Elmwood Quarterly Insights July, 2013

Financial Planning Investment Management Tax & Estate Services

Elmwood Wealth Management 2027 Fourth St., suite 203

Berkeley, CA 94710 (510) 858-2723

[email protected] www.ElmwoodWealth.com

Elmwood Quarterly Insights In This Issue:

1) In tandem with a brief state of the firm address, the Elmwood team would like to extend a warm thank you to our clients.

2) We talk about the great Warren

Buffet quote, “only when the tide goes out do you discover who’s been swimming naked” And what it means for our stock market

3) We take a look at how financial planning considerations for women may differ from those of men

4) A summary of current Elmwood investment themes and our strategies that go along with them

July 2013

We Build and Preserve Wealth


Elmwood Wealth Management

Elmwood Company Update With the first half of 2013 officially at a close, Elmwood Wealth Management has now been in operation for eight months, and looking back, we are astonished just how fast this initial period passed! We would like to extend a heartfelt thank you to our clients and business partners as our initial success exceeded our expectations. At the close of June, we find ourselves nearing a milestone of $50 million in assets under management. We are thrilled to be working with both past relationships as well as new clients just recently introduced to the Elmwood team. We sincerely appreciate the trust you have placed in our advisory services. Our initial success gave us the opportunity to double our office space via the custom build-out of an adjacent suite. At the completion of the build-out, we hosted a successful open house event for clients, business partners, and friends of Elmwood. With our current lease taking us to the year 2016, we are pleased to establish a long-term base within the East Bay community. With the larger office space, we are actively pursuing the addition of a fourth member to our investment team. We have the good fortune of taking our time to find someone who will provide a good fit for the long-term. We would also like to introduce our new summer intern, Sherry Jiaa, who is currently a student at U.C. Berkeley. Advancements in technology allow us to

Quarterly Insights: July 2013

operate our business in a very lean fashion. As a direct result of our smaller and more efficient structure, we are purposely positioned to have a large degree of flexibility in meeting with our clients. While our new office space certainly provides a convenient meeting spot for clients throughout the Bay Area, we just as often meet clients in their respective homes or businesses. In addition, technology offers us the ability to host video meetings over the internet. This flexibility is something our client’s value when doing business with Elmwood. The development of close, personalized relationships sit at the core of Elmwood’s value proposition. With summer in full swing, we want to remind clients of our love of baseball! In support of our East Bay location, Elmwood holds season tickets to the Oakland A’s. Open dates remain for what should be an exciting pennant race in July, August, and September. To this point in 2013, the A’s have done their part to remind everyone that Bay Area baseball expands beyond a certain black and orange team from across the bridge! Thank you again for your support in helping make Elmwood a success. We look forward to a long and rewarding relationship together.




A View From The Beach

Bob Gillooly, CFA

Volatility returned back to the stock and bond markets the last two months. Our domestic stock market was up more than three percent, yet foreign markets and our own bond market did not fare so well. Though all have rebounded somewhat since this time, at one point in June the S&P 500 had fallen almost five percent and some emerging markets more than 15 percent. These rough waters remind us of the famous Warren Buffet quote, “Only when the tide goes out do you discover who’s been swimming naked”. These short market pull backs provide an opportunity to look at our own portfolio to analyze potential vulnerability. Here was our view from the beach. First, the U.S. stock market held up much better than foreign markets. This is a good sign and we continue to expect domestic stocks to outperform international, particularly U.S. small company stocks. Secondly, with cash earning nearly nothing the past four years, investors have been very aggressive trying to earn income in other areas. It appears this idea has been overplayed when areas like REITs were down 12%, utility stocks down 11%, and junk bonds down 8% in just a short period of time. Interestingly enough, stocks that paid no dividends at all were actually up the last two months. Next, health care stocks continued their strong relative performance and are now up 20% this year, likely due to their more defensive nature and the recent improvement in Medicare reimbursement rates. Last, as the 10 year U.S. Treasury interest rate rose from 1.60% to 2.60% (see chart) in just a few weeks, there was a mini-panic of investors rushing to get out of bonds. This also led to some dislocations within the bond market, mostly by bond funds that use leverage to improve returns.


Our Investment Strategy Now that we’ve seen what it looks like when the tide goes out, we feel more prepared for the summer ahead. Recent volatility confirms our suggestion published in our April Elmwood Insights when we took action by reducing some of our more volatile stocks, including some investments in China and the Emerging Markets. Looking forward, we will continue to overweight our U.S. holdings relative to those held internationally. Our stocks are focused on the growth of their dividends, rather than the absolute level of yield. Healthcare remains a key theme as we continue to build around companies that can manage well in a higher cost environment. Our bond approach remains conservative, and we will take advantage of any further dislocations in the market to improve the interest earned.




