2016 December Newsletter

FIM Group Staff
By: FIM Group Staff

General Investment Team Commentary (November 18, 2016)

With the U.S. elections behind us, investors are now left to digest the results. Markets have responded, at least in the first two post-election weeks, with a “Trump Jump” in certain U.S. stocks, the U.S. dollar, and U.S. interest rates.

A narrative has quickly emerged that the unexpected election results will lead to a positive economic growth shock for the American economy. This jolt, so the thinking goes, will be driven by corporate tax cuts, infrastructure spending programs, and reduced regulatory costs. The dollar strength- ened against other currencies in anticipation of this theoretical growth burst, and stocks expected to benefit the most from this scenario (including those of financial, pharmaceutical, and industrial goods companies) moved higher. In contrast, bonds and other interest-rate sensitive investments came under further pressure. This continued a trend that began late in the summer when central banks around the world dropped hints of reduced market intervention. Precious metals-related stocks also generally reacted negatively to the election results. “Safe haven” investor demand for gold and silver diminished on anticipation that a stronger economy would put an end to further monetary policy extremism.

Some of you have understandably been asking how our team is responding to the election results. Others have expressed concerns about the relatively weak performance seen in portfolios these past two months. We touched on both questions in our November webinar (a recorded version is available on our website at, but we’ll summarize our thoughts here. First, we are making no significant course changes in direct response to the election results. We like our positioning in each of our four core strategies, and we believe that we are well situated to meet return expectations in any number of scenarios that could unfold under a Trump administration. As to our short-term performance, the primary headwind we’ve seen in the last two months is the relatively sharp move higher in interest rates. This move has affected sentiment toward some of our longer-term bonds, higher dividend-paying stocks, and precious metals-related investments.

As we’ve discussed over the last few months, our team has been proactive in trimming portfolio positions deemed to be most sensitive to a higher interest rate environment. These reductions have primarily been in select bonds (mostly closed-end funds), real estate investment trusts (REITs), and precious metals-related stocks. The highly interest rate-sensitive holdings we’ve retained generally fall into two camps.

The first are stocks that feature either funda- mental growth drivers or significant valuation discounts that can counter the negative impact from higher rates. For example, we own a basket of U.S. and international REITs trading at deep discounts to net asset value, with management teams working diligently to correct these discounts. Dream Office REIT in Canada is one such holding. Dream Office trades at more than a 25% discount to our estimated private market value of its net assets (real estate minus debt). Its management team is working successfully to sell certain office properties in markets such as Ontario where private market values are high, while improving the attractiveness of others in areas such as Alberta where occupancy is below average. We expect that these moves will gradually reduce the abnormally high trading discount in the stock.

The second major category of investments we hold with direct interest-rate risk is our allocation to U.S. Treasury bonds. We hold these positions primarily in our Balanced Conservative and Yield Income strategies, and most of these Treasuries mature between 2020 and 2026. As we noted on the November webinar, these bonds are highly liquid, expose us to acceptable downside risks should rates continue higher, and provide decent upside potential should markets refocus on longer- term structural headwinds for economic growth. For example, powerful trends in demographics (aging populations), debt (still very high, and growing), and technological disruption (including the increasing use of automation/advanced robotics across a wide swath of industries) are all longer-term deflationary factors that could keep a lid on economic growth, inflation, and interest rates. The Trump-inspired burst higher in the dollar, if sustained, is also potentially defla- tionary. A stronger dollar threatens to crimp the profits of U.S. multinationals while more generally allowingcompanies exporting products to the U.S. to lower their US$ prices.

Bottom line: While the autumn jump in rates has been a short-term performance headwind for us, we believe that the going-forward trend under a President Trump is far from certain. As such, we are staying balanced in our positioning and retaining some exposure to rate-sensitive holdings. Most of these, like Dream, have characteristics that we believe can counter a higher rate scenario should that become the “new normal.” Others, like the U.S. Treasury bond basket, offer relatively low-cost insurance against scenarios where the deflationary forces noted above persist in the years ahead. 

FIM Group Staff
By: FIM Group Staff

Stay or Go — the Rollover Decision

Changes in employer or retirement are two life events when you will be faced with the decision whether you should roll over your retirement plan to an IRA or maintain it in your employer plan. Below are some factors that you should consider in determining which option is best for you.

There are several reasons to consider making a rollover to your IRA. In contrast to an employer plan, in which your investment options are limited to those provided by your employer, the universe of IRA investments is almost unlimited. Also, investment changes can usually be made much more quickly in an IRA because there is usually not as much bureaucracy as there is in a company plan.

IRAs are more flexible when it comes to estate planning by allowing you the option of splitting accounts and naming several primary and contingent beneficiaries, including charities and trusts. Similarly, the distribution options in an IRA (especially for your beneficiary following your death) may be more flexible than the options available in your employer’s plan. Non-spouse beneficiaries of an IRA can stretch distributions on the inherited IRA over their life expectancy. Many company plans do not allow the stretch option and are very restrictive on beneficiary nominations.

