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Diversification: The Only Free Lunch On Wall Street

The value of long term asset diversification , sometimes known as “the only free lunch on Wall Street” is discussed in a recent MarketWatch article offering “Five Steps to Beating the Market.” “Stock investors typically regard ‘the market’ as essentially the Standard and Poor’s 500 Index of large U.S. growth stocks.” The article tracks and summarizes financial performance records since 1928 for large-cap blend the (S&P 500), large-cap value, small-cap blend, small-cap value stocks and a four-fund combination of these asset classes. In every summary, the four-fund combination produced a superior return to the S&P 500 alone. However, the price investors pay for higher performance is higher volatility. “For patient investors, those temporary losses are a relatively small price to pay for tripling the long-term return.” The following “five ways to beat the market” are drawn from the data the tables below. According to the article, investors should realize: Outcomes are not predictable at the outset. Longer time periods make more dependable returns. The correlation between levels of risk and expected return may be less clear with a diverse portfolio over long investment periods. “When you compare the worst 40-year periods, you find that two of three other asset classes (SCB and SCV) had not only higher average returns but also better worst-case returns.” A diversified portfolio has a higher probability of meeting or exceeding 10% long-term returns. “Two of the other three asset classes, plus the four fund combo, had no 40-year periods at all with returns less than 10%.” “Wall Street tries very hard to convince investors they can beat the market by hiring ‘the right manager’ to choose stocks,” but the article suggests that “beating the S&P 500 index doesn’t depend on a manager. It’s the asset classes that do that. Click to enlarge Click to enlarge

When Is A "7% Return" Not A 7% Return? Answer: Most Of The Time

By Gregg S. Fisher Let’s say you make a $100,000 investment in stocks that compounds at 7% per year (which is not far from what US equities have historically returned), and you hold onto that portfolio for 25 years without adding or withdrawing funds. For the sake of argument, let’s assume the return is constant, never deviating from 7% every year. As the Constant 7% line in Exhibit 1 demonstrates, at the end of a quarter-century holding period, the value of that $100,000 sum would have more than quintupled to $542,700. For most investors, this would be a very satisfying outcome. Click to enlarge The catch, of course, is that the assumptions we have made above are unrealistic. Aside from certain cash equivalents, no investment will grow at exactly the same rate every year, and the riskier the asset (e.g., stocks), the greater the volatility. To simulate the real world, we ran five randomized trials (all depicted in Exhibit 1), all with an “average return” of 7% a year, but now adding the additional element of 14% per year volatility, or standard deviation, which is also close to the historical experience for a stock proxy such as the S&P 500 Index. Since 14% volatility, or risk, can manifest itself in many different patterns, that “average 7% return” can take vastly different paths with entirely different outcomes. Allow me to explain what I mean. Terminal Value of $900,000, $500,000, or $200,000? How can the ending portfolio value after 25 years vary from a little more than $200,000 to almost $900,000? It’s because volatility can be the investor’s friend or foe, depending on when , and how many , losses and gains occur. For instance, if large losses are encountered early in an investment’s lifecycle (as in Trial 1, where the ending value is just $228,000), they pull down the amount of funds available for growth in later years. This scenario reminds me, in a slightly different context, of a retiree led to believe that there’s little risk in the sustainability of a 4% portfolio withdrawal rate in retirement. If the investment portfolio suffers significant losses in his first few years of retirement, then he’s behind the eight ball if he intends to keep pulling out 4% of initial portfolio value (adjusted for inflation) each year to meet his cost of living. On the other hand, if large gains build up early on, there’s that much more money to compound and to absorb future losses. Trial 2 shows such a case, with a final portfolio value of $869,000 that significantly outperforms the 7% compound return. In the three other trials, two outcomes significantly underperformed the 7% compound return (Trials 3 and 4), and one (Trial 5), despite some wicked cycles, ended with almost identical wealth. The point is that the total amount of an investor’s gains and losses can vary widely since that 14% volatility, which can dramatically affect the compounding rate, can move returns either up or down (remember, in theory volatility can work in an investor’s favor every year, just as it can also work against you). Thus, a “7% average annual return” doesn’t mean much when it comes to measuring actual long-term investment returns. Harry Markowitz, a Nobel Prize winner who’s considered the father of modern portfolio theory, suggested