How Do I Prepare my Portfolio for Inflation?

Contributed by: Angela Palacios, CFP®, AIF®

Inflation is common in developed economies and, generally, more healthy than deflation. When consumers expect prices to rise, they go out and purchase goods and services now rather than waiting until later. While it is likely that inflation will continue to trend higher here in the U.S. in the coming months the question is “Can this harm my portfolio’s ability to help me achieve my goals?” Consider the following factors contributing to or detracting from the inflation outlook.

Our investment committee has discussed inflation at length for several years now. Here are some highlights from our discussion.

Factors influencing inflation in the short term and long term:

1. Large amount of monetary and fiscal stimulus

   There has been a record amount of stimulus being pushed into the pockets of American’s by the government. The consumer is healthier than it has ever been and demanding to purchase.

2. Supply chain disruptions

   Whether due to shipping constraints or lack of manpower, companies can’t make enough of many different products to meet current demand. Does this sound familiar? It should because a year ago all we could talk about is not having enough toilet paper and disinfectant wipes. People were paying big prices for even small bottles of hand sanitizer.

   Fast forward one year and the shelves are now overflowing with these items and prices have normalized. Once people have spent the money they accumulated over the past year, demand will likely return to normal.

3. Starting from a very low base

   The point to which we are comparing current inflation is one of the biggest influences on the calculation. Right now, for year-over-year inflation, we are comparing to an economy that had very little to no economic activity occurring. When you compare something to nothing, it looks much larger than it actually is. A year from now we will have a more normal comparison base.

4. Wage inflation

   One of the biggest factors in the lack of inflation over the past decade was a lack of wage inflation. We are now seeing wage inflation because companies can’t hire enough people to meet the current demand for their goods or services. Wages are going up trying to entice people back to work. Once government transfer payments slow or run out, many of these individuals will likely return to the workforce again causing wages to return to more normal levels (although it is possible wages settle at a new base that is higher than they were before).

5. A complete lack of velocity of money

   While banks are flush with cash, they still aren’t lending. Why? Because the banks, due to banking regulation changes over 10 years ago, only want to loan large amounts of money to someone who is creditworthy. The creditworthy consumer is so healthy that they don’t need to borrow money.

6. Technology increasing productivity

   A large portion of the country just increased productivity by reducing commute time over the past year via remote working capabilities. Companies that would never have considered allowing remote work now find themselves reducing office space and making permanent shifts in working style. This is just one example of how growth in technology can increase productivity which, over time, puts downward pressure on prices.

It is important to understand what investments could do well if we are surprised and inflation is around the corner.

First of all, your starting point is very important. Are you starting from low inflation or are your inflation levels already elevated? The answer is we are starting from a long stretch of time with very low inflation rates. So in the chart below you would reference the lower two boxes. Then you need to ask, is inflation rising or falling. Low and rising inflation is the bottom left box. You may be surprised to see the strong average performance from varying asset classes in this scenario. Inflation that is reasonable and expected can be a very positive scenario for many asset classes.

In our Second Quarter investment commentary we will dive a little deeper into the asset classes that perform well and how we think about incorporating that into your portfolios!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

The Key To Financial Planning Is Sticking to the Basics!

Contributed by: Sandra Adams, CFP®

A colleague of mine and I were recently presenting a session on Savings for Junior Achievement for a Detroit High School class as part of The Center’s Financial Literacy initiatives. As part of our presentation, we both shared personal stories about how the fundamentals of budgeting and savings had personally impacted us during our earlier years. Why am I sharing this with you?

First, it was a good reminder that our perspective about money certainly changes over time. Thinking back, I now realize that how I think about money now is certainly different than how I thought about money in my teens and twenties. This is important especially when we are talking to our children and grandchildren about handling money.

Second, it was a good reminder that our experience teaches us good lessons. The things we have been through over our lifetimes, especially with money, sticks in our minds either positively or negatively. Positive experiences and behaviors we will tend to repeat and negative experiences and behaviors we hopefully will learn from and NOT repeat. Although some people take longer to learn than others.

Third, and most importantly, I was reminded with my own story that sticking to the financial planning basics works.

The Basics Are:

• Paying yourself first. (Building savings to yourself right into your budget!)

