As this newsletter is being delivered, the ADS leadership team will be at NADA in Las Vegas. This year’s show is sure to be jammed packed with great meetings, time with some of our valued dealer clients, as well as meeting many new dealers interested in improving their F&I sales process and results.
It was two years ago when NADA was last in Las Vegas. During that show, EV’s were ALL the rage! There was so much talk and hype about EV’s and the demise of the ICE vehicles. It was the FUTURE, or that is what they wanted you to believe.
At that time, we published an article on our skepticism of the prognosticators certainty around the adoption rate of the BEV’s. This was met with some negativity when it came out, but we must remember that two years ago there were months’ worth of backorders for anything electric, so it was only fair to receive some criticism over our cautionary approach.
Now here we are entering another industry event and another manufacturer (Volvo) just pulled back funding on their EV program – much to the pleasure of Wall Street, as their stock surged 20% on the news.
So how did we go from all the rage to a mere footnote in just two years? Is it because the demand was artificial, the talking head CEOs were making statements to appease their investor base, or have we now had two years of real world experience to prove out a lot of the concerns we pointed out. Most likely, it is a combination of all the above.
Let’s be clear, there is a place for EV’s and there is some demand for them, but it is not NEAR what we were being led to believe. The EV market will continue to grow and may even see some significant growth (due to its relatively small market share currently), but the ICE based vehicles that have powered this country for over a century, may just be around for another century…
Richfield, Ohio – Advanced Dealer Solutions is proud to welcome Dave Ditgen as Managing Partner.
Dave has over two-decades of experience working with auto, RV and powersports dealers with their risk management programs and improving their F&I performance.
“Dave’s experience as a producer and regional sales manager for a large P&C and F&I provider make him an ideal Managing Partner for us.”– says Bob Mancuso – President of Advanced Dealer Solutions.
“I have known the leaders of Advanced Dealer Solutions for years and am excited about the opportunity to work and grow with them as well as build out a robust independent P&C offering.” – Dave Ditgen
“We are thrilled to have Dave and his vast P&C knowledge as part of ADS. We look forward to introducing him to our current dealers where he will help them evaluate their risk management programs and insurance needs.” – says Ryan Nelson – EVP of Advanced Dealer Solutions. Ryan went on to say, “We know dealers need a truly independent voice, not just in F&I, but also in P&C offerings and we are confident Dave will be that independent voice helping dealers place their insurance needs”.
Dave is based in Denver, CO and will be focused on building out ADS’ risk management and P&C services nationwide as well as continuing to grow ADS’ F&I development business.
Advanced Dealer Solutions is a full service, dealer development agency focused on automotive, RV, and powersports dealers across the United States. Please contact 844-320-3722 or [email protected] for any inquiries.
Richfield, Ohio – Advanced Dealer Solutions is proud to welcome Brandon Kerns as Director of Dealer Services.
Brandon has extensive experience in the automotive business ranging from F&I manager, controller, P&C producer, income development training and working with a floor plan provider.
“Brandon’s experience as a controller will be beneficial to dealers as he works with them to maximize their P&L’s by increasing sales, F&I production and reducing wasteful marketing spend.”– says Bob Mancuso – President of Advanced Dealer Solutions.
“I am excited about being able to provide dealers so many leading programs and services all with an unbiased approach and to have the world-class team at ADS supporting me.” – Brandon Kerns
“Having Brandon and his unique skillset gives our dealers another great resource to utilize as part of doing business with ADS.” – says Ryan Nelson – EVP of Advanced Dealer Solutions. Ryan went on to say, “Brandon’s attention to detail, his understanding of reinsurance and his knowledge of how stores operate, make him an ideal fit for ADS”.
Brandon is based in Denver, CO and will help support the growth of the ADS income development platform throughout the western states.
Advanced Dealer Solutions is a full-service dealer development agency focused on automotive, RV, and powersports dealers across the United States. Please contact 844-320-3722 or [email protected] for any inquiries.
Richfield, Ohio – Advanced Dealer Solutions is proud to welcome Kyle Reese as Managing Partner.
