Consumer Perspective from CAGNY Conference

FAM Funds Research Analyst Kevin Gioia, CFA

FAM recently attended the CAGNY (Consumer Analyst Group of New York) 2019 Conference where some noteworthy trends in the consumer-packaged goods space were identified:

  • Competitive Landscape: More educated consumers are demanding higher nutrition and more natural food products, along with increased convenience. Smaller companies, as well as private label (store brands), have been able to innovate much faster to meet these demands.
  • Industry Response: Legacy competitors have sought to reposition products with innovations in health & wellness and packaging, while also looking to acquire smaller, faster-growing companies.
  • Cost Management: Packaged good manufacturers are evaluating every step of the supply chain to identify waste with a goal of investing savings into growth initiatives.
  • Marketing Innovation: There are innovations in packaged goods marketing including tying products to a social cause (e.g., environmental sustainability or public health). In addition, companies are shifting spending to digital channels with many now allocating more than half of their marketing budget to e-commerce.
  • FAM Perspective: Trends aside, people want good tasting food. Our holdings in the space include a spice manufacturer that is innovating in sustainable production practices, supply chain transparency, and recyclable packaging. Another position is in a snack food provider that has deployed an asset-light approach to free up capital for innovation.

4Q18 earnings for both companies reflected the success of these innovation efforts, which should support attainment of our longer-term performance objectives for growth in market share and/or same-store  sales.

Please see Fenimore disclosure.

Seeking Quality at Bargain Prices

As someone once said, “The stock market is the only store in America where, when everything goes on sale, people run out the door!” However, the FAM Funds team gets excited and runs into the store seeking to invest in high-quality companies at bargain prices.

We do this with confidence because history demonstrates that stock markets tend to be fairly rational over the long term with prices typically correlating to the true economic value of the enterprises.

Discover what stocks our fund managers purchased in 2018 as well as their thoughts for 2019.
FAM Funds 2018 Annual Letters

Please see Fenimore disclosure.

Headwinds, Fundamental Analysis, & Opportunities

We are studying the economic and political concerns of the day. So far, our conclusion is that while these issues are quite real – we see many companies reporting slower growth and thinner profit margins – it remains unclear if they are severe enough to trigger a recession as some may fear.

Meanwhile, there are reasons to be optimistic. Many of the problems facing us will likely be resolved. For instance:

  • No matter your political leanings, we can all probably agree that politicians around the world tend to focus on self-preservation – while posturing is sure to be involved, we expect resolutions to both the U.S./China trade conflict and government shutdown
  • The Federal Reserve may decide that current conditions no longer warrant further interest rate increases

At the company level, challenges are usually met and overcome through a combination of ingenuity, hard work, and adaptation. With our holdings, this includes:

  • Finding suppliers outside of China to avoid tariffs, cutting costs, and raising prices to offset higher costs to the extent possible
  • Continuing efforts such as growing through product additions, entering new geographies, and acquiring smaller competitors

The economic and political backdrop in which we invest is always shifting. As a result, Fenimore tries to take advantage of opportunities when people sell due to fear and invest in enterprises that we estimate can do well, and grow, in a wide variety of scenarios.

Please see Fenimore disclosure.

Short-Termism: When Volatility Leads to Performance-Chasing

By Drew P. Wilson, CFA
This is the final in a series of posts about short-termism from FAM Value Fund Co-Manager Drew Wilson.

Human nature leads investors to strive for maximum returns and our industry may further condition them to always seek more, often in comparison to others. Investors feel compelled to chase performance – to sell funds (fire managers) that are underperforming and buy those funds (hire managers) that are outperforming. After all, how can one be maximizing returns if someone else is doing better? For financial advisors the temptation to chase performance may be amplified when a client asks the seemingly fair question, “Why are we keeping this underperforming fund?”

 

In a July 2014 Vanguard research study titled “Quantifying the Impact of Chasing Fund Performance,” the mutual fund firm found that performance-chasing strategies often diminish returns. The study used actively-managed, U.S. equity mutual funds available in Morningstar’s database that had been in existence for at least three of the 10 years ending 12/31/2013 (3,568 funds). With respect to this universe of funds, Vanguard took Morningstar’s nine style categories based on blend, growth, and value subsets of large-, mid-, and small-cap funds, and looked at hypothetical results for each based on buy-and-hold and performance-chasing approaches.

 

The buy-and-hold strategy was simple: invest in any fund, sell only if the fund was discontinued, and replace a discontinued fund with one of the median-performing equity funds within the style box.

 

The performance-chasing strategy invested in any fund that had above median 3-year returns for the period 2004 to 2013. Funds that achieved below median returns for a rolling 3-year period were sold and replaced with a fund that achieved an average annual return within the top 20 performing funds over the prior 3-year period. The results, detailed in the chart below, were conclusive: a performance-chasing approach may, in practice, be a hindrance to building wealth. *

* Source: Vanguard, “Quantifying the Impact of Chasing Fund Performance.” July 2014

We know the symptoms, but what’s the cure for short-termism? How should investors steel themselves against behavioral and external factors that may lead them to attempt to time the market or chase performance?

As advisors well know, the key is to have a comprehensive, understandable, long-term investment plan that can serve as a foundation. It is hard to stay the course if you do not know the course. In my view, performance against that plan should be the primary yardstick – not what others’ returns are or whether all your money managers are number one across multiple time periods.