• Living within your means (spending first for needs and then for wants; spending for wants only if there is money in the budget).

• Building a savings reserve for emergencies.

• Building savings in advance for short-term goals.

• Not accumulating debt that is not needed and paying off any credit in the money that it is accumulated.

• And once you can do all that, building long-term savings for long-term goals like buying a house and retirement.

At one point in my life, I was in a real financial hole, but by sticking to the basics and having a lot of patience, I slowly dug myself out. And I sit here today being able to say that by following the fundamentals, you can be financially successful.  Sticking to the basics works!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

How Individual Stocks Are Performing So Far In 2021: We Are Exhausted

Contributed by: Nicholas Boguth

Picking individual stocks is a challenge. Many professionals dedicate their entire lives to the endeavor and still underperform the market. Look at these surprising numbers from the S&P 500 (representing the U.S. Stock Market) and its top 50 constituents.

Last month, the market as a whole was making all-time highs while a lot of individual names were lagging. As of 5/6/2021, the S&P 500 was at an all-time high (0% below its 52-week high), but 45 out of the top 50 stocks were not. If you had investments in some very well-known companies, you may have been 15% or more below the high point!

Investing in individual stocks is not for everyone. It can be a very high risk/high reward strategy; this past year is a great example. Contact your advisor if you’re considering this strategy.

This material is provided for information purposes only and is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, sell or hold a specific security. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

After-Tax 401(k) – An Often Forgotten Strategy

Contributed by: Josh Bitel, CFP®

Roughly half of 401(k) plans today allow participants to make after-tax contributions. These accounts can be a vehicle for both setting aside more assets that have the ability to grow on a tax-deferred basis and as a way to accumulate assets that may be more tax-advantaged when distributed in retirement.

As you discuss after-tax contributions with your financial advisor, you might consider the idea of setting aside a portion of your salary over and above your pre-tax contributions ($19,500 for people under age 50 and $26,000 for those over 50). By making after-tax contributions to your 401(k) plan now, you could build a source of assets for a potentially tax-efficient Roth conversion.

What to consider:

Does your plan allow for after-tax contributions?

Not all plans do. If an after-tax contribution option is available, details of the option should be included in the summary plan description (SPD) for your plan. If you don’t have a copy of your plan’s SPD, ask your human resources department for a copy or find it on your company’s benefits website. You can also talk to your financial advisor about other ways to obtain plan information, such as by requesting a copy of the complete plan document.

What does “after-tax” mean?

After-tax means you instruct your employer to take a portion of your pay — without lowering your taxable wages for federal income tax purposes — and deposit the amount to a separate after-tax account within your 401(k) plan. The money then has the ability to grow tax-deferred. This process differs from your pre-tax option in which your employer takes a portion of your pay and reduces your reported federal taxable wages by the number of your salary deferrals and deposits the funds to your pre-tax deferral account within the plan.

Are there restrictions?

Even if your plan has an after-tax contribution option, there are limits to the amount of your salary that you can set aside on an after-tax basis. Your after-tax contributions combined with your employee salary deferrals and employer contributions for the year 2021, in total, cannot exceed $58,000 (or $64,500 if you are age 50 or over and making catch-up contributions). Your after-tax contributions could be further limited by the plan document and/or meet certain nondiscrimination testing requirements.

Okay, but how does this help me build Roth assets?

When you are eligible to withdraw your 401(k) after-tax account — which could even be while you are still employed — you can rollover or “convert” it to a Roth IRA or a qualified Roth account in your plan, if available. The contributions you made after-tax may be able to be rolled into a Roth IRA each year, even while you are still employed!

If your plan allows for after-tax contributions and you think they may be right for you, it may be time to chat with your financial advisor.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

This material is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

5 Tips For Home Buyers In 2021

Contributed by: Angela Palacios, CFP®, AIF®

Real Estate Boom: The Perfect Storm

For many investors our home is one of our biggest assets.  Over the past year, we have been stuck inside of our biggest asset nearly 24/7.  You’ve heard the saying “Distance makes the heart grow fonder.”  This seems to apply to our home for many of us.  Over the past year, companies like Home Depot or Lowes have seen success because we nowhere to spend money except on home projects.  Others have spent so much time at home they have outgrown it or find they want different things from their home.  This has resulted in one of the hottest home real estate markets since 2005.  A recent Zillow survey shows 1 in 10 Americans have moved in the past year!  I saw the first open house in mid-April in my own neighborhood and there was a steady line of people going in and out of the house all afternoon, cars were lined up down the street!

