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Welcome to the Roaring Twenties

“The Roaring Twenties were the period of that Great American Prosperity which was built on shaky foundations” – Paul Getty.

Happy New Year and welcome to the Roaring 20’s! Low interest rates, easy credit conditions as well as increased central bank liquidity fueled the stock market rally in 2019. Investment managers with expertise in macro analysis rode the wave, whereas fundamentalists who focused on corporate profit growth in many instances did not.

Before going into a brief market view for the coming year, I thought it made sense to first work a bit on my self-promotion. After-all, if I don’t do it, who will?


To clients, friends and readers – If you possess financial assets of $100,000 or more which sit in an old company 401K retirement plan, a brokerage account where you pay sales commissions, or with an adviser who exclusively picks mutual funds instead of managing an investment portfolio, then it may be time to move on to an investment manager/adviser that will better serve your needs.

As we inevitably age, our ability to withstand large drawdowns in our investment portfolios decrease with time. A 30% portfolio drawdown is unpleasant for everyone, however the twenty-five year old who has years to recoup losses can afford to make mistakes, while an older worker nearing retirement cannot. In these uncertain times, it has never made more sense to seek professional advice in planning your financial future, but it is important that the advice you receive is for your benefit, rather than your adviser’s. There is never a charge to speak to us about our services. Please contact me to find out more and to see if we’d be a good fit.

Much of the competition we face in our business is with advisers who work for the well-known firms who focus on selling products (such as mutual funds) rather than managing risk. My criticism of mutual funds along with investment managers/advisers who heavily rely on them has never been a secret. Investors who employ managers/advisers that either exclusively or heavily utilize mutual funds as their investment vehicle of choice will likely come up short when compared to investing with a separate account manager, who manages client portfolios made up of individual stocks, bonds, exchange traded funds and alternative investments. Here is why.

· Inability to Personalize – A mutual fund is an investment vehicle which pools together many investors assets. In order for this to work well, each investors’ return objectives and risk tolerance should be similar. This is unlikely to ever be the case. Factors such as investment time horizon, allocation preferences, ethical considerations, tax situations, concentrated investment positions, liquidity and income needs can vary widely between investors. Mutual funds are a generic, one size fits all investment vehicle.

· High Fees or Complex Costs – Typically a separate account investment manager/adviser charges somewhere in the ballpark of 1% of assets under management. However, in addition to this charge the mutual fund company/manager must also be paid as well. Mutual fund expense ratios can be as little as a couple of basis points but as high as a couple of percentage points and include management fees, 12b-1 fees (marketing), administrative fees, and operating costs. Additionally, many mutual funds have high trading turnover within their portfolios, which can mean investors are paying implicitly more in both trading commissions and bid/offer spreads. Personal Capital, a robo-advisor firm published a table of estimated charges by large institutions who heavily utilize mutual funds, which was then re-published in Financial Advisor IQ in late 2017 here. Simply put, if you are paying an investment advisory fee of 1% to your investment manager/adviser and additionally paying a mutual fund expense ratio of 1% then you are paying at least 2% away in fees annually for the management of your investment portfolio. This is the amount an investor’s investment needs to return every year before he/she will begin to profit. The question an investor should ask – why am I paying double for an investment manager/adviser to simply pick mutual funds for me?

· Tax Disadvantage – Mutual funds have certain tax disadvantages that negatively impact returns. Similar to individual securities such as stocks and bonds, profits in mutual funds are subject to capital gains tax. However, with mutual funds an investor will be held accountable for any capital gains the fund has throughout the year. As an investor, you have no control over when or what the fund sells or when it distributes these capital gains to you. For example, a mutual fund could have purchased shares in a company many years ago whose stock then increased in value. A new investor may have bought into the mutual fund after the gains in the stock occurred and therefore not received any of the benefit of the share price increase. However, when the fund goes to sell those shares, all current investors will be subject to the full amount of capital gains tax – whether or not the investor profited from the past purchase of those shares. Additionally, mutual fund capital gains can be incurred as the result of investor redemption requests, as the portfolio manager running the fund may need to sell securities to cover these sales requests. Also, because capital gains in a mutual fund are distributed to the shareholders of the fund, an investor could end up paying taxes on gains in a year where he/she didn’t sell any shares themselves or even worse when the overall fund had a losing year. In other words, an investor can lose money in a mutual fund and still have to pay taxes.

· Poor Communication – Investors in mutual funds should not expect to communicate directly into the fund investment management team. Instead, investors will be assigned a sales representative whose main objective is to sell more mutual funds, not manage investments. Mutual funds can have thousands of shareholders, which makes communicating directly with a portfolio manager pretty much impossible. Investors who have questions about strategy and or portfolio changes will be unable to speak with anyone but a sales representative. Additionally, it is unlikely a mutual fund manager or sales representative will contact investors to see if their investment objectives have changed and if that particular mutual fund still fits their circumstances.

Services Offered by Pacificus Capital Management

As a wealth management firm, we focus on investment management and wealth planning.

Occasionally, clients ask us questions about specific services we offer beyond traditional investment management. While most client relationships begin with the management of their investment portfolios, it also extends to all aspects of their financial wellbeing. Feel free to contact us if you have interest in discussing any of the services highlighted below.

· Investment Management

· Retirement Planning

· Education Funding

· Equity Ownership & Stock Option Advice

· Tax & Estate Planning

· Philanthropic Planning


On markets, my outlook closely mirrors the views of one of my investing hero’s and greatest hedge fund managers of all time, Stanley Druckenmiller, who was recently questioned during a Bloomberg TV interview.

The risk market looks to be in good shape. In the US we have full employment, $1 trillion plus annual deficits (large fiscal stimulus), very low nominal interest rates and negative real interest rates. Additionally, conditions across major developed world markets are not materially different.

When I think back historically, I see a fair amount of similarities to the late 90’s period (1997-2000), where the Fed eased three times during 1998 in response to the Russia/Asia crisis and the blow-up of hedge fund Long Term Capital Management. These insurance eases potentially extended the economic cycle and brought the stock market to new all-time highs throughout 1999. Therefore, my base case given the Fed’s reactionary monetary policy response is constructive for the year ahead. On markets, I believe developed economy stocks will perform well, emerging markets could finally outperform, commodities will broadly put in positive results while US interest rates will either remain stable or lower, which means assets closely affected by the cost of money such as real estate and housing should also do fine.

With all that said, as market prices increase, the inherent risk within the market increases. Prices are not cheap and are vulnerable to larger than average pullbacks. The most important thing when it comes to managing money and investments is risk management. Thoughtful diversification strategies coupled with an honest assessment of one’s risk tolerance enables investors to compound returns over long time horizons. This is, and has always been our aim for 2020 and beyond.


Justin Kobe, CFA

Founder, Portfolio Manager & Adviser

Pacificus Capital Management

Family Vacation Photo Summer 2019 – Rome, Italy


Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated.Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counter-party capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.

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