When investors adopt long-term perspectives, the businesses in which they invest may very well do the same over time with their internal investments. I believe this prescription could be healthy for our economy and, by association, for investors’ long-term returns.

Please see Fenimore disclosure.

QCDs: A Charitably-Minded, Tax-Efficient Strategy

By Kevin T. Smith, CFP®, CTFA, CDFA™

In the Financial Services field we love to use acronyms. RMD (Required Minimum Distribution), YTM (Yield to Maturity), and AGI (Adjusted Gross Income) are common ones that you may have heard. However, if you are older than age 70 ½, have a Traditional IRA, and make charitable gifts annually, a QCD (Qualified Charitable Distribution) is a good acronym to know.


QCDs – A Brief Background
Individuals with monies in a Traditional IRA, who are older than 70 ½, draw their Required Minimum Distribution each year. These distributions are treated as taxable income and included in your AGI. However, since 2006, individuals have had the ability to direct these required distributions (up to $100,000) to a qualified charity of their choice and exclude the amount from their taxable income each year. This strategy is referred to as a Qualified Charitable Distribution.

However, even though you are making a charitable gift, you may not include this amount in your itemized deductions. In other words, you cannot “double dip.”

Why the Popularity Now?
With Congress passing the Tax Cuts and Jobs Act in late 2017, it doubled the standard deduction for individuals and joint filers ($12,000 in 2018 for individuals and $24,000 for married filing jointly). This significantly reduces the number of individuals who will be itemizing their deductions. For those taxpayers who were itemizing their charitable gifts and are now taking the standard deduction, the tax benefit of the charitable gift is lost.

This has created more popularity for the QCD from IRAs and may provide the following benefits:

  1. Satisfy some, or all, of your Required Minimum Distribution
  2. Reduce your taxable income which can potentially:
    • Reduce the amount of tax on your Social Security benefits
    • Reduce the costs of Medicare Part B and Part D premiums
    • Help you avoid exposure to the 3.8% net investment income tax
    • Allow you to qualify for certain tax credits that have income caps

Please note these additional QCD strategy items:

  1. The charity must be a qualified charity per IRS standards (it cannot be a private foundation or donor advised fund)
  2. The distribution must be made directly from your IRA trustee to the charity (check payable to the charity)
  3. The QCD can be accomplished with Inherited IRAs where the beneficiary receiving the distribution is older than 70 ½

If you have already satisfied your RMD for 2018, you can look to the 2019 tax year and beyond as Congress has made the ability to do a QCD permanent. If you have questions on whether the QCD from your IRA is a strategy that may benefit you, we recommend that you speak with your tax professional.

Please see Fenimore disclosure.

Short-Termism – Investors’ Returns

By Drew P. Wilson, CFA

This is the third in a series of posts about short-termism from FAM Value Fund Co-Manager Drew Wilson.

There are any number of reasons investors may find it difficult to achieve their financial goals. In some cases, unexpected and uncontrollable events can wreak havoc on a financial plan. But it is often an investor’s own actions that lead to the failure of meeting their objectives. There is a branch of science called Behavioral Finance dedicated to exploring how an individual’s propensities and predilections can short circuit rational investment decisions.

Unfortunately, in my opinion, there is a powerful gravitational pull that has fostered a short-term mindset with many investors. This force comes from academicians, practitioners, pundits, and the financial press who promote – wittingly or unwittingly – return-diminishing behaviors such as market-timing and performance-chasing.

How well does a short-term investment approach work? In my next post I’ll highlight a compelling research study that compares performance-chasing versus buy-and-hold behaviors. At FAM, we have a long-term approach; however, despite consistent results for buy-and-hold strategies, this research study exposes a challenge the investment industry faces. Stay tuned.

Please see Fenimore disclosure.

Short-Termism – Hurts the Economy

By Drew P. Wilson, CFA
Investment Research Analyst

There are many who believe that short-termism hinders the U.S. economy. On June 6, 2018, corporate titans Jamie Dimon (CEO of JPMorgan Chase & Co.) and Warren Buffett (famed investor and CEO of Berskshire Hathaway), wrote an op-ed in The Wall Street Journal highlighting the problem of short-termism:

“…Companies frequently hold back on technology spending, hiring, and research and development to meet quarterly earnings forecasts that may be affected by factors outside the company’s control, such as commodity-price fluctuations, stock-market volatility and even the weather.”

“…The pressure to meet short-term earnings estimates has contributed to the decline in the number of public companies in America over the past two decades. Short-term-oriented capital markets have discouraged companies with a longer-term view from going public at all, depriving the economy of innovation and opportunity…”[1]

Additionally, a McKinsey Global Institute study that focused on 2001 through 2014 shows that the economic costs can be material. Their research gleaned that firms with a long-term focus had materially higher revenues, earnings, profits, and market capitalizations at the end of this time compared to those who had a short-term view.[2]

Next time, I’ll discuss how short-termism can hamstring many investors’ returns.

[1] Source: The Wall Street Journal’s Opinion, By Jamie Dimon and Warren E. Buffett, June 6, 2018

[2] Source: McKinsey Global Institute, “Measuring the Economic Impact of Short-Termism,” February 2017

Please see Fenimore disclosure.