a rule-of-thumb method to evaluate the relationship between average performance and compound return: compound returns equal the average return minus half of the variance, and that increasing the variance of returns without increasing the average return will hurt investment performance. How Much Risk Can You Tolerate? Let’s shift gears now and apply the implications of the math that I’ve just described to real-life investment portfolios. I have worked with investors now for nearly a quarter of a century. From that vantage point, I can say that there are some investors out there who would be comfortable with a portfolio comprised entirely of high-risk assets, hoping for that $900,000 outcome described in Trial 2. But I can also state that such intrepid investors are relatively few. For the great majority of our clients at Gerstein Fisher, fear of a dismal outcome overwhelms the hope for a spectacular one. Most would be content with a smooth ride that achieves the constant 7% result, rather than reaching for the $900,000 outcome fraught with risk. We understand and respect this mindset, which is why we make risk mitigation front and center for most of the portfolios that we manage. Probably the most important such strategy-a classic-is diversification . Since many different asset classes tend to move up and down at different times, holding a collection of them tends to smooth the ride for a portfolio (i.e., reduces volatility). That’s why for most investors it’s an advantage to own both stocks and bonds, both US and international stocks, both bargain-priced “value” stocks and high-flying “growth” stocks, as well as some alternative asset classes such as REITs (we prefer both domestic and foreign ones), and perhaps some gold and commodity futures. The market movements in 2016 are a case in point. For example, year-to-date through May 2, while both domestic and international large growth stocks were down nearly 1%, value stocks and bonds were up, and global REITs and gold jumped 8% and 21%, respectively. Of course, there’s a limit to how far you should take diversification, since if you owned every investable asset on earth, the returns would probably cancel one another out and you’d be left with zero. But few investors have to worry about excessive diversification; in our experience, most are not diversified enough . How much diversification you should strive for, and with what assets, very much depends on your individual financial goals (both long- and short-term), time horizon, and ability to live through trying investment times without being tempted to bail out of the markets. If you work with an investment advisor such as Gerstein Fisher, we can help you construct such an individually tailored, diversified portfolio, and coach you through the inevitable market cycles. Conclusion Long-term portfolios with the same average annual return can produce astonishingly different final wealth sums due to volatility and differing patterns of gains and losses along the way. A well-diversified global portfolio can help to reduce volatility levels and make for a smoother ride for investors. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Gerstein, Fisher & Associates, Inc.), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Gerstein, Fisher & Associates, Inc. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Gerstein, Fisher & Associates, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Gerstein, Fisher & Associates, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Suburban Propane Partners’ (SPH) CEO Mike Stivala on Q2 2016 Results – Earnings Call Transcript

Suburban Propane Partners LP (NYSE: SPH ) Q2 2016 Earnings Conference Call May 05, 2016, 09:00 ET Executives Davin D’Ambrosio – VP & Treasurer Mike Stivala – President & CEO Mike Kuglin – CFO & CAO Analysts Brian Brungardt – Stifel Operator Welcome to the Suburban Propane Second Quarter 2016 Financial Results Conference Call. [Operator Instructions]. And ladies and gentlemen, this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended relating to the Partnership’s future business expectations and predictions and financial condition and results of operations. These forward-looking statements involve certain risks and uncertainties. The Partnership has listed some of the important factors that could cause actual results to differ materially from those discussed in such forward-looking statements. These are referred to as cautionary statements in its earnings press release which can be viewed on the Company’s website. All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements. With that being said, I’ll turn the conference over to the Vice President and Treasurer, Mr. Davin D’Ambrosio. Please go ahead, sir. Davin D’Ambrosio Thank you, John and good morning, everyone. Welcome to Suburban’s Fiscal 2016 Second Quarter Earnings Conference Call. Joining me this morning is Mike Stivala, President and Chief Executive Officer; Mike Kuglin, Chief Financial Officer and Chief Accounting Officer; Mark Wienberg, Chief Development Officer; and Steve Boyd, our Senior Vice President of Operations. Purpose of today’s call is to review our second quarter financial results, along with our current outlook for the business. As usual, once we’ve concluded our prepared remarks, we