Kyle has nearly 20-years of experience in the automotive industry ranging from working for a large TPA, being a partner in an agency and being a partner in an independent dealership group. His track-record for growth and success is unquestionable.
“Kyle’s experience as a dealer provides him a unique opportunity to help other dealers evaluate their current marketing programs, F&I providers, as well as many other key areas of their business.”– says Bob Mancuso – President of Advanced Dealer Solutions.
“I have known ADS for years and have been impressed with their leadership, professionalism, and vision. I am excited about the opportunity to play a significant role in ADS’s future growth and expansion.” – Kyle Reese
“We are ecstatic to have Kyle as part of the ADS team. His drive, values and purpose fully align with our mission and vision to help dealers achieve more through our independent platform” – says Ryan Nelson – EVP of Advanced Dealer Solutions. Ryan went on to say, “Kyle’s passion for helping dealers succeed is directly in line with ours and makes him a perfect fit for our team”.
Kyle is based in Columbus, OH and will be focused on growing the ADS brand in Central and Southern Ohio as well as Kentucky and Tennessee.
Advanced Dealer Solutions is a full service dealer development agency focused on automotive, RV, and powersports dealers across the United States. Please contact 844-320-3722 or [email protected] for any inquiries.
Richfield, Ohio – Advanced Dealer Solutions is proud to welcome Bruce Osborne as General Manager.
Bruce has three decades of experience serving the F&I industry in a variety of roles since making his start in automotive retail. “Bruce’s roles as Chief Revenue Officer and National Sales Manager at the product administration level make him an ideal fit to help take the ADS team to the next level.”– says Bob Mancuso – President of Advanced Dealer Solutions.
“Advanced Dealer Solutions has a well-earned reputation for overall dealership development. I am excited to be joining such a professional organization. Working together, we will help our dealers achieve new heights.” – Bruce Osborne
“We are excited to have Bruce and his vast industry knowledge available to our team. I am confident he will add immediate value to our dealers and associates.” – says Ryan Nelson – EVP of Advanced Dealer Solutions.
Bruce is based in Springfield, OH and will be focused on current and future dealer relationships alongside the team of ADS F&I training representatives.
Advanced Dealer Solutions is a full service, dealer development agency focused on automotive, RV, and powersports dealers across the United States. Please contact 844-320-3722 or [email protected] for any inquiries.
The data for The 2023 Kerrigan Dealer Survey is based on over 650 responses from franchised auto dealers in Kerrigan Advisors’ proprietary dealer database. Survey responses were collected from June 2023 to October 2023.
2023 Kerrigan Dealer Survey Results Kerrigan Advisors’ fifth annual Dealer Survey was designed to gauge dealer sentiment on the future value of their business, growth plans, earnings expectations, as well as perspectives on franchise values and their trust levels in the OEMs.
The results of this year’s survey found a majority of dealers still have a positive outlook on valuation over the next 12 months with 52% projecting 2023’s strong valuations will sustain into 2024 and 21% expecting an increase next year. That said, more than a quarter of dealers (27%) expect valuations to decrease in the next 12 months, the highest level since the survey’s inception in 2019, and almost double 2019 and 2020’s levels.
The reduction in valuation expectations is consistent with dealers’ views on future profitability (see chart on following page). Only 15% of surveyed dealers project a rise in profits in the next 12 months, while 38% expect a decline. Interestingly, 47% project earnings will stay the same in 2024, a six-percentage point increase from last year and an indication that current earnings, which remain far above pre-pandemic levels, are starting to normalize according to more dealers.
With a rising number of dealers seeing a decline in earnings in the next 12 months, it is not surprising to see an increase in dealers seeking a sale, albeit still a slim minority. 6% of dealers surveyed plan to sell one or more dealerships in the next 12 months, three times 2022’s results. That said, nearly half of dealers still plan to grow their enterprise with 47% looking to add one or more dealerships.
