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Mike Parker, CFA and Kurt Grove, CFA

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Unpacking Political Outcomes

Posted by Mike Parker, CFA and Kurt Grove, CFA on 11/2/20 2:15 PM

The following is our view on how to navigate this week’s heavy political slate, which is an excerpt of our Growth Equity quarterly update. Political risks are particularly challenging for investors, especially in economic areas where cash flows can be impacted by shifting political winds. Thanks to the fungibility of capital, we see opportunities for the main cylinders of our economic engine to continue to fire. The exercise just requires increased fundamental rigor.

The Market’s Dynamic Adjustments to Probability

The only thing certain about political uncertainty: it comes in many forms and can be tough to predict. The House subcommittee’s efforts are one aspect, while November moves us closer to solidifying compositions of both executive and legislative branches. Given that this particular exercise recurs on four- (presidential) and two-year (midterm) cycles, the market is no stranger to digesting, and seeing through, this newsflow. The market’s embedded probability-weighing mechanism will not wake up on November 4th and flip from 0% to 100% should the underdog win; probabilities shift daily in one way or the other with prices adjusting in anticipation of the changing outcomes.

The Administration’s Impact on the Market

It’s easy to fall down a rabbit hole when attempting to assess which political outcomes are more market-friendly. We see strong odds that executive leadership of US businesses will continue to deploy their fungible capital towards attractive returning pursuits. The economy in turn will grind forward regardless of party composition in Washington. Chart 1 below acts as an elegant reminder of how this dynamic has unfolded—and likely will unfold—across decades of shifting political winds:

Chart 1: Growth of $1 Since Coolidge

Above represents growth of $1 invested in the S&P 500 Index since 1928 including dividend reinvestment. Source: S&P Global, FactSet

A Lesser Unknown Challenger

We also see some factors translating into decreased uncertainty in the current cycle. Presidential challengers tend to be more of a wildcard relative to incumbents due to lesser-known governance histories. The 2020 Democrat card mitigates many of these factors, given Biden’s vice presidential history. On the healthcare front, a full-Obamacare reinstatement would entail dusting off the marketplace implementation playbook, with the possibility to avoid system crashes that plagued 2013’s implementation. Federal budget dollars would undoubtedly shift, causing sources of funds from the prior four years to turn to possible beneficiaries. This might put outlays to defense in the cross-hairs, while education, healthcare, and environmental affairs could be net benefactors.

Federal Taxation Efforts Over the Decades

On the tax front, there would, undoubtedly, be increased efforts to extract more from corporate coffers and from high-income individual earners. Although a corporate rate hike directionally would cause us to slip down the ranks of being globally competitive, a pro-forma 28% rate leaves us in better relative territory than the 35% level of 1993-2016 and all prior periods going back to the 1940s. Since capital has a way of migrating away from harsh regimes to more favorable ones, we see it likely that federal tax receipts will continue their path of fluctuating around an equilibrium, when viewed in the context of domestic GDP. Chart 2 below shows how this relationship has held rather consistently in the post-WWII era (blue line) despite massive changes to individual income tax brackets (yellow dotted line).

Chart 2: Federal Tax Receipts in Relative Context

Source: Tax Policy Center, Urban Institute and Brookings Institution; US Bureau of Economic Analysis; FactSet.

The Bar Is Always Rising

The bar for public equity investors to ingest information is always being raised. Setting all current macro factors on the scale, we see enough visibility for economic value creation to continue, which should bode well for equity market appreciation. Retaining consummate adaptability at our core will continue to prove essential, along with the need to identify and leverage all aspects of our increasingly digital futures. This will likely translate into more front-end work behind idea generation, but these are the exact conditions in which our investment process is built to thrive.

Download a full copy of our portfolio review by clicking here.

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Topics: Investing in the Future, Current Events, Asset Management, Growth Equity Commentary

Satisfying Absolute and Relative Outcomes

Posted by Mike Parker, CFA and Kurt Grove, CFA on 10/23/20 3:15 PM

The following is an excerpt from our recently published SWS Growth Equity 3Q strategy update, which is available in its entirety here. In the full piece, we provide our take on how to think through various sources of political uncertainty as investors, in addition to assessing the strategic merits of our internally managed strategy for public growth-style equity.

We view our quarterly updates as accountability milestones. The main goal is for the embedded analysis to act as the ultimate arbiter on whether our premise remains valid while assessing our efforts to deliver results. Despite what feels like a year’s worth of market-impacting news squeezed into a single quarter—we take a stab at deciphering some of this later in our Market Perspective section—3Q2020 was accretive in both relative and absolute terms, and we remain optimistic on continuing our quest for sustainable alpha delivery. We also see strong odds that the output of these efforts could satisfy two important investor bases, the ever-discerning relative performance seekers and those more focused on absolute outcomes. The details behind this reveal that long-term capital is well served by focusing on the sources of disruptive innovation.

