An Ace Ventura Environment: An Ideal Time for Efficient Growth

Why Invest in Efficient Growth:

• Top 1 percentile: Running Oak’s Efficient Growth separate account has performed in the top 1% of all Mid Cap Core funds in Morningstar's database over the last 10 years, net of fees.¹
• 5 Stars: Efficient Growth has a 5-Star Morningstar rating and received Morningstar's highest quantitative score of Gold.  
• Since inception, Efficient Growth has provided 27% more return than the S&P 500 Equal Weight Index and 10% more return than the S&P 500 Total Return Index, given the same level of downside risk, gross of fees. (Ulcer Performance Index)*

How to Invest:

• Efficient Growth is currently available as an SMA and ETF. (ETF specifics and SMA historical performance can't be shared in the same post - sorry, it's annoying, I know. Please inquire for the ticker or more information).
• The ETF Which Shall Not Be Named just hit its 1-year anniversary and has grown over 9000% since launch – from 2 to 187mm.

Performance update:

• Running Oak’s Efficient Growth portfolio was up 4.72% in July, gross of fees (4.68%, net).*

• Efficient Growth outperformed the S&P 500 Total Return Index and S&P 500 Equal Weight Index by 3.5% and 0.23%, respectively, in July, gross of fees.*

   

“If I’m not back in 5 minutes, just wait longer.” – Ace Ventura, Pet Detective

If there isn’t a recession in the next 5 months, just wait longer.

I’m not in the business of predicting recessions and thank goodness – I would have been fired a long time ago. I AM in the business of helping investors plan for and protect against a recession, though. Running Oak’s Efficient Growth portfolio helps clients and advisors effectively preserve wealth and guard against major drawdowns. Losing hard-earned money stinks.
Two good friends of mine are in the recruiting business. Both have said for a while now that there is clearly a recession from their perspective. High level roles weren’t being created and, instead, were being shed. Meanwhile, the government has been on a hiring binge, propping up job numbers, as I would imagine is always the case in an election year. Payroll revisions came out recently, revealing that 818,000 fewer individuals are employed than previously thought. The labor market isn't strong. 

The yield curve is generally considered to be the best predictor of a recession. When the yield curve first inverted (longer-dated rates dropped below shorter-term ones, which is abnormal), many assumed a recession was imminent. However, recessions follow normalization (when longer-term rates go from lower than short-term to higher), not inversion. The yield curve has now been inverted for longer than any time since just before 1929. What ensued then was unpleasant. The yield curve appears to be on its way to normalization (no longer inverted), again – following the longest inversion in almost a century.

A major driver of normalization is the Federal Reserve. In just over a week, the S&P 500 has bounced almost 8%, after experiencing a quick dip over the prior two weeks. The rationale behind the bounce is lower inflation numbers, seemingly giving the Federal Reserve more room to cut rates. In fact, a recent article stated that the question is no longer “if” the Fed will cut in September but by how much. If the Fed cuts rates, particularly by a larger amount, short term rates will decline, increasing the likelihood of normalization in the near future.

Again, recessions follow yield curve normalization. You may currently be asking yourself, “Should I invade Russia?” You may also be asking yourself, “Why would the Fed cut rates if doing so will lead to normalization followed by a recession?” History seems to be pretty clear about not doing the former, just ask Napoleon and Hitler. As for the latter, the Fed is famously late and wrong. They often cut rates late and when a recession is unavoidable, meaning the Fed cutting rates, not normalization – a result of the Fed cutting rates, is your recession cue. Regardless, the question now isn’t “if” the Fed will cut rates but by how much. 

The Fed would like to cut rates for a multitude of reasons, including the one below. Credit card defaults are now at all-time record levels.

In sum, a recession in the near future seems likely. If not in the next 5 months, just wait longer. Again, I’m not predicting a recession - because I’m not good at that, but caution seems prudent. If the best predictor of recessions has you wary, what is the appropriate course of action? If, like Ace Ventura, you have the reflexes of a cat and the speed of a mongoose, perhaps you can time things perfectly and tactically. If, like me, you have the market reflexes of a drunken elephant and the speed of a groggy sloth, I would recommend Efficient Growth.

Efficient Growth - Your Portfolio Recession (and No Recession) Buddy:

Efficient Growth is constructed to systematically and proactively address the risk of loss at all times. The portfolio will ALWAYS:

• Avoid over-valued companies - You don't want mean reversion working against you. The hottest companies very often become the coldest in a recession.
• Avoid over-leveraged companies - Debt is a double-edged sword that tends to turn on its wielder in a recession.
• Avoid over-concentration - Efficient Growth is equally-weighted, diversifying risk across companies and industries.

Differentiated Approach and Construction:

• Mid Cap stocks are at their cheapest in 25 years relative to Large. Efficient Growth provides significant Mid Cap exposure.
• Efficient Growth is built upon 3 longstanding, common sense principles: maximize earnings growth, strictly avoid inflated valuations, protect to the downside.
• Running Oak utilizes a highly disciplined, rules-based process, resulting in a portfolio that is reliable, repeatable, and unemotional.

Of course, a seemingly imminent recession may once again be put off for a later date. If so, Efficient Growth has performed in the top 1% of its peers over the last 10 years, performed roughly in line with the S&P 500 over the same period, AND has done so with minimal exposure to the Magnificent 7 and never having been invested in NVDA. Efficient Growth has provided much needed diversification without sacrificing upside.  

Efficient Growth’s philosophy is simple, easy to understand, and common sense:

• Above Average Earnings Growth – Because owning a company that is making more and more money is obviously a good thing.
• Attractive Valuations – Because paying a dumb price is, well, dumb.
• Lower Downside Risk – Because losing money stinks. Lower drawdowns mean smaller bounces are required to get back to new highs.

With just the slightest bit of critical thinking, one would theorize that Efficient Growth is likely to outperform due to higher earnings growth and investment in under to fairly valued companies and do so with less downside risk, due to the avoidance of overvalued, unprofitable, and insolvent companies. Efficient Growth would also never have almost 30% of the portfolio invested in just 6 highly correlated companies. (Because that would be irresponsible, putting clients at risk...)

Running Oak's goal is to maximize the growth of clients' portfolios, while subjecting them to far less risk of loss. In other words, we aim to help your clients realize their dreams and avoid nightmares. 

To learn more about investing in this Ace Ventura environment, please visit https://runningoaketfs.com or feel free to set up a time here: Schedule a call.

For additional data and context regarding the claims made within this post, please refer to the Disclosures and Additional Data document located here.

Investment Advisory Services are offered through Running Oak Capital, a registered investment adviser.

*Past performance is no guarantee of future results. Performance expectations are no guarantee of future results; they reflect educated guesses that may or may not come to fruition. All indices are unmanaged and may not be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments and strategies may be appropriate for you, consult with us at Running Oak Capital or another trusted investment adviser.

Stock prices and index returns provided by Standard & Poor’s.