Author: Mark Sloss (Page 1 of 7)

New WCM monthly newsletter format

We are pleased to present the last stage of our updates and improvements to our monthly newsletter. You will now find a greater emphasis not just on our views of where we just were, but on where we are and where we are headed, with a deeper discussion of the episodic and structural risks we see driving our investment decisions. We also now include a topical discussion of ESG considerations that have emerged as priorities over the period covered by the newsletter.

As always, you will find our newsletters in the Library, available to all.

Updates to our monthly newsletter format

WCM has made some changes to our monthly newsletter to make it more engaging and useful for our readers. First, we have moved our interpretive analysis of the month gone by to the front and expanded it. We follow that with our current portfolio positioning and what we see as the capstone risks to our stance. Lastly, we close with a performance survey of capital markets for the prior month, calling out what we see as the most consequential returns which played into both our thinking and our results.

As always, you can find our latest newsletter in the Library, along with an archive of prior newsletters. Thank you for reading!

WCM appointed lead advisor for two new impact-oriented donor advised funds

We are very proud to announce that we are joining forces with HealRWorld, Angels.Inc., and the SDG Impact Fund as the lead advisor for two new donor advised funds (DAF). Each DAF is driven by a specific mission to direct capital in pursuit of the United Nations Sustainable Development Goals. The first DAF, the HealRWorld SDG Impact Fund, is focused on improving access to financial resources to fuel business and capital formation and catalyze growth for women- and minority-led small businesses. According to MPAC Solutions, a scant 1.3% of $70 Trillion of institutional capital is allocated to women and diverse management teams. The HealRWorld fund is raising capital through the charitable structure to make mission- and program-related investments in these small businesses that demonstrate strong ESG attributes and an orientation toward attaining one or more of the SDG targets. HealRWorld’s proprietary data and analysis has demonstrated that small businesses with strong ESG attributes are up to 3X more credit worthy than the typical small business, making them both good businesses and good risks.

The fund will also make strategic investments in community- and small business-oriented targets, both through lending and taking equity stakes, in order to further align investment with mission and amplify the potential outcomes from capital raised in the DAF, as well as bring coinvestment capital to the table to multiply the available resources for these businesses.

Equally exciting is the Angels.Inc SDG Impact Fund. The Angels.Inc fund is focused on funding media projects and ventures that are contributing vastly to innovation for the betterment of society and our future as well as contributing to our well-being, mental health and amplifying the positive messages and goals of the United Nations Sustainable Development Goals (SDGs). The investment mandate for the Angels.Inc. fund is more expansive than the HealRWorld fund, committing to investing in the same small businesses, but will also invest in and fund media-related targets consistent with Angels.Inc’s “Media For Good” mandate.

For more information or to make a commitment to these amazing charitable efforts geared at empowering and ennobling business and media to lift up and serve everyone equally and inclusively, please visit our Philanthropic Services page, email the Funds at, email us at, or call us at 866-894-5332.

WCM Chart of the Week for June 5, 2020

Economic fault lines run deep across America. Many of these lines have been laid bare as a consequence of the economic crisis unleashed by the COVID-19 outbreak, but the lines were there long before, and will continue long after. Those sitting on the bottom rungs of the prosperity ladder not only were among the most vulnerable as business, trade and service ground to a halt, they are in the worst position to participate in the recovery. Access to capital is critical to household and business formation, maintenance and growth. As recently as 2017, the last time the FDIC released its biennial national survey, 18.7% of American households were underbanked (relying on payday lenders, rent-to-own, pawn shops, refund anticipation loans, and other non-bank resources), and a full 6.5%, or nearly 8.5 million households, were completely unbanked. Without access to the financial infrastructure enjoyed by nearly 70% of the population, the road ahead will be difficult if not impossible, and investing in community financing through CDFIs and other non-traditional conduits will be critical to an inclusive recovery.

