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VIEWPOINT
SUMMER 2016
T
he toasty temperatures and lengthy days of
June, July and August have long been called
the Dog Days of Summer. While the summer
months usually mark a slow period for Wall Street and
the financial markets, the business newswires have
been anything but quiet.
Between political concerns at home and volatility
abroad, the market continues to keep investors on
their toes. Nowhere was this more apparent than in
Britain’s surprise decision to part ways with the European Union, resulting not only in the disappearance
of trillions of dollars from global capital markets, but
also, and more dangerously, the appearance of nearly
as many breathless “Brexit” headlines.
In the late days of this past June, even the most optimistic observer could be forgiven for believing that
the sky was falling. And while the market went on to
regain the ground it gave up—and then some—the
question now looms: with instability potentially lurking in the next news cycle, what should you do?
In a word: you should go on vacation and enjoy the
summer months, even if the market refuses to follow
suit. In times like these, filled to the brim with shortterm uncertainty, we believe that our firm’s careful,
disciplined, and emphatically long-term investment
outlook is more important than ever—and that, while
all investors look at current events, great investors
strive to look through them. So whether this letter
finds you at your desk or your dock, rest assured: our
team here at Tufton Capital remains hard at work on
your behalf…Dog Days of Summer be darned!
We begin this edition of Tufton Viewpoint with our
firm’s outlook for the economy and financial markets
beginning on page two. As you’ll read in our investment analyses throughout Viewpoint, we continue to be
cautious but still positive on the equity markets even
Investing In Your Future
as we approach new highs for the Dow Jones and
S&P 500 indexes. And while we anticipate a slightly
positive second half of 2016 for equities, we anticipate
another period of volatility in getting there.
Every four years, politics and finance converge as
Americans elect a president and investors attempt to
forecast how the outcome will affect their portfolios.
Our article on page four, “Trump vs. Clinton: Who is
Better for the Markets”, concludes that the uncertainty
surrounding the outcome may have a larger short-term
impact on the financial markets than who ultimately
wins.
We hope that you find these and the other articles
throughout Tufton Viewpoint interesting and thoughtprovoking and encourage you to reach out to our financial team to discuss any of these topics in more detail.
All of us at Tufton Capital wish you and your families
an enjoyable rest of the summer, and we sincerely
thank you for your continued support! n
Chad Meyer, CFA
President
Inside This Issue
The Second Quarter of 2016: Ending Where We
Started
Page 2
Trump vs. Clinton: Who is Better for the Markets?
Page 4
Company Spotlight: Nordstrom, Inc. (Ticker: JWN)
Page 5
The Role of Equities in a Portfolio
Page 6
Charitable Giving Vehicles
Page 7
410-400-8500 n www.TuftonCapital.com
VIEWPOINT
SUMMER 2016
The Second Quarter of 2016: Ending Where We Started
F
ireworks came early
this year as the United
Kingdom voted in favor
of leaving the European
Union. The outcome of
the nationwide referendum
was not what the markets
expected, leading to a wild
ride in the stock market and
ERIC SCHOPF
tremendous price volatility,
PORTFOLIO MANAGER/PARTNER both down and up. The
outcome of the June 23 vote
was not apparent until the following day. The stock
market reaction was swift, with the S&P 500 declining
3.6%. After taking the weekend to digest the news,
investors extended their selling mood the following
Monday, resulting in an additional drop of 1.8%.
When the dust settled, the S&P 500 was sitting at
levels first reached in the fall of 2014.
closed June exactly where we started and are again
within 1.5% of the record high set last July. The 10year U.S. Treasury yield, however, has remained low
with a month-end close of 1.47%.
The stock market posted respectable results for the
second quarter, with the S&P 500 delivering a total
return of 2.5%. Year to date, the total return is 3.8%.
The Federal Reserve continues their accommodative
stance thanks to an economy that just can’t seem to
find the next gear. A weak Bureau of Labor Statistics
payrolls report for the month of May combined with
steep downward revisions to March and April figures
kept the Fed on their back foot and appears to have
eliminated any possibility of an interest rate hike in the
near term. Interest rates quickly reflected the Fed’s
new dovish outlook. As a reminder, the 10-year U.S.
Treasury started the year at 2.3%.
Volatility in reaction to the future of the European
Union will likely persist. The United Kingdom’s exit
negotiations with the EU will stretch out a number
of years and there is no telling the composition of
the final agreement. Trading relationships, potential
tariffs, and investment flows are all now in question.
