EXCHANGE: AN ETF EXPERIENCE

Meet an Advisor — Kathryn Schwartz

EVAN HARP DECEMBER 19, 2022

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Exchange: An ETF Experience is coming February 5–8, so Evan Harp is sitting down and chatting with some of the advisors who will be there. Today’s edition is focused on Kathryn Schwartz of Pawleys Investment Advisors.

Evan Harp: When and how did your practice begin?

Kathyrn Schwartz: I founded my company in 2010. I actually started in the business over 30 years ago and worked for larger firms in various roles. I really just wanted to get back to working face to face with clients, so I started my Registered Investment Advisory firm in 2010.

Evan Harp: What is your investment philosophy?

Kathyrn Schwartz: I do primarily individual stocks, and I actually launched two private placement Reg D Rule 506 funds in 2011. When I started the firm, I really wanted clients to be able to hold me accountable for the investment performance. I manage the Pawleys Dividend Fund and the Pawleys Growth Fund. They’re both long-only equity funds, and I concentrate both portfolios with high-conviction ideas across all sectors. Stocks of companies with little or no debt, good earnings growth, and rock solid cash-flow, in my opinion, are best positioned to perform well in the long run.  As a part of the Jobs Act, back in 2012, there was a lift on the advertising ban for performance. I saw it as an opportunity to not only allow my clients to hold me accountable, but to be able to promote my performance. Things have gone really well. Advisors can invest in my strategies through a TAMP, SMArtX.  In 2018, I signed my first family office as a client, and have basically bootstrapped the firm to right around $75 million in assets under management today.

Evan Harp: What was the biggest obstacle you had to overcome and how did you do it?

Kathyrn Schwartz: That’s a really good question. I tend to be an impatient person by nature. But again, when I started the firm, I wanted clients to be able to hold me accountable for the stock performance over the long-term. I really had to shift my thinking to focusing on doing a good job and providing good investment performance for clients, and the firm growth will follow.

Evan Harp: February 5 through February 8 is going to be when our Exchange conference is slated, what do you think the biggest story in the market will be at that time?

Kathyrn Schwartz: Exchange is always such a dynamic, energetic conference. It’s just a great way to stay on top of what’s at the forefront of people’s minds, and learn about the launch of new products But I think this year might be a little bit different, because people have moved past the “shiny ball” syndrome — Crypto, NFTs, and SPACs — the things that used to be the hot topics are no longer working. I think that people are going to come in to the conference with more of a risk-off attitude, and maybe be a little bit more thoughtful about overall portfolio construction, selecting new products, and conducting more due diligence.

Evan Harp: Who’s another financial advisor that inspires you and why?

Kathyrn Schwartz: Evan, that’s a great question. I had to think hard on this one — and then it just was crystal clear, the answer to the question. It’s actually someone who is an advisor to advisors. Her name is Liz Ann Sonders and she is the Chief Investment Strategist at Charles Schwab. I was fortunate to have worked at Schwab for over 10 years, and was on her team when Schwab developed its overall approach to portfolio construction. I learned a lot in that role, and what inspires me about Liz Ann is that she shares context and language that’s extremely helpful to use in client conversations to help them stay on track with their plan and avoid the distraction of everything that comes out in the news.

Evan Harp: Do you have your eyes on any ETFs right now and if so, which ones?

Kathyrn Schwartz: I do almost solely individual stocks but the one ETF I do use is the SPDR S&P 500 ETF Trust (SPY) because it’s just a really good way to make tactical shifts within portfolios. If there’s an opportunity where the markets turn down and we want to put cash to work, SPY is a perfect way to do that.

Evan Harp: What are you looking forward to about Exchange?

Kathyrn Schwartz: Again, the energy. The last the last time I attended, I really started to develop some relationships with people who are in a position to help launch products. Because at some point, I’ll take my 10–11 year track record with my funds and once we have the enough assets to support the expense, we’re looking at launching those as ETFs. I’m looking forward to seeing old friends and meeting new people.

For more news, information, and analysis, visit VettaFi | ETF Trends.

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The business headlines are covered with stories of last year’s sexy darlings tumbling out of bed. Crypto coins, miners and brokers have fallen as much as -80%, most SPAC’s (blank-check Special Purpose Acquisition Companies) are way below their initial offering prices, Chinese Internet stocks are down -70%, and the “meme” stocks like GameStop are off about -65%. Not to mention the outright false pricing and theft occurring with NFT’s (Non-Fungible Tokens) and digital properties in various Metaverse virtual reality worlds like Sandbox and Decentraland. When previously high-flying investments fall out of bed, it is an especially good time to make sure there are no surprises lurking in a portfolio. The Dow Jones Industrial Average and S&P 500 are down -9% and -14% for 2022 respectively, and the technology-focused NASDAQ has fallen consistently since last fall, so maintaining portfolio quality is critical as we move through 2022.

