2017 December Newsletter

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

Separating the Essential from the Nonessential

When I was 20 years old, I set up success seminars, sales training events, inspirational talks, and workshops for a man who, at only age 32, had come from humble beginnings to retire, start a school, and share his “wisdom.” He was a ferocious reader and a self-proclaimed observer of life, people, and experience as he sought to tease out wisdom from interacting with other people. 

I sat through a lot of talks with him, and my boss would hammer home two things that are guiding this letter today. First, he would say, “Many people have been in business for 30 years and wonder why they have little success other than to survive. When you look at their business, they have not grown, strived to serve their customers and clients better, or cultivated a learning mindset, but rather have just repeated the same things, year after year.” He would then discuss how things change, and insist that we must be on the forefront of that change, by reading, finding mentors, studying, carefully observing, and even staying humble, so that we don’t get what he called “cocky and sloppy.”

Second was the theme of one of his canned talks that he often gave at churches, which he called “Man’s Response to Energy.” He said that we change when we are in the presence of people. He insisted that we should carefully choose our associates, friends, and even family (a slight joke). He also said that we should make sure we get to the facts and make decisions based on them, which means separating “essential” facts from “nonessential” ones. In other words, do the homework and be objective. He would go on about the energy of overhyped talking points, be they negative or positive, and cited the metaphor that we need to be like a mountain, remaining unmoved by the enthusiasm that brought the facts to the surface. 

I often think about this man as I go about my personal and professional life. He inspired me to always be learning, strive to be better, get the facts straight, be wary of “enthusiasm”-driven hype, and work to stay humble. For example, I enjoy watching my kids play soccer. Some of this joy, though, gets diluted nearly every outing by the herds of parents and fans shouting at the kids, the coaches, and the refs as if they don’t know their jobs. I’ve noticed sometimes that once one loud parent starts acting up, the behavior can spread like a bad flu, and soon half the crowd is yapping about calls or plays gone “wrong.” Having coached, refed, and played the game (not very well, I’ll add), I know that what might seem “easy” from a perched position in the stands isn’t anything close to easy when you’re on the field. Professional sports can bring even crazier behavior among the spectator set as all the benefits of instant replay, super slow-mo, and HDTV make every fan an armchair genius.

In the business and investing world, I come across these situations, too. One thing that usually scares me is when I see companies starting to be swayed by cranky analysts and shareholders or quick-return-seeking vultures, many of whom have never sat in a boardroom, never hired or thought about how to manage an employee (let alone 10,000), and never even used or analyzed the company’s products or services. Good management teams know how to handle and separate out this noise and focus on the things that matter for long-term value creation. Not-so-good teams can get swept up in the myopic hype and make decisions that prove costly in the long term. At the extremes, management efforts to live up to hype can drive unethical behavior that puts an entire company at risk.

Take, for example, the previous senior management team of Brixmor Property, the company we highlight as a recent new buy in this newsletter’s Investment Team Spotlight. In early 2016, an internal audit at Brixmor found that top brass there conspired to manipulate quarterly financial statements. The CEO, CFO, and other staff fudged the reports so that they would show consistent growth in an area that many Wall Street real estate analysts focus on: same-store net operating income. This smoothing, of course, is a big no-no, and when news hit the tape, the stock fell over 20% before new management (and super­visory procedures) was put in place to remedy the unfortunate leadership lapses there.

At FIM Group, we spend time trying to get a feel for management quality, their willingness to continuously learn, stay focused on what matters, instill a culture of continual improvement, and operate with humility. Are they really listening to their stakeholders, striving to innovate and move their companies forward? Or are they swayed by short-term hype, mired in complacency or “cocky and sloppy”? And are their financial incentives (such as compensation packages) designed to encourage the former or the latter?

In an entirely different phase of the investment management process, deciding what to do with a stock after its share price has slumped, we also try to embrace these lessons from my past. My 33 years of investing experience has taught me that selling something just because the price went down is not a very successful long-term strategy. Instead, I work hard and encourage my team to also work hard to separate out the hype and the noise (including our own behavioral biases) and focus on the facts. Have the reasons we bought an investment changed to the extent that we would no longer buy it at today’s price? Has its price hit a level where the risk-reward ratio is no longer favorable? Is there simply something on our watch list that would fit better in our portfolio mix? 

In the spirit of humility, I’ll readily admit that we’ve had and will continue to have investments that just seem to miss the goal on every shot. That is why we diversify and control position sizes. There will surely be more “shoulda, coulda, woulda” moments when we hold a position that, in retrospect, after further review in super slow-mo, we should have sold. We work hard to learn from these mistakes and apply our learning to future situations requiring these difficult decisions to buy more, hold, or cut bait.

