Dear friends,
As we reached the end of a year more tumultuous than most, we were reminded of the paramount importance of health. We trust you and your loved ones have remained healthy through the pandemic, and hope the new year will bring us all relief from the many challenges 2020 presented.
In the new year, we had hoped to put behind us the volatile political situation that has afflicted our country for the past several years. Unfortunately, the events of the past week have dashed those hopes. A violent attack on Congress has shaken many of our institutions. A few years ago, it would have been unfathomable to imagine an outgoing US president would encourage his supporters to march on the capitol. And this unimaginable thing too, has happened. We are struck this week, by the variety of friends and colleagues overseas who have expressed their incredulity and concern that such a thing might happen in the US. And yet it has.
The long-term vibrancy or malaise of every economy is underpinned by its legal institutions and politics. US institutions have been shaken this week, in a manner that will likely have long term implications. The world’s assessment of the US’s political stability and uniform application of rule of law have been dramatically undercut by remarkable images of a mob running amok through the US capitol. The near-term impact will likely be contained by the almost uniform condemnation of the actions that led up to the sacking of the Capitol buildings. Underscoring the seriousness, almost every business lobby immediately condemned the actions of the mob, and the politicians who incited them. This includes the staid National Association of Manufacturers.
As with virtually all the dramatic political events of the past few years, the market seems to have shrugged the past week off. Major US indices remain at or near all time highs, seemingly oblivious to the impact of the on-going public health crisis and the significant impact it has had on much of the global economy. Many long term investors see the vast disconnect between the underlying economy and the markets and wonder: how long can this last?
In the fairy tale Sleeping Beauty, an entire realm is enchanted and frozen in place when the princess falls asleep. The cook was arguing with one of his assistants before the enchantment and is about to strike him. When the princess awakens, the very first sound is that of the cook slapping his assistant.
In similar ways, the US economy and large swaths of the global economy have been frozen in time, seemingly enchanted by the actions taken by governments and central banks around the world to alleviate the public health impacts. The Federal Reserve has conjured its own spells all year, conducting large asset purchases and hinting at a long period of zero or near-zero interest rates. Stock market investors have participated wholeheartedly in this enchantment, driving many stocks well into bubble territory.
Just as in Sleeping Beauty’s realm, we expect we will all wake up one day, a day like any other, with a slap in the face and this historic bull market for stocks will come to an end. Given the heady heights this market has reached, the long road down is likely to be unforgivingly treacherous. We recommend equity investors maintain caution as the new year gets underway. We cannot say when exactly this bull-market will end, but several indicators, the amount of new issuance, the extreme euphoric rise of the past few months, underlying economic conditions and nosebleed valuations are all signals that have presaged the biggest changes in momentum during past market bubbles. Though much of the market is extremely overvalued, as usually happens at the tail end of a bull market, there are some attractive opportunities in stocks at the value end of the spectrum. The renewable energy/cleantech sector, after having a break-out year in 2020, still has some compelling opportunities for long term investors. We also view the long-term prospects of many emerging markets positively, and the valuations in these markets are not nearly as extreme.
For bond investors, this year has capped several years of very low yields, and an interest rate policy that is bent on driving investors towards riskier assets. We believe investors should continue to maintain allocations to high-quality short and medium term bonds, despite the limited return they offer. Exposure to speculative or longer-dated bonds should be reviewed for appropriateness, since these issues can be volatile when interest rates or perceptions of risk change.
Though we are not yet past all the public health dangers, we fully expect that this difficult period for our country and the world will come to an end soon, and we will finally turn the page on the difficult year we have had. During these challenging times, we wish you and your families health and peace of mind.
Please let us know if you’d like to discuss any of the above in more detail.
Regards,
Louis and Subir

The foregoing contents reflect the opinions of Washington Square Capital Management and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or constructed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. 

