A Long-Distance Relationship

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Deidra-web

by Deidra Krys-Rusoff
Senior Vice President

Municipal Bonds Attract Foreign Investors

U.S. stocks ended the week near record highs with the S&P 500 trading above 2,170 and the Dow above 18,545. A gain for the week would mark the fourth consecutive weekly advance.

The dollar strengthened on speculation that global central banks aren’t in a rush to add to unprecedented stimulus. In aggregate, U.S. economic indicators were positive for the week, such as the Purchasing Managers Index and housing starts, which presents further evidence that the economy is gaining traction. The benchmark 10-year Treasury closed the week unchanged, yielding 1.55 percent.

Brexit, negative interest rates and increased global market volatility have resulted in greater flows of foreign capital into the municipal market. The Federal Reserve’s flow of funds data revealed that foreign holdings of municipal debt rose to $89 trillion, up over $2 trillion in just the first quarter of 2016. We believe this is a direct outcome of foreign investors seeking positive yield in more stable markets and away from the negative yields oversees.

Why would foreign investors be interested in local government bonds? Many state and local governments are modestly growing, which is attractive to foreign investors seeking safety and stability. Georgia, Tennessee and North Carolina are examples of states benefitting from revenue growth beyond their expected yearly projections. In addition, Tennessee and Hawaii’s credit ratings were recently upgraded by Standard & Poor’s.

Not all states are sharing in the growth. New York reported yesterday that first quarter personal income taxes were down, reflecting the slowdown on Wall Street. This was partially offset by increases in sales tax and business tax revenue. Alaska, North Dakota, Oklahoma and Wyoming are also expecting revenue declines and volatility this year due to the effect of lower oil and coal prices.

Also, some states are losing direct sales tax revenue due to an increase in online shopping. Estimates of the tax losses are in the billions of dollars. Current laws allow some states the ability to tax business entities that have a physical store or warehouse in state, as established by a Supreme Court ruling in 1992. South Dakota is trying to mitigate revenue losses by establishing a law that will tax online sales based upon volume of sales (greater than $100,000) or quantity of sales (greater than 200). South Dakota’s law was written with the intent to directly challenge the 1992 ruling. Many states are awaiting the outcome and stand willing to draft similar laws should South Dakota win its challenge.

Our Takeaways for the Week

  • Recent market volatility and low global yields have increased foreign interest in state and local municipal bonds
  • Overall state revenue growth is increasing, but not all states are participating in the growth

Disclosures

Financial Times Names Ferguson Wellman to Top 300 RIA List

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Financial Times Names Ferguson Wellman Capital Management
to Top 300 Registered Investment Advisers List

PORTLAND, Ore. – July 18, 2016 – Ferguson Wellman Capital Management was recently named by Financial Times to their “FT 300 Top Registered Investment Advisers” list.

According to their detailed methodology, the RIAs are first examined via the RIA database and then only firms with $300 million or more in assets under management are considered. Next, the financial publishing company uses a formula based on six criteria and calculates a numeric score for each. Among the items of consideration are adviser assets under management, asset growth, the company’s age, industry certifications of key employees, SEC compliance record and online accessibility. According to the editors of the FT 300 RIA list, it is “presented as an elite group, not a competitive ranking of one to 300. This is the fairest way to identify the industry’s elite advisers while accounting for the firms’ different approaches and different specializations.” Over 520 RIA firms applied to be selected and of the 300 that made the list, only four firms from Oregon were selected.

“We are always pleased to see our firm mentioned on these lists among our peers,” said Jim Rudd, principal and chief executive officer. “It is a testament to the hard work and dedication of everyone at Feguson Wellman and West Bearing, but even more importantly to the clients we serve.”