In today’s hype-filled world and frothy market environment, the lessons from my early professional days are more valuable than ever. Many brand-named stocks are trading at levels that remind me of the dot-com bubble days. Like then, many investors seem to be buying what’s hot and going up without much regard to the price they are paying. The hype of “easy” passive index investing has created an increasingly vocal herd of supporters, but I’m convinced that the “facts” of investing history will eventually assert themselves. Price and quality matter for long-term returns. Investors who put effort and experience toward seeking quality companies with quality management teams and who can effectively filter out hype and noise when making tough decisions have a durable advantage. Our team endeavors to do just that – and we work tirelessly to improve our skill sets and processes with the goal of exceeding your expectations.

Lucas Schwaller, CTFA®, CES®
By: Lucas Schwaller, CTFA®, CES®

Planning for Incapacity

Baby Boomers in the U.S. are turning 65 at the rate of 10,000 per day. Alzheimer’s disease affects 1 in 9 people over age 65. And aging isn’t the only problem. Stroke is the #5 killer in the USA, and 49% of Americans have at least one risk factor for stroke. About a third of people hospitalized for stroke are under age 65. And stroke is the #1 cause of long-term disability. These aren’t fun stats, but they should forcefully remind us that estate planning isn’t merely about passing along our assets at death. Properly done, it also helps with the management of assets during life as well as addresses the management of our affairs and the carrying out of our wishes should we become unable to manage our own affairs.

I find that the major gap in a great many estate plans is effective planning for incapacity. Yes, many people draft a Living Will, along with their estate plan, and many also put a Durable Power of Attorney in place, but are they really thinking through the implications and using the best tools for the job? There are many tools, both financial and medical, that should be considered. Here I will address these tools, as well as the difficult topic of defining “incapacity.”

Generally speaking, incapacity means not having the ability to make effective decisions or to manage oneself or one’s affairs. I think we can all agree that when someone is diagnosed with Alzheimer’s, they are considered incapacitated, but what about familiar themes like when to take the car keys away from Dad or tell Mom she should move to assisted living? It is the period between completely lucid and clearly incompetent that gets sticky. And it doesn’t help that one of the symptoms of a person’s diminished capacity is paranoia, often manifested in thinking that people trying to help don’t care or are only after their money. It also is a fact that elder abuse is a common problem. The reality is that it is vitally important that you identify, well in advance of an issue, the people you trust to make financial and medical decisions on your behalf and that you put the right documents in place to empower them. Then, in many situations, decisions can be made by the appropriate parties, regardless of the level of competency. Documents should also define how competency is determined when it is a “trigger.”

Some of the signs of diminished capacity are memory loss, decreased or poor judgment, difficulty understanding simple concepts, mood swings, trouble communicating, confusion about time and place, difficulty with familiar tasks, trouble understanding visual images and spatial relationships, withdrawal from work or social activities, misplacing things, and losing the ability to retrace steps. As we age, all of us will experience some form of diminished capacity. The point at which we cross the line into incapacity is a legal issue that varies by state as well as by the facts and circumstances of the individual.

Many tools can help manage the financial and medical needs of clients suffering from incapacity. On the financial side, some familiar tools like the Account Title, Powers of Attorney, Guardianship and Revocable Living Trusts are necessary. On the medical side, Living Wills, HIPAA Authorization, Physician’s Orders for Life-Sustaining Treatment, Durable Power of Attorney for Healthcare, and Long-Term Care Insurance may be appropriate. I’ll briefly discuss the functions and some cautions of these, starting with the financial management tools.

Account Title

An account can be titled in many ways, but how does someone else manage your affairs? In an account titled solely in my name, for example, no one else has advance authorization to access it. An outside power like a Power of Attorney, discussed below, is needed. Joint Tenancy gives access to each joint tenant but can cause other problems, since it involves the legal ownership of the property. Therefore, when it is a joint tenant other than your spouse, imagine the problems that can arise if your son were divorcing or your daughter caused damage in a DUI accident. Having nonspousal joint tenants can be problematic, as well. Instead, think about granting Signature Authority, which gives the right to sign without ownership issues. And, of course, in the name of a Trust, when one is being used in the plan, the Trustee can access the assets.


In case people do not plan, every state has the ability for a court to appoint a Guardian or Conservator to make decisions for the Ward (the incompetent person). Guardianships are generally to be avoided, however, as they can be expensive, time-consuming, and public, but at least they are a form of backup plan for those who do lack one.

Power of Attorney

In a Power of Attorney, the person appoints an Attorney-in-Fact to sign on their behalf. This can be either a broad set of powers (general power) or powers quite restricted and specific to certain issues (limited power). Most important is that the power is “durable,” meaning it is valid even during incapacity. This has become such a problem that some states have begun deeming a power to be durable, in order to avoid guardianship proceedings. Be aware, though, that many firms prefer that these powers be signed on their own forms, or even offer policies meant to protect the account holder that can be tough to navigate, especially when time is of the essence.

