1st Quarter 2017

April 15, 2017

Dear Client:

Over the last 18 months we have fielded many questions from our clients and prospective clients, as well as friends and family. With so many events happening, from Brexit to several worldwide elections, the political climate has been interesting to say the least.  And while many of these events may still have some lingering effects on the markets, we at Noesis firmly believe it’s all about the economies around the world when it comes to investing successfully for the long term. But political questions aside, we did want to take the time to ask our research team some of the more salient questions and get their collective feedback.  This newsletter will focus on those questions and our responses.


  • Jerry Spitzberg (JS)
  • Shihfang Chuang (SC)
  • Christian Paterok (CP)
  • Steve Smith (SS)


1. What characteristics in a company make you excited?

SC – We are interested in companies that are leaders in their industry.  They must have a sustainable growth strategy and a solid balance sheet to support it. We also like companies that have a wide moat and high switching cost for their clients.

JS – These companies traditionally operate around the world and they understand how to do business in the global economy.  We always look for companies with strong leadership and exceptional corporate culture.

SS – We like game-changing technology (smart phones, smart cars); expanding return on invested capital (ROIC), improving profitability or efficiency trends that can persist for an extended period.

CP – From a strategic perspective a certain competitive advantage such as a unique product/service, brand, scale, switching cost, or patent is important. The company should be in a favorable competitive situation with a high entry barrier, or weak bargaining power from its suppliers / customers, or a low threat of substitute products. From a financial perspective, sustainable growing revenue, earnings, and cash flow streams with a good visibility are critical. These streams should be healthy in relation to the balance sheet.

2. Where do you get new investment ideas?

SC – We are open to all sources of ideas. However, the industry reports and conferences are usually the main source of ideas.  We also screen companies from lists, for example, the most admired companies in the world, the most innovative global companies, the most ethical companies, etc.

SS – We are able to screen quantitative data and technical characteristics, emphasizing specific factors, through our systems such as William O’Neil, Zack’s and Bloomberg databases. Additionally we may read items of interest from Wall Street analysts or commentary by other investment professionals. We then research those ideas to determine if they fit our clients’ needs through our due-diligence process.

CP – Industry research and conferences are helpful. Even more are insightful conversations with the conference participants as well as with friends or clients working in different industries.

JS – We are always on the lookout for new trends or themes which we can participate in by finding companies who can capitalize on these opportunities.

3. How do you stay on top of new industry developments and education?

SC – We attend industry conferences and seminars often and subscribe to a wide range of publications.  We also have relationships with experienced investors of all styles and clients and prospects from a wide range of backgrounds. Travelling is also a good way to get exposure to new ideas and to stay on top of new development outside of the U.S.

CP – By attending various conferences, either sector-specific or general investment-related. The CFA Institute offers plentiful content to its members to stay on top of latest developments, tools, and thinking in the financial academia and industry: Conferences, research papers, curriculum updates, book recommendations.

4. Can you tell us which are the markets and sectors that are appealing to you and what is the reason behind it?

SC – We are very interested in the Emerging Asia region. The middle class in that region is getting wealthier and turning consumption into the main force of growth. Valuation is also attractive. We remain very confident in the IT sector especially the software industry.

SS – I have been focusing on late-cycle names in Tech, Industrials and Materials; especially being underweight in the last two groups. Still overweight consumer cyclicals, as they have been the best performers since 2009, but trying to find attractive entry points in Industrials, Material and other Tech names. We control risk through industry and geographic (including country) diversification. We also balance portfolios with growth and income securities, be it bonds or higher dividend stocks. Individual countries often experience short periods of sharp rises (overly optimistic) followed by long periods of slow decline (reality and apathy). See Russia, Brazil, Venezuela. The currencies follow a similar path.

CP – Emerging Asia offers, besides solid growth, also a relative stable political environment compared to other emerging markets. Among developed markets we like Europe; the region shows improving fundamentals while valuation is still attractive. We have a strong interest in the Consumer sector, either the high spending American or emerging Asian. Demographic trends in the developed world are providing long-term support to the Healthcare sector.

