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Osborne Partners Capital Management, LLC
AAII Orange County Chapter
February 22, 2020
Osborne Partners Capital Management, LLC
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Justin McNichols, CFA – Chief Investment Officer • Chief Investment Officer and Principal for OPCM with over 25 years of experience. • Previously, the head of equity research at Wells Fargo Asset Management. • Additionally at Wells, managed over $1 billion in separate account and mutual fund assets. • A CFA Charterholder and a member of the CFA Society San Francisco and CFA Institute. • Earned a Bachelor of Arts degree in Economics in three years and a M.B.A. in Finance from the
University of California at Irvine.
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• The 2020s – The Great Normalization
• Introduction to Osborne Partners
Agenda
The Last 20 Years of Bubbles and
What It Means for the Future
Justin W. McNichols, CFA – Chief Investment Officer
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Two Decades of Asset Bubbles, Easy Money,
and Severe Bull and Bear Markets
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2000 Starts With a Generational Internet Bubble
That Causes a Major Recession
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The Internet Bubble Causes a Major Recession,
Prompting The Federal Reserve To Enact Easy Monetary Policy
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Easy Money Causes Bubble #2 –
A Housing Bubble That Pops in 2005
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Continued Easy Money Causes Bubble #3 –
Credit That Pops In 2007
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Global Easy Money Creates Bubble #4 –
Natural Resources Which Pops In 2008
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Easy Money Result –
An Unprecedented Triple Bubble Implosion
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Four Types of Recessions
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Earnings Recession: 1990, 2001, 2015 • Recession caused by any number of short-term factors
• Corporate earnings slightly negative for at least two quarters
• Economy Bottoms less than 1-2 years after peaking
• Equities usually fall by less than 20%
Economic Recession: Today? • Recession caused by Economic Old Age
• Corporate Earnings are negative for at least two quarters
• Economy Bottoms 1-2 Years After Peaking
• Equities fall around 20-30%
Federal Reserve Recession: 1969-1970, 1980-1982 • Recession caused by the Federal Reserve Raising Interest Rates too quickly or for too long
• Corporate earnings usually fall for more than two quarters
• Equities can fall more than 30%
Credit Recession: 2007-2009 • Major recession caused by a lengthy period of easy money, spike in consumer and
corporate debt levels
• Corporate earnings can fall for years
• Economy bottoms years later and the economic rebound is long and tepid
• Equities can fall more than 40%
What Happened Coming Out of the
2007-2009 Major Credit Recession
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1) The U.S. quickly reduces interest rates to a 0% Fed Funds.
2) The U.S. exits the global recession first before most of the rest of the
world.
Results in three major factors:
1) The U.S. dollar starts a decade long rise of 40% versus other currencies.
• Result: U.S. equities outperform Foreign equities.
• Result: Natural Resources that are priced in U.S. dollars face multi-
year headwind.
2) Economic growth is slow for many years:
• Result: Any company with higher earnings growth is consistently bid
higher – Amazon, Netflix, cloud software, tech in general.
3) Persistent Record Low Interest Rates:
• Result: Income investors bid up “bond proxies” like utilities,
consumer staples, and REITs to levels rarely seen
Valuations Spike and Risk Spikes!
Valuations For High Growth Companies = High Risk
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Valuations for Bond Proxies = High Risk
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Result Twenty Years Later – Slow Build Up of Extremes
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• Abnormal Returns for all asset classes
• Strong returns concentrated in one asset class and only a few sectors
• Recency bias causes herd mentality and overvaluation continues
An investor cannot invest directly in an index. Please see the end of this presentation for more information regarding this table. The Alternatives asset class is since 1987.
Last 10 Years Since 1977 Return
Annual Return Annual Return Difference
------------- ------------- -------------
Domestic Equities 13.6 11.4 2.2
Foreign Equities 5.0 9.6 (4.6)
Natural Resources (4.7) 5.9 (10.6)
Real Estate 8.9 10.7 (1.8)
Alternatives 4.5 6.9 (2.4)
Fixed Income 3.1 6.9 (3.8)
Equal Weighted 5.3 9.6 (4.3)
Osborne Partners Capital Management, LLC.PERFORMANCE COMPARISON TABLE
Asset Class Return Divergence From The Long-Term Average
12/31/2019
Our Present Environment – Five Extremes
Extreme #1 = U.S. Equities versus Foreign Equities
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Our Present Environment – Five Extremes
Extreme #2 = U.S. Growth Equities versus Value Equities
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Our Present Environment – Five Extremes
Extreme #3 = U.S. Dollar Versus Foreign Equities and Natural Resources
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Our Present Environment – Five Extremes
Extreme #4 = Hedging No Longer Useful
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Our Present Environment – Five Extremes
Extreme #5 = Interest Rates
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What To Expect From The 2020s
“The Great Normalization”
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1) The U.S. dollar appreciation slows or ceases:
• Demand increases for previously underperforming, but improving
currencies and economies
• Foreign Equities and Natural Resources headwinds are reduced.
2) Countries outside the U.S. begin to post earnings growth at or above the U.S.
• 2020 estimated EPS growth for U.S. is similar to the rest of the world.
3) Extreme valuation differential reverses
• U.S. trades at a 30% premium to ROW
• U.S. trades at a 40% premium to Emerging Markets
• U.S. trades at a 30% premium to Germany
• U.S. trades at a 25% premium to Japan and Brazil
• U.S. trades at the same valuation as India
4) Natural Resources: Improved supply, rebounding demand, no USD headwind.
What To Expect From The 2020s
“The Great Normalization”
U.S. Dollar Appreciation Slows
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What Happens To Foreign Equities if the U.S. dollar appreciation slows or ceases?