Founded in 1975, Ferguson Wellman Capital Management is a privately owned registered investment advisory firm, established in the Pacific Northwest. As of 2016, the firm manages over $4 billion for more than 740 clients that include individuals and families; Taft-Hartley and corporate retirement plans; and endowments and foundations with portfolios of $3 million or more. West Bearing Investments, a division of Ferguson Wellman, serves clients with assets starting at $750,000. (data as of January 2016)

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Methodology and Disclosure from Financial Times:

The third edition of the Financial Times 300 has assessed registered investment advisers (RIAs) on desirable traits for investors. To ensure a list of established companies with deep, institutional expertise, we examine the database of RIAs registered with the U.S. Securities and Exchange Commission and select those that reported to the SEC and select those that had $300m or more in assets under management (AUM). The Financial Times’ methodology is quantifiable and objective. The RIAs had no subjective input. The FT invited qualifying RIA companies – more than 1500 – to complete a lengthy application that gave us more information about them. We added to this with our own research into their practices, including data from regulatory filings. Some 520 RIA companies applied and 300 made the final list. The formula the FT uses to grade advisers is based on six broad factors and calculates a numeric score for each adviser. Areas of consideration include adviser AUM, asset growth, the company’s age, industry certifications of key employees, SEC compliance record and online accessibility. The reasons these were chosen are as follows: AUM signals experience managing money and client trust. AUM growth rate can be a proxy for performance, as well as for asset retention and the ability to generate new business. We assessed companies on both one-year and two-year growth rates. Companies’ years in existence indicates reliability and experience of managing assets through different market environments. Compliance record provides evidence of past client disputes; a string of complaints can signal potential problems. Industry certifications (CFA, CFP, etc.) shows the company’s staff has technical and industry knowledge, and signals a professional commitment to investment skills. Online accessibility demonstrates a desire to provide easy access and transparent contact information. Assets under management and asset growth, combined, comprised roughly 80 to 85 percent of each adviser’s score. Additionally the FT caps the number of companies from any one state. The cap is roughly based on the distribution of millionaires across the U.S. We present the FT 300 as an elite group, not a competitive ranking of one to 300. This is the fairest way to identify the industry’s elite advisers while accounting for the firms’ different approaches and different specializations. The research was conducted on behalf of the Financial Times by Ignites Distribution Research, a Financial Times sister publication.

When the Metrics Don’t Fit

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Brad-00447-cmykby Brad Houle, CFA
Executive Vice President

Investor confidence rallied the S&P 500 this week with the index climbing to all-time highs mid-week and returning more than one percent by the week’s end. Bonds were lower in price and higher in yield with the 10-year Treasury moving from a 1.43 percent yield on Monday to a 1.59 percent yield at the end of the week.  Retail sales for June were stronger than expected and the Citigroup Economic Surprise Index recently hit the highest level since January 2015.

We have had a number of client questions regarding the article titled “Can We Ignore the Alarm Bells the Bond Market is Ringing” published in the July 11, 2016 edition of The New York Times. The essential thrust of the article is that, using traditional metrics of looking at global bond markets, we are in store for a serious global recession. However, due to the amount of accommodative monetary policy worldwide, the traditional metrics don’t apply.

Bond prices are not being set by markets, but rather by bureaucrats in different countries and in different currencies. To deal with the global malaise left over from the financial crisis, central banks around the world have been using quantitative easing in an attempt to stimulate economies. This strategy has been moderately successful in the United States if you look at unemployment and the strength of the consumer economy.  In other locations the strategy has had more of a mixed success. The jury is still out on the efficacy of quantitative easing in Japan and Europe longer-term.

One of the results of quantitative easing is a prevalence of negative interest rates worldwide. Bonds totaling $10 trillion and representing 14 different countries, one third of the world’s sovereign debt, now have a negative yield. As a result of these low interest rates U.S. Bond yields are very attractive to global investors. The United State 10-year Treasury at 1.50 percent is a compelling buy to an investor relative to a Swiss Franc denominated 10-year bonds with a -0.40 percent yield. If an investor buys this bond and holds it to maturity they will get back less than they invested. This calls into question the concept of the time value of money.

The United States is essentially importing low interest rates from abroad. As global investors buy U.S. Treasury bonds the prices rise causing the yields to drop. As a result, we do not believe the traditional signals regarding the economy gleaned from the bond market are reliable.

Our Takeaway for the Week

  • Central Bankers are setting interest rates, not the markets

Disclosures

Ferguson Wellman’s 40-Year Report

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Front_Page_FW_WB_40yr_Report

We are pleased to present our firm’s 40-Year Report. In addition to sharing some milestones Ferguson Wellman and West Bearing Investments reached in 2015, we have collected facts, history and imagery that reflect who we are as a company and how Ferguson Wellman has grown over four decades. To read the report, please click here.