Kerrigan Advisors attributes this growth bias to dealers’ significant capital accounts as a result of more than three years of record profits. Kerrigan Advisors estimates the industry has amassed over $200 billion in pre-tax profits since 2020. In addition to burgeoning capital accounts, the majority of dealers (62%) believe earnings will either stay at 2023’s high level or increase over the next twelve months. This indicates that most dealers do not believe earnings will revert to pre-Covid levels in the near future, if ever, which bodes well for the continuation of a growth bias amongst dealers.
2023 Kerrigan Dealer Survey Results by Franchise
Note: These results reflect the collective view of the 650+ dealers surveyed, regardless of a dealer’s specific franchise ownership.
While the majority of dealers surveyed believe individual franchises will either increase or remain the same in value over the next 12 months, every franchise saw a reduction in the percentage of dealers projecting an increase in value along with a rise in the percentage of dealers expecting a decline in value as compared to 2022. Kerrigan Advisors believes these results are a reflection of the rising discontent within the dealer body regarding OEMs’ electric vehicle (“EV”) strategies and the overabundance of EVs on many dealers’ lots.
Over 40% of surveyed dealers expect these franchises to decline in value in the next 12 months.
Notably, Lincoln and Infiniti’s results are more than double the industry average.
Kerrigan Advisors queried dealers again regarding the expected impact of OEM planned changes to the dealer model on future profitability. The majority of dealers are less concerned than they were in 2022 that OEM changes to retailing will impact their future profitability. Nearly every franchise saw a notable rise in the percentage of dealers who expect no impact on profitability from OEM retailing changes. Kerrigan Advisors believes this marked improvement from the 2022 Dealer Survey is a result of dealers’ skepticism regarding OEMs’ ability to execute on their proposed retailing changes, particularly given weak consumer demand for EVs.
For the first time since Kerrigan Advisors started querying dealers, our firm asked about dealers’ trust level in each franchise. The results were quite noteworthy and echoed the sentiment regarding changes to OEM retailing strategies. Toyota received the top results by far, with 72% of dealers indicating they had a high level of trust in the franchise, over three times higher than the survey average. By contrast, 46% of dealers reported they had no trust in Ford, consistent with the expectation of a decline in future Ford franchise profitability due to the OEM’s EV/future retailing strategy.
Notable Changes for Specific Franchises (2023 versus 2022)
CDJR – CDJR saw a notable increase in dealers expecting the franchise to decline in value, from 24% in 2022 to 53% in 2023 – a 29-percentage point increase. Kerrigan Advisors expects this negative dealer sentiment is a reflection of CDJR’s rising inventory levels and lack of incentive spending. Dealers are concerned Stellantis will continue to oversupply the market with new vehicles resulting in a return to pre-pandemic gross profits on new vehicles and a substantial decline in dealer profitability. Consistent with this change, CDJR ranked 2nd behind Ford as the franchise most expected to see a decline in earnings and value as a result of OEM retailing changes, up from 9th place in last year’s survey. Furthermore, 39% of dealers have no trust in CDJR, placing the OEM as the 4th least trusted franchise.
Ford –Ford remains the franchise most expected to see a decline in profits as a result of the OEM’s changes to its retailing model. Consistent with this negative sentiment, Ford is the non-luxury franchise least expected to see a rise in valuation in the next 12 months. These results reflect dealers’ lack of trust in the OEM with Ford ranking as the least trusted franchise – 48% of dealers surveyed reported that they had no trust in Ford, the highest percentage of any franchise. Kerrigan Advisors expects this negative sentiment to impact Ford’s future blue sky multiple and franchise valuation.
Kia – This franchise surpassed Toyota for the first time in 2022 to become the franchise most expected to increase in value over the next 12 months. Impressively, it sustained its improved results in 2023. Notably, Kia saw one of the largest increases in positive profit expectations as a result of expected changes to its retailing model and ranked as the 8th most trusted franchise. These positive results are consistent with Kerrigan Advisors’ upgrade of Kia’s franchise multiple in the second quarter of 2023 and positive outlook for 2024.
