After many months of contentious and extremely negative campaigning from both parties, the Republicans emerged as victors last night in several very close races.
This was a surprise to most, as polls and pundits alike had already given the White House keys to Mrs. Clinton. Many have asked what FAI is doing in the portfolios given this surprising event.
Our goal at FAI is to provide active diversified investment management for our clients that we expect to deliver superior results over an entire business cycle. We conduct detailed due diligence on all of our holdings in order to “own what we know and know what we own”. This long term disciplined approach to investing has served us well over the years. That will not change.
We did not predict who was going to win the race, nor did we position the portfolio for any one candidate or party. Instead, we spent our time understanding economic strengths/weaknesses using data such as consumer spending, housing, industrial production and interest rates just to name a few. We layer on top of that a historical and current view of global market valuations to increase the odds that we are “fishing in the right pond”.
Heading in to the fall, all of this detailed analysis led us to the conclusion that we should be reducing our equity exposure. We put those conclusions to work in September and have been holding a large amount of cash in the portfolios waiting for the opportunity to put the cash back to work.
Since President-elect Trump’s candidacy has been short on policy details, and he has no real policy history to reflect on, it is very difficult to predict what policies can get enacted and what they might look like. Many question marks remain regarding main platform ideas such as the repeal of Obamacare, increased infrastructure spending, tax reform and international trade agreements. All investors face the same uncertainly. It is because of this uncertainty and the volatility it causes that we feel very comfortable in our detailed investment process and our active and diversified investment philosophy.
We believe these attributes are critical to investing in the new President Trump era:
Active Management – We utilize a proprietary asset allocation model that analyzes economic conditions, business fundamentals and valuation to balance the risk/reward tradeoffs in the portfolio assets. Because the information flow emanating from the political infrastructure could be much more fluid and volatile, we believe it will be important to retain the ability to change our exposure to both stocks and bonds if our analysis suggests that we should.
Diversification – We continue to diversify our portfolio across multiple price drivers, not making large bets on any one price driver or economic scenario while tilting the portfolio towards our strongest convictions. If this election taught us anything, it is that even with what appears to be high probability outcomes, nobody has a crystal ball. Diversification combats this weakness in a very productive way.
Disciplined Process – We will continue to use our disciplined investment analysis process to help identify pockets of opportunity that may present themselves from the chaos and uncertainty surrounding the election and aftermath.
Although the election results have been very difficult to predict, we do believe that the world just became more uncertain. Because of this, we believe our investment philosophy and process will help protect the very wealth that you have entrusted to us while positioning us to take advantage of any market disruptions that may occur.
On Behalf of the Investment Committee
Curt Gross, CFA
Principal & Chief Investment Officer