategy:
We are investing in companies
only has there been a tremendous amount of natural that have large underground reserves of both natural
gas discovered in America, but new technology has led gas and oil. We are also taking advantage of less
to a boom in new oil discoveries as well. The obvious ways to exploit this theme. For example,
abundance of new energy will mean our country must companies which help clean up gas and oil wells, and
invest in virtually every aspect of our energy transportation companies that move both supplies
infrastructure to make this resource available.
and the commodity itself across the country.
Investment Theme:
Total Return Equity Investing – Elmwood’s Strategy:
Look for companies that have the
Total return takes into account both price appreciation cash flow to both buy back their own stock and
and dividend payments. Companies are increasingly increase their dividend. If a company bought back 2%
raising dividends and buying back stock as a return to of their outstanding shares annually and paid a 2%
shareholders.
dividend yield, your total return would theoretically be
4%. This is a great backdrop in any circumstance.
Investment Theme:
U.S. Health Care Needs – With Elmwood’s Strategy:
An increase of both the number
new health care legislation now in place, approximately of participants and the frequency of accessing health
40 million individuals will become eligible for health care inevitably will drive up the cost to cover this
care coverage. This fact, coupled with the aging baby phenomenon. The investment opportunity lies within
boomer demographic will create substantially more companies that benefit by serving a larger number of
demand for health care going forward. participants, yet are able to help reduce the cost of
service. Insurance, benefit management, and product
distribution companies all look well positioned here.
Investment Theme:
High Current Bond Yields – Elmwood’s Strategy:
We take a more active approach to
Yields for most good quality bonds are extremely low. our bond portfolio. We are buying high current income
Yet there is a segment in the market where you can corporate bonds (6-7%) with good credit quality, yet are
buy both high quality and high current interest paying relatively short in maturity. Some of these will likely be sold
bonds. before maturity. We are also using higher income paying
preferred stocks (6%) that offer more favorable tax
treatment as a substitute for longer maturity bonds.
Investment Theme:
Mortgage Backed Bonds – The Elmwood’s Strategy:
Investors have been reluctant to
housing market has found a bottom and default rates re-engage with the mortgage bond market since the
are declining. Should interest rates rise, these bonds financial crisis. Much of this risk has been accounted
typically perform better than most. for and there is an opportunity to find higher yields.
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5.
Elmwood is committed to making life easier for
you while maximizing your investment potential.
Elmwood Wealth Management
2027 Fourth St., suite 203
Berkeley, CA 94710
(510) 858-2723
info@ElmwoodWealth.com
www.ElmwoodWealth.com
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