Buyers are competing against each other in a frenzy putting offers on homes 10% or more above asking prices and eliminating contingencies, offering free rent etc.  Doing anything they can to have their offer move to the top of a sellers list.  Home prices are up 15% in the last year alone and houses are only staying on the market for a few days.

Low interest rates are another catalyst, yet again.  According to bankrate.com, 30 year mortgage rates are well below 3% as of April 13th, 2021.  This is lower than they have ever been making homes more affordable (at least until prices were driven up).  Also, don’t discount the stimulus money potential home buyers may have been banking!

Lastly, and probably one of the biggest behind the scenes driver of this housing market, is the fact that home building never recovered after the 2008 financial crisis. 

According to the Census Bureau 991,000 single-family homes began construction in 2020.  This is the 9th year in a row that the number has increased.  However, when you consider back in 2005 the all-time US record for new home starts was 1.72 Million we are still far off the pace set over a decade ago!

As one of our largest generations, millennials, are starting families they are exploding onto the scene ready to buy homes.  After 2008, the home building industry hasn’t been able to build these cheaper entry level homes as the price of inputs has gone up so there is very short supply.

So what can a home buyer do for an edge today?

1. Get preapproved for a mortgage – an offer that is contingent upon this will likely fall to the bottom of the list

2. Have your down payment ready PLUS! – if you really want a home you may need to come up with additional money to put down if the bank doesn’t appraise the home you want for the price you have to pay

3. Don’t forget the home inspection – but your bidding competitors might forego this to make their offer look better so consider bringing a general contractor or someone knowledgeable in home repair projects you know with you to look at the house

4. Act quickly – reach out first thing in the morning for an appointment if you see a home listed for sale

5. Know someone in your desired neighborhood?  Ask them to post on the neighborhood Facebook page to see if anyone is selling soon.

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

“Do Good at Work” A Center Book Club Discussion

Contributed by: Sandra Adams, CFP®

Our Center team took on the challenge of a different kind of book with this quarter’s book club discussion, choosing to read Brea Boccalandro’s new release Do Good at Work: How Simple Acts of Social Purpose Drive Success and Wellbeing.

The general premise of the book was to offer practical advice on how to make your work life more meaningful by job purposing — making a meaningful contribution to others or a social cause as part of the workplace experience. Studies show that we work harder, longer and happier when we pursue social purpose. And it doesn’t matter what position we hold in an organization — anybody can job purpose their own job.  We can all use our own jobs for good and be proud that our job matters.

Some Center Team members share their thoughts below:

“Going forward, this book has helped me think more intentionally about connecting the work we do to a larger purpose.” — Lauren Adams, CFA®, CFP®

“My key takeaway from the book is that small acts make a huge difference. No matter what your job is you can find fulfillment.” — Kelsey Arvai, MBA

“Two things that I learned:  (1) Leave ample ‘time’ for the important things in work and life; and (2) Most people are inner givers, but some need to be taught.”  — Matthew E. Chope, CFP®

Our Center book discussion group had interesting conversations around “Do Good at Work” and these concepts and enjoyed applying them to the work we do with each other, with our clients and with the community. We have already begun to apply the concepts we discussed in our book group and have several other ideas in the works to apply in the near future.

Sandra Adams, CFP® is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

The Center Social Strategy: How We Construct Values-Based Portfolios

Contributed by: Jaclyn Jackson, CAP®

In honor of Earth Day, we’ve used the last couple of weeks to highlight environmental, social, and governance (ESG) investing.  We began by explaining why ESG investing has grown in popularity.  Then, we explored the variety of approaches used to support values-based investing.  This week, we’ll cap our blog series with a Q&A style discussion about how The Center designs social strategies.

What are the first steps of building a values‐based investment strategy?