Consumer and business confidence will suffer until
there is some clarity on these important issues. It
is also difficult to project the future standing of the
remaining EU members. Immigration curbs in
Fixed income markets reacted in similar fashion, with
the safe-haven 10-year U.S. Treasury note dropping
in yield from 1.74% prior to the vote to 1.43% the
following Monday. Later in the week, the realization
that the immediate economic impact of the U.K.’s
departure would not be calamitous had investors
rushing back into the market. The final three trading
days of the month provided strong gains and led to a
recovery of nearly all initial Brexit-related losses. We
(Continued on page 3.)
General U.S. Government Debt as a % of GDP
110%
95%
80%
65%
50%
35%
20%
Source: FactSet
1965
2. Investing In Your Future
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
410-400-8500 n www.TuftonCapital.com
VIEWPOINT
SUMMER 2016
(Ending Where We Started... continued from page 2.)
England will place additional pressures on member
countries to accommodate refugees. In addition,
should the U.K. somehow manage to flourish under
their EU independence, more members may defect.
the latest obstacles. Slow growth in China and Japan,
uneven growth throughout the Eurozone, and sickly
economies in South America have central bankers
working overtime implementing monetary policy.
The European Central Bank expanded their asset
purchase plan in June to include corporate bonds.
The massive bond purchases have pushed interest
rates into negative territory throughout Europe.
That’s right – bond holders, instead of receiving
interest payments, are actually paying creditors for
the privilege of holding their debt. The Fed is in no
position to increase interest rates in the current global
environment. The beneficiary of current monetary
policy has been shareholders. Equities become more
attractive as interest rates fall. The most disconcerting
aspect of the whole exercise is the fact that economic
growth has been so anemic despite the extraordinary
monetary efforts.
The United Kingdom’s exit will not greatly impact the
global economy, as the sovereign state represents less
than 4% of the global gross domestic product. The
EU, on the other hand, collectively represents 23%
of global gross domestic product. The general health
of the EU is a bigger concern than the decision by
the U.K. to exit. This we do know: the U.K.’s vote to
leave the EU will result in a lower standard of living
vis-a-vis a lower relative currency valuation. The
Pound/Euro conversion shot from .76 to .83. Prior to
the vote it took .76 Pounds to buy 1 Euro. The same
Euro now requires .83 pounds. That trip through the
Chunnel into France will now be 9% more expensive.
The same is true for conversion to the U.S. Dollar. .75
Pounds are now required for 1 U.S. Dollar, up from
.67 Pounds. A trip to New York is now 12% more
expensive.
It appears that there may be limits to the effectiveness
of monetary policy. The Federal Reserve has noted
on numerous occasions that fiscal policy plays an
equally important role in influencing the economy.
The government’s tax and spend policies, however,
have been capped due to government debt reaching its
permissible levels relative to the size of our economy.
It was just five years ago when sequestration reentered
our financial lexicon. The automatic budget cuts
were a way of reducing the federal budget without
Back home, the Federal Reserve continues to greatly
influence the fixed income and equity markets. The
steady drumbeat of bad news from around the world
has the Fed looking beyond the U.S. economy when
making interest rate decisions. Brexit and its potential
to disrupt economic activity in the short term are just
(Continued on page 8.)
Global Yield Curves
3.00%
2.25%
1.50%
0.75%
0%
-0.75%
-1.50% 1M
3M
Japan
6M
1Y
Germany
2Y
3Y
U.S.
5Y
7Y
Britain
10Y
30Y
France
Source: FactSet
3. Investing In Your Future
410-400-8500 n www.TuftonCapital.com
VIEWPOINT
SUMMER 2016
Trump vs. Clinton: Who is Better for the Markets?
T
JOHN KERNAN
here are many hotly
debated topics
concerning the
presidential candidates.
One that people come to
us about time and again is,
“Who would be better for the
markets?”
RESEARCH ANALYST
Markets hate uncertainty.
Even uncertainty about two outcomes that are
mostly neutral can push markets lower. While
Trump supporters may believe that his pro-defense,
conservative stance might provide more stability,
Clinton supporters fire back with the fact that Trump
is an unknown quantity and brings uncertainty.
Clinton would be a known quantity, for good or for
ill, and is often viewed as an extension of the current
administration.
It is tempting to look to historical averages to get a
better idea of what result would have the best effect on
the market. Indeed, we found plenty of articles online
that do just that. However, some very basic statistical
analysis- just looking at the numbers- shows us we
can’t rely on those averages. There are simply far too
few elections for any average to make sense.
