2015 November Newsletter

Paul Sutherland, CFP®
By: Paul Sutherland, CFP®

Radical Responsibility = Good for the USA

A few weeks ago, my brother Bobby (founder/chief cherry guy at Cherry Republic) and I were chasing our boys through the woods near Glen Arbor, Michigan, where we grew up. Bobby and his family live near his store in Glen Arbor, not too far from Mom and our childhood home. As we were playing “hide and seek,” Bobby stopped by an area where the trees had been blown down by the “storm of the century” this past August. He said, “You know, Paul, I’ve helped raise money and have worked with the park service and county officials to help clean up after this devastation.” He thoughtfully looked around and said, “We grew up here … and planting trees seems like the right thing to do. We have a responsibility.” 

I thought about “responsibility” a lot afterward, and I am fascinated by what motivates people to think and act beyond the “here and now.” What motivates someone to spend time in meetings to replant trees rather than watching Michigan vs. Purdue? Or more simply to invest resources today for returns that may not accrue to their families, communities and fellow earthlings until many years down the road.

Statistics show more and more that people are investing instead of spending. We are learning and gaining wisdom instead of merely being entertained (see page 2). In his book 7 Habits of Highly Effective People, Stephen R. Covey refers to building one’s own skills and staying current as “sharpening your saw.” College enrollment is robust despite the cost, continuing education is on the rise, and it seems we’re getting more responsible about our own and the world’s futures. I wonder if it’s due to DNA/nature or nurturing that motivates us to create a better future for ourselves, our families and others. Bobby is 54 years old, so planting trees that won’t mature for 50 years certainly isn’t about making things better for himself. Clients who wish to leave a legacy for their children, grandchildren and others after they are gone certainly are not engaging in a selfish pursuit. I wonder if responsibility is part habit … or perhaps perspective? The current perspective seems to be that we must take responsibility for our own well-being, but not in a selfish way that allows others to fall through the cracks. Rather, more like what I call being a “responsible citizen” – a person who feels responsible for himself/herself, family, friends, social networks, future generations and those less fortunate. This is a positive trend, and it is good for the stability of nations. Lately, when I hear political candidates speak, I hear a call toward responsibility. Forward-thinking, educated citizens are good for the nation, our future generations, our world and the global economy.


Volkswagen has defrauded the world. Its employees lied, covered up and created a culture where misinformation was acceptable. Bringing this to light 10 years ago would have been much better than today as this fraud might destroy jobs, villages and a brand. Volkswagen employees’ behaviors were not what many would call “responsible.” Companies are not “people,” they are made up of people who have a moral code embedded in their DNA and who know right from wrong. Lying is wrong. Just because we see constant lying – in presidential debates, on talk radio and about one’s supposed 15-minute private meeting with the Pope – is not anchoring on a responsibility to truth. It is not helpful for society or the long-term sustainability of a society, business or family. The World Health Organization (WHO) recently brought to light an ingredient in the weed killer RoundUp (produced by the company Monsanto) that might cause cancer. Naturally, we do not yet know the truth, but I hope for the sake of our kids’ health that Monsanto did not hide evidence that RoundUp is carcinogenic.

At FIM Group, we try to get to the truth by assessing companies and looking for integrity and virtue in their employees and culture. We believe values matter (which is why we do not invest in Monsanto, Volkswagen or tobacco companies). Making value judgments is not easy because there are always shades of gray. We can rationalize almost any behavior, but it’s all about gathering perspective. I heat my home with natural gas, though it still pollutes. But it is cleaner than coal and fuel oil and not as smelly as my neighbor who heats with wood. I suspect many of my brother’s neighbors will be heating with wood this winter. They will make good use of the thousands of downed trees. But while burning the logs might not be perfect, it seems rational and proper, even responsible. But that is my perspective. Like all of us, my perspective is clouded by my life experiences, education and such, so to some, wood heat might be “fantastic,” while others might vilify anything but hydro power and wearing a wool sweater and gloves to bed on a cold Northern Michigan winter’s night.

Older and Wiser

All decisions are made with incomplete information about an uncertain future, but they must still be made responsibly with facts and the understanding to weigh the decision to likely end up successful. Lying about a product is not compromis-ing, it is irresponsible. Lying is not a corporate thing, it’s an individual thing, made by people discussing how to “frame” something in a conference room. Hope-fully, those who looked away, nodded their heads and went along as part of Volkswagen’s hoodwinking of consumers will learn a lesson that virtue and values matter. Others, learning from Volkswagen, will hopefully come to understand that honesty is the best policy. 


