Greetings, and welcome to the March issue of Condor Monthly! In this issue, we discuss the service of electronic statements and the potential advantage of investing abroad. In this month’s Financial Planning Corner, we have information on tax efficient portfolio management. Additionally, if you have significant tax loss carry forward from previous years, please let us know, so that we may take the appropriate actions to utilize them to your tax advantage.
What's New at Condor Capital
For those who are not enrolled, Condor Capital provides electronic statements delivered to your email. By enrolling in Condor Capital’s electronic delivery service you are able to not only receive you statements earlier but reduce the paper mailing sent to you. We encourage you to sign up for electronic statements from Condor Capital if you have not already done so. In addition to Condor Capital's platform, the custodians (Schwab, Fidelity, and TD Ameritrade) for your accounts are capable of providing electronic statements also. As a reminder to Schwab account holders, their Schwab Alliance online account has to be activated in order to receive their electronic statements. If you have any questions about the program offered by Condor Capital or the custodians, or would like to enroll, please call Angelica Weber at Condor Capital on (732) 356-7323 or email her at angelica@condorcapital.com.
From the Portfolio Manager
Investing Abroad
Over the past year, we have taken steps to boost our clients’ international exposure to take advantage of more rapid growth abroad. This shift stems largely from the fact that the U.S. economic cycle is more mature than most other economies of the world. As a result, there is more upside potential in areas such as Europe and Japan, whose economies are at an earlier stage of recovery. However, while many individuals invest abroad solely with the aim of achieving higher returns, the benefits of increased diversification will have the largest impact on one’s portfolio in the long run. Modern Portfolio Theory proves that by adding international assets to a mix of U.S. stocks, investors reduce portfolio risk while enhancing risk-adjusted returns.
In addition to the benefits of diversification, there are currently some very attractive investment opportunities abroad. One reason for these opportunities is the general inefficiency of the international equity arena. With so many stocks listed on various stock exchanges in an assortment of countries worldwide, most stocks are followed by few, if any, analysts. This presents numerous prospects for a shrewd manager with the resources to exploit these inefficiencies. As a result, international investing is one area in particular where an active manager generally adds value in excess of his or her benchmark, thus justifying the management fee. At Condor Capital Management, all of the international funds selected for our clients have peer-topping long-term returns, proven management teams, and low expenses. We will continue to work closely with our international advisors, which include such well-known firms as Artisan, Nuveen’s NWQ, and Oppenheimer, to ensure that our selection criteria remains fulfilled.
From time to time, Condor Capital will utilize country-specific funds to target nations where there is the potential for sustainable long-term appreciation. Currently, Condor is utilizing Matthews Asian Funds to target investments exclusively in Japan. Matthews focuses solely on investments within Asia and is known as one of the best in the business in this part of the world. With prices beginning to stabilize and the central bank contemplating a rise in rates, the Japanese economy finally seems to be nearing an end to its decade long struggle with deflation. Japanese businesses are regaining pricing power and the current government remains more open to structural reform than its predecessors were. In addition to an improved domestic outlook, increasing exports to the rapidly expanding and labor-abundant Chinese economy have Japan’s equity market primed for ongoing improvement.
While one can achieve added diversification through investing in foreign large cap stocks alone, the correlation between domestic equities and international small-caps or emerging markets is even lower. However, these areas of the international market are much riskier than large-caps and exposure to these asset classes should be minimal. Condor utilizes only proven managers within this arena and we maintain close ties with them to ensure that clients’ interests are always prioritized.
We are also emphasizing international diversification in the fixed income arena. The benefits of investing in non-dollar denominated securities are increasing due to several macroeconomic factors. One of these reasons is potentially greater yields on overseas bonds due to differing central bank rates. Although the Federal Reserve’s tightening of monetary policy has largely erased these differences over the past year-and-a-half, some countries still maintain higher interest rate levels. Additionally, international economies have become more fundamentally sound than at any time in recent memory. High commodity prices have left some foreign governments with growing current account surpluses and ballooning foreign exchange reserves. While there are still some fundamental causes for concern overseas, the overall improvement in economic health is reflected by the ongoing credit rating increases for the majority of international debt. Most importantly, an expected depreciation of the dollar at a gradual pace over the next several years will provide a powerful tailwind for overseas fixed income investors. In fact, given the relatively low yields available worldwide, currency movements could represent the bulk of one’s foreign fixed income performance. This anticipated downward movement in the dollar is likely to be caused by growing government and trade deficits. Additionally, while the dollar’s position as the global currency of choice is unlikely to be seriously tested, its near monopoly in this sphere of international trade is coming to an end. Increasing trade between Asia and Europe and the emergence of the euro will lead to declining demand for dollars by foreign central banks.
While there are certainly risks associated with investing abroad that are generally absent in the domestic market, the benefits of added diversification render this a necessary area to include in one’s portfolio. The opportunities linked to economies that are experiencing accelerated rates of growth also allow for the possibility of returns in excess of those within the domestic market. All told, we believe investors will do well maintaining a geographically balanced portfolio in an increasingly integrated global economy.
Please note that international investing carries added risk. Additionally, depending on the unique needs of each client, not every account will have assets sub-advised by all of the international advisors mentioned above.
Financial Planning Corner
Tax Loss Harvesting
A key strategy in managing any portfolio is maintaining tax efficiency. Many Americans pay a sizeable amount of taxes to the government, sometimes topping 40 percent. Although it is nearly impossible to avoid taxation completely, it is possible to reduce your financial burden by utilizing tax loss harvesting, where a portfolio’s tax liability may be reduced by selling securities at a loss to offset capital gains. There is no limit on how many times an investor can realize a capital loss to counter any gains that occurred in a given year.
The benefits of realizing capital losses extend beyond matching capital gains and into income tax reduction. The tax code allows for $3000 in unmatched capital losses to be deducted from your regular income per year. So for an investor in a 35% tax bracket, this would amount to a savings of $1050 on federal income tax annually. Moreover, annual losses exceeding $3000 can be carried over into the next year.
Of course, tax loss harvesting is not quite that simple, since advisors must avoid violating the wash-sale rule. It states that investors cannot recognize a loss on the sale of a particular security if they buy the same or a “substantially similar” security within 30 days following the sale. Thus, the rule is in effect for 31 days before or 31 days after the sale of the security.
At Condor, we believe that managing your money is the top priority; however, we seek to do so in the most tax-efficient manner possible. If it becomes necessary to sell a security at a loss to offset capital gains in your portfolio, there are several ways to circumvent the wash-sale rule while maintaining your portfolio position. The portfolio managers may buy a different stock in the same industry or a mutual fund that contains securities similar to the one that was sold. Another method involves doubling up on the security you want to sell and selling the original shares after the 31 day period, or selling the security and repurchasing it after 31 days, thereby realizing a loss for tax purposes and reestablishing your original position.
Another method of avoiding the wash-sale rule is the exchange traded fund or ETF. An ETF is considered “substantially identical” only if it is the exact same fund. Even if an ETF is focused on the same market sector as the original security, as long as it has a different name and comes from a different source, it does not violate the rule. Simultaneous transactions can occur between stocks and ETFs, mutual funds and ETFs, as well as between two ETFs. Although they may behave similarly, the ETF is not considered “substantially identical” to the security and may be used to reestablish your portfolio position inside of the 31 day period dictated by the wash-sale rule.
In utilizing tax loss harvesting, it is vital to keep records of securities in separate tax lots. This way, the portfolio manager can sell the high-basis security first to realize the smallest gain. Condor’s portfolio managers regularly utilize this technique to ensure that our clients are never burdened by unnecessarily high tax obligations. 