will open the session to questions. However, before getting started, I would like to briefly reemphasize what the operator has just explained about forward-looking statements. Additional information about factors that could cause actual results to differ materially from those discussed in forward-looking statements is contained in the Partnership’s SEC filings, including its Form 10-K for the fiscal year ended September 26, 2015 and its Form 10-Q for the period ended March 26, 2016 which will be filed by the end of business today. Copies of these filings may be obtained by contacting the Partnership or the SEC. Certain non-GAAP measures will be discussed on this call. We have provided a description of those measures, as well as a discussion of why we believe this information to be useful in our Form 8-K furnished to the SEC this morning. Form 8-K can be accessed through a link on our website at suburbanpropane.com. At this time, I’d like to turn the call over to Mike Stivala for some opening remarks. Mike? Mike Stivala Thanks, Davin. Good morning, everyone. Thanks for joining us today. The record warm temperatures reported for our first fiscal quarter persisted into the second quarter making the 2015, 2016 heating season the warmest on record. In fact according to NOAA, heating degree days for this year’s heating season were reported at 82% of normal. Our volumes were obviously impacted by the lack of customer demand for heating needs. However, we rely on our flexible cost structure and the strength of our balance sheet to help mitigate some of the short-term weather-driven earnings shortfall. The fundamentals of our business remained strong and as has always been our philosophy, our balance sheet and our business model provide us with the support to withstand the effects of this kind of dramatic weather event. We came into this fiscal year with more than $150 million of cash on hand. Despite the lower earnings, we continued to fund all of our working capital and capital expenditure requirements without the need to borrow under our revolving credit facility throughout this year’s heating season. We also funded the $42 million acquisition of Propane U.S.A at the end of our first fiscal quarter and we ended the second fiscal quarter with approximately $59 million of cash on the balance sheet. Additionally, during the quarter, we took steps to further strengthen our liquidity position, with the opportunistic refinancing of our revolving credit facility which was scheduled to mature in January 2017. We received excellent support from our bank group as the syndication was well over subscribed, despite the challenging conditions in the credit markets. The new facility increases our available borrowing capacity from $400 million to $500 million in support of our long-term growth initiatives. It reduces our interest requirements from improved pricing and relaxes several of the covenant requirements. With the heating season now behind us, our employees are well-positioned to focus on the things they can control, fine-tuning our operating model to drive further efficiencies, continuing to execute on our customer base management initiatives and seeking opportunities to expand in strategic markets. In a moment, I’ll provide some closing remarks including some comments on our outlook for the remainder of the fiscal year. However, at this point, I’d like to turn the call over to Mike Kuglin to discuss our second quarter results in more detail. Mike? Mike Kuglin Thanks, Mike and good morning, everyone. To be consistent with previous reporting, as I discuss our second quarter results, I am excluding the impact of unrealized non-cash mark-to-market adjustments on derivative instruments used in risk management activities which resulted in an unrealized loss of $739,000 in the second quarter of fiscal 2016 compared to an unrealized loss of $7.4 million in the prior year second quarter. Additionally, net income and EBITDA in the second quarter of fiscal 2016 include a loss on debt extinguishment of $292,000 associated with refinancing of our revolving credit facility. Net income and EBITDA for the second quarter of fiscal 2015 include a loss on debt extinguishment of $15.1 million associated with refinancing of our 2020 senior notes and $2.1 million of expenses related to integration of Inergy Propane. Therefore, excluding these items, net income for the second quarter of fiscal 2016 would have amounted to $93 million or $1.53 per common unit compared to net income of $161.2 million or $2.66 per common unit for the prior year’s second quarter. Adjusted EBITDA for the second quarter of fiscal 2016 amounted to $145.1 million compared to $214.3 million in the prior year second quarter. As Mike indicated, record warm weather for this year’s heating season was really the story for both the first and second quarters of 2016. As a result, retail propane gallons sold in the second quarter of fiscal 2016 of 199.7 million gallons decreased 38.1 million gallons or 19.1% compared to the prior year. Sales of fuel oil and other refined fuels in the second quarter of fiscal 2016 of 13.3 million gallons decreased 6.6 million gallons compared to the prior year. Similar to the first quarter, the unseasonably warm weather was persistent as temperatures