Changes To Portfolios

This has created an opportunity for rebalancing that we are taking advantage of during the week of March 16, 2020. Below is a quick summary of pending changes. Following the summary is our rationale for implementing these changes to the portfolios. PLEASE NOTE – This is the same fundamental analysis we applied during the Financial Crisis to help protect against loss of value and maneuver to safety and eventual gains.

Summary of Our Shift into U.S. Stocks

• We are slightly increasing our position in U.S. stocks and selling the positions in arbitrage and event-driven strategies (ADANX and ARBFX).
• This is an incremental adjustment reflecting the more attractive return potential for U.S. stocks following the recent selloff.
• We believe this shift improves the long-term return potential of the portfolios without meaningfully impacting the portfolios’ risk profiles.

This past week, global stock markets continued to fall following a shock to oil prices (due to Saudi Arabia’s sudden decision to drastically cut prices). This comes after a continued spread of the Coronavirus, with communities around the world instituting social distancing measures and quarantines.

The Gardner Group recognizes that all this is highly unnerving and even frightening for clients. We further acknowledge that the full economic and medical effects of this disease are unknown. However, part of our investment discipline is to use our long-term orientation to our clients’ advantage by looking out beyond the near-term fear to rationally assess fundamentals and valuations. When there is a highly compelling case, we are prepared to act by adding back to risk assets like stocks when they are cheap and unloved. This is one of the hardest actions to take as an investor—to “be greedy when others are fearful.” But by acting with informed conviction, we can add long-term value to our clients’ portfolios.

As our longer-term clients know, we have been conservatively positioned with lower allocations to U.S. stocks and higher allocations to fixed-income and diversifying alternative strategies. In recent weeks we’ve seen the benefits of these latter holdings, as they’ve held up compared to stock markets, or even appreciated.

Following the more than 20% selloff in U.S. stock markets, however, our base-case five-year return estimates for U.S. stocks have improved to a point where we believe it’s prudent to add a modest amount back to our U.S. equity allocation in our balanced portfolios, which will be spread across existing larger-cap U.S. equity investments already owned in the portfolios. The position will be funded by closing out our tactical allocations in the arbitrage and event-driven strategies.

After these rebalances, we remain moderately underweight to U.S. stocks (roughly 8% across our Growth With Income portfolios). As valuation-based investors, The Gardner Group view large price declines as opportunities to add back to stocks at attractive prices. If the selloff continues—and clearly it could—while it may be uncomfortable, we will be assessing whether it makes sense to further increase our portfolio allocations to stocks (by another similar increment), which we know can pay off handsomely for investors who stick to their discipline through volatile market environments.

Lastly, The Gardner Family Spring Break 2020 has been cancelled to address our clients’ situation. This has also reminded us of the tens of thousands of dollars we invest every year in our technology platform and Disaster Recovery Plan. This allows us to maintain multiple systems at our corporate office and virtual workplaces. Should the Coronavirus spread, as many health experts expect, we may elect to work from home and temporarily eliminate in-person meetings. Trading, distributions, and answering your questions will be available throughout these tough times for our country.