JS – Quite a number of our U.S. based companies have higher growth rates in these Emerging Markets which allow us to participate.

5. What are your criteria to use funds?

SC – When there is a high risk investing in individual names, for example, the small cap companies, we look to participate via low cost funds of one type or another. Perhaps the theme we like to invest is relative broad, for example, the region or sector ETFs.

CP – To enter a position quickly when speed of execution is critical; to gain diversified regional or sector exposure; to invest in attractive markets where we lack the expertise; to complement an existing portfolio with the goal to minimize the differences in risk exposures between the portfolio and benchmark.

6. What do you think about emerging markets? Does the emerging market actually exist?

SC – Emerging markets do exist and they are going to support the world’s GDP growth when most developed markets start to experience a lower growth rate for extended period.

CP – The ONE emerging market does not exist. Who remembers the excitement around BRIC countries? Brazil and Russia are going through recessions; India has hopes and potential, but does not realize it in a meaningful way, only China shows substantial economic improvements. This is the reason, why we prefer Asia among the developing markets.

7. Is the Market efficient?

SS – The Market is efficient in the long-run. In the short-run, human behavior, irrational assumptions and misinformation create inefficiencies which, at times, can persist for longer periods.  Always remember, the Market doesn’t stop at “Fair Value” on the way up or down; nor do prices of individual stocks. Additionally, stock returns are not Normally Distributed; the tails are very fat with a large percentage of very poor performers along with very good performers creating a barbell.

CP – The market is emotional in the short term and rational in the long-run. Various market anomalies exist, investors show herding behavior, and markets go through cycles of excessive greed and fear. In Warren Buffett’s words, frequent efficiency does not mean it is always efficient.

JS – We do not look at volatility in the markets necessarily as a bad thing because it can provide us with buying opportunities over time.

8. The Federal Reserve (Fed) seems poised to raise interest rates at least once if not twice this year.  How does this impact our thinking and what are we doing to adjust our portfolios?

SS – An unexpected increase in Fed Funds and/or Discount Rate is a harsh surprise for equity investors; especially those invested in momentum stocks. Given the Fed is slowly coming off of its zero interest-rate policy (ZIRP) as the economy has improved closer to full-employment, we don’t view one or two more rate rises in 2017 as forefront in our investment strategy or risk-control process. Increases are expected, and many observers feel the Fed is “behind the curve.”

CP – The futures market expects two more rate hikes in 2017, in-line with the Fed’s expectations. The measured pace should be seen as a way back to normality driven by improving economic fundamentals and thus positive for equity investors. In fixed income portfolios we already stayed short on duration, either through structured notes or fix-to-floating coupon bonds. While we were probably too early, it is helping us now. Going forward we monitor the relative value between equity and bonds to determine shifts in the asset allocation.

9. Jerry, you had the opportunity to travel to Nashville for the CFA conference in February.  What did you learn?

JS – This conference focused on Wealth Management and I had many take-aways over the two days. The prominent theme was how the communication with clients should be and is changing throughout the industry. Communication and the relationship should focus on the specific goals of each client which vary from one family to the next. Truly understanding our clients’ needs requires excellent listening skills and EQ or Emotional Intelligence.  EQ was covered in detail and is gaining a lot of attention along with behavioral finance. These discussions led into providing what could be the two most important things Noesis provides to our clients: discipline and education. Discipline, to avoid the behavioral tendencies of individual investors; and education of our clients, so they can learn and perhaps educate others including the next generation of their families. By no means is IQ or Intelligence Quotient not part of the relationship, but there needs to be a balance between EQ and IQ for the relationship to prosper.

Another area of communication that was discussed is the quarterly reporting that most financial firms currently provide. These reports typically focus on how an account did versus benchmarks. Perhaps a better way of reporting is to focus on how your wealth is providing for your well-being and where your wealth is versus specific goals.

The CFA conferences are always top level and I am pleased both Steve Smith and Christian Paterok are going to the annual meeting in Philadelphia next month.

Our next issue will focus primarily on our recent company summit and Noesis Vision Statement.  Nico Letschert will be sharing this with you in July.  In the meantime, as always, we welcome your feedback, questions and referrals.


Research Team