2023 1st Quarter Investment Review and Portfolio Changes
In our quarterly investment update, we’d like to:
- Summarize market activity over the 1st quarter of 2023
- Introduce an option for managing your cash balances
- Discuss upcoming portfolio changes
- Provide various market returns information
Market Summary for the 1st Quarter of 2023
In the 1st quarter, the global stock market delivered a ~7% return as a rebound from the recent lows experienced in September 2022 continued, despite fresh concerns over turmoil in the banking sector and slowing growth in corporate revenue and earnings. Valuations for US stocks, as measured by the ratio of stock price to earnings (P/E) remain consistent with their long-term average, and international stocks remain below their long-term average.
The US bond index also rose ~3% as investors anticipated a potential decline in interest rates in the future, which would drive prices higher on bonds as interest rates and bond prices move inversely.
The Consumer Price Index (CPI) in March reflected a 5% rate of inflation over prices a year ago and continues to slow from the ~9% peak rate of 2022, as many inflationary factors such as supply chain constraints become less impactful for the price of goods. Housing costs, which comprise a third of CPI, increased at an ~8% rate compared to a year ago. Increases in the price of services continue to be driven by a tight labor market and also tend to be harder to reverse, as pay cuts do not sit well with workers. Meanwhile, some goods that had excessive price increases in earlier pandemic years are starting to decline, for example, used cars reflected an ~11% year-over-year price decline.
A mix of bank runs, balance sheet losses, and liquidations at Silicon Valley Bank, First Republic, and Signature Bank caused concern for many individuals regarding the soundness of the financial system and the security of their bank deposits. While the recent issues may bring back feelings of uncertainty from the global financial crisis of 2008, we would consider these bank failures to be relatively isolated and reflecting a combination of a failure to manage interest rate risk and a concentrated client base in tech companies, wealthy individuals, and cryptocurrency investors. These idiosyncratic risks, while unfortunate, may reflect better health for the financial system than if bank failures were due to credit losses driven by borrowers unable to pay on their loans, as credit losses would broadly drive across the financial sector. Credit risks continue to be an area of focus across the portfolio, and earlier in the year, we increased the expected stability of bond portfolios through the use of conservative Treasury investments and reduced investment in publicly-traded credit bonds.
New Cash Management Option
To address the needs of our clients in finding an efficient solution to managing cash balances, we are making a new cash management tool available to our clients, Flourish Cash. We consider Flourish to offer competitive interest rates (4.4% for balances up to $500K), high insured limits ($1.5M+), easy transfer with your existing bank accounts, and a quick online signup process. Flourish doesn’t have account maintenance fees or minimum balances. As with all our recommendations, WFA receives no compensation for recommending Flourish Cash, and our recommendation is based on our assessment of the benefits offered.
Flourish does require an email invitation from your advisor to establish an account – please reach out to your team if you would like to get started or learn more.
Upcoming Portfolio Changes
Historically, for clients incorporating illiquid investments, our portfolios have incorporated a 4-5% investment in private real estate through the Versus Real Estate Fund (VCMIX). The conservative fund has delivered an annualized return over the past five years of ~5%, and in comparison to the US bond index, the fund has delivered a higher return and experienced less volatility.
Over the last year, as interest rates have increased, financing costs for real estate have also risen, moderating the potential for appreciation on real estate. While the conservative portfolio within Versus Real Estate has declined ~6% over the past four quarters, it has strongly outperformed public real estate markets which declined ~20% over the same time period. Due to the headwinds presented by higher interest rates, we will reduce the real estate investment by 2%, and transition those funds to an investment that we anticipate can benefit from the high interest rates currently available.
The 2% reduction in real estate will be used to increase our investment in the Pioneer Insurance-Linked Securities fund (XILSX), which has been a component of our illiquid portfolios for over five years, during which it has delivered a higher return than the US bond index, and experienced less severe declines in value than the US bond index or global stock market over that period. The reinsurance fund participates in the business of providing insurance to insurance companies to cover the insurance policies that they write, in exchange for collecting insurance premiums.