Construction fundamentals form the foundation of any investment strategy. First, we assure that asset allocation aligns with investment time horizons and investment goals. Even the most conservative research attributes 40% of investment performance to asset allocation. Liberal evaluations attribute as much as 90% of performance to asset allocation. Another fundamental philosophy applied to the construction process is being fee sensitive. The reality is that investment costs add up and the compounding effect of those costs diminish returns. Therefore, considering the costs of values‐based funds is a vital part of developing social strategies. In short, values‐based investing adds layers to the construction process, but it certainly does not change the foundational layers of that process.

What’s the difference between ESG Investing and Socially Responsible Investing (SRI)?

A: In the past when investment managers tackled values‐based investing, many used Socially Responsible Investing (SRI) methods. SRI takes a hard stance on eliminating industries from one’s investment strategy that do not match their ethics. However, there are consequences for taking such a black and white investment approach. Research has shown that completely eliminating industries from investment strategies undermines diversification and ultimately, erodes longevity. We strive to set clients up for the best possible outcomes (from a financial and values alignment perspective in this instance). For that reason, we prefer ESG investing; it has a values‐driven agenda, but doesn’t compromise performance (because investors can maintain diversification). At the end of the day, we want you to both uphold your values AND be able to retire. Our goal is to provide strategies that include longevity and diversification while protecting your values.

How we sift the wheat from the shaft when it comes to choosing ESG funds?

ESG investing is gaining popularity. As a result, we are seeing more and more ESG funds on the market. On one hand, it helps value‐aligned investors with diversification. On the other hand, it can set the stage for trendy, superficial products that don’t truly meet the needs of values‐aligned investors. To combat this, we make an effort to work with companies that have a reputation for walking the walk. Companies like Parnassus Investments, PAX World Funds, and Calvert Research & Management are companies that have demonstrated a longstanding commitment to values‐based investing. They actively engage with companies to improve behavior. Pax, for example, uses its shareholder voting power to advocate for better company governance.

How are ESG product inconsistencies navigated during the strategy construction process?

When faced with complex decisions, we ultimately consider what brings the most value to clients.  Last week we learned, all ESG funds aren’t created equal.  Values-based funds can excel by some measures, but fail by others.  It’s a tough negotiation to build a strategy and as a result, there is some give and take involved.  When faced with complexity, we launch internal research initiatives to identify best practices.  Ultimately, data dictates what we believe is the right thing to do for the overall strategy.

Admittedly, we’ve only scratched the surface of how The Center develops social strategies.  Luckily, the conversation doesn’t have to end.  We are happy to chat more about our process and support you in integrating values into your investment plan.  We hope you enjoyed our ESG blog series and have a Happy Earth Day!

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All investments are subject to risk, including loss. There is no assurance that any investment strategy will be successful. Asset allocation and diversification does not ensure a profit or protect against a loss. It is important to review the investment objectives, risk tolerance, tax objectives and liquidity needs before choosing an investment style or manager. Sustainable/Socially Responsible Investing (SRI) considers qualitative environmental, social and corporate governance, also known as ESG criteria, which may be subjective in nature. There are additional risks associated with Sustainable/Socially Responsible Investing (SRI), including limited diversification and the potential for increased volatility. There is no guarantee that SRI products or strategies will produce returns similar to traditional investments. Because SRI criteria exclude certain securities/products for non-financial reasons, utilizing an SRI investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. Raymond James is not affiliated with and does not endorse the opinions or services of Parnassus Investments, PAX World Funds, and Calvert Research & Management.

The Final Four 'Stocks': A Center Spin-Off Competition

Contributed by: Jeanette LoPiccolo, CFP®

To celebrate the annual college basketball tournament, The Center Team hosted an internal spin-off competition. We set aside our favorite teams and adopted individual stocks instead. You may be thinking – that sounds kooky! It is a bit. Our celebration is a mash-up of internal team education, some charitable giving, and a bit of friendly competition. 

How It Works

Our investment strategies contain mutual funds and ETFs that are comprised of individual stocks. The stocks are our basketball teams. Nick Boguth, our trusted portfolio administrator, highlighted 30 of these stocks within our carefully chosen strategies. Each stock was then selected by a team member and entered into our March “Market” Madness brackets. While the Center takes a long-term approach to investing, we are tracking these stocks for a short period just for fun. The top four winners will receive a donation to their favorite nonprofit organization.