>span class="s1">Guns or Butter? Choices Decide Which Way We Go

As a society we can look at our current state of affairs in the U.S. and world and see nothing but problems. We can blame these problems on political parties (very popular today), or we can accept them and look at them as opportunities to learn, apply wisdom and act. The two front-running presidential candidates seem geared to act, which scares the status quo lovers and anyone who might have to give a little up. It’s good that we are embracing candidates who are about action. The older and wiser among us know that what will take place is a steady muddle-through of mistakes, miscalculations and some good ideas that take root toward what we call “progress.” Business will go on. And if we and businesses are taxed a bit more, no big deal. We will still use our cell phones and buy stuff. We will buy less stuff, but that is not the economy’s fault – we are aging, and we don’t need to outfit a new home. As always, we are migrating in ways that are causing booms and busts. Just look at Detroit, Los Angeles, Miami or Las Vegas home price gyrations to see the current trends. Our economy in some way will gain a resilience from the belt-tightening U.S. households are engaging in – and it should allow for more steady economic statistics once we get our bearings on what our priorities are … which basically is the natural tension of “guns or butter.” Today, it would be “big government defense vs. education, infrastructure, jobs and family well-being.” 

Wisdom Not Wasted 

For fun this month we have put two numbers on each of the employees’ photos on the front of this month’s newsletter. The first number represents years in the industry and the second represents years at FIM Group. I feel old thinking there will be a “40/30” on my photo. Thankfully, there’ll be everything in between, because a successful firm is built on diversity of experience, training, age and nurture/nature, a fact I am become more aware of in our Investment Committee meetings. 

Recently, a younger associate told me Facebook was “old-school” and that I should use Twitter, LinkedIn or other sites to stay connected to family and friends. I also still like to send old-fashioned handwritten postcards, notes and such. But Facebook is useful to me and our younger associates. I can tell Mom, family and friends all at once that my wife Amy is in Uganda, show the boys looking so distinguished as they go off to their first day of kindergarten and second grade in their St. Mary’s school uniforms, and see postings of the trees downed in Glen Arbor. 

A simple discussion about how we communicate turns quickly into a lively discussion for advertising companies leading to Google and Facebook about how we communicate and where advertising monies will go. I was recently told by an app creator that more money is spent on apps than on feature films, and that we spend more time on social media than watching TV (both stats have not been verified). That information is important, at least directionally, because how companies advertise, how we communicate and how we spend time all translates into how we will spend our resources, how we will make choices, etc. Companies that help us communicate and access each other through the Internet, for example, will prosper. On behalf of clients we have purchased directly Alphabet (Google), Tiso Black-star, CK Hutchison, TiVo and others through closed-end trusts in the entertainment, communication and advertising spaces. We see this as a good area of growth regardless of whether the economy is growing slow or fast. We also like healthcare, travel, energy, real estate, income securities and other areas that benefit from an aging population and slow growth. 


The guy who fell off the Empire State Building and was heard to have said as he flew past the 17th floor, “So far so good,” had his perspective. And FIM Group’s team also has a collective perspective, which is why we try to be transparent and communicate the why, what and how of what we do, so clients feel informed and knowledgeable. Right now, for example, clients with taxable accounts will notice an increase in transactions as we take advantage of tax losses and allow Uncle Sam to share in the pain of any (hopefully temporary) losses. Perspectives are going to be different. The guest pastor at church last Sunday told a story about a young brother and sister who bought ice cream, and as the boy turned around from the counter, his cone brushed against a lady’s fancy fur coat. The young sister looked at him and said, “Now see what you have done ... you got fur in your ice cream!” Perspective is everything, and as we move into Thanksgiving time, my favorite holiday time of year, we wish to say to our clients – those full of wisdom, those full
of youth and those in-between – thank you and happy holidays!