Because the collateral for the reinsurance fund is held in short-term Treasuries, the fund earns ~5% on the collateral, in addition to the expected returns of the reinsurance premiums. The demand for reinsurance capital has increased as reinsurer balance sheets have declined due to rising interest rates in 2022 decreasing the value of bonds that are a significant component of balances sheets for reinsurers, and payments for insurance claims related to Hurricane Ian. As the demand for reinsurance capital increases, we expect the premiums paid to the investors who supply reinsurance capital may increase as well.
For clients invested in portfolios that do not include illiquid investments, we are incorporating a daily liquid reinsurance fund, the Pioneer CAT Bond fund (CBYYX) in the portfolio, replacing another alternative investment: iMGP Alternative Strategies Fund (formerly named Litman Gregory Alternative Strategies). The Pioneer CAT Bond fund invests in a subset of the reinsurance market that offers daily liquidity, and we anticipate that it may benefit from the same potentially favorable pricing dynamics and Treasury yields as the illiquid reinsurance investment.
Please reach out to us if you have any questions regarding this portfolio change, and we’d be glad to address them.
Market Returns for the 1st Quarter of 2023
| Market Returns |
Index |
1 Quarter |
1 Year |
3 Years |
10 Years |
| Global Stock Market |
MSCI All Country World Index Net |
7.31% |
-7.44% |
15.37% |
8.06% |
| US Bond Market |
Bloomberg US Aggregate |
2.96% |
-4.78% |
-2.77% |
1.36% |
| US Stock Market |
S&P 500 Composite |
7.50% |
-7.73% |
18.62% |
12.24% |
| Inflation |
Consumer Price Index |
0.94% |
4.90% |
5.38% |
2.65% |
| 10-Year Treasury Yield |
3.48% |
Returns as of 3/31/2023, for trailing periods. Returns for periods over one year are annualized.
If you would like to review any aspect of your investments or have any questions regarding this message, please contact us and we would be glad to discuss further.
Thank you,
The Wade Financial Advisory, Inc. Team
Portfolio commentary pertains only to portfolios directly managed by Wade Financial Advisory, Inc. Please reach out to us if you would like to discuss a change in management of any portfolio not directly managed by Wade Financial Advisory, Inc
2023 1st Quarter Investment Review and Portfolio Changes
Neelesh Champaneri, CFA®, CAIA®
2023 1st Quarter Investment Review and Portfolio Changes
In our quarterly investment update, we’d like to:
Market Summary for the 1st Quarter of 2023
In the 1st quarter, the global stock market delivered a ~7% return as a rebound from the recent lows experienced in September 2022 continued, despite fresh concerns over turmoil in the banking sector and slowing growth in corporate revenue and earnings. Valuations for US stocks, as measured by the ratio of stock price to earnings (P/E) remain consistent with their long-term average, and international stocks remain below their long-term average.
The US bond index also rose ~3% as investors anticipated a potential decline in interest rates in the future, which would drive prices higher on bonds as interest rates and bond prices move inversely.
The Consumer Price Index (CPI) in March reflected a 5% rate of inflation over prices a year ago and continues to slow from the ~9% peak rate of 2022, as many inflationary factors such as supply chain constraints become less impactful for the price of goods. Housing costs, which comprise a third of CPI, increased at an ~8% rate compared to a year ago. Increases in the price of services continue to be driven by a tight labor market and also tend to be harder to reverse, as pay cuts do not sit well with workers. Meanwhile, some goods that had excessive price increases in earlier pandemic years are starting to decline, for example, used cars reflected an ~11% year-over-year price decline.
A mix of bank runs, balance sheet losses, and liquidations at Silicon Valley Bank, First Republic, and Signature Bank caused concern for many individuals regarding the soundness of the financial system and the security of their bank deposits. While the recent issues may bring back feelings of uncertainty from the global financial crisis of 2008, we would consider these bank failures to be relatively isolated and reflecting a combination of a failure to manage interest rate risk and a concentrated client base in tech companies, wealthy individuals, and cryptocurrency investors. These idiosyncratic risks, while unfortunate, may reflect better health for the financial system than if bank failures were due to credit losses driven by borrowers unable to pay on their loans, as credit losses would broadly drive across the financial sector. Credit risks continue to be an area of focus across the portfolio, and earlier in the year, we increased the expected stability of bond portfolios through the use of conservative Treasury investments and reduced investment in publicly-traded credit bonds.