To analyze the effects on the market, we need to look
at elections where no incumbent was running, of which
there have been only eight in the last century. One of
those, in 1928, had a 49% gain- which had more to
do with speculative trading and the roaring 20’s than
the election of Herbert Hoover. Similarly, it was the
housing crash and financial crisis, not the election of
Barack Obama, that led to a 31% loss in 2008. So, we
look elsewhere.
Trump’s plan for a wall and increased immigration
policing can be partially offset by decreased military
spending. His plans are to support larger, more
powerful armed forces with less money. However,
4. Investing in Your Future his proposal to institute big tax cuts that are revenue
neutral are under intense scrutiny (and sometimes
ridiculed) by professionals. The Committee for a
Responsible Federal Budget (CRFB) estimates
Trump’s plan will reduce federal revenues by $10.5
trillion in the first decade, and increase debt by $11.5
trillion. Trump counters that his plan would generate
enough growth that it would more than pay for all of
the spending. The CRFB disagrees.
Clinton also looks to increase spending, but would
increase debt by $250 billion, close to where it would
be without any changes at all to the current plan.
The difference is a tax increase on high earners
and businesses. Without the promises of large tax
reductions, her budget plans look much easier to
realize.
There simply is not enough to go on here to justify a
change in investment policy. Whether Clinton means
lower growth, or Trump means higher borrowing
costs, or vice versa, anything that is knowable is
already priced in to the market. While some investors
might believe they have a special understanding of the
international debt markets, for example, and can earn a
premium over the next several months, that is not how
we believe most people should be investing.
We find it very unlikely that either candidate will by
themselves cause the financial markets to change their
patterns of risk and return. We continue to watch
individual stocks for their exposure to tax plans that
may affect their business—aerospace companies like
Lockheed Martin, for example. But no election result
would likely cause us to reallocate money out of, or
into, different asset classes. Furthermore, because
indexes like the S&P 500 are market capitalization
weighted, as the price of a stock increases, the stock
receives a greater weighting in the index. This
conflicts with what we focus on as value investors –
buying securities as they fall in price. n
410-400-8500 n www.TuftonCapital.com
VIEWPOINT
SUMMER 2016
Company Spotlight: Nordstrom, Inc. (Ticker: JWN)
I
t is a well-known fact
that Nordstrom (Ticker:
JWN) is the retailer with
the greatest return policy in
the industry: if you are not
happy with your purchase,
return it for a no-questionsasked refund. This laser
SCOTT MURPHY
PORTFOLIO MANAGER/PARTNER focus on the customer experience is what separates Nordstrom from its competitors and inspires the customer
loyalty that is the envy of the retailing world. With
its headquarters in Seattle, Washington, it is currently
operating 315 stores in the U.S. and Canada. These
include 121 full-line stores and 194 Nordstrom Racks
located in 38 states with good prospects for store
growth in underserved regions of the country.
The stock price has fallen 20% year to date due to a
significant reduction in its sales forecast and expected
earnings per share for 2016. Nordstrom certainly isn’t
alone in this consumer-led stock selloff, and of those
in its industry that have sold off, Nordstrom retains
a leading position. Management is pulling back store
openings and will cut its corporate staff by 10% in order to better position the company for rosier times. As
value-oriented investors, we will continue to monitor
this investment and stay patient. We believe our original thesis is still intact, and more time is needed for the
underlying business of this great company to recover.
We still feel Nordstrom is a solid company and will
trade higher as the industry conditions improve. The
company has a strong balance sheet, is selling at fiveyear lows using Price/Earnings and Price/Cash Flow
metrics and has a generous 4% dividend yield. Sometimes it takes patience for a great company to work out
to be a great investment. Brick and mortar retailers
are not “in fashion” right now on Wall Street, but we
believe that fact means a good value for our clients. n
Nordstrom, Inc. (Ticker: JWN) Stock Chart
$85
$75
$65
$55
$45
$35
$38.05
(as of 6/30)
6/30/13
9/30/13 12/31/13 3/30/14
6/30/14
9/30/14 12/31/14 3/30/15
6/30/15
9/30/15
12/31/15
3/30/16
6/30/16
Source: FactSet
5. Investing In Your Future 410-400-8500 n www.TuftonCapital.com
VIEWPOINT
SUMMER 2016
The Role of Equities in a Portfolio
A
t Tufton Capital, we
allocate portfolios
based on our
clients’ financial objectives,
risk tolerance and time
horizon, and we factor in
our expectations for longterm investment returns.