Toyota –Toyota continues to outperform on every level. Most notably, Toyota is the most trusted franchise by dealers, scoring 17 percentage points higher than its nearest non-luxury competitor Subaru. This monumental lead in the trust equation has resulted in the franchise having the highest expected increase in profits as a result of the OEM’s retailing changes with only 7% expecting a decline, the second to lowest level behind its sister franchise, Lexus. Most impressive, despite having the highest blue sky multiple of all non-luxury franchises, dealers expect the franchise’s value will continue to rise. These results are consistent with the buyer demand Kerrigan Advisors sees for Toyota franchises.
The 2023 Kerrigan Dealer Survey results demonstrate the changing auto retail environment and dealers’ perspectives of the OEMs. The majority of dealers project profits and valuations will remain at or rise above post-pandemic levels over the next 12 months, though an increasing minority have a more negative outlook. Nearly half of dealers are seeking to acquire dealerships in the next 12 months, despite higher interest rates, an indication of an overall positive industry outlook. That said, dealers have distinctly varying views on specific franchises, with certain OEMs eliciting a lack of trust and confidence, while others earn a high level of trust and strong profit expectations.
Based on these results, Kerrigan Advisors believes there is more risk to valuations and the buy/sell market going into 2024, though we expect transaction activity will remain elevated as dealers seek to add scale to their business and believe OEM retail changes will have minimal impact on future profits.
Methodology
The data for The Kerrigan Dealer Survey was gathered from Kerrigan Advisors’ annual survey of auto dealers in conjunction with the issuance of The Blue Sky Report. The Kerrigan Dealer Survey is based on 650+ anonymous responses from franchised auto dealers in Kerrigan Advisors’ proprietary dealer database. Responses were collected from June 2023 to October 2023.
Another month flies by at a seemingly record pace! It is shocking that we are down to our last two months of 2023. The good news is we all have 60 days to make the most of this year and head into 2024 with momentum on our side.
November brings us the Thanksgiving holiday which makes it a great month to stop, take stock and appreciate all that we have to be thankful for.
At ADS we are all thankful for the successful year we are having, the dealers we get to work with, and the incredible additions we have added to our team. Please take a moment and meet our newest team members to learn a little about them as well as the role they will play here at ADS.
In terms of other industry matters, it is good to know the strike has been settled and manufacturing can resume at the affected plants. Additionally, there is a lot of news coming out about the BEV market and how oversold the hype for electric really seemed to be. It will be interesting to see where the consumers and the industry end up taking the BEV offerings the many manufactures chose to race to market with. There are a few recent articles below which provide some good insight into some of the shift in enthusiasm.
Vehicles: 2019 Cadillac CTS-V Sedan – Satin Silver 2019 Cadillac CTS-V Sedan – White 2017 Cadillac CTS-V Sedan -Gray 2017 Cadillac CTS-V Sedan – Silver 2016 Cadillac CTS V Sedan Red 2019 Chevrolet Corvette Red 2022 Chevrolet Camaro Black/White
Activation: Pennsylvania State Police Selinsgrove, PA
Recoveries: Pennsylvania State Police Auto Theft Task Force (PSP-ATTF) Pennsylvania State Police Selinsgrove, PA Washington Metro DC Police Swedesboro Police, NJ
Dealership: Murry Motors Selinsgrove, PA
On October 2, 2023, at about 7 AM as employees from the car dealership came to work, they discovered that the dealership had been broken into and several vehicles were missing from the lot. Using the GEO-Fence option on the LoJack GPS App, they were able to determine immediately what vehicles had been stolen. The dealership notified the Pennsylvania State Police, Selinsgrove who took the initial report. The Pennsylvania State Police Auto Theft Task Force was notified and responded to the scene. Working with the General Manager from the dealership who has access to the LoJack GPS App, within minutes, they were able to determine the current locations of each of the seven stolen vehicles. The Pennsylvania State Police Auto Theft Task Force sent Troopers to locate and recover most of the stolen vehicles that were still in Pennsylvania. However, two of the stolen vehicles had already left the State of Pennsylvania. With information supplied by the Pennsylvania State Police Auto Theft Task Force, the 2022 Chevrolet Camaro was located and recovered by the Swedesboro Police Department in New Jersey. The 2017 Cadilac CTS-V (color Silver) was located and recovered by the Washington DC Metro Police, in Washington DC.