The Times They Are a Changin’

The run-up to the 2016 presidential election has been anything but boring. This summer it looked like the Washington establishment was going to serve up a battle between two political dynasties in Jeb Bush and Hillary Clinton. However, that narrative has fallen on seriously tough times. Clinton is running into a State Department email scandal problem, and the big democratic donors have sent behind-the-scene messages to Joe Biden to get in the race. Jeb Bush, who was the big-donor money leader, has had a really tough time connecting with voters, and his campaign seems to lack passion. More important, on both sides of the aisle, anti-establishment candidates have taken the lead. More specifically, why has Donald Trump pulled so far ahead? Why has Bernie Sanders, an avowed socialist, garnered 24% of the democratic vote? I am in no way endorsing any of these candidates. I merely want to examine this phenomenon and its implications for the country, the economy and, ultimately, the investment landscape. 

Donald Trump in particular fascinates me because he has said so many things that would normally end someone’s candidacy. In fact, the more the media and the GOP establishment attack Trump, the higher his approval ratings go. I know Trump would not want to hear this, but this phenomenon is not about him completely. Much of Trump’s popularity comes from the fact that he speaks his mind freely, he does not use a teleprompter and he is proposing non-politically correct solutions to some of the nation’s pressing issues. Trump to me represents a very deep distrust of the Republican National Committee and the media by the republican base. The voters are not allowing these institutions to guide the narrative. In fact, they are rejecting the narrative completely. While Trump may not be perfect for many of his supporters, they feel that what they see is what they get. His statements are not carefully crafted and polled to see if they resonate. Rather, he shoots from the hip with straight talk that seems to make sense to many people. I watched with fascination as the beltway pundits ridiculed and mocked his ideas and his background. The republican beltway community is clearly insulated from what is going on in the rest of the country, and in a sense is tone deaf to what the majority of the country is thinking.

Bernie Sanders has been a rising leader who to many, especially the young, is thought of as a reasoned, thoughtful, uncorrupted man of the people – not beholding to big business, the government bureaucracy or old people, much to the chagrin of Hillary Clinton. Clinton was clearly the anointed one by the Democratic National Committee, and most thought few would bother to run against her. Some believe Sanders is thought to be a bit too “pro-labor, anti-war, free education for all, tax the wealthy and close the tax loopholes,” even for some democrats, which some believe would make him unelectable in a general election. The democratic supporters know this, but Sanders, while not a complete outsider to the establishment, is being pushed to look like a fringe candidate and, more important, he is not Hillary Clinton. Clinton is not polling well, and she is seen by many democrats as untrustworthy and dishonest due to all her past baggage from her husband’s White House days, the Clinton Foundation and now the current State Department email server scandal. She also is viewed by many as the favorite of the financial class, big business, big government, celebrities and not in touch with the common person who worries about healthcare, debt payments, the rent and putting food on the table, not to mention the idea of sending their kids to college. She is still well-loved by many in the party, but these poll numbers have allowed Sanders and now Joe Biden to gain footholds in what otherwise up till a few months ago looked to be a slam-dunk nomination.  

Clearly such anti-establishment sentiment is happening for a reason. Many Americans feel like they are falling behind as middle-income jobs disappear due to globalization and an emerging robotics trend that is being predicted to replace 35% of all jobs by 2035. Additionally, the cost of college has inflated out of the reach of many people’s children unless they take on massive amounts of debt. There is also a sense of corporate cronyism, government corruption and the continued rise of the top 0.001%. Income inequality has not been this wide since the late 1920s right before the Great Depression and a massive change in what Americans wanted from their leadership in Washington. Whether one agrees with these statements or not does not matter, because it is what an increasing majority of Americans believe to be true. The mistrust of all our institutions has never been higher, and this is being manifested in the popularity of Donald Trump and Bernie Sanders. 

I expect massive institutional change to occur over the next 20 years. I also expect non-traditional leaders to emerge who are not tied to the old institutions and will offer fresh, dusted-off “old” ideas of how we as a nation should grapple with the issues at hand. At FIM Group, we will be monitoring this change closely and what the implications mean for client portfolios. For example, will we get a wave of populism that demands a breakup of the large corporations like the trust-busting days of Teddy Roosevelt? If so, what would that mean for our current holdings and how could we position our clients to benefit? The bottom line is that change is coming, as our current institutions are clearly viewed by the people they serve as failing. For many it will be uncomfort-able, and the establishment will fight this as all establishments fight change. However, change should also be viewed as an opportunity. We will be looking for silver linings; we will embrace this coming change and profit from it.

