Preaching the Virtue of Patience


Investors don’t always appreciate the virtue of patience, but the experts who manage their money do.

With interest rates expected to rise, and the dollar and euro continuing to duke it out across the globe, the next few years will likely yield mixed results for investors.

Michael Simon, CPA, CFA, the president, founder and chief investment officer of AlphaMark Advisors in Fort Mitchell, Kentucky, which manages $333 million in assets, offers his perspective on the coming financial environment. 


LEAD Magazine: With interest rates expected to gradually increase, how is your firm preparing for this anticipated event? What adjustments, if any, are you making in your money management strategy because of it?

Michael Simon: As a firm we are educating our clients about what this change in the interest rate environment will mean to them. Our clients have gotten used to the low-yield, fixed-income environment and have relied on equities to increase annual income. We are helping our clients understand that in the future we should be able to reduce their risk by buying higher yielding bonds as rates go up, while maintaining the level of income that they have grown accustomed to. We are preaching the virtue of patience. There is nothing to do right now except be prepared for when we can act. In anticipation of rising interest rates, we decreased the average maturity of our clients’ bond portfolios to about three years. In addition, we have over-weighted the following in our equity portfolios: regional banks, currency hedged developed foreign funds and small cap domestic stocks. All of these investments should do better than the averages as interest rates rise. 


LM: What is your firm’s equity investment philosophy?

MS: Our equity investment philosophy is to seek high quality companies with sustainable earnings momentum that produce a reliable cash flow during all economic cycles.


LM: What do you believe the effect of gradually rising rates will have on the earnings momentum of high quality, high cash-flow companies?

MS: We believe the largest companies that have significant exports will be hurt as the Fed raises interest rates. Rising short-term rates will cause the U.S. dollar to strengthen. A stronger U.S. dollar makes U.S. exports much more expensive. We feel it is imperative to shift the investor’s focus away from the huge multinational companies to small high quality companies with earnings momentum. Investing in index funds guarantees investment in the largest companies. It is our opinion that active investing is the way to avoid such pitfalls. We do not think that rising interest rates will have as big an impact on the small, more nimble companies. In April 2015, we launched the nation’s only actively managed small cap ETF: the AlphaMark Actively Managed Small Cap ETF (SMCP – NASDAQ). SMCP focuses on high quality, high cash-flow small cap companies exhibiting earnings momentum.


LM: How does your firm determine what are the most important factors to consider when recommending investment advice to your clients?

MS: Ultimately the client’s intended use for the funds in an investment portfolio determines how the portfolio should be invested. The age of the client is less important; it is much more important to understand the end use. A 73-year-old client who does not need their investment portfolio to provide income or security may invest their portfolio aggressively in hopes of producing larger returns for their beneficiaries. Another 73-year-old investor may need income and security, and thus invest much more conservatively. Tax issues are also a large determinant in deciding how to invest a portfolio. Decisions have to be made on whether the largest potential gainers should be held in a qualified account or should investments that guarantee a fixed return be held in a qualified account. All of these factors along with understanding a client’s true tolerance for risk are evaluated during an active interview process that does not stop when the client leaves the office, but is ongoing.


LM: Since the AlphaMark equity investment philosophy is grounded by an appreciation of risk, how does that translate to investor success as rates head higher?

MS: We have always felt that it is important to talk about risk first. Most investors do not understand their tolerance for risk. They always want to talk about returns and how to maximize returns. It is our job as advisors to explain risk, quantify risk and help the clients appreciate risk. We are confident that our clients will have more successful portfolios as we limit risk and work to generate the best-suited returns for them.


LM: In an economic environment where rates gradually increase, how do you expect the stock markets to react short term and longer term?

MS: Historically, stocks can weather rising interest rates as long as the economy is strong. In the past, longer-term rates had only gone up because inflation expectations had gone up. Inflation expectations generally go up because of past inflationary experience and increased pressure on commodity and/or wage prices. Interestingly enough, the Fed has made its goal to raise rates even though neither of these environments exists. But look closer: Inflation does exist. Stocks have done quite well as the Fed has kept rates low. In fact, stocks and real estate prices have increased at what many have called an inflationary rate. So, the stock market reaction to increasing rates will depend on how strong earnings are. With all things equal, for every one percent increase in long-term interest rates there could be a 10 percent drop in stocks. If earnings are up 8 percent to 10 percent, then the stock market could move sideways. It is our opinion that the Fed is basing its policy on the observable price increases in real estate and stocks. The Fed will be very cautious to not create a panic but instead cool down the rise in those asset prices. Short term, this can mean much slower growth in stock prices but longer term lead to a healthier market environment where stocks can grow at their long-term average.


LM: The International Monetary Fund recently cut its 2015 economic growth forecast to 3.3 percent from 3.5 percent amid mounting threats from China and the Eurozone. That’s the weakest pace since the financial crisis. With troubles hitting the Global Growth Outlook, what are some positive investment opportunities your firm has identified for your clients?

MS: 3.3 percent is still favorable growth. With that being said, we are concerned with rising U.S. rates, the recent rout in Chinese equities and the continuing problems with Greece. We have full confidence in domestic small cap equities and have advised clients to increase their small cap allocation by using the AlphaMark Actively Managed Small Cap ETF. SMCP is tax efficient, something that standard mutual funds lack. Its fees are 26 percent less than the average small cap mutual fund and it is liquid throughout the entire trading day. In addition, SMCP is completely transparent.


LM: What’s the one thing that’s most misunderstood about the services you offer?

MS: The investment advisory business is filled with many individuals calling themselves financial advisors. These include stockbrokers, insurance salespeople and so-called wealth advisors from various financial institutions. Most of these individuals are glorified salespeople. AlphaMark Advisors is an independent registered investment advisor. We report to no one but our clients. We are completely independent and highly credentialed with a long-term track record. It is frustrating when the investing public lumps all financial professionals into the same basket. AlphaMark Advisors was the only Greater Cincinnati firm to be selected as one of CNBC’s Top 100 Wealth Management Firms.

AlphaMark Advisors is located at 250 Grandview Drive Suite 175, Fort Mitchell, KY 41017. You can reach them at 859.957.1803 or visit their website at