The value of the seven recovered stolen vehicles was estimated at a little over a half million dollars.
The Pennsylvania State Police Auto Theft Task Force said that the investigation is continuing. They have reached out to the LoJack Regional Law Enforcement Liaison Team to assist with their efforts.
As we head into the final quarter of the year, many of us begin turning our attention to next years goals, objectives, and planning for our future successes. Although next year is important, and there are steps we can all take to ensure a fast start to the year, we need to be mindful that we still have a full quarter of sales to transact, 2023 goals and objectives to measure, and customer needs to satisfy today… as well as into next year.
For many of our dealers, they find the challenge of finishing strong, and starting stronger invigorating and seem to find an extra gear (as we do) this time of year. We know the importance of both, and we work hard to assist our dealers and their teams to make the most of both present and future.
One of the ways we do this is by conducting a thorough review and planning session with each of our dealers where we focus on in store profitability, product attachment rates, return of participation premium and individual development plans. This collaborative review adds accountability to all levels as well as pushes all stakeholders to the next level of performance.
If you haven’t taken a deep dive into your store’s performance, processes, reinsurance program, or pay plans recently, please reach out to us to conduct an unbiased evaluation and profit analysis so you can be sure you are getting everything your time and capital investment deserves.
Be sure to check out the article from one of our wealth management partners, Chris Daizel with London & Capital, as he discusses current markets and future outlooks and how they can affect a dealers trust portfolio. https://advanceddealersolutions.com/2023/10/reinsurance-trust-updates/
Last month we were excited to host our 3rd annual ADS Invitational at historic Firestone Country Club in Akron, Ohio. We had dealer representatives from across the country join us for 3 days of spirited competition on the golf course. The competitiveness was on full display not only on the golf course, but also at the poker table and bags court! We appreciate everyone taking time out of their busy schedules to spend the time with our team.
Congrats to Team Mancuso for their victory!
AFIP Certification
The AFIP Certification Program gives F&I professionals the power to sell their products with confidence and authority. Professionals certified through AFIP gain a working knowledge of the state and federal laws associated with the F&I profession, opportunities for continuing development, and higher standing in the industry.
In a continued effort to bring value to Auto, RV, and Powersport Dealers ADS will be hosting an on-site discounted AFIP course to North East Ohio on October 17th – 18th, 2023.
Interested in AFIP certification? Reach out to an ADS representative about hosting an AFIP course near your location!
Susan G. Komen® Organization In 1980, Nancy G. Brinker promised her dying sister, Susan, that she would do everything in her power to end breast cancer forever. In 1982, that promise became the Susan G. Komen® Organization and the beginning of a global movement. What started with $200 and a shoebox full of potential donor names has now grown into the world’s largest nonprofit source of funding for the fight against breast cancer. To date, they have invested nearly $3.6 billion in groundbreaking research, community health outreach, advocacy and programs in more than 60 countries. Their efforts have helped reduce deaths from breast cancer by 43% since 1989 and they won’t stop until their promise is fulfilled.
This past month the ADS Team enjoyed The Power of One More by Ed Mylett. At it’s core, The Power of One More is about your willingness to do one more rep, make one more phone call, get up one hour earlier, build one more relationship, or do one more thing for whatever your situation calls for. You were not born to be average or ordinary, You were born to do something great.
Live2Lead
LIVE2LEAD, hosted by Maxwell Leadership Team Members Kelly Price and Nicole Harwood, will be a day full of personal and professional growth opportunities.
You will hear from some of the most impactful leaders in the country. Ryan Leak, Marcus Buckingham, Kendra Scott, and of course, John Maxwell! In addition, Kelly Price, an entrepreneur, Leadership, and Personal Growth Coach, will speak on building a robust culture in your business and personal environment. The event will be held on Thursday, October 12th at Grace Church in Middleburg Heights, OH.