Post performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

Dear Friends,

The third quarter saw bond and equity markets remain at opposite extremes in response to continued difficult economic conditions. Bond markets are signaling a long recession ahead, with interest rates projected to remain below 1% for the next several years. Equity markets, in sharp contrast, are priced near all time highs, despite a 20% drop in corporate profitability over the past two quarters, high unemployment and widespread business closures. 

So why the divergence? In our view, it’s the continued unprecedented levels of fiscal and monetary stimulus that has been pumped into the economy and markets (and the implied promise of more to come).  Excess liquidity has kept asset prices elevated and this is playing out in both the stock and bond markets.

Equity markets continue to hover around the highs reached in late summer after the remarkable rally from the bottom of the March lows despite economic activity remaining well below pre-pandemic levels.  The S&P 500 trades at 29 times trailing 12 month earnings and over 31 times normalized (10 year) earnings. These are peak levels, and unless there is an enormous rise in profits for companies of all stripes, these levels will be difficult to sustain.

Never has the adage that stocks trade on hope and bonds on fear rung more true. 

The third quarter also saw municipal and state finances partially recover from the free fall of the second quarter.  The impact on business sectors, however, has been highly variable. Residential construction appears to be a bright spot, presumably due to anecdotal reports that people working from home are investing in building comfortable working conditions. In contrast, commercial real-estate has not recovered to any material degree and many retail sectors, apart from consumer staples continue to struggle. Travel and leisure services are also hard hit, while technology products and services seem to be benefitting from the current work from home environment.

The Federal Reserve announced they would keep rates close to or at 0% at least until 2023, an indicator of how much medium and long-term damage the Fed believes has been done to the US economy by COVID-19. Low rates do help a recovery, at the cost of bond investors and ordinary savers. In our view, low interest rates alone will not be enough to help the economy recover; in fact, as evidenced by current stock valuations, low rates often encourage speculation, widen the already enormous wealth gap between the rich and the poor and create asset bubbles which can ultimately delay a cleansing of the economic system.  So in addition to an accommodative interest rate policy, we believe there needs to be a clear, effective strategy for the public health crisis that continues to hobble much of the country. The current administration appears to be banking on miracle cures which will resolve the crisis overnight. While there is a possibility that a vaccine will be available next year, and a smaller one that it will be over 70% effective, neither is assured. Meanwhile, the public health toll continues to mount on vulnerable Americans and industries.  

Though most other countries have managed this public health crisis better, global economic activity remains depressed and the world bank estimates global GDP will contract over 5% in 2020, a decline we have not seen in decades. In such an environment, with no imminent resolution to the public health crisis or its economic impacts, we continue to maintain a cautious allocation strategy, limiting exposure to risky assets.

We are now three weeks from a consequential presidential election in the US. A change in administrations is likely to bring about a reset in the US’s pandemic containment policies, with a stronger focus on preventive public health measures and clearer communication on the pandemic. If Congress and the government end up under Democratic control after November, we are likely to see another stimulus spending bill, tempered by broader restrictions to control the pandemic. If the current administration wins re-election, we would expect there to be a smaller stimulus bill, and a lengthier public health crisis. Neither of these events would have a material impact on the stock market. The bond market has the capacity to absorb large amounts of public debt, we do not expect increased debt issues to impact medium terrm rates while inflation is in check and the Fed keeps short-term rates low.
There is, however, a third possibility, that of a contested result and litigation over the presidential election. If this were to happen (as it did in 2000), we expect a lop-sided Supreme Court to side with the RRepublican candidate. This will have then been the second time in 20 years that the Supreme Court decided an election (against the winner of a popular majority). Such an outcome would result in lasting damage to the legitimacy of the court, and other public institutions in the country. This outcome is also the

We are now three weeks from a consequential presidential election in the US. A change in administrations is likely to bring about a reset in the US’s pandemic containment policies, with a stronger focus on preventive public health measures and clearer communication on the pandemic. If Congress and the government end up under Democratic control after November, we are likely to see another stimulus spending bill, tempered by broader restrictions to control the pandemic. If the current administration wins re-election, we would expect there to be a smaller stimulus bill, and a lengthier public health crisis. Neither of these events would have a material impact on the stock market. The bond market has the capacity to absorb large amounts of public debt, we do not expect increased debt issues to impact medium term rates while inflation is in check and the Fed keeps short-term rates low.