Revocable Trust

Assets in a trust are managed by the Trustee on behalf of the beneficiary. Keep in mind that the trustee manages only funds owned by the trust, so retitling of assets is important. Likewise, seamless transition should take place from trustee to trustee, but when the client is their own trustee then paranoia can set in on anyone suggesting removal as a trustee, so a well-drafted Incapacity Clause should identify how incapacity is determined. It is generally better to turn over power sooner rather than later.

Now, let’s move to a brief review of some of the tools available for medical decision making.

Living Will

Living Wills go by other names, such as Healthcare Directive or Advanced Directive. They state your wishes for end-of-life medical care. These are legal in every state, and forms can readily be found online or at your local hospital. Just make sure your physician is aware of your wishes and is willing to comply.

HIPAA Authorization

HIPAA (meaning the Health Insurance Portability and Accountability Act of 1996) provides Data Privacy and Security Provision for Safeguarding Medical Information. While these issues are certainly worthy goals, the 2003 Privacy rule can cause trouble getting information, if not properly authorized. Check your planning documents, and confer with physicians and hospitals for authorization.

POLST–Physician’s Orders for Life-Sustaining Treatment

A POLST does not replace an Advanced Directive, a Living Will, or a Durable Healthcare Power of Attorney. Rather, it is designed to work together with them. A POLST form is, in essence, a portable medical order for the specific medical treatments you want during a medical emergency. Since it is a doctor’s orders, it must be complied with by the service provider. A POLST replaces the DNR, or Do Not Resuscitate, instructions and is used mostly for those seriously ill and in need of end-of-life care. As a state law instrument, the name can vary in different states.

Durable Power of Attorney for Healthcare

Similar to a Financial Power of Attorney, a Durable Power of Attorney for Healthcare is intended for medical decisions. Such a power allows the attorney-in-fact to make decisions and to sign on behalf of the principal. 

Long-Term Care Insurance

It has become harder to find standalone policies for long-term health care, due to low interest rates and changing demographics. In fact, the American Association for Long Term Care Insurance (AALTCI) states that sales are down from 750,000 policies in 2000 to a mere 105,000 in 2015.

However, if you are interested in Long-Term Care Insurance, one option is to look for Life Insurance policies that build cash value quickly and allow lifetime distributions for long-term care. This is a “hybrid” approach, though, and usually requires lump-sum funding.

In summation, with the Baby Boom generation reaching age 65 at a rate of 10,000 a day, and with medical advances keeping us alive more effectively than ever, we have to be concerned whether we will live on if and when our brain develops symptoms of diminished capacity. In these cases, we need to ensure that our wishes continue to be followed and that we are cared for, both financially and medically, in accordance with our wishes. Advanced planning can make a huge difference in the quality of life, care, family harmony, and finances. If you have questions or need additional assistance in this regard, please contact your FIM Group financial planner. We’d be happy to work with you and your attorney to establish, review, or revise an estate plan.

Brixmor Property Group

Brixmor Property GroupSummary Snapshot
Brixmor Property Group
BRX  Website:
Share Price/Market Capitalization: $18.27/US$5.5b

Investment thesis: Brixmor is a retail real estate investment trust largely abandoned by investors who fear the threat posed by Amazon and other e-commerce companies. Its new management team is refocusing on local, asset-level accountability; redevelopment opportunities within the current portfolio; and long-term cash generation. We bought this high-quality portfolio of commercial real estate for 20% below our estimate of net asset value (NAV). The stock’s 6% dividend yield is well covered by cash flow, and we expect mid-single-digit annual dividend growth in the years ahead.

Brixmor is a leading owner and operator of high-quality, open-air shopping centers. The company’s approximately 500 shopping centers comprise 84 million square feet in established trade areas across the nation. Its diverse tenant mix consists of leading nondiscretionary and value-oriented retailers, as well as consumer-oriented service providers. Approximately 70% of its shopping centers are grocery-anchored.

Management has been capitalizing on the disruption roaring through the U.S. retail landscape by releasing space from struggling stores like Kmart to thriving ones like Ross at much higher rents. It is also broadening its tenant mix to include entertainment concepts such as Dave & Buster’s and fitness chains such as Orangetheory Fitness. The company’s current strategy involves selling centers that it believes to have limited long-term growth potential and then recycling the capital into a variety of redevelopment opportunities in its most-proven locations. These opportunities include adding density to existing centers where it can add concepts like Panera Bread to underutilized outparcels.

Brixmor has raised over $5b in unsecured debt over the last 18 months, giving it ample flexibility to fund future growth. About 96% of its debt is fixed rate, with an average maturity of 5.4 years and an average cost of 3.8%. It recently hiked its dividend by 5.7% and will likely be more opportunistic around share buybacks in 2018. At our purchase price, we expect to receive a 6% dividend yield with base-case 5% annual dividend growth. We also believe the share price discount to net asset value can narrow as management executes on its strategy – and proves that there’s still a place for well-located brick and mortar in our increasingly digital retail world.


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