What To Expect From The 2020s
“The Great Normalization”
Foreign Equities Begin To Outperform U.S. – Earnings Growth and Valuation
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2020 Estimated Earnings Growth = U.S. 8-10%, Rest Of The World 8-10%
2020 P/E Premium U.S. versus ROW = 32% (One of the highest in decades)
What To Expect From The 2020s
“The Great Normalization”
Value Outperforms Growth – Investors Overweight Growth
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Growth equities are trading at a 20-year valuation high of nearly 25x earnings
Growth equities trade at a 60% premium to value equities as value earnings are bottoming:
What To Expect From The 2020s
“The Great Normalization”
Natural Resources in the 2020s
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Natural Resources versus the U.S. Dollar:
What To Expect From The 2020s
“The Great Normalization”
Natural Resources in the 2020s
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Natural Resources Example Inventory Levels:
Source: The International Coffee Organization
What To Expect From The 2020s
“The Great Normalization”
Fixed Income in the 2020s
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The Consensus Is Interest Rates Are Staying At Record Lows Or Headed Lower.
Over the Past 30 Yrs, the Average Inflation Rate Is 2.4% and the Average Fed Funds Rate Is 3.0%.
If Inflation Is at the 30 Year Average Today, Why Is the Fed Funds 1.50-1.75%?
Do Interest Rates Belong at These Levels?
What To Expect From The 2020s
“The Great Normalization”
How To Invest?
1) Avoid overweighting U.S. Equities, along with HiGroHiVal and Bond Proxies:
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What To Expect From The 2020s
“The Great Normalization”
How To Invest?
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2) Use a Multi-Asset Class Discipline. Delivers Equity-like Returns with Less Risk
Simple Equal Weighted Multi-Asset Class Portfolio:
Returns Achieved With Long-Term Standard Deviation (Risk) of 10.7%.
The Long-Term Standard Deviation of Global Equities is 19.0%
The Multi-Asset Class level of risk is 44% less than a portfolio of 100% global stocks.
Multi-Asset C lass Global Equities Return
Period Annual Return Annual Return Capture
------------- ------------- ------------- -------------
3 Year 7.2 12.5 58%
5 Year 4.5 8.6 52%
7 Year 4.8 10.1 47%
10 Year 5.3 9.3 57%
20 Year 5.9 5.1 116%
43 Year 9.6 10.6 90%
Multi-Asset Class Return Capture Versus Global Equit ies
12/31/2019
Please see the presentation disclosures for more information regarding this table.
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Osborne Partners provides sophisticated investment management with
active financial planning for wealthy individuals, families, and institutions.
The OPCM Difference
• History – Over 82 years. One of the oldest firms in the U.S.
• Discipline – Customized, actively managed multi-asset class, using individual
securities
• Team – CFA® Charterholders and CFP ® Practitioners on the team
• Service – Long term annual client retention routinely 99%
• Performance – A history of outperformance with low downside capture
CFA Institute does not endorse, promote or warrant the accuracy or quality of Osborne Partners Capital Management LLC. CFA® and Chartered Financial Analyst® are registered
trademarks owned by CFA Institute.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S.,
which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Presentation Disclosures Osborne Partners Capital Management, LLC (OPCM) is registered with the Securities and Exchange Commission as a Registered Investment
Adviser (RIA). Registration is not meant to denote any form of recommendation or endorsement by the SEC or state securities regulators.
This presentation is offered for informational purposes only by OPCM and should not be considered investment advice. The opinions expressed
herein are strictly those of Osborne Partners Capital Management, LLC.
Past performance is not indicative of future results. Inherent in any investment is the possibility of loss. None of the data presented herein
constitutes a recommendation or solicitation to invest in any particular investment strategy and should not be relied upon in making an
investment decision. Each investor should select asset classes for investment based on his/her own goals, time horizon and risk tolerance.
OPCM does not provide tax or legal advice. This presentation should not be considered a comprehensive review or analysis of the topics
discussed today. These materials are not a substitute for consulting with your legal and/or financial professional(s) in a one-on-one context
whereby all the facts of your situation can be considered in their entirety.
Despite efforts to be accurate and current, this presentation may contain out-of-date information. Additionally, OPCM will not be under an
obligation to advise you of any subsequent changes.
Information provided during this presentation is provided “as is” without warranty of any kind, either express or implied, including, without
limitation, warranties and merchantability, fitness for a particular purpose, or non-infringement. OPCM assumes no liability or responsibility for
any errors or omissions in the content of the presentation.
CFA Institute does not endorse, promote or warrant the accuracy or quality of Osborne Partners Capital Management, LLC. CFA® and Chartered
Financial Analyst® are registered trademarks owned by CFA Institute.
In the Performance Comparison Table on slides 16 and 30, the following benchmarks are used to represent each asset class: Fixed Income –
Barclays US Aggregate Bond Index (1977-1999), Barclays US Govt/Credit Interm Bond Index (2000-2019); Domestic Equities – S&P 500; Foreign
Equities – MSCI EAFE (1977-2000), MSCI World ACWI ex US (2001-2019); Natural Resources – GSCI (1977-1991), Bloomberg Commodity
(1992-2019); Real Estate – NAREIT (1977-2004), NAREIT Global (2005-2019); Alter-natives – Hennessee Market Hedge Fund Index (1987-
1999), HFRI Fund Weighted Index (2000-2007), HFRI Asset Weighted Index (2008-2019). The Equal Weighted Portfolio represents a hypothetical
portfolio equally weighted in each asset class of the corresponding benchmark. The Global Equities return on slide 30 is the average weight of
the S&P500 and the MSCI World ACWI ex. US.
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