Year-End Tax Planning

  • Planning ahead always is a smart idea, and that’s especially true when it comes to your taxes. As 2015 draws to a close, there’s still time to make the most of strategies that can help reduce your tax bill on April 15 and allow you to reap other potential financial benefits.

    It’s always a good idea to claim all the deductions or credits for which you qualify. Maximizing your retirement contributions is one example that offers two benefits. Depending on the type of retirement plan, you may be able to deduct those contributions from your income. At the same time, of course, you also add to your retirement nest egg. For 2015, individuals are able to contribute up to $5,500 into an IRA, or $6,500 for individuals 50 and older. Employees with 401(k) or 403(b) plans are able to make elective deferrals up to $18,000 ($24,000 for employees age 50 or older). SIMPLE IRA contribution limits for 2015 have also increased to the lesser of $12,500 or earned income ($15,500 for employees 50 or older).

    Charitable gifts also can lower taxable income. And the child and dependent care credit can help reduce your costs for care regardless of your income. These are all possibilities to explore now to decrease the tax you’ll have to pay when you file your return in 2016. As of the writing of this article, there are a few credits that have not been extended to 2015, but have historically been congressionally approved very late in the year. For 2014, a taxpayer could deduct the higher of his or her state income tax or state sales tax. If the sales tax deduction is not renewed, your tax liability could increase significantly, especially if you live in a state with no income tax and you are accustomed to deducting sales taxes. 

    In addition, if the law is not changed by the end of the year, taxpayers: 

    • Can no longer use an above-the-line deduction for tuition and related expenses for college or graduate school; this deduction was helpful for those with higher incomes who cannot qualify for education credits 
    • Over age 70½ can no longer exclude from income any distributions made from individual retirement accounts to qualified charities

    If you are expecting to face capital gain taxes this year, loss harvesting can help reduce what you’ll pay. It involves selling any investment that has declined in value before year-end, including stocks, bonds and mutual funds, so that the capital losses you report can offset your capital gains. As part of our overall investment process, our team will review and harvest losses in our clients’ non-retirement accounts prior to year end when we feel it is appropriate. Keep in mind, too, that you can deduct up to $3,000 of capital losses from your taxable income, so selling losing investments before year-end can be a smart move even if you don’t need to reduce capital gains taxes this year. 

    As a reminder, for individuals who turn 70½ in 2015, this is the first year you will be required by the IRS to take a distribution from your IRA. Even though you have until April 15, 2016, to take the distribution, it is usually advisable to take your first distribution during the 2015 calendar year. That way, you avoid having two taxable distributions made during 2016. Failure to take your required minimum distributions (RMD) is subject to a 50% penalty for any shortfall in distribution. 

    Do you have health insurance coverage? If not, you will likely face a penalty. Under the Affordable Care Act, the amount you had to pay for failure to have coverage started out relatively low, up to a maximum of $285 per family in 2014. It jumped to a maximum of $975 this year, and it’s set to more than double again in 2016, to a maximum of $2,085 for each family. Besides avoiding the penalty, another way to lower your taxes is to take advantage of medical flexible spending accounts (FSAs), which allow you to set aside pretax dollars to cover unreimbursed medical bills. This year, you can contribute up to $2,550 to an employer-sponsored FSA. And, unlike in the past, instead of losing all of your FSA contributions if you don’t use them by year-end, you can now carry over as much as $500 from one year to the next. 

    If you are enrolled in what the IRS defines as a high-deductible health plan, you might be eligible to contribute to a health savings account, which can offer you a pre-tax option for covering your deductible. In 2015, the contribution limits are $3,350 for individuals and $6,650 for a family. And there’s no time limit on when you can use your contributions to cover unreimbursed qualified medical expenses. Now is the time to review and update your health insurance status as necessary to maximize your options and avoid any last-minute surprises when you file your taxes. 

    High-income taxpayers have had an even greater incentive to lower their taxable income in recent years. Not only has the top tax rate risen, but there also is a higher Medicare tax on wages, a new tax on investment income, and increased dividend and capital gain tax rates. At the same time, some popular tax deductions and personal exemptions are now off limits for affluent taxpayers. That’s why it’s important to act now to ensure that you can take full advantage of opportunities to minimize your income and benefit from tax-advantaged options. If you would like to discuss any of these tax-planning opportunities in more detail, please give one of our financial advisers a call.