There is, however, a third possibility, that of a contested result and litigation over the presidential election. If this were to happen (as it did in 2000), we expect a lop-sided Supreme Court to side with the Republican candidate. This will have then been the second time in 20 years that the Supreme Court decided an election (against the winner of a popular majority). Such an outcome would result in lasting damage to the legitimacy of the court, and other public institutions in the country. This outcome is also the one most likely to be negative for investors in all asset classes. An uncertain outcome will hit US equity markets, and spook bond investors further.

Regards,

Subir Grewal, CFA Louis Berger

The foregoing contents reflect the opinions of Washington Square Capital Management and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or constructed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. 

Post performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

Dear friends,
We hope you and your family are all well.
The third quarter saw bond and equity markets remain at opposite extremes in response to continued difficult economic conditions. Bond markets are signaling a long recession ahead, with interest rates projected to remain below 1% for the next several years. Equity markets, in sharp contrast, are priced near all time highs, despite a 20% drop in corporate profitability over the past two quarters, high unemployment and widespread business closures.
Why the divergence? In our view, it’s the continued unprecedented levels of fiscal and monetary stimulus that’s been pumped into the economy and markets (and the implied promise of more to come). Excess liquidity has kept asset prices elevated and this is playing out in both the stock and bond markets.
Equity markets continue to hover around the highs reached in late summer after the remarkable rally from the bottom of the March lows despite economic activity remaining well below pre-pandemic levels. The S&P 500 trades at 29 times trailing 12 month earnings and over 31 times normalized (10 year) earnings. These are peak levels, and unless there is an enormous rise in profits for companies of all stripes, these levels will be difficult to sustain.
The third quarter also saw municipal and state finances partially recover from the free fall of Q2, though cities and states hit hardest by the first COVID-19 wave are still looking at huge budget shortfalls. The impact on business sectors has been highly variable. Residential construction appears to be a bright spot, presumably due to anecdotal report that people working from home are investing in building comfortable working conditions. In contrast, commercial real-estate has not recovered to any material degree and many retail sectors, apart from consumer staples continue to struggle. Travel and leisure services are also hard hit, while technology products and services seem to be benefitting from the current work from home environment.
The Federal Reserve announced they plan to keep rates at or close to 0% at least until 2023, an indicator of how much medium and long-term damage the Fed believes has been done to the US economy by the COVID-19 pandemic. Low rates do help a recovery, but often at the expense of bond investors and ordinary savers. In our view, low interest rates alone will not be enough to help the economy recover; in fact, as evidenced by current stock valuations, low rates can often encourage speculation, widen the already enormous wealth gap between the rich and poor and create asset bubbles which can ultimately delay a cleansing of the economic system. So in addition to an accommodative interest rate policy, we believe there needs to be a clear, effective strategy for the public health crisis that continues to hobble much of the country. The current administration appears to be banking on miracle cures which will resolve the crisis overnight. While there is a possibility that a vaccine will be available next year, and a smaller one that it will be over 70%
effective, neither is assured. Meanwhile, the public health toll continues to mount on vulnerable Americans and industries.
Though most other countries have managed this public health crisis better, global economic activity remains depressed and the world bank estimates global GDP will contract over 5% in 2020, a decline we have not seen in decades. In such an environment, with no imminent resolution to the public health crisis or its economic impacts, we continue to maintain a cautious allocation strategy, limiting exposure to risky assets.
We are now less than three weeks from a consequential presidential election in the US. A change in administrations is likely to bring about a reset in the nation’s pandemic containment policies, with a stronger focus on preventive public health measures and clearer communication on the pandemic. If Congress and the federal government end up under Democratic control after November, we are likely to see another major stimulus spending bill, tempered by broader restrictions to control the pandemic. If the current administration wins re-election, we would expect there to be a smaller stimulus bill, and a lengthier public health crisis. We don’t believe the difference between these two outcomes will have a material short term impact on the stock market. The bond market has the capacity to absorb large amounts of public debt, we do not expect increased debt issues to impact medium term rates while inflation is in check and the Fed keeps short-term rates low.
There is, however, a third possibility, that of a contested result and litigation over the presidential election. If this were to happen (as it did in 2000), we expect a lop-sided Supreme Court to side with the Republican candidate. This will have then been the second time in 20 years that the Supreme Court decided an election (against the winner of a popular majority). Such an outcome would result in lasting damage to the legitimacy of the court, and other public institutions in the country. This outcome is also the one most likely to be negative for investors in all asset classes. An uncertain outcome will hit US equity markets, and spook bond investors further. It’s safe to say that investors (and Americans for that matter) would prefer a clear and definitive result on or shortly after election night.
Please let us know if you’d like to discuss any of the above in more detail.
Regards,
Louis and Subir

