Summary of Our Deliberations

On Monday March 23, 2020, we held the second segment of our Q2 investment strategy meeting. Our deliberations focused primarily on determining the best manner in which to implement our previously stated goal of positioning your portfolios in assets we believe offer the strongest staying power and financial strength through the recession we believe we are now in while also offering strong recovery potential when things improve. What this means essentially is we have taken actions to better concentrate your investments in ETFs containing the highest quality stocks (we refer to them as the “stalwarts”) that we believe have the strongest market positions, financial strength and sustainable cash flows.

To provide a little more detail on our changes to your portfolios, within equities, we significantly boosted your concentration to large cap stocks primarily within the technology and health care sectors of the economy while reducing exposure to smaller cap stocks which are inherently less financially secure. This change provides increased concentration within your portfolios in “stalwart” companies like Microsoft, Apple, Amazon, Walmart, Costco, Merck and Johnson & Johnson. You will see in your accounts additions of several new ETFs that give us this exposure including the XLK (technology ETF), IHE (U.S. pharmaceuticals ETF), and RTH (U.S. retailers ETF). To determine the best ETFs to implement this strategy, we thoroughly analyzed the balance sheets and cash flow strength of the top five companies in these ETFs to be sure we were investing in companies with above average cash flow relative to debt. I would also note that as part of our strategy process, we took the opportunity to streamline or reduce the number of individual ETF holdings within the models. This allows us to better concentrate your investments in the areas we believe will serve us all best in the upcoming economic and market environment.

With respect to your holdings within fixed income, we decided to concentrate for now solely on U.S. Treasury notes and bonds, which are considered the strongest bonds in terms of credit quality. We eliminated holdings within mortgage-backed bonds, preferred stocks and high yield debt as we want at this time to concentrate holdings in the highest quality credits. We are now overweight a normal allocation in the long and intermediate maturity sectors within bonds, and at a normal weight in short term bonds. In terms of portfolio macro allocation, our actions reduced net equity exposure slightly, while increasing fixed income exposure. Exposure to REITs and small cap stocks was also reduced.

Some final thoughts…. This has been an unprecedented and turbulent time for all of us. We have seen unprecedented volatility and the fastest decline by far into bear market territory in history. Making forward-looking estimates of the economy and corporate profits right now is probably more difficult than any of us on the committee have ever seen in our careers. That is why we believe investing more of your assets in blue chip “stalwarts” offers some risk protection because of their strong business position and cash flows, and with the extent of the downturn uncertain, we want to be in the strongest companies financially. We did set an investment trigger, as we do at every meeting, that would cause us to re-evaluate and most likely increase our equity exposure if there was a new, positive development with respect to a medical treatment  or vaccine for COVID-19, or an indication that new cases were peaking or coming down which would result in improved economic activity. We wish everyone the best of health and stability in the forthcoming days. 

S.R. Schill & Associates.