Financial Planning Considerations For Women

Shannon S. Lemon, CFP®

Life events such as marriage, having children, retiring, and caring for aging family members, all can have a profound impact on our financial circumstances. Women often face a different set of financial considerations than men. They are more likely to exit the workforce to stay at home with children or aging parents, tend to live longer than men, and often have a different risk tolerance when it comes to investing. This makes it extremely important to address women specifically in the financial planning process when working with couples. Women need to be very proactive in managing their finances and preparing for life events. Women need to start saving early! Life gets in the way of our retirement savings plans all the time. We have tuition to pay, cars to fix, vacations to take, concerts to attend, shoes to buy, sickness to deal with and more. Participating in a 401k plan as early as possible is important to building retirement assets. Because women may experience periods being out of the workforce, their contribution levels to retirement plans and their earnings history for social security is less than their male counterparts. Regardless of how much is contributed, the important part is getting started. If you are unsure of how much to contribute at least try to put away the required amount that will allow the full employer match, which is usually between 3-6%. Over time as comfort grows with budgeting, contributions can be increased. For women, a greater portion of their retirement is financed with social security because they have limited assets elsewhere. Not enough emphasis is placed on when and how social security should be taken versus applying at the earliest possible age. Deferring social security until full retirement age for both spouses can have a significant financial impact, especially for a surviving spouse. There are always other factors to consider such as health and the need for additional income, but overall a great


deal of planning can be done with regards to configuring the largest payment based on the individual’s earnings record or their spouse’s earnings record. Some individuals may be dually entitled if they are divorced or widowed. So before you file with the social security office, have your advisor walk you through the various options available to maximize your social security payment. Women tend to live on average 5 years longer than men, which equates to needing additional assets to cover their living expenses throughout their lives. This is further impacted by the fact many individuals have higher expenses near the end of their lives due to increased medical expenses. With women living longer than men, the likelihood they will need some type of long term care at the end of their lives is very likely. Planning for a serious illness or care at the end of life can be achieved through a long-term care policy. Generally long term care policies are not considered until someone reaches their 50’s but the key to a long term care policy is putting it in place well before a serious illness occurs and while a policy is still cost effective. Being prepared can avoid a financial hardship for the surviving spouse. Life Insurance also plays an important role in financial planning and helps to relieve financial stress due to an unexpected death of a spouse. If a couple has young children, significant debt such as a mortgage, it is especially important to carry adequate life insurance to cover these obligations so the surviving family can continue to meet their financial obligations. Finally, it is important for both spouses to be involved and active regarding their finances. Transitions between the various stages of life can often be difficult; however, planning ahead financially can help couples be better prepared to meet the financial obligations and allow them to focus their time and energy on one another and their family.





Investment Theme: U.S. Energy Resurgence – Not only has there been a tremendous amount of natural gas discovered in America, but new technology has led to a boom in new oil discoveries as well. The abundance of new energy will mean our country must invest in virtually every aspect of our energy infrastructure to make this resource available.

Elmwood’s Strategy: We are investing in companies that have large underground reserves of both natural gas and oil. We are also taking advantage of less obvious ways to exploit this theme. For example, companies which help clean up gas and oil wells, and transportation companies that move both supplies and the commodity itself across the country.

Investment Theme: Total Return Equity Investing – Total return takes into account both price appreciation and dividend payments. Companies are increasingly raising dividends and buying back stock as a return to shareholders.

Elmwood’s Strategy: Look for companies that have the cash flow to both buy back their own stock and increase their dividend. If a company bought back 2% of their outstanding shares annually and paid a 2% dividend yield, your total return would theoretically be 4%. This is a great backdrop in any circumstance.

Investment Theme: U.S. Health Care Needs – With new health care legislation now in place, approximately 40 million individuals will become eligible for health care coverage. This fact, coupled with the aging baby boomer demographic will create substantially more demand for health care going forward.

Elmwood’s Strategy: An increase of both the number of participants and the frequency of accessing health care inevitably will drive up the cost to cover this phenomenon. The investment opportunity lies within companies that benefit by serving a larger number of participants, yet are able to help reduce the cost of service. Insurance, benefit management, and product distribution companies all look well positioned here.

Elmwood’s Strategy: We take a more active approach to our bond portfolio. We are buying high current income corporate bonds (6-7%) with good credit quality, yet are relatively short in maturity. Some of these will likely be sold before maturity. We are also using higher income paying preferred stocks (6%) that offer more favorable tax treatment as a substitute for longer maturity bonds.

Investment Theme: High Current Bond Yields – Yields for most good quality bonds are extremely low. Yet there is a segment in the market where you can buy both high quality and high current interest paying bonds.

Investment Theme: Mortgage Backed Bonds – The housing market has found a bottom and default rates are declining. Should interest rates rise, these bonds typically perform better than most.

Elmwood’s Strategy: Investors have been reluctant to re-engage with the mortgage bond market since the financial crisis. Much of this risk has been accounted for and there is an opportunity to find higher yields.


Elmwood Wealth Management 2027 Fourth St., suite 203

Berkeley, CA 94710 (510) 858-2723

[email protected]

www.ElmwoodWealth.com

Elmwood is committed to making life easier for

you while maximizing your investment potential.

Elmwood Quarterly Insights July, 2013

Economy & Finance

Transcript of Elmwood Quarterly Insights July, 2013