Dear friends,
The past several months have been a very challenging time bringing dramatic changes to all our working and personal lives. We hope you and your family are safe and in good health.
In the capital markets world, the past quarter has been nothing short of remarkable. In March, we saw the quickest descent into a bear market in S&P 500 history, driven by the extreme measures required to contain the spread of the Covid-19 pandemic. The S&P 500 hit a low of 2,237 for the year in late March. The 10Yr Treasury rate fell below 1% for the first time in its history. Since then, buoyed by trillions of dollars of stimulus support from governments and central banks around the world, many equity markets have recovered from those lows. The S&P 500 closed the second quarter at 3,100, only 10% below it’s all-time high reached in February. Most international equity markets have made similar recoveries as investors have shrugged off the economic fallout from COVID-19 with a view that any economic downturn will be short-lived and overcome by the flood of liquidity provided by central banks.
Bond markets are, in contrast, pointing to a far more pessimistic outlook. The 10 year treasury continues to trade below 0.70%, a level never reached before 2020. Buyers of 10 year Treasuries believe rates in the US will remain below 1% for most of the next 10 years. The 10 year rate for German bonds is -0.47%. That’s not a typo, it is a negative rate. Investors are paying the German government for the privilege of giving it money. Bond markets, which are larger and tend to be more restrained than equities markets, point to a deep and extended recession across much of the world.
Economic indicators seem to support the bond market’s view. In February 2020, over 152 million people in the US were employed in non-farm related activity. By May, that number had fallen to 130 million, as several industries largely shuttered their doors. June has seen some limited gains, with non-farm employment increasing to 138 million. The resurgence of Covid 19 cases in various parts of the country puts much of that partial recovery in employment at risk. And there’s concern as the pandemic drags on many of these job losses may be permanent.
This pandemic has also stretched to the limit, the finances of many municipalities and states. Government entities generally maintain more stable levels of hiring and employment, but we have begun to see furloughs and layoffs in the government sector as well.
The public health response in the US has been decidedly mixed. State governments across much of the North-East and Pacific coast appear to have acted on the advice of public health experts. In contrast, state governments across the south and south-east have been less careful, opening many public venues, beaches and businesses earlier than public health experts recommended. The unfortunate, predictable result is that the south and south-east of the country now have confirmed case rates that are as high as the north-east at its peak.
This pandemic has also exposed sharp differences in the response and capabilities of public health officials in different countries. When compared with the well-coordinated action taken in other countries, it seems clear to us that the US government has bungled its response to this pandemic. The rate of new infections has fallen sharply in much of Europe and several Asian countries like Japan, Taiwan, Vietnam and China. In contrast, the US, India and Brazil are
reporting record numbers of new cases each day. And unlike India and Brazil, the US is a developed nation that should have the organizational and healthcare infrastructure capacity in place to handle this type of crisis.
Back in February and March, there was a faint chance that a strong, coordinated global response might contain and then end the spread of the virus. The prior experience with SARS gave some hope. With confirmed global cases now at 13 million and rising sharply, it is clear that containment is not possible, unless far more draconian social isolation measures are implemented immediately across the world. This scenario seems highly unlikely. Our best hope now is that a vaccine or cure is found and the long-term health impact of contracting this virus is contained.
A great deal of uncertainty remains around the future trajectory of economic conditions and asset prices. A lot depends on the efficacy of potential vaccines and treatments for those sickened by the virus. The ability and capacity of businesses to adapt to changed circumstances is another key factor. Many businesses operating on thin margins have experienced enormous financial stress over the past few months. We have seen several high profile bankruptcy filings and expect to see many more before year-end. The response of consumers and workers to dramatically changed living and working conditions will play a large role in determining the level of economic activity in the months to come. Many households in the US and across the world have undergone severe financial strains over the past few months as several industries like hospitality, travel and entertainment have seen revenues dry up. When these workers return to their old jobs, or find new ones, we expect they will be more cautious about their consumption habits for quite some time.
Our view is that the US and economies around the world remain in the midst of a sharp global recession. The ineffective pandemic response in several large economies virtually guarantees that the impact of the pandemic will be with us through the rest of the year. As value investors
looking at the level and direction of economic indicators, we see severe challenges for most businesses, a weak earnings environment and a significant drop in consumer demand. While governments and central banks around the world have thrown trillions of dollars as a stopgap to address economic fallout, we don’t see this as a solution so long as the pandemic continues its current trajectory. That said, can asset prices continue to rise despite being completely untethered to the underlying economy? The answer is yes. The past few months have shown how flooding liquidity into the marketplace can boost stock prices. But rather than fixing the underlying problems in the economy, this liquidity is merely blowing up an asset bubble and stretching valuations to heights we haven’t seen since the dotcom bust in 2000. As any long term investor knows, the problem with asset bubbles is they eventually pop, often without any advance warning.
We recommend investors remain very cautious, and limit allocations to risk assets like equities. We think investment grade bonds, inflation protected bonds, emerging market bonds and precious metals (gold and silver) are good alternatives in this environment. We continue to believe there will be an opportunity to buy high quality risk assets at significant discount in the coming months.
Best,
Louis and Subir

