Bruce Hotaling

Bruce Hotaling

The Picture or the Frame

Welcome to 2013. We here at Hotaling Investment Management, LLC wish you and your family a safe and prosperous new year! We will do our best to work with you to obtain these goals.

By most measures, 2012 was quite a good year for investors. Stocks, measured by the S&P 500 generated a total return of 16%. Bonds, measured by Barclay’s US Intermediate Government/Credit, returned 3.89%. This is a broad look at fixed income returns – and the simple takeaway is that most fixed income sectors did alright last year.

The numbers are now in the books. When the calendar ticked over into 2013, good as the returns were, they no longer matter. Now, by convention, we are collectively focused on what our returns will be for the calendar year 2013.

I am not a big believer in forecasts, so I will not produce a top ten list of prognostications for the coming year. You can find some of the more prominent views (Barron’s Roundtable, Byron Wien or Bill Gross) on-line. Most seers, over time, only generate 50/50 results. Their opinions, while interesting, have limited “investability.”

What I can do is point out certain observations, constraints or opportunities as I perceive them. In my opinion, it is often difficult for investors to hone in on the important stuff, and look through the noise. It is not new information or strategies that make the difference, rather it is seeing and acting on what is already apparent.

  1. Volatility is here to stay. Uncertainty is inherent in investment markets and always has been. Without it, there would be no return potential to investors. When the commentator on CNBC says “markets dislike uncertainty” feel free to turn off the television.
  2. Try not to “love” your investments. As Tom Hanks said in A League of Their Own, “there’s no crying in baseball.” Emotions will only cause problems.
  3. Herd thinking. 2012 produced strong equity returns while in fact most investors were moving money from stock funds into bond funds. The overwhelming tendency is to do what everyone else does. Think about becoming a contrarian.
  4. Taxes are going up. The payroll tax, a new Medicare tax and the new Net Investment Income Tax. They will impact nearly everyone, but will not have any noticeable impact on the investment markets. These are separate from the tax increases/deduction limits agreed to by Obama and Congress in avoiding the fiscal cliff.
  1. Earnings Estimates. Stock prices and earnings are reasonably well correlated over time. Current estimates for the S&P 500 are $113.15 (2013) and $125.11 (2014) per share. Any revision to these numbers is a critical factor to watch relating to the direction of stock prices.
  2. Valuation. The market is trading at 12.8x 2013 earnings estimates, below the 10 year average of 14.2x. A 14.2x on $113.15 implies a $1,600 price level for the S&P 500 or an approximate 10% return from today’s level.
  3. Economic Data. There remains a lot of economic wood to chop. Job growth is stubbornly slow, real income growth is low (declining), and income inequality is growing.
  4. Low Interest Rates. The Federal Reserve has stated its intention to keep rates lower, longer, until true economic growth takes hold.
  5. Marginal Inflation. Labor costs are low. Energy (oil and gas) prices are expected to continue to fall. That’s it.
  6. Cost is critical. Do not overpay. The key sentiment when purchasing an asset is caution, not urgency.

While I am optimistic about the coming year, I think a good measure of patience is in order. Sitting still is OK. Few made their investment riches in one or two trades. We will follow the same tried and true investment process and guidelines we have in the past.

One aspect of our investment process we are improving is our transparency. We are implementing a new portfolio accounting and reporting system called Tamarac that I am confident you will find to your liking. You will be able to view the same reports and analyses we view (if you wish). It will also be available through a client “portal”, allowing you to log in any time you like. This will be in place by March.

In the meantime, please feel free to check in if you have any questions. Valerie, Eileen, Justin and I are always available to take care of you.

Bruce Hotaling, CFA

Managing Partner

Change is Good

I am proud to announce, as of November 1, 2012, Hotaling Investment Management, LLC has transitioned to an independent investment advisory firm. All of us would like to thank you for your patience and helpful interaction. We have relocated to downtown Wayne, and invite you to come visit our new offices if you have not already. If that is not possible, please visit our new web site www.hotalingllc.com where you can experience a taste of our new presence in the investment management world.

I want your experience of the change in the structure of our business to be seamless. We will both need to become accustomed to some new aspects to our relationship, and we will help bridge this for you. From our end, transitions typically lead to challenges, new learning and ultimately an improved potential. We want to be open to new capabilities in the investment management world that will ultimately benefit you. My overarching goals are to continue to provide you direct access to us, quality investment management and customized financial planning solutions. We are now better positioned to do this than ever before.