Simplicity can be achieved by consolidating multiple retirement funds in an IRA. There will be no need to track several different retirement plans, beneficiaries, and with- drawal options on each. IRAs can be aggre- gated for fulfilling your RMD from any one or a combination of your IRAs. In contrast, with a company plan, the employee usually must take the RMD for each plan separately.

For those who have the option to roll over their employer plan, particularly one that has a significant amount of appreciated employer stock, it might be in your best interest to not roll the stock over but instead to take a lump sum distribution of the stock and roll over the remainder of your retirement plan through a tax strategy known as Net Unrealized Appreciation (NUA). The details are beyond the scope of this article, but if you would like to discuss NUA further please reach out to one of our financial professionals.

For some of you, staying with a company plan might be the best option. As an example, if you are over 701⁄2, are not more than a 5% owner in your employer, and are still working, if the plan allows you can delay taking your RMDs for the plan until April 1st of the year following the year you retire.

In situations where you need to access funds early, if you are 55 or over, your retirement plan typically offers the ability to withdrawa funds without the 10% penalty, which you would incur if you roll over to your IRA and need these funds before age 591⁄2. In addition, most plans allow loans from your retirement plan up to the lesser of $50,000, or 50% of your vested balance. Loans are not permitted from IRAs.

Your employer’s plan may also offer better creditor protection. In general, federal law protects your total IRA assets up to $1,283,025 (for 2016)—plus any amount you roll over from a qualified employer plan or a 403(b) plan—if you declare bankruptcy. (The laws in your state may provide ad- ditional protection.) In contrast, assets in a qualified employer plan or 403(b) plan generally enjoy unlimited protection from creditors under federal law, regardless of whether you’ve declared bankruptcy.

In general, you can keep your money in an employer’s plan until you reach the plan’s normal retirement age (usually age 65). Some plans even allow retirees to keep their retire- ment savings in their plan longer. However, in most situations IRA rollovers provide the most flexibility and simplicity in the long run. The decision to stay or go in an employer plan is highly specific to your individual situation.

If you would like more help in looking at the pros and cons of a rollover, please contact one of our professionals.

The Walt Disney Company

The Walt Disney Company 
Ticker: DIS

Share Price/Market Capitalization (11/18/2016): US$98.24/US$157b

Company Description: The Walt Disney Company (“Disney”) is a global entertainment giant with leading brands including ESPN, Lucas Films, Pixar, and Walt Disney World. Disney’s business consists of four primary segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products/Interactive Media.

Investment Thesis: Disney offers compelling value as it currently trades at a rare discount to both the U.S. stock market and our estimate of fundamental value. Changing industry dynamics in home entertainment, a relatively light year for Disney’s film business, and the recently opened Shanghai Disney will weigh on profit growth this year, yet we believe these are temporary challenges. On a longer-term view, we believe that Disney will provide investors with attractive growth. We expect our returns to comprise mid-high single-digit, long-term earnings per share growth and a normalization of its currently depressed valuation.

Disney is a well-known entertainment power- house with some of the world’s most valuable brands. Its largest segment is the Media Networks business, accounting for roughly 50% of operating profit. Brands here include ABC, ESPN, and the Disney Channel. Parks and Resorts, including Disneyland, Walt Disney- world, and its latest addition, Shanghai Disney, make up 20% of operating profit. Studio Entertainment, another 20% of the company’s operating profit, produces films including Frozen, Star Wars, and Toy Story. The remaining 10% of operating profit comes from the Consumer Products business, which leverages the company’s characters and franchises.

Disney normally trades at a premium to the overall market, given its high levels of profitability and rock-solid balance sheet. In the last 12 months, however, its stock performance has lagged, despite respectable fundamental performance. We believe the disconnect stems from market concerns with consumer “cord cutting” and the reaction of advertisers to these trends. Furthermore, Disney’s film lineup over the next year will compare unfavorably to the Star Wars—heavy 2016 lineup, and its Shanghai Disney will take a few years to hit the profitability levels of its more mature parks elsewhere.

We do not expect the flat profit growth expected for the upcoming year to be the start of a new, longer-term trend. In fact, if we look forward to 2018, we expect that Disney will successfully adjust to changing consumer behavior affecting its Media Networks segment (via various “virtual bundles” of its leading networks). We also expect a big jump on the film side with two Star Wars films in 2018 and reduced profit drag from the Shanghai resort. The market will also likely begin to anticipate the next edition of the massive Frozen franchise sometime in 2019 or 2020. In short, we believe Disney remains on track to generate considerable, long-term profit growth for investors, despite the likely 2017 hiccup. We expect that the discount currently on offer by an overly short-term focused market will not persist for long. 


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