The foregoing contents reflect the opinions of Washington Square Capital Management and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or constructed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. 

Post performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

Dear friends,
We hope you and your family are healthy and safe.
The past quarter in the markets has been one of those periods where days can seem like years, and weeks like decades. We entered 2020 with risk assets, including stocks and high yield bonds, trading at all time highs. Stocks reached lofty valuations on cyclically high earnings. An exceedingly overvalued market then ran into an exogenous shock that has prompted comparisons with the dust bowl of the 1930’s.
The S&P 500 started the year at 3230, and rose as high as 3393 in mid-February. Six weeks later, it ended the quarter in a bear market, down over 20% at 2584. This has been the quickest descent into a bear market for stocks in many decades. The moves in the bond market have been equally extreme. Early March was a period of immense dislocation in many major markets, precipitated by a collapse in oil as travel was curtailed across the globe. This created a spate of margin calls and the collapse of many levered trading strategies that rely on stable correlations between different asset classes. The margin calls and panic this induced drove numerous participants to raise cash, at any cost. The rush towards the safety of US treasuries pulled the 30 year yield below 1% in early March, a level never before breached. That was the earliest sign that something had begun to go very wrong. By late March, most market participants came to realize that without extended stay at home orders, the US healthcare system would be overwhelmed by the same issues confronting Northern Italy. Facing the possibility that death counts would rise exponentially as hospitals drowned under the load of COVID-19 patients, most US governors made the responsible decision to curtail movements. We are now at the point where market participants are estimating the duration of these disruptions to normal economic activity.
Our view remains the same as it was in early March. This is not a short-term pause, but rather the end of a business cycle. The size of the exogenous shock suggests to us that the damage will be extensive and could rival the 2008-2009 crisis. The speed with which job losses have occurred, essentially shuttering entire industries, has been shocking. US unemployment claims have never exceeded 900,000 in a single week. The week ending March 20 saw over 3.3 million workers file for unemployment. As if that number wasn’t staggering enough, it doubled the next week. 6.6 million additional workers filed for unemployment benefits during the week that ended March 27. Several large companies announced mass lay-offs or furloughs in the week ended April 3, so the news will likely continue to be grim. Every one of those lay-offs represents a family that now faces enormous uncertainty around basic material needs including shelter, food and healthcare. The human cost of our current situation is not limited to those who have fallen ill.
The US unemployment rate is almost certainly well above 10% right now (in 2009, it peaked at 10%). Fed governors have speculated that in a worst case scenario
unemployment could climb as high as 30% or even 40%. These are numbers that the US has not seen since the Great Depression. While the US economy is very resilient, it’s hard to imagine a scenario, even with outsized levels of stimulus, where the economy bounces right back from this magnitude of systemic shock.
The largest unknown in all our estimations is the actual trajectory of COVID-19. We have begun to see case numbers in parts of Europe and harder hit areas in the US level off, but it’s unclear how long the restrictive measures currently in place will be required. We do know that our government’s haphazard, tardy and contradictory response to the crisis in the early weeks closed off some of the less costly paths we could have followed. The US is
now the clear epicenter of the pandemic and the developed economy most likely to shoulder the highest burden from it. The current conversation centers around “flattening the curve” of new infections, which have been rising steadily in the US (even in the absence of readily available, accurate tests). As the World Health Organization has pointed out, once the curve is flattened, it has to be brought down as well. The example of the Asian countries is that relaxing stay at home orders can easily lead to a resurgence in infections. Eradicating the pandemic is a task that will be measured in months, not weeks.