To kick off our competition, our amazing team members, Lauren Adams, Nick Boguth, and Jaclyn Jackson led a Zoom presentation on the fundamentals of stock investing, valuations techniques, and where those 30 stocks fit within client portfolios. It was a great opportunity for all team members–not just those in investment or planning roles—to “check under the hood” of our most commonly used investments to see the stocks that help determine the fund’s performance. Each team member then selected their best guess to “win”. The Center will donate $1,000 to the final four nonprofits. Go team!

Our Final Four Winners

1. Josh (HD), Alex's Saints Foundation

2. Kelsey (TGT), Ruth Ellis Center

3. Sandy (JNJ), Haven (Oakland County)

4. Matt T. (LB), Methodist Children's Home (Redford, MI)

P.S. Want to know more about The Center’s charitable giving? 

Check out our Center Cares page. Our internal Charitable Committee is made up of 6-8 team members who help coordinate charitable giving activities, volunteer events, and promote donations of our time and talent to local nonprofits. We believe in supporting our local community, building relationships with nonprofits, and promoting financial education to underserved communities.

Jeanette LoPiccolo, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She is a 2018 Raymond James Outstanding Branch Professional, one of three recognized nationwide.

The RJFS Outstanding Branch Professional Award is designed to recognize support professionals in RJFS branches who contribute to the success of their advisors and teams. Each year, three winners are selected and recognized during this year's National Conference for Professional Development. To be considered for this award, Branch Professionals must have been affiliated with Raymond James for at least one year and could not have won the award in the past.

Q1 2021 Investment Commentary

Contributed by: Center Investment Department

April 2021 - The Center Investment Team provides market feedback for the first quarter.

Rotation. The transformation that turns a figure around a fixed point in mathematics.  So far 2021 has been a story of rotation for markets.  Two of the worst sectors in 2020, energy and financials, have become the best performing sectors so far in 2021.  If you looked at your December 31st statement and made changes based on return only – you would have missed significant gains…an old but good lesson that past performance isn’t necessarily indicative of future returns.

Last year technology benefited the most from the pandemic as people shopped from home, worked from home and looked for entertainment at home.  This year markets have been influenced heavily by the deployment of vaccinations and the hope that we can return to normal soon.

Google trends show increased interest in searches for flights and hotels which is an early sign of pent-up demand for travel that will follow in coming months.

Year to date, through 4/1/2021, a diversified portfolio made up of 40% S&P 500 Index, 20% MSCI EAFE Index and 40% Barclays US Aggregate Bond index is up about 2.4% showing a nice start to the year.  The Federal Reserve has reiterated they are “not even thinking about raising interest rates” according to Chair Jerome Powell.  Despite that, the market has pushed long-term rates higher, pricing in several rate increases before the end of 2023 despite the Fed chair’s messaging.  This has created a challenging return environment to longer dated bonds but results in more attractive interest rates today than we have witnessed in a while.

Economy

Inflation remains muted although we are seeing small pockets due to supply chain disruptions.  Between bottlenecks on the west coast and the blockage of the Suez Canal, it takes goods longer and longer to reach our shores.  A lack of velocity of money continues to be a headwind to higher inflation and the main reason why we haven’t seen it pick up substantially even though the supply of money has grown drastically with monetary and fiscal stimulus. As long as banks don’t have a large incentive to loan money (via higher interest rates) inflation may continue to be muted. 

Initial jobless claims, an early indicator for the direction of unemployment, have dropped to the lowest level recently since the pandemic began.  This should support a continued decline in the unemployment rate.

Government and Stimulus

The American Rescue Plan Act of 2021 was signed in law this past quarter.  This resulted in stimulus checks to the public.  Check out our recent blog for more details. These checks are anticipated to be spent rather than saved.  Check out the graph below showing the spending spike in January after the $600 check was received.  The additional $1,400 checks started getting delivered the week of March 17th.  I expect we will see another spike in consumer spending for March and April.

President Biden hasn’t wasted any time turning attention to the next stimulus plan in the form of the infrastructure bill.  It is likely this bill will not get passed unless mostly “paid for” by other means than deficit financing.  Bargaining on tax hikes has already started in Washington, at least behind the scenes.  It’s going to be a long process, but we can say with high conviction that taxes will likely increase at the corporate and individual levels.  We continue to watch how this will affect markets and you, our clients.  