Change can often help us step outside our box. It is often easy to slip into thought habits, or put on someone else’s blinkers. For example, even though we are confronting a list of global and domestic issues and most investors sense a high degree of anxiety, 2012 has been a good year to be an investor. Stocks and bonds have produced attractive returns. The S&P 500 has returned 14.9% through the end of November. To put this year’s results into some context, the average price return for the S&P 500 dating back to 1929 is about 7%. The average for the past 10 years is about 3%. These figures do not include dividends or the re-investment of dividends.

Change is ever present. At the moment, some investors are uncomfortable with what has been dubbed the “fiscal cliff” and it has become a bit obsessive. We owe this to a large degree to the media. The media’s ability to define the issues we face is extraordinary. This is vastly different than simply reporting the news. The choice of language, the nuance and the frequency of the message all have impact on our views.

My opinion is that the policy makers will resolve the tax and budget complications. While it is as politicized as ever, it is solvable. When we are on the other side of the “issue” looking back, like so many times in the past, it will seem so much less than it does at the moment. Markets reflect perpetual uncertainty. This has been the case throughout history. No outcome has ever been comfortably known, in advance. As soon as the most pressing concern of the day is resolved, another will take its place. It never gets “easy.”

Current economic data (home prices, employment, auto sales) shows signs of positive change – and the most important aspect of economic data is its directionally, not its absolute level. Corporate profits and thus earnings remain solid. Stocks look well priced (though not cheap) and are likely the asset category of choice for the next 12-18 months. Board room discussions today have to do with return to shareholder – things such as dividends and share buy-backs. Potential tax law changes will likely not have a dramatic impact on the investment merit of these discussions. Cash on balance sheets is high, and interest rates are low. You will likely hear of companies issuing debt to fund dividends, something unimaginable 4 years ago.

Investment grade corporate and municipal bonds look expensive to me. If you own bonds, by all means hold on to them, but at the moment, its no place to shop. Other sources of income such as higher yielding corporate bonds and certain real estate investment trusts are more attractively priced.

Patience in markets like these is of the utmost importance. As a rule, it is better to “sit on cash” than to over pay for an asset. Warren Buffett, who needs no introduction, commented on owning stocks over the last 100 years, “You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.” (NY Times, October 16, 2008) Though it is extremely difficult, we want to be sure we do not feed into the sentiment of the day.

Please feel free to check in if you have any questions or would like to review you portfolio prior to year end. Valerie, Eileen, Justin and I are always available to take care of you.

Bruce Hotaling, CFA

Managing Partner

Hotaling Investment Management, LLC Transitions to Independent Registered Investment Advisory Firm

New Entity to Offer Even More Client Service

November 1, 2012, Wayne, PA – Hotaling Investment Management, LLC, a respected investment management and financial planning firm, announced today it is now a fully independent Registered Investment Advisor. Bruce Hotaling, CFA, managing partner and founder, said, “Our team could not be happier with this transition. We will now be better positioned to deliver customized portfolio management to our clients as an independent firm. But first, of course, our hearts go out to all those in need after this unprecedented storm.”

Hotaling Investment Management, LLC is now headquartered in the heart of Wayne at 100 West Lancaster Avenue, Suite 105, Wayne, PA, 19087. The main office number is 610-688-0616, and the website for the new firm can be found at www.hotalingllc.com.

Hotaling, a Wayne resident for nearly 20 years, is a graduate of Hobart College and The American University. He continued his pursuit of professional education, and in 2006 earned the Chartered Financial Analyst (CFA) designation, one of the highest degrees available in the financial services industry. After an initial career in commercial banking, he transitioned his skills to providing customized investment advice to wealthy families, institutions, and foundations. Wealth for Women is a primary area of concentration for Hotaling and his team, focusing on the investment needs of women in transition, whether from divorce, widowhood, or other circumstance.

Current clients of Hotaling Investment Management, LLC will continue to be served by an outstanding team, including:

Valerie-Clark Roden, who serves as primary client contact and heads business development as well as corporate communications efforts and events.

Eileen J. Paul, CFP, whose primary responsibilities include investment analysis, daily trading, and performance monitoring. She is also responsible for financial planning, insurance overviews, and retirement feasibility assessments.

Justin Brooks, who handles all cash management and fixed-income clients, with a particular emphasis on homeowner associations. He is also in charge of operational requirements and ongoing compliance for the office.

Hotaling Investment Management, LLC will use Charles Schwab Institutional as its custodian for its client accounts. Schwab, a San Francisco-based firm, is well regarded among investment advisors and investors as a reliable custodian, with quality reporting and client interface. Schwab’s continuing investment in technological innovation and client service make it consistently among the highest-ranked custodians in the financial services industry.


Bruce Hotaling, CFA
Managing Partner