The Batmobile….. There is not much debate for which superhero is best known for their car, it is Batman, bar none. We will be looking at a few models of the Batmobile in this section.
Classic T.V. Series Batmobile
While it’s never going to seem the most advanced entry considering its origins as a Lincoln concept car circa 1955, the original – the “OG”, if you will – is the favorite of many, and likely will remain so for as long as there’s someone to tell the story of where it all started. Long, bubble-topped – and, for some reason, two-toned — the original on-screen Batmobile (it had taken other forms in the comic books before the TV series debuted in 1966) would go on to be not just one of the most recognizable Batmobiles of all time, but one of the most recognizable movie cars of all time.
The Burton Era
The Burton movies were the first time Batman hit the mainstream since the ultra-campy Adam West TV Series, and they were a whole lot darker – some might even say scary, especially when considering Jack Nicholson’s take on The Joker in Batman – so they needed a ride to match. Enter the Burton-mobile, all long, monochromatic, bewinged and jet-powered. It looked like a cross between a steampunk rat rod and a Lockheed SR-71 spy plane and used a good ol’ Chevy V8 engine for motive force. This may be the most recognizable and celebrated Batmobile of all time, with everything from Lego, to Hot Wheels, to the Grand Theft Auto video game series featuring cameos of it.
Batman Forever
While the Burtonmobile’s cockpit was all dark and ghoulish, it seemed that the crew behind the car for the Val Kilmer-starring Forever film wanted a little more flash than that – or, a lot more. Not only did the dance rave-y blue lighting and crazy glowy wheels (with Batman spinners!) bring a lighter look to the Batmobile, it was also better in-keeping with the ultra-bright makeup and costumes worn by the Riddler and Two-Face villains played by Jim Carrey and Tommy Lee Jones, respectively. It also kind of made it look like what you might see in a comic book because with all that colour, it would jump off the page that much more. Still had the bloody great big batwings out the back, though, and was still powered by a Chevy V8.
Batman and Robin
Remember when we said the Batmobile compliments the Batsuit in any given film? Well, when your Batsuit infamously features nipples, your Batmobile…well…let’s just say they ratcheted the “bling” component up to about 11 for this one. Even more glowy spinners than the Forever car, even spikier batwing tailfins, a quasi-transparent body shell and – just like the TV series car – no more roof all pointed to a Batmobile and Batman character that seemed to kick “stealth” down a few notches on his modus operandi.
The Dark Knight Trilogy
This is kind of where the Batmobile story takes a weird turn; no longer did it look lithe and low, instead appearing enormous and somewhat jeep-like. The weird part is how this particular Batmobile – nicknamed (or is that “officially named”?) The Tumbler wasn’t exclusive to Bruce Wayne himself. For starters, you can see that Wayne Enterprises owned a whole fleet of them to the point where we see Wayne actually having to request one in black from Lucius Fox. Later, in The Dark Knight Rises the “fleet” thing is driven home when we see a number of Tumblers patrolling the Gotham streets. Fun fact: The Tumbler was fully functional and did many of its own stunts during the filming of the movie.
Batman V Superman/Suicide Squad/Justice League
Good for this entry making its way into three movies – but that’s kind of easy to do when so much of what’s seen on-screen is CGI. This particular Batmobile may look kind of like a neat cross between the Tumbler and something a little more lithe and athletic (think quarterback to The Tumbler’s linebacker), but it was huge and quite expensive to build (its Mercedes-sourced 6.3L V8 probably didn’t help on the cost front) – and had to make it through three full-length movies. So, some CGI-derived cost-cutting had to happen. It does have the honour of the only Batmobile to be wrecked by Superman’s claws, though We would love to hear your fun/historical/interesting piece including pictures and a short bio. Email to: [email protected].
What’s Cookin’?
Skeleton Crudite Looking to get veggies in on Halloween? Serve it up in this fun way to get everyone to put down the candy for a bit. The ingredients this week are all suggestions so arrange them with the vegetables of your liking and take a look at two different images for ideas.