Impact of Tax Reform on the Stock Market

In wait of details around the Biden administration’s tax reform, which is speculated to increase the corporate tax rate from 21% to 28% and increase GILTI tax rate (foreign tax rate) from 11% to 21%, many are pondering the implications of change on the stock market.  Portfolio strategists believe growth stocks will be most impacted by tax reform.  Some economists estimate that a 28% tax rate could decrease corporate earnings by 9% in 2022.  However, we have to do a bit of perspective-taking before jumping to conclusions about what this means for investors.

1)   Tax reform must go through Congress.  Economists don’t believe a 28% tax rate will pass through congress.  In fact, Goldman Sachs and UBS Financial Services assume a 25% tax rate will pass.  Goldman believes that may look more like a 3% corporate earnings clip, while UBS believes it may be 4%.  Either way, that is much more modest than the 9% some are considering with a 28% tax rate. 

2)   Keep in mind, many forecasters are tempering market expectations already for S&P 500 company profits in 2022.  If the tax hike is less than expected or delayed from the expected timeline there could still be a catalyst for robust market returns in 2022 even with corporate tax rate increases.

3)   Tax reform may not thwart economic growth.  Based on what Biden has proposed in the past, some of the proceeds of tax increases will probably go towards infrastructure spending.  Note: that could help balance the impact of increased tax rates because infrastructure spending usually expands the economy.

4)   Investors are agile.  If growth positions are suspected to be impacted most by tax reform, investors can adjust their strategies to include companies best equipped to handle tax changes.  Not to mention, some companies may even issue special dividends during this time.  When Barack Obama was re-elected in 2012, companies suspected tax hikes (which never came to fruition).  Subsequently, 20 of them issued special dividends. All that to say, there may be some opportunity for investors to pick up investment income.

5)   The last and most important thing to understand when considering the implications of tax reform on the stock market is that historically, there isn’t much correlation between stock market returns and tax reform.  As demonstrated by the chart below, the S&P 500 has been up when taxes both increase and decrease.  Clearly, there is opportunity to meet investment goals no matter the tax policy, so investors should not stray from investment discipline.

Other Headlines: SPACs

More SPACs (Special Purpose Acquisition Company) were created last year than the previous TEN years, and interest in these “blank-check companies” continued to climb in the first quarter of this year. In fact, more money has already been raised in one quarter this year than all of last year’s record year. Here’s a quick look at what they are and why they are taking off. 

First, what is a SPAC? It is a public shell company that raises money to buy a private company. The basic steps look like this:

1. Manager creates a SPAC

2. Investor puts $10 into it

3. Manager buys part of a private company for $10

4. The private company merges with my public SPAC, and boom – you own $10 worth of a company that is now public (OR you think I picked a bad company, and you take your $10 back).

On the surface it seems like a sweet deal; you either get a piece of a hot new company, or you take your $10 back. There are some unique risks to SPACs, though. The big one is obviously that after the merger you are typically left with a small, unproven company. Smaller, private companies are typically quite risky. The company’s stock price might not go up after it becomes public. It might even fall 50, 60, 70%. Ouch! Also, if you don’t like the deal after it is announced, you just missed out on whatever returns you would’ve had elsewhere. Last year, the S&P 500 returned almost 18% (almost 70% from the market bottom on March 23rd)...many investors sat in a SPAC all year only to reject the deal and missed out on huge potential gains.

There’s no definitive reason why SPACs are taking off, but it does show that there are investors willing to take on a high-risk investment. Maybe there is excess cash in the markets, investor exuberance, something to do with low-interest rates, high valuations or low return expectations elsewhere, or confidence in big name SPAC managers; but whatever it is, it has been a lucrative undertaking for those creating the SPACs as the costs paid to the managers/sponsors are not cheap.

Portal Updates

Just a reminder that we have a Center for Financial Planning Inc. app available in the app store for your investment portal!  If you don’t have access to the portal yet, please reach out and we can set this up for you!  Also, we now have the capability to allow you to aggregate your other accounts in this portal for a complete view of you assets in one place!  If you want to learn more, check out our tutorial videos here.

As always, if you have questions please don’t hesitate to reach out to us!  Thank you for the continued trust you place in The Center!