A good starting point is to evaluate the S&P 500 to see how stocks compare. Companies are facing rising interest rates and persistent inflationary pressures. There are actually 504 stocks in the index since there are four companies with two different share classes (Google, Fox, News Corp, and Under Armour). Companies are facing rising borrowing costs as the Federal Reserve raises interest rates and slows bond purchases, so debt:equity is a good ratio to review. Companies with excessive outstanding debt eventually have to pay off their loans, which becomes a drag on earnings. As of today, there are only 18 companies in the S&P 500 with zero debt, and there are a whopping 152 companies that owe more in debt that the total equity value of the company. Persistent inflationary pressure will challenge companies in delivering consistent earnings growth. There are only 90 companies in the S&P 500 with 5-year earning-per-share growth above +25%, and 183 are below +5%, with 19 that are negative. Out of 500 companies, wouldn’t it be better to choose financially sound companies with strong balance sheets and consistently growing earnings? Index funds are a great vehicle for those just starting to invest in the stock market. We use SPY, the S&P 500 ETF (Exchange Traded Fund) as a way to make tactical moves into the market at opportune times. But the core of the money we manage on behalf of clients is invested in concentrated portfolios of stocks with little or no debt, good earnings growth and rock-solid cash-flow.

There are many ways to construct portfolios and select stocks that deliver solid performance over time. In my opinion, and what has consistently worked well for both the Pawleys Dividend Fund and the Pawleys Growth Fund, is to balance sector weightings and choose stocks of companies with little or no debt, good earnings growth, and rock-solid cash flow. We don’t beat the markets every year, but the exceptional long-term numbers speak for themselves, and our clients can sleep well.

Source: yahoo! finance, Refinitiv

What would Alexander Hamilton, the first Secretary of the U.S. Treasury, think about Bitcoin?  Last week I visited the Virgin Islands, sailing past Nevis where he was born, and pondered this question.  The current Secretary of the Treasury, Janet Yellen, has said that she has concerns about cryptocurrencies, yet also sees benefits.  The Chairman of the Securities and Exchange Commission, Gary Gensler, teaches a course on Blockchain and Money at MIT, and is an advocate.  The role of the Treasury is to issue money, oversee tax payments, supervise banks, and manage the finances of the government.  The role of the Securities and Exchange Commission is to oversee the raising of money and issuance of securities.  Regulators are struggling with cryptocurrency and how to define it, and thus how to regulate it. 

Currency by definition is a unit of account, store of value, and medium of exchange.  In order to be an effective medium of exchange a currency should be stable, unlike Bitcoin which has been extremely volatile.  Securities, on the other hand, are issued by public and private entities and typically trade on centralized exchanges.  As of 2014, the IRS has stated that capital gains taxation applies to what they refer to as “virtual currency,” or cryptocurrency, supporting it being a security.

Hamilton believed that ownership and economic safety were requisites to liberty, and spearheaded the birth of central banking and the issuance of currency.  In 1790, he launched the Revenue Cutter Service, which ultimately became the Coast Guard, to protect the public against “breaches of the Revenue laws.”  You could say that centralization is about not just control, but also protection.  Bitcoin is decentralized, and proponents value privacy and rail against centralization and governmental control.  Centralization provides protection – if my Visa card is lost and used by someone else, I am not responsible for those purchases.  But if a Bitcoin holder lose a private key for their wallet, their tokens are lost forever and they have no recourse.  Hamilton was very aware of the delicate balance between control and protection.  He stated in his instructions to the Cutter Officers: “(our) countrymen are freemen, and, as such, are impatient of everything that bears the least mark of a domineering spirit.”

Hamilton was an innovator, so if he were alive today, might be a proponent of Bitcoin.  But if he were sailing on a Revenue Cutter today, I am confident he would be on the lookout for pirates smuggling square groupers in exchange for Bitcoin – “keeping a careful eye upon the motions of coasting vessels, without, however, interrupting or embarrassing them unless where some strong ground of suspicion requires that they should be visited and examined.”  And he would reiterate cautious words about the important balance between control and protection.

Sources: CNBC, yahoo! finance, IRS, Hamilton First Report on the Public Credit and Letter to Revenue Cutter Officers, June 4^th, 1791