Ingredients Bell Pepper Cucumber Carrots Celery Broccoli Tomato Mushroom Radish Cauliflower Zucchini Olives Snap peas Directions Make sure to slice the bell peppers in long strips. For the picture on the right the “guts” is spiralized zucchini and thinly sliced radishes. Be sure to serve with a side of ranch or vegetable dip!
If you have a recipe to share, please email us a picture of yourself and your recipe at [email protected] and you could be featured in our next newsletter!
London & Capital has been managing Trust-compliant portfolios for dealers’ reinsurance programs for over 15 years. We don’t believe that reinsurers’ investment objectives can only be met by off-the-shelf fund solutions. We work to create individual Trust Account portfolios with individual holdings, structured around the specific needs of the dealer’s reinsurance program. Investing in individual securities wherever possible, allows the portfolios to remain relatively liquid and provides for more flexible risk management strategies.
Investing with a deep understanding of Trust accounts, investment restrictions and the F&I space ensures we can streamline the admin burden and set-up requirements for dealers and Agents, while meeting the stringent requirements of Administrators.
WHAT HAS HAPPENED IN 2023
With inflation well above the 2% Federal Reserve target, financial markets have need to adapt to the sharpest rise in the Fed interest rates in the past 40 years as the base rate has moved from 0.5% to 5.5% and counting.
The banking failures in March, although uncomfortable, appear to have been successfully contained.
The S&P 500 Index posted solid gains in the first half of the year. The performance can be almost entirely attributed to a strong bounce in share prices of the largest seven tech firms (Apple, Microsoft, Google, Alphabet, Amazon, Nvidia, Tesla and Meta) after a torrid 2022. These seven largest companies now make up more than 25% of the index.
WHATS NEXT
The fundamental questions all market participants are asking is:
Will the US economy will enter into a recession?
Will inflation continue to trend down towards the Fed’s 2% target?
The Fed need to navigate a difficult tightrope between keeping inflation in check (by hiking short-term interest rates), without inducing a severe economic recession in the process. They’re aiming to keep interest rates in a Goldilocks range and pull off a ‘soft landing’ (i.e. slow the economy enough to kill inflation but without causing a severe recession) – not too high, not too low! Equity returns this year suggest that investors are betting that they can do it, encouraged by the trend of slowing inflation.
However, we’ve seen plenty of volatility in prices when the Fed has come out to show their hand – most recently at the famous annual Jackson Hole speech where Fed Chairman Jerome Powell suggested they’d rather push rates a little higher to ensure inflation is under control (and therefore accept the risk of inducing a recession). We expect that uncertainty to continue into the end of this year.
Given the strong start to the year and the ongoing risk of higher future interest rates, we have been reducing risk; trimming our equity exposure and increasing our bond exposure. Why have we done this? Given the ongoing mixed economic data, trying to time the market to perfection or call ‘peak rates’ is a fools errand and we’re expecting more bumps in the road as we head into Q4 2023. We’re looking to err on the side of caution and ensure we’re protecting and preserving capital over the long-term.
If the Fed falls off the tightrope and short-term interest rates move higher, we’d likely see a falls in values of risk assets. Bond prices may also fall a little but the higher bond coupons on offer today provides us a level of income that should cushion the impact.
THE BOTTOM LINE
Reinsurance Trust account restrictions often mean that portfolios can only have a limited allocation to Equities (i.e. 10-20% of the portfolio). As such, allocations to fixed income securities make up the vast majority of a Reinsurance Trust portfolio.
Equity exposure remains meaningful for the portfolio, but it is an asset class that remains very sensitive to the changing economic conditions and therefore where we see the most volatile returns. However, fixed income bonds provide much more consistent investment income, especially now interest rates have risen sharply over the past 9 months, and it’s this income that will likely determine the path of returns for the Reinsurance Trust accounts. The outlook for cash and bonds looks much more attractive than in the previous five years and we can now expect yields of 6% or more per year over the medium term.