RICK RUBIN, CFA
For most clients, we manage
PORTFOLIO MANAGER
balanced accounts that consist
of diversified portfolios of
stocks, bonds and cash. Occasionally, a client asks us
whether all their investments should be fully invested
in stocks, because stocks have higher returns over
time. Our answer is usually … NO! A key reason to
diversify your assets is related to a concept known as
“correlation.”
How do we apply this concept to managing money?
Correlation quantifies the strength of the association
between two variables. Correlation is expressed as
a value between -1 and 1, with 1 indicating perfect
positive correlation and -1 indicating perfect negative
correlation. Our ultimate goal is to identify a portfolio
of securities with high return expectations and with
high negative correlation to each other (-1 or slightly
under). Said differently, we want to own securities
that perform well in the long run and whose price
changes do not track each other closely.
For example, we invest in stocks across a wide range
of economic industries such as technology companies,
utilities, financials, etc. We like the long-term value
characteristics of many technology companies
(Microsoft, Oracle, Qualcomm), and yet we continue
to have sizable investments in slower-growth utility
and telecommunications sectors. In part, we can justify
these seemingly differing investment positions because
of the “correlation” benefits. That is, the technology
sector’s stock prices behave quite differently than
stocks in the other two sectors in the short term.
“defensive” investments. Typically, bonds we purchase
tend to perform well when the stock market is weak.
In particular, U.S. Treasury bonds are viewed as a safe
haven by investors, and these bond prices rise sharply
during times of stock market turmoil (think 20082009 financial crisis). Thus, we invest a portion of our
clients’ money in U.S. Treasuries because these bonds
have high negative correlation to the stock market.
We use stocks as the primary vehicle of producing
capital appreciation, income and dividend growth for
clients. Stocks prices are volatile, and they can add
stress to investors’ lives as they watch their investments
fluctuate. As your portfolio manager, we work to
lower your portfolios’ volatility by using a balanced
allocation and purchasing value-oriented stocks that
offer a margin of safety. It’s important to remember
that even though stocks can be volatile in the short
term, historically, stock returns far exceed the returns
of bonds and cash. Also, stocks protect a portfolio’s
purchasing power against the negative impacts of
inflation.
We believe above-average dividend yields of highquality companies provide huge benefits to a portfolio.
One of the biggest advantages of reinvesting dividends
is a compounding wealth effect. Albert Einstein
realized this concept when he said “compound interest
is the eighth wonder of the world. He who understands
it, earns it … He who doesn’t … pays it.” Although
slowly compounding dividends may not be as exciting
as your friend’s hot stock tip, this strategy helps build
and preserve your wealth over time. We believe in
owning shares of well established companies that
consistently pay and grow their dividends! n
As compared to stocks, we view bonds and cash as
6. Investing In Your Future 410-400-8500 n www.TuftonCapital.com
VIEWPOINT
SUMMER 2016
Charitable Giving Vehicles
Learn how to use charitable giving tools to grow a
donation through investment, possibly allowing you
to donate more than by gifting directly.
W
hen making a sizable donation as a direct
gift, you know exactly how much you can
afford to give and how it will affect your
overall finances, but you may wish you could do more.
If so, charitable trusts and annuities provide ways
for you to make a major charitable donation while
simultaneously receiving reimbursements that can help
provide financial security.
Charitable Gift Annuities (CGAs)
With a normal annuity, donors fund the annuity
with an initial payment, this payment receives gains
from investment and then the donor is paid a fixed
income throughout the year using this money. With
a CGA, the charity, rather than an investment firm,
serves as the management company, and any profits
the investment earns go to the charity rather than the
donor.
Essentially, CGAs allow a charity to borrow the
money put into the annuity for investment growth
before returning the majority of it back to the holder
through annuity payments. CGAs usually have lower
return rates than other annuities, but can compensate
for these low returns through the tax benefits that they
offer. The charitable donation deduction amount is
equal to the present value of the charity’s “remainder
interest” of the donation, or the excess of the fair
market value of the donation over the present value
of the annuity. This allows the donor to receive an
income tax deduction as well as a portion of the
donation back through annuity payments.
As with any investment, CGAs do have some
downsides. They can tie up a large portion of your
retirement funds and are costly to terminate outside
of their set term. Before you enter into a CGA, you
should be completely sure that you will not need the
funds you are contributing in the immediate future.
CGAs can also be risky because they will terminate if
the charity you donate to goes bankrupt. In order to
avoid this, it’s crucial to research the charity you will
donate to and make sure that it is financially stable.
Charitable Remainder Trusts (CRTs)
CRTs provide a different way to grow charitable
7. Investing In Your Future
donations through investment. The donor makes an
initial donation to the trust, which is then invested and
makes annual distributions to a beneficiary (usually the
grantor), giving the remainder to the chosen charity.
