Over the last few weeks, the mood within global financial markets has become a bit more cautious, especially when it comes to interest rates. There seems to be a quietly growing anticipation that perhaps we are nearing a turning point with global monetary policy. The Federal Reserve is now generally expected to raise short-term rates by year-end, while the European Central Bank has begun to drop hints that a “taper” to its quanti- tative easing may be in store for 2017. At the same time, markets are being warmed up to the idea that looser fiscal policies, most typically in the form of government spending on infrastructure, might soon be heading our way.
While we make no claims to being savvy “macro” forecasters, the possible higher interest rate outcome from a “tighter monetary policy/looser fiscal policy” scenario does not look to be fully priced into markets today. Interest rates remain negative in large parts of the global economy, making many bonds and “bond-like” stocks (such as consistent dividend-paying consumer staples companies) expensive relative to their fundamentals. Amid this backdrop, our team continues to pare back investments that could be vulnerable to higher rates. These are primarily closed-end bond funds that have benefitted up until now from the low-interest-rate environment.
On the buying side, we continue to find good value in select stocks, although these are mostly stocks where near-term sentiment is mixed. For example, we’ve been buying Mitie Group, a UK-focused facilities and property management services company amid the BREXIT uncertainty, and also drug and diag- nostics giant Roche, which recently reported a slightly softer than expected quarter. We’ve also found good value in
Hulic, the Tokyo-focused property company featured in this month’s Investment Team Spotlight. Hulic’s business is well positioned to benefit from several growth areas in Japan (including senior living and tourism), making it more resilient than others, should interest rates begin to normalize there.
Over the next few weeks, we will be digest- ing September quarterly earnings results for most of our portfolio companies (as well as our top watch list targets). This time of year is often when companies hold investor calls to provide an outlook for the year ahead, so our team will have plenty of things to assess and discuss. As always, should you have any questions or concerns about your portfolios, please don’t hesitate to be in touch. As our next newsletter will come out in early Decem- ber, we wish you and your families a very happy and safe Thanksgiving.
“Families are always rising and falling in America.” – Nathaniel Hawthorne
According to studies conducted by U.S. Trust, 70% of family inheritances are lost by the second generation, 90% by the third. This rate is staggering and alarming, especially when you consider the $30 trillion that’s expected to be transferred over the next 30 years.
Given a long-enough timeline, the deterioration of wealth from generation to generation is inevitable; however, there are two often-overlooked forms of guidance that can provide your heirs with what they need to maximize your legacy: preparation and communication.
Becoming financially wise is a journey, and it’s imperative to teach budgeting, saving, and even investing from an early age, sitting down often to discuss the basics of money management. Keep it simple, though, and engage with your children throughout the process. For instance, if you’ve been teaching them about the value of saving, follow up frequently to discuss what they might be saving for, and why. Allow them to make mistakes and fail, especially at those ages before the mistakes and failures become significant and potentially detrimental. Keep in mind the fact that it’s a journey as you’re assisting them in gradually transforming and developing their decision making.
Utilize philanthropy for training and practice whenever you can, as it typically provides less contentious decision making than larger estate or family business matters might. Allow siblings to conduct research, evaluate, make decisions jointly, and allot a giving budget on behalf of the family. This practice in working together can arm them with the responsibility and skill sets to one day handle and manage their own financial independence and, eventually, the family estate.
Another exceptional opportunity to educate children presents itself when college approaches. They should be involved from the onset of the process. When you meet with your advisor to discuss or estimate college costs, make sure to take the student with you. They need to see the cost disparities between the different colleges on their list and comprehend the financial impact these will have on the family as a whole or, should they be taking on debt, on their future.
Already Have Adult Children? There’s Still Time to Get Started
It might not be as straightforward or as easy to help an adult child fully grasp the importance of properly managing their inheritance, but the alternative of silence and wishful thinking hasn’t worked historically.
Parents are often concerned that knowing about family money might undermine motivation. However counterintuitive it may seem, this has not been found to be the case. Rather, not disclosing wealth has been shown to foster ignorance rather than motivation.
Share information by taking your adult children in and introducing them to your advisor(s). Involve them in the process of establishing or revising your estate plan. Feel uncomfortable disclosing certain information? Speak with your advisor beforehand to determine your goals for the meeting and what information you’d like included or excluded.
In the end, what you’re hoping to raise are, in effect, family Chief Financial Officers who can responsibly and independently care for themselves.
It will certainly be a challenge, and personality types will affect how readily children of all ages adapt, learn, and become successful. Yet what better way is there to slow generational wealth deterioration in your heirs than by instilling the very values that made you successful and preparing them with as much information as possible?
Investment Team Spotlight: Hulic Co Ltd.
Corporate Website: www.hulic.co.jp/en
Share Price/Market Capitalization (10/21/2016): US$9.75/US$6.5b
Company Description: Tokyo-based real estate investor/developer with a portfolio of 214 midsize commercial buildings near key transit stations.
Investment Thesis: Hulic is a top-notch, Tokyo-focused commercial real estate investment firm with highly regarded senior management. The company is poised to benefit from strong Tokyo real estate fundamentals, growth in Japan tourism, increased Japanese senior living needs, and investor demand for high- quality, tangible investments. Shares look significantly undervalued relative to our estimated liquidation value.
Hulic was established in 1957 with a close relationship to Fuji Bank (now Mizuho Financial Group). Today, Hulic leases space in its 214, mostly Tokyo- located, midsize commercial buildings to Mizuho and a diverse mix of other tenants. Leasing from these buildings accounts for two-thirds of Hulic revenues, with the remainder coming from select property sales.
Vacancy across Hulic’s portfolio is less than 1%, thanks to super-prime locations, solid in-migration trends to Tokyo, and limited new supply. Management runs a conservative balance sheet yet takes an active role in redeveloping properties for increased value creation (more leasable space and higher rental rates). During its current three-year strategic plan, Hulic intends to remodel or redevelop 20 to 30 properties, while also making new acquisitions of senior care–related properties and tourist hotels.
Among Japanese companies (and global real estate companies, for that matter), Hulic has a solid reputation for environ- mental and social responsibility. Many of its buildings feature solar panels, rooftop greening, and natural lighting and ventilation technologies. As an employer, Hulic stands ahead of its peers in areas including the promotion of women to senior management positions and the provision of in-house childcare.
Since the Abenomics-driven Japanese stock market boom peaked in 2013, Hulic’s stock price has fallen 45%, despite a doubling of book value per share. We believe that shares now trade at a mean- ingful discount to the private market value of its real estate holdings (net of all debt) and expect to see this private market value grow at a high single-digit clip for years to come. This growth will source from solid rental yields of 4>#/p###
to 6%, redevelopment projects, and accretive property acquisitions.
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