Investing through Uncertainty: Focus on Digital Enablers

First, a side note on persistent uncertainty. Attempting to see through the haze is core to what we do, and it will always be so when investing in public equity. Assessing today’s seemingly limitless slate of imperfect information, it’s becoming clearer that the thesis we identified back in May—better outcomes require being over-indexed to the digital enablers—continues to be a critical thematic overlay in navigating the current environment. It also suggests that we don’t require “all-clear” signals on the election, stimulus sizing/timing, or COVID therapeutics/vaccines in order to deliver attractive return results. It does require careful diagnosis of the root causes behind the current massive demand shifts and deciphering what’s sustainable versus transitory.

Growth of $1 since Coolidge

Source: S&P Global, FactSet

Investing amidst a backdrop of COVID exhaustion can make it easy to overlook how increasingly reliant shareholder value creation has become upon digitally-sourced innovation. We highlight evidence of this in Contributors & Detractors (page 4 here), but it provides a helpful reminder of why it’s imperative to make the identification of the source and directionality of disruptive innovation a core investment process tenet.

Download a full copy of our portfolio review by clicking here.

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Topics: Investing in the Future, Current Events, Asset Management, Growth Equity Commentary

Recent Volatility in Context

Posted by Mike Parker, CFA and Kurt Grove, CFA on 9/9/20 4:11 PM

Volatility in the equity markets is ever-present, even if it may be hiding below the surface for some time. Investors do not need to be reminded of March 2020, where the Market Volatility Index (“VIX”) spiked to 82, coinciding with 31%, 38%, and 34% respective declines in the Russell 1000 Growth Index, Russell 1000 Value Index, and S&P 500 Index.

Chart 1: CBOE Volatility Index (“VIX”) 

Source: FactSet

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Topics: Investing in the Future, Asset Management, Financial Planning

A Digitally-Enabled Recovery

Posted by Mike Parker, CFA and Kurt Grove, CFA on 7/29/20 11:41 AM

The following is an excerpt from our SWS Growth Equity quarterly update, our internally-managed strategy based upon an institutionally-designed investment process.

Evidence shows that exposure to the digital enablers is an increasingly critical investment consideration. What was previously a future-proofing exercise has now become a critical pandemic navigation tool. We started to assemble data behind this thesis as they unfolded closer to the eye of the storm back in March/April/May, but the first June-quarter cohorts are echoing the same sentiment: many demand shifts are structural rather than cyclical.

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Topics: Current Events, Asset Management, Growth Equity Commentary

SWS Growth Equity July Strategy Update

Posted by Mike Parker, CFA and Kurt Grove, CFA on 7/23/20 3:02 PM

The following is an excerpt from our recently published SWS Growth Equity 2Q Strategy Update, which is available here to download. 

The second quarter was far from typical. The good news, we see our portfolio’s positioning in alignment with the sustainable drivers behind the market recovery’s shape. Indicators that we identified closer to the storm’s eye (back in March, April, and then May) have been reinforced by subsequent data releases, and it all revolves around exposure to the digital enablers as a key thesis component. This helps to clear the path through prolonged periods of uncertainty and impaired visibility. We take a stab at quantifying the economic magnitude that the market will be tasked to predict later in Market Perspective (see full quarterly here), but July demand proxies continue to net out to continued improvement.

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Topics: Investing in the Future, Current Events, Asset Management, Growth Equity Commentary

Strategy Fact Sheets
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SWS Growth Equity (Oct 2020): Access Here

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SWS Dividend Equity (Oct 2020): Access Here

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SWS Balanced Income (Sep 2020): Access Here

Strategy Resources
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Growth Equity 3Q2020: Access Here

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Growth Equity 2Q2020: Access Here

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Growth Equity 1Q2020: Access Here

Other Research
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Unleashing Asset Allocation Benefits (Mar 2019): Access Here

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4Q2018 Market Update: Access Here

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Volatility in Context (Dec 2018): Access Here

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3Q2018 Market Update: Access Here

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2Q2018 Market Update: Access Here

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Growth Becoming "The Market" (Jul 2018): Access Here

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The Current Opportunity (Apr 2018): Access Here

In the News
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How Technology's Massive Impact on Investing Can Help Shareholders

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The Financial Revolutionist: Investment management's "galling reality."

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FA Magazine: Running Leaner And Meaner With Tech

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