The machinery of the markets has been operating throughout the crisis, despite extreme volatility in both stock and bond markets. We have, however, seen the city we love come to a virtual standstill as every effort is made to contain the impact of the pandemic. It has been strange to see silence descend on New York during the daytime, a silence broken only by the tragic and constant wail of ambulances. Like many of you, our lives have been directly impacted by the pandemic. We have been unable to work from our office for weeks and have initiated our disaster recovery plans to work from home (we were prepared for this type of situation despite how remote a possibility it may have seemed a few months ago). Unfortunately, the best information we have suggests that many other areas of the country might face similar circumstances.
In our view, the market’s recovery from this sudden stop will be slow and halting. In 2000- 2002, it took the stock market over 18 months to bottom. In 2008-2009, it took a year and a half of declines before the nadir was reached. Though this crisis has arrived with remarkable speed, there is no reason to believe the recovery will be as sudden. The rolling, global nature of the shutdowns required to control the spread of the virus will ensure that some level of demand weakness remains through much of the year. Most economists now forecast a global recession that lasts three quarters with US GDP declines being estimated at 10-30% at their height.
We believe these numbers are in the right range, though there is an outside chance that the extreme measures to mitigate the spread of coronavirus last longer. The impact on many industries and enterprises will be severe. A survey of small businesses in the US indicated that 25% of them anticipate closing permanently within weeks if conditions do not improve. Large businesses will face enormous financial stresses if revenue streams continue to be disrupted for months. We have already seen the impact in the high-yield bond space, where many enterprises were operating at very high leverage with no margin for error.
Lastly, the scale of the fiscal and monetary stimulus required to stabilize the markets and the broader economy is immense. The US government has already passed a stimulus that will cost about 10% of GDP. We believe more will be required. The profligacy of the current administration meant we were operating trillion dollar deficits in the midst of an economic boom. With economic activity rapidly collapsing and the need for more stimulus measures apparent, the deficit will surely balloon to multiple trillions in 2020. It is clear that tax rates will have to rise in the future, and US government finances will be weaker. Among the long range factors to consider is the reality that the US economy has now seen three extreme market crashes within the space of 20 years. This history will surely have an impact on the manner in which younger investors view the markets.
We continue to advise caution and recommend investors prepare for more big swings in volatility as markets respond to news flow and search for stability over the coming months. For several quarters now, we have been increasingly defensive in our positioning (reducing stock exposure), concerned about outsized valuations. Though we believe the broad stock indices have not yet reached a bottom, we have begun to see decent valuations on some individual companies and some good opportunities in the bond space. The next few weeks will see a flood of Q1 corporate earnings reports and we’ll get more insight into how companies have managed this crisis and which are best positioned going forward.
The silver lining to major market downturns is that it provides a buying opportunity for investors who are patient and focused on the long term. By being defensively positioned, we’ll have the opportunity to shift money from low-risk bonds into stocks at more favorable valuations. While we think stocks likely have further to fall, calling a market bottom is difficult, so our strategy will be to buy incrementally when we see good value and think the risk/reward looks favorable.
Within every crisis are the seeds of adaptation that make us better able to avoid such crises in the future. Though the short and medium term prognosis is weak, in the long-term we expect to return to normal levels of growth. As with so many other challenges our society has faced, we are convinced we will make our way through this one as well.
Best,
Louis and Subir