CRTs offer more security than CGAs because they
don’t make the donation until the end of their term, so
donors can give to smaller and potentially less stable
charities without putting their income at risk.
CRTs offer many tax benefits, including an income tax
deduction and the fact that the trust itself is not taxed
for income. However, the beneficiary is taxed on any
income distributed to him or her.
Many people nearing or at retirement age choose to
donate through a CRT because it can provide them
with an annuity for a number of years. For those
donors who have estate planning concerns, CRTs
may be especially attractive, as they offer a full estate
tax deduction if created at the grantor’s death. When
considering CRTs, grantors should keep in mind
that they are required to distribute between 5 and 50
percent annually to the beneficiary of the trust.
Charitable Lead Trusts (CLTs)
CLTs are similar to CRTs, except that they make
their annual distributions to the charity and hold
the remainder for the grantor or beneficiary instead
of the other way around. If the grantor receives the
remainder, it is referred to as a “grantor trust,” while if
a beneficiary or third party receives the remainder, it is
referred to as a “non-grantor trust.”
Grantor trusts offer an income tax deduction, while
non-grantor trusts provide an estate tax deduction.
Additionally, with a grantor trust, the grantor is taxed
for income not given to the charity. With a non-grantor
trust, the trust itself is taxed for this income. Grantor
trusts are usually used if an individual wants to donate
during his or her lifetime, while non-grantor trusts are
used to provide a gift to an individual’s family after his
or her death while still providing money to charity.
Annuities versus Unitrusts
CRTs and CLTs both come in two different forms,
annuity and unitrust. The only difference between
the two is how annual payments are calculated. With
CRATs (charitable remainder annuity trusts) and
CLATs (charitable lead annuity trusts), the beneficiary
receives annual payments of fixed dollar amounts.
410-400-8500 n www.TuftonCapital.com
VIEWPOINT
SUMMER 2016
(Ending Where We Started... continued from page 3.)
being directly tied to the legislature. Unless the
new administration is willing to alter fiscal policy to
generate more growth, we may continue to be stuck in
our current low interest rate environment.
The investment environment continues to be
challenging. Corporate profit growth has slowed, and
interest rates remain low. The upcoming presidential
election promises to keep investors on edge.
Regardless of the environment, we continue working
hard to find attractive investments worthy of your
portfolio while maintaining suitable balance to reduce
risk. n
(Vehicles... continued from page 7.)
With CRUTs (charitable remainder unitrusts) and
CLUTs (charitable lead unitrusts), the beneficiary
receives annual payments at a fixed percentage of the
trust’s value for that year. CRATs and CLATs offer
more consistency, while CRUTs and CLATs give the
beneficiary the opportunity to potentially receive larger
(or smaller) payments depending on the trust’s value
that year.
Choosing a Giving Method
Charitable trusts and annuities can allow you to
make a larger contribution to charity than a simple
gift, because they allow your money to grow over the
trust’s term. However, these options can be expensive
and difficult to manage. They also create an extended
timeline, which delays the full benefit of your donation
from reaching the charity until a number of years have
passed. Yet, for donors that would otherwise have to
sacrifice their charitable goals to protect their own
finances, trusts and annuities may be a more appealing
option.
Before deciding to integrate these types of giving
vehicles into your charitable strategy, interested donors
should seek financial and legal advice to avoid any
potential complications. n
This article was written by Advicent Solutions, an entity unrelated to
Tufton Capital Management. The information contained in this article is
not intended for the purposes of avoiding any tax penalties. Tufton Capital
Management does not provide tax or legal advice. You are encouraged by your
tax advisor or attorney regarding any specific tax issues. Copyright 2013
Advicent Solutions. All rights reserved.
Tufton Capital Management Team
Top row: Ted Hart, Gina Jackson, Rick Rubin, Eric Schopf, Chad Meyer, Scott Murphy,
LaShawn Jenkins, John Kernan
Bottom row: Neill Peck, Randy McMenamin, Barbara Rishel, Kim England
303 International Circle, Suite 430
Hunt Valley, Maryland 21030
8. Investing In Your Future
Viewpoint is published for our clients and professional associates. Copies will be provided to
educators, accountants, and other professionals on request. The views expressed are of those by
the authors of Tufton Capital Management and are subject to change. Any action based on the
information in this publication should be taken only after a detailed review of the specific situation.
Copyright 2016 Tufton Capital Management, Inc. All rights reserved.
410-400-8500 n www.TuftonCapital.com