WCM Chart of the Week for May 1, 2020

This past week we witnessed two of the worst US economic reports many of us have ever seen. On Wednesday, it was reported Q1 GDP contracted 4.8% on an annualized basis, and Thursday’s unemployment report brought the total number of newly unemployed to over 30 million, consuming all of the jobs gains since the depths of the Great Recession. But, even with all the bad news on the economic front over the past several weeks, the US stock market as measured by the S&P 500 posted its strongest monthly gain since 1987. At least for now, the stock market is looking beyond the current rut to the potential for prosperity on the other side. That is certainly reasonable considering the amount of monetary and fiscal stimulus being injected into the economy and capital markets as we have been discussing for several weeks. Against this backdrop we are still compelled to ask ourselves what the trigger for re-testing the March equity drop might be. It could be an acceleration of virus cases, a state-level bankruptcy or two, or China-related backlash or retaliation. Current state of mind – hopeful but watchful. [chart courtesy Standard & Poors and Bloomberg LP © 2020]

A new definition for “systemically important” businesses

At the peak of the Financial Crisis in the stretch from 2007 to 2009, we became familiar with the notion of systemically important institutions. With the failure of major banks and investment banks like Bear Stearns, Lehman Brothers, Countrywide and Washington Mutual, the private and public sectors had to come to grips with the idea that for-profit businesses could be so essential to the orderly functioning of the overall capitalist system that they could not be allowed to fail, even if that required the rescue of a public company with taxpayer money. This notion gave rise in part to a series of laws and regulations including the Dodd-Frank Wall Street Reform and Consumer Protection Act. Certain financial institutions were too important either by virtue of function or size or both to be allowed to fail, undermining confidence and the orderly conduct of our economy and markets. These institutions would be protected, but they would also be more critically regulated to mitigate the risk of failure.

Whether standing in long lines of anxious neighbors to stock up on staples or watching a public address from the White House rose garden, we have been presented with a new and really more fundamental notion of what a systemically important business is. In fact, the shelter-in-place approach to mitigating the spread of COVID-19 has created a new class of systemically important businesses as we redefine, on the fly, what used to be luxuries like working from home or having household staples delivered as now being existential.

Through the present market turmoil, it is difficult to see this new order clearly, but in the months and years to come we will collectively be forced to reflect on what we are learning through experience now. There are fundamentals to the orderly functioning of communities and societies that we all know intuitively, and yet we continually fail to prioritize until we are tested. Right now we are sitting at the bottom of Maslow’s hierarchy of needs, focusing on physiological and safety needs. That’s health, food, water, shelter, personal security, financial security, and so on. Our current situation is depriving us of the ability to climb further and focus even on social belonging because of the paramount importance of the first two.

We can make light of the run on toilet paper, canned goods and hand sanitizer, but that is as explicit a manifestation as there is of what matters right now – health and hygiene and nutrition. The systemically important are food producers and grocery stores, pharmaceutical companies and pharmacies, hospitals and laboratories. They are also the providers of basic infrastructure, public and private, that keep the lights on, the water flowing, and goods and services moving from point A to point B so we can be home and be socially distant. We are also going to get a graphic look at how fragile the bottom of the economic ladder is where access to basic physiological and safety needs is not assured on a good day much less in the midst of a crisis.

From an investor’s perspective, this will cause a re-rating of securities according to what really matters when we are against the wall. From municipal finance to support hospitals and emergency workers to ownership of companies that are essential to the food supply chain, we will have a renewed and clarified sense of where our investment capital is the most needed and where it should be treated with the highest levels of stewardship and oversight, whether or not it is backstopped by government, because these companies and services are simply too systemically important to fail. And with that, there is an opportunity for companies and for governments to rethink stakeholder rights and responsibilities, and to provide best-in-class transparency and good governance and prioritize quality and longevity over short term rewards.

The view from here

In these last hours before the US markets open for this week’s sessions, here are a few more thoughts we have shared in our community.