Any opinions are those of the author and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Dividends are not guaranteed and must be authorized by the company's board of directors. Special Purpose Acquisition Companies may not be suitable for all investors. Investors should be familiar with the unique characteristics, risks and return potential of SPACs, including the risk that the acquisition may not occur or that the customer's investment may decline in value even if the acquisition is completed. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Not All ESG Funds Are Created Equal

Contributed by: Kali Hassinger, CFP®, CDFA®

 

If you’ve read last week’s ESG blog, you should be familiar with the basic ideas driving ESG investing and aware of the recent investor rush to ESG investment funds.  Although 2020 was full of unforeseen circumstances, the trend to Sustainable and Responsible Investing has been building over many years. 

In the past, ESG was often used interchangeably with SRI, or Sustainable and Responsible Investing.  In reality, they are not exactly one in the same.  ESG analysis creates a set of standards used to screen investments through Environmental, Social, and Governance criteria.  Almost all Sustainable and Responsible strategies use at least one of the E, S, or G factors within their analysis, which is perhaps why the ESG abbreviation seems to have taken hold in recent years.  However, there are four prominent Sustainable and Responsible Investment approaches that are most often used to develop a portfolio or mutual fund.

Best-In-Class (Positive) Screening

This strategy involves investing in companies or sectors that have the best, or most positive, ESG performance relative to their peers.  The hope is that the investments selected in a best-in-class process will be able to handle unexpected changes regardless of the industry.  However, one criticism is that this includes all industries and sectors, often incorporating gas, oil, and mining companies, as long as they are handling ESG factors better than their peers.  Some refer to this as the “least bad” approach, as opposed to the best.  This is a good option for those who are afraid to miss out on returns by removing investments due to ESG factors.

Exclusionary Integration

Negative screening is what many so often associate with ESG investing.  This is most likely because it one of the oldest screening approaches and was often guided by religious beliefs with the investments eliminated through this process often referred to as “sin” stocks.  This approach, however, has evolved over the years to be less explicitly aligned with religions.  Now, exclusionary screens work to avoid companies based on more ESG related factors, such as fossil fuels, animal cruelty, and weapons production.  This approach is appropriate for investors who have specific ethical or religious motivations and want to be sure that their money is invested in a way that aligns with their beliefs.

ESG Integration

The ESG Integration approach involves using environmental, social, and governance factors to make decisions within a traditional financial analysis process. This approach does not prohibit investments in any particular sector or industry, and it searches to find value and opportunities by combining ESG information with conventional financial information. This method can include companies who have historically performed poorly in relation to ESG factors but who are working to improve on an environmental, social, or governance issue.  Notice the usage of OR in the last sentence.  This means that companies do not need to score or screen well in all three factors to be included or considered within an ESG integration fund.  This flexibility provides a vast investment universe and can be more palatable for investors who are still skeptical of ESG investing.

Sustainability-Themed Investing

Sustainability-themed investing often develops a portfolio aimed at solving a specific environmental or sustainable issue.  Within the selected theme, such as clean technology, climate change, animal welfare, or green energy, analysts will work to determine the strongest companies who positively represent this issue.  This allows investors to focus their resources on specific trends and to invest in companies who reflect those same beliefs in their business practices.

Although we have discussed these approaches as four separate methodologies, in reality, most ESG mutual funds use a combination of several or all of these tactics to build their portfolio.  This combination, which less frequently excludes specific industries or companies than it has the past, allows for more flexibility, which can translate to more opportunity for investors.  Many believe that companies who are focusing energy and time on ESG factors will be more poised for future success.  Are you interested to know how The Center develops and manages our ESG strategies?  Jaclyn Jackson, CAP® our firm Portfolio Manager will provide some insight next week!

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Kali Hassinger, CFP®, CDFA® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Sustainable/Socially Responsible Investing (SRI) considers qualitative environmental, social and corporate governance, also known as ESG criteria, which may be subjective in nature. There are additional risks associated with Sustainable/Socially Responsible Investing (SRI), including limited diversification and the potential for increased volatility. There is no guarantee that SRI products or strategies will produce returns similar to traditional investments. Because SRI criteria exclude certain securities/products for non-financial reasons, utilizing an SRI investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. Investors should consult their investment professional prior to making an investment decision.