New Cash Management Option
To address the needs of our clients in finding an efficient solution to managing cash balances, we are making a new cash management tool available to our clients, Flourish Cash. We consider Flourish to offer competitive interest rates (4.4% for balances up to $500K), high insured limits ($1.5M+), easy transfer with your existing bank accounts, and a quick online signup process. Flourish doesn’t have account maintenance fees or minimum balances. As with all our recommendations, WFA receives no compensation for recommending Flourish Cash, and our recommendation is based on our assessment of the benefits offered.
Flourish does require an email invitation from your advisor to establish an account – please reach out to your team if you would like to get started or learn more.
Upcoming Portfolio Changes
Historically, for clients incorporating illiquid investments, our portfolios have incorporated a 4-5% investment in private real estate through the Versus Real Estate Fund (VCMIX). The conservative fund has delivered an annualized return over the past five years of ~5%, and in comparison to the US bond index, the fund has delivered a higher return and experienced less volatility.
Over the last year, as interest rates have increased, financing costs for real estate have also risen, moderating the potential for appreciation on real estate. While the conservative portfolio within Versus Real Estate has declined ~6% over the past four quarters, it has strongly outperformed public real estate markets which declined ~20% over the same time period. Due to the headwinds presented by higher interest rates, we will reduce the real estate investment by 2%, and transition those funds to an investment that we anticipate can benefit from the high interest rates currently available.
The 2% reduction in real estate will be used to increase our investment in the Pioneer Insurance-Linked Securities fund (XILSX), which has been a component of our illiquid portfolios for over five years, during which it has delivered a higher return than the US bond index, and experienced less severe declines in value than the US bond index or global stock market over that period. The reinsurance fund participates in the business of providing insurance to insurance companies to cover the insurance policies that they write, in exchange for collecting insurance premiums.
Because the collateral for the reinsurance fund is held in short-term Treasuries, the fund earns ~5% on the collateral, in addition to the expected returns of the reinsurance premiums. The demand for reinsurance capital has increased as reinsurer balance sheets have declined due to rising interest rates in 2022 decreasing the value of bonds that are a significant component of balances sheets for reinsurers, and payments for insurance claims related to Hurricane Ian. As the demand for reinsurance capital increases, we expect the premiums paid to the investors who supply reinsurance capital may increase as well.
For clients invested in portfolios that do not include illiquid investments, we are incorporating a daily liquid reinsurance fund, the Pioneer CAT Bond fund (CBYYX) in the portfolio, replacing another alternative investment: iMGP Alternative Strategies Fund (formerly named Litman Gregory Alternative Strategies). The Pioneer CAT Bond fund invests in a subset of the reinsurance market that offers daily liquidity, and we anticipate that it may benefit from the same potentially favorable pricing dynamics and Treasury yields as the illiquid reinsurance investment.
Please reach out to us if you have any questions regarding this portfolio change, and we’d be glad to address them.
Market Returns for the 1st Quarter of 2023
Returns as of 3/31/2023, for trailing periods. Returns for periods over one year are annualized.
If you would like to review any aspect of your investments or have any questions regarding this message, please contact us and we would be glad to discuss further.
Thank you,
The Wade Financial Advisory, Inc. Team
Portfolio commentary pertains only to portfolios directly managed by Wade Financial Advisory, Inc. Please reach out to us if you would like to discuss a change in management of any portfolio not directly managed by Wade Financial Advisory, Inc
This communication contains the opinions of Wade Financial Advisory, Inc. about the securities, investments and/or economic subjects discussed as of the date set forth herein. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENTS BEAR RISK INCLUDING THE POSSIBLE LOSS OF INVESTED PRINCIPAL.
Wade Financial Advisory, Inc. is an investment adviser registered with the Securities and Exchange Commission. Registration of an Investment Advisor does not imply any level of skill or training. A copy of current Form ADV Part 2A is available upon request or at www.advisorinfo.sec.gov. Please contact Wade Financial Advisory, Inc. at (408) 369-7399 with any questions.
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