Global markets finally caught up, in the negative sense, to China’s stock markets as worries about the COVID-19 “novel” coronavirus spread to the developed West faster than the disease itself. A contagion of concern overtook markets and left us with a week of returns we have not experienced since the Financial Crisis in 2008. What is materially different from our perspective is that this correction is not a response to a lack of faith in the system itself. During the Crisis, securities prices collapsed on the fear that it was actually impossible to value many of them, and that large parts of the system were in fact worthless. In certain cases this did prove to be the case as a sudden disappearance of liquidity exposed a large quantity of bad loans and mortgages that had been ingested by major financial institutions, causing the collapse of systemically important operations like Lehman Brothers, Bear Stearns, Washington Mutual and Countrywide. There was absolutely widespread panic that we could be facing a new Great Depression as the financial system itself seized.

This past week was very different. As we have previously explained, COVID-19 of course has and will continue to have economic consequences, but it does not call into question the soundness of markets, banks and whole economies as we experienced a dozen years ago. We find it likely that the response to the virus will impact company earnings and the GDP of nations. Shutting down the 2nd largest economy (China) for weeks if not months would never have gone unnoticed and unpriced. Reasonably, that demands revisiting what companies are worth and whether yesterday’s prices reflect tomorrow’s realities. Prior to the outbreak, fundamentals were reasonably solid around the world. Not boom, but certainly not bust. The situation we find ourselves in could take that optimism down to modestly solid, or perhaps slightly weakened. But even a mild global recession triggered by this moment does not call into question the fundamental underpinnings of finance and commerce. We are seeing steep and sudden drops in stock markets that remind us of 2008, and nearly unprecedented lows in interest rates, without anywhere near the breakage that brought about those kinds of corrections historically.

So, in a word, why? We see a few different forces at work which all feed our collective response to unconstrained uncertainty. Emotion, namely fear, is always a powerful motivator. Fear of the virus, fear of losing money, reasonably make people want to be safe. 2008 still looms large in the minds of investors and a PTSD-type response is not out of character. Fool me once, shame on you. Fool me twice, shame on me.

That emotion is being fed by a toxic brew of real, or worse, real but incomplete, data without framing or context, and quite a lot of false narratives. Add to that the markets are now patrolled and exploited by algorithms and artificial intelligence engines that can actually capture and quantify shifting sentiment and strong moves one direction or another in prices, and exploit or even amplify or aggravate those moves for profit. We have seen numerous isolated examples of this played out in the “Flash Crash”, the “Fat Finger”, and other moments over the last many years which show how quickly and to what extremes things can break loose on little information or bad information. Throw something at the market like the novel coronavirus and we could experience those types of extreme (over)reactions again and again.

We anticipate that clarity and greater understanding around the virus’ pandemic qualities and impacts will help markets firm up, and would not be surprised to see a fair price for securities settle at something less than the peaks from just a couple weeks ago after accounting for the drag from lowered economic activity. It is also our expectation that we will see some manner of coordinated global response across the major central banks to compensate not for falling stock prices but for potential lost GDP from less commerce, less travel, and less work. Depending on the magnitude of the response this could put a floor in prices, or at least slow the descent and tamp down volatility while investors regain their footing.

Less than a novel on novel coronavirus

Following are a few notes we shared with our clients and their trusted advisors earlier in the week that we think warrant repeating as we finish what has shaped up to be the worst week in the markets since the Financial Crisis.

COVID-19, popularly and generically referred to as “the (novel) coronavirus” has become that X factor we look for that comes from outside the markets and the normal news cycle to disrupt the status quo. While issues we have previously discussed like Brexit, the Hong Kong protests, and Iranian conflict are meaningful, markets generally take them in stride and try to price the risk. It may result in days or weeks of volatility, but eventually investors settle on how to value it. COVID-19, like Zika and SARS before it, is different. Brexit or HK are the product of people making active decisions. They may be decisions with adverse outcomes, but they are understandable, observable, and follow some kind of reasoning, whether or not we agree with it. Something like this virus introduces another dimension of uncertainty, because for now, we do not fully grasp the impact it will have on global health. So, even though we can observe and predict human decisions on how they are likely to respond to set information, the responses are and will continue to be dynamic based on the emerging understanding of and consequences of the virus.