The foregoing contents reflect the opinions of Washington Square Capital Management and are subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or constructed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. 

Post performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

In the last debate between Democratic presidential candidates, moderators challenged billionaire Tom Steyer on his commitment to combating climate change. Steyer made his fortune in the hedge-fund industry by investing in fossil fuel businesses among other things. He said this was before he fully understood the challenge posed by climate change and has since divested of all such investments. By way of explanation, Steyer said his businesses invested widely in all sectors of the economy, including fossil fuels.

Not all investors are billionaires who can launch self-funded campaigns for the presidency, but the point Steyer made actually can apply to almost anyone who invests in public markets: divesting entirely from fossil fuel companies is rather challenging when you hold a diversified portfolio. 

The demand for ethical investment choices is as old as the modern stock market itself. When shares in public companies first began to trade in the 18th century, Quaker endowments confronted the discomfiting fact that some of their investments might be profiting from the slave trade. This realization led to an early divestment campaign. Institutional investors like pension funds and endowments have long included ethical factors in their investment decisions. This has often been a response to prodding by activists and students, most famously during the campaign against apartheid in South Africa. Individual investors have generally not faced such pressure, though some of our clients with politically aware children would beg to differ.

We do not believe consumer or investor choices alone can deliver structural change. Yet where we invest is a window into how we think about the impact of our investments, or whether we’ve thought about it at all. As investment professionals focused on socially responsible investing, we speak daily with families who want their investments aligned with their values. Our clients have varying motivations for engaging us. Many are concerned about the environment, war, human rights, gun violence and worker’s rights. While seeking to avoid investing in companies that profit from destructive practices, we simultaneously seek investments in sustainable companies (a process called positive screening).

In recent years, millions of Americans have begun to examine their investment decisions with a moral/ethical lens. Few are as outspoken about economic morality, or have as large a platform as the leading candidates for the Democratic nomination. We decided to put the two progressive candidates (Bernie Sanders and Elizabeth Warren) to the test by evaluating their investment portfolios against their rhetoric. 

Our analysis makes it clear that even well-informed investors with access to the best information have a tough time incorporating their values into their portfolios. For years now, Senator Warren has criticized the CEOs of both J.P. Morgan and Facebook. Yet, by our estimate, Senator Warren and her husband have approximately $50,000 invested in each company’s shares. This would almost certainly come as a surprise to Senator Warren, as it would to most Americans with conventional portfolios.

To calculate this number, we used self-reported, 2018 senate asset disclosure forms for Senators Bernie Sanders and Elizabeth Warren. Since candidates are only required to report broad ranges for the value of their investments, our analysis has to be limited to these ranges as well.