Brandywine Global

Summary Snapshot

Legg Mason Brandywine Global
Income Opportunities Fund
(Ticker: BWG,

Share Price / Net Asset Value Per Share / Total Distribution Rate
(10/20/2015): $13.18 / $15.50 / 11.84>#/b###

Description: The Legg Mason Brandywine Global Income Opportunities Fund is a closed/end fund, meaning it provides access/liquidity to investors in a similar mechanism to individual stocks. As a closed/end fund it has a fixed pool of capital and does not have to worry about investor flows (in/out) disrupting their long/term strategy. The fund’s stated goal is foremost current income with a secondary objective of capital appreciation. In order to achieve these goals, the fund will invest globally in the debt (bonds) of countries, companies, mortgage-backed securities, and currencies. A key factor that must be understood is the use of leverage within the fund, currently standing at 35.73%.

Investment Thesis: We believe that in the Legg Mason Brandywine Global Income Opportunities Fund we have an investment to complement the way we invest/allocate to our equity ideas at FIM Group. As a matter of principle, Brandywine Global likes to utilize a top-down macro framework; whereas at FIM Group we have traditionally been bottom-up investors. When analyzing funds, we take a slightly different tack as compared to individual securities; our focus lies in three key areas. 

First, we take a look at the people managing the fund – in the case of Brandywine you’ve got a team with a very deep bench. The lead managers, Stephen Smith and David Hoffman, on the fund have a combined 87 years of industry experience. Brandy-wine Global is a well-known value shop that was founded in 1986; Smith and Hoffman (backed by a team of 12) are known to invest their way with disregard to benchmarks. As they are benchmark agnostic, investors who choose Smith and Hoffman must be willing to accept higher levels of volatility in anticipation of a more favorable risk-reward balance through market cycles. Over the years, Smith and Hoffman have proven that their methodology can create category/leading results.

This leads us to the second area we look at when analyzing funds: process. We listen to the qualitative story, how they purport to get where they want to go. This is then checked against quantitative measures – does the story hold up or rather do their results seem to stem from what it is they claim to be doing? With a belief in mean-reversion and that total debt issuance is less important than the real rates (and the potential for inflation to moderate) in any given economy, Smith and Hoffman stitch together a unique portfolio. Unlike the Citigroup World Government Bond Index, they will not invest blindly just because the marketplace is flooded with certain countries’/companies’ debt. Being benchmark agnostic, there isn’t much more we can add to the process here, as it can really be summed up as a best-ideas global fixed-income portfolio (they aren’t afraid to make calls contrary
to consensus).

Given the lack of constraints, how does this fund match up against their category and peers? Our third point of focus: performance. Here, we know that the closed-end version of this strategy, while newer, is ostensibly the same as sister strategies at Brandywine Global. Looking at the various iterations through market cycles, we have seen that while at times they have underperformed in the near-term, the team at Brandywine Global has consistently been able to outperform their peers through market cycles. 

Something key to pay attention to, in addition to people, process and performance, is leverage. As this is a closed-end fund; Smith and Hoffman are allowed to take on leverage; which cuts both ways in the risk-reward relationship. During periods of underperformance in their strategy, as they have seen over the past year, leverage will amplify their divergence from the index and their peers. When queried on the matter, the fund’s positioning within emerging markets is flagged as the culprit ... Brandywine Global believes that the divergence in the inflation within developed economies (weak) and emerging (strong) cannot last. So far they have been early on this call, though we are inclined to agree with them. 

In the interim we are being paid to be patient. Currently we are able to invest in this fund at a 14.97% discount to the fund’s net asset value (NAV); in addition, the fund is currently distributing 11.84% to shareholders. Historically, the fund has traded at an average discount to NAV of 11.92%; with investor sentiment a near-term drag on the market price
of the fund, we are inclined to remain diligent and collect an elevated distribution rate. We have confidence that the team at Brandywine Global will continue to prudently manage their fund through all market cycles. 

One area we have not highlighted would be the portfolio level analytics – things like credit quality, duration, country allocation, currency allocation, type of debt instruments, etc. These portfolio characteristics and more are considered when reviewing a bond fund and when allocating to it within the various portfolio groups that we manage at
FIM Group. If you would like to go into these details with us, we would be happy to oblige.

Data Source:s Management Meetings, Company Filings


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