We are not doctors, nor do we play them on TV, but we have been closely following not just the news cycle, but the output of expert organizations tasked with addressing this challenge. Indications continue to be that it is more easily spread than SARS and the bird flu, but the health impact appears to be less for healthy populations and the fatality rate lower for at-risk individuals, although most definitely and regrettably not zero. That does not mean this is something we take lightly either as investors or as global citizens. But it does help us chart a path forward. In the near term, the containment efforts are aggressive and the impact on society and commerce severe. As we have seen in China and now in South Korea, this has had an enormous impact on daily life and stopped business more or less in its tracks. The latest round of market reactions was triggered by a cluster of cases in Italy, which brings developed Europe into play. Emerging clusters in other areas like Iran suggest that with China as the vector, anywhere globally they have engagement and influence is a likely launch point for more cases. Inevitably this will lead to spread in parts of the world that either do not have the autocratic control of China or the health care infrastructure of Italy or Japan to address them, and we could see this accelerate to a global pandemic.

But, as counterintuitive as it sounds, from the investor’s perspective this may not be the worst thing. The economic damage being done is mostly from the preventative measures being taken to slow or stop the spread of the virus. Public transit is halted, air travel grounded, borders closed, events canceled, factories shut down, etc. If we find ourselves at a moment where these measures no longer restrain the spread of the illness, the focus will shift to healthcare and hygiene, as with seasonal flu and other communicable illnesses, and business ought to return to some semblance of normal. But in the near term, we are observing the volatility that comes with uncertainty, and also expect some degree of repricing as global economies absorb the consequences of lower activity. It is also not out of the realm of the possible that central banks will follow China’s lead and intervene to keep the economic engines running.

WCM Chart of the Week for February 21, 2020

More and more companies, including airlines and oil companies, are announcing an intention to achieve carbon-neutral operations over the next couple decades. But, it is important to look behind the headlines and understand what that sort of pledge actually means.  What business is the company actually in and does the pledge include their supply chain or product output? From the Climate Accountability Institute (Oct. 9, 2019, data through 2017), global fossil fuel and cement emissions from 1965 to 2018 totaled 1,354 billion tonnes of carbon dioxide and energy-related methane (GtCO2e); The twenty largest investor-owned and state-owned fossil fuel companies produced carbon fuels that emitted 35% of the global total (480 GtCO2e); Looking over the entire historical data set they find their current database of 103 fossil fuel and cement entities emitted 1,221 GtCO2e, or 69.8% of global since 1751 (1.75 TtCO2e); of which the Top Twenty companies are responsible for 526 GtCO2e, or 30% of all fossil fuel and cement emission since 1751. [Charts and data, Climate Accountability Institute, October 2019]

Climate Accountability Institute, October 2019
Climate Accountability Institute, October 2019

WCM Chart of the Week for February 10, 2020

The US Bureau of Labor Statistics has been reporting impressive trends across many demographic categories for several quarters. One of the most important trends we see is development in the female workforce. Total US Labor Market participation reached an impressive 83.1% rate in the key age category of 25-54 year-olds. These levels have not been reached since the pre-crisis era over a decade ago. The real story is gains made by female workers. Women in this demographic have led the overall participation rate, rising from 73.3% in late 2015 to its latest reading of 77%, three times the percentage gain of men in the same category who rose from 88.2% to 89.3% over the same period. Even with this good news, we cannot lose focus on UN SDG #5 (Achieve Gender Equality and Empower All Women and Girls). Women in the US still earn only about 80 cents on the equivalent dollar wage for a man, a gap which expands further for Latinas, black women and women of Native American and Hawai’ian descent. [Chart courtesy Bloomberg LP © 2020, data US BLS]

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