Both candidates hold substantial amount of cash, so let’s start there. Sanders has publicly chastised America’s largest banks with some regularity, and his banking relationships reflect that criticism. He banks with the Senate Federal Credit Union and two community banks. If you are concerned about the outsized power that very large banks wield, you would do well to follow his lead and switch to a credit union or community bank.

Senator Warren’s banking choices are rather inexplicable. She has been trenchant in her criticism of the largest American banks (notably, she had a very public spat with J.P. Morgan’s CEO Jaimie Dimon last month). Warren has publicly and legislatively supported community banks. In a banking proposal her campaign unveiled this summer, she envisions a partnership between community banks and the postal service to deliver low-cost banking services to underbanked communities. Despite several good community banking options in both Massachusetts and DC, Senator Warren seems to have chosen to patronize larger banks, including two behemoths, Capital One and Bank of America. 

Senator Warren’s investment portfolio looks very much like that of a former educator. She holds a number of broad-based, low-cost index funds, many of them at TIAA-CREF, an investment firm that has had a long partnership with colleges and schools. These are cost-effective saving and investment vehicles. However, broad index funds incorporate virtually every industry in the economy including arms manufacturers, polluters and companies which have worked to undermine unionization efforts. These holdings are at odds with Warren’s political positions. 

Throughout the campaign, Senator Warren has presented a robust climate change policy. Yet, over 4% of her stock portfolio is invested in the oil and gas industry, including approximately $40,000 in Exxon Mobil.

Bernie and Jane Sanders’ investment portfolio consists largely of mutual funds. In common with Sen. Warren and her husband, Jane Sanders has several investments with TIAA-CREF. This is an unremarkable coincidence given their work as educators. 

The Sanders have begun to take the first steps towards ethical investing since their holdings include a socially responsible mutual fund. The couple appear to be familiar with how SRI fund managers push companies to adopt more responsible practices. By seeking out socially responsible investments, they demonstrate greater awareness than most Americans. Yet their portfolios still contain numerous investments they would doubtless find objectionable.

The moral or ethical questions surrounding business activities can get obscured when considering a small investment in a large multi-national corporation with dozens of operations in several countries. Mutual funds often contain hundreds of individual investments, creating an even greater challenge for investors who seek to implement a social responsibility mandate. Like most investors in mutual funds, the Sanders don’t appear to have fully investigated what their mutual funds are invested in. For example, Bernie Sanders has sparred with Bill Gates over taxes and the outsized influence billionaires have on US politics. Yet, the Sanders single biggest stock holding is Microsoft, entirely via mutual funds. Despite Senator Sanders best intentions, and even though they invest in a socially responsible fund, his investments do not seem to fully align with the Senators’ values.

Since many companies do not accurately report on social/ethical criteria, implementing a SRI mandate becomes an insurmountable challenge for most individual investors. Most investment professionals in the industry have no experience in socially responsible investing. Many will cavalierly dismiss ethical criteria by making unfounded claims that ethical portfolios negatively impact performance.

In fact, SRI helps reduce economic risk in a portfolio. Unsustainable and exploitative business practices create significant risk of fines and accrue unaccounted liabilities. The example of tobacco companies is instructive, and we would suggest that fossil fuel investors may soon face a similar situation as governments and communities across the world seek to recoup the costs of climate change from the most culpable and largest actors.

Broader adoption of ethical criteria by investors on its own is insufficient to reverse systematic trends like climate change, wars and runaway inequality. It does, however, have an impact. If, for example, we wish to see meaningful policy action on climate change, investors have to speak up, with both their voices and their dollars. Separating our investments from other spheres of our lives simply perpetuates the status quo.

What then should families who wish to incorporate ethical criteria into their investment process do? The first step would be to engage an investment professional with extensive experience in the area. Our firm has 15 years of experience advising families on how best to incorporate their values into their investments. When done with care and diligence, ethical investing can reduce both economic and idiosyncratic risk and help improve portfolio performance.