Mr. Baker: North American Management is a wealth management firm catering primarily to high net worth individuals, families and non-profits. We've been in business since 1928. Our assets under management are just under $1 billion. We also have a Trust Company that is chartered in New Hampshire, a neighboring state with attractive and progressive trust statutes.
We are a hybrid firm managing client assets internally and externally through select managers under the firm's asset allocation and risk management model. We customize investment portfolios, and in addition to trust products and services, offer general and estate planning, tax advice and risk protection.
Our primary focus as asset managers is first and foremost risk management. We believe that superior asset management results from more than buying stocks. Our aim is to generate attractive returns for our clients while exposing them to the least amount of risk. We work with our clients to identify their unique goals and objectives, and construct portfolios using tactical asset allocation and bottom-up individual security selection.
In 2008, for example, our early identification of systemic credit risk caused us to move into cash and fixed income early in the year. We were able to preserve capital for our clients and significantly outperform the market. We have been gradually putting cash to work in 2009, increasing our equity exposure as we have seen signs of improvement in the market.
TWST: Do you utilize the top-down look at the economy and the market before you invest from the bottom up? You were very prescient last year talking about the consumer-led recession and the retrenchment, but how has it been for you the past 12 months?
Mr. Baker: First, let's talk about the macro situation. We do start with a top-down approach to the economy and the market. From there, we then focus on a bottom-up methodology within specific industry sectors and asset classes.
Looking at where we are today, there are five or six issues that we are really concentrating on from a macro standpoint. One of the most important factors remains the financial health of the US consumer, who accounts for nearly 20% of global demand and 70% of US demand. After a decade of over consumption, the US consumer is in the midst of a lengthy deleveraging process. We still contend that the U.S. consumer is the engine that drives the world's economy. In the near-term, however, there is little doubt that the BRIC countries will have faster consumption growth, though we are very skeptical of "de-coupling" and believe it may be some time before this is a reality.
At some point, the BRIC nations and other parts of the world will be able to offset the consumption of the U.S. consumer to some degree, but we are not there yet. Unquestionably, growth is going to come from the emerging nations, but we still think the US, Europe, and to a lesser extent Japan, remain vital, and in each case, people are saving more and spending less.
The megatrend for the next five years will be thrift and saving, which does not bode well for an economy that was dependent on excessive consumption. At the peak, people were spending 130% of their income on consumption.
Consumption and income will be more closely aligned than we have seen in decades. For example, many baby boomers lost 40% - 50% in their 401Ks. They saw their friends and relatives lose jobs and are now looking at retirement with much less capital. They must adjust to a lifestyle where they spend less. This is going to have a deleterious effect on an economy in our view. We think that we could see end demand for tangible goods down approximately 20% for the foreseeable future.
This doesn't mean there are no opportunities, but it's certainly not going to be an environment where all boats rise. We believe it's going to be survival of the fittest, with a higher premium on good stock selection. Whatever industry sector you are in, there is going to be a greater distinction between winners and losers than ever before. Those with poor balance sheets, weak management and inadequate business plans may not survive, and moreover, may be sacrificed at the expense of better run companies with strong balance sheets. The stronger companies will be better positioned to rebound going in to 2010. As a consequence, we think that M&A activity will increase in the months ahead, although it will be restricted to some degree as long as credit is still being rationed. There will be less asset based lending, and more cash flow based lending.
The market may improve in the near term as we receive more positive data, but in a post stimulus world we may face challenges in 2010 and beyond. Rebounds may be more muted than in the past and we do not think we are going to get the growth rates that many expect. As we look forward, absent incredible additional stimulus from our government, it is going to be hard to return to former highs.
We believe that yield (income) is going to become critically important over the next three to five years. As baby boomers near retirement, they will focus on owning securities that pay a current income stream. Spending habits will require regular monthly or quarterly distributions. Saving rates are not encouraging holders of cash, and treasury bills are yielding 1% or less. This makes it increasingly unattractive to put money in short term riskless securities if yield is required. This means looking further out on the yield curve in order to purchase higher dividend yielding securities. This is a challenge and requires diligence, but opportunities do exist.
Another theme that we consider important is obesity. Consequently, we see opportunities in healthcare, in particular companies that provide treatment for diabetes. As eating habits in emerging markets start to resemble those in the United States, obesity and diabetes could become a problem globally. We have 180 million people in the world that have diabetes, 24 million in this country, with the potential of that number increasing to 30 million over the next decade.
We continue to focus on the financial sector, where survival of the fittest is the prevailing theme. Many of the largest problems are behind this sector now, as those firms in need of help have received "medication" from U.S. policy makers. But we think we are going to find we are living in a world where there is a lot less available credit. The larger well capitalized banks or even some smaller banks and mid-sized banks that have good balance sheets or tighter lending standards will thrive.
Tickers included in this excerpt: BK, EPD, EXPD, FDX, GS, JPM, LLY, NVO, SNY, UPS
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