were warmer than normal and the prior year for nearly all 13 weeks of the second quarter. The only market that experienced favorable weather compared to the prior year was California where volumes responded strongly compared to the prior year. Overall, average temperatures across all of our service territories for the second quarter of fiscal 2016 was 13% warmer than normal and 20% warmer than the prior year second quarter. In our northeast service territories, average temperatures for the second quarter were 30% warmer than the prior year second quarter. In the commodity markets, propane prices at the beginning of the quarter continued to descend lower from the first quarter. However, prices by mid-February then rallied for much of the remainder of the quarter. Despite the recent increase, commodity prices remained lower relative to historical price levels. Overall, average posted prices for propane, basis Mont Bellevue, for the second quarter of fiscal 2016 were $0.39 per gallon or 27% lower than the prior year second quarter. Average fuel oil prices of $1.08 per gallon for the second quarter of fiscal 2016 were 40.2% lower than the prior year second quarter. Total gross margins of $267.9 million for the second quarter of fiscal 2016 were $85.3 million or 24.1% lower than the prior year primarily due to lower volumes sold. Unit margins for the second quarter were slightly lower than the prior year second quarter as a result of lower mix of fee-related volumes. Combined operating and G&A expenses of $122.8 million were $16.1 million or 11.6% lower than the prior year second quarter as we leveraged our flexible cost structure to reduce expenses. Savings were primarily due to lower volume-related variable costs including lower over time and vehicle fuel costs, lower variable compensation associated with lower earnings, as well as lower insurance costs and continued operating efficiencies resulting in reduced headcount and vehicle count. Net interest expense of $18.9 million for the second quarter of fiscal 2016 decreased by approximately $800,000 primarily due to savings through the refinancing of the Partnership’s previous 7.375% senior notes due 2020 with new 5.75% senior notes due 2025 which is completed in the second quarter of fiscal 2015. Total capital spending for the second quarter of fiscal 2016 amounted to $11.8 million including $5.8 million of maintenance capital compared to total CapEx of $12 million in the prior year second quarter. Turning to our balance sheet, we now move through our historically high period of seasonal working capital needs and during the second quarter, we funded all our working capital and capital expenditures cash on hand and internally generated cash. With more than $353 million of capacity under our revolver and $58.7 million of cash on hand at the end of the second quarter, we have ample liquidity to fund our working capital requirements and our projected capital needs for the remainder of the fiscal year. As Mike mentioned, we completed the refinancing of our senior secured credit facility during the second quarter. The new five-year revolving credit facility amended and restated previous revolving credit facility dated January 5, 2012. We’re very pleased with the outcome of this opportunistic refinancing and the support of our bank group. Back to you Mike. Mike Stivala Thanks, Mike. As announced in our April 21 press release, our Board of Supervisors declared our quarterly distribution of $0.8875 per common unit. In respect of our second quarter of fiscal 2016, that equates to an annualized rate of $3.55 per common unit. The quarterly distribution will be paid on May 10 to our unitholders of record as of May 3. While this past winter season provided a challenging operating environment due to significantly lower customer demand, the temporary earnings shortfall does not affect the overall fundamentals of our business, nor the financial strength that has been a hallmark of our conservative approach towards managing the business. We continue to maintain our focus on executing our strategic growth initiatives, seeking opportunities both within the propane space and through diversification into businesses that meet our strategic criteria and that can supplement or complement our propane business. We remain patient and disciplined in our approach, yet believe we’re well positioned to be opportunistic. In closing, I would like to thank all of our dedicated employees for continuing to remain focused on providing exceptional service to our customer base, while driving operating efficiencies and managing our cost structure. Our operations personnel have done an outstanding job delivering on our customer base growth and retention initiatives throughout the first half of fiscal 2016, continuing to build on our post integration momentum. And as always, we appreciate your support and attention this morning. I would now like to open the call up for questions. John, can you help us with that please? Question-and-Answer Session Operator [Operator Instructions]. And first we will go to the line of Brian Brungardt with Stifel. Please go ahead. Brian Brungardt Just curious if you have any updates regarding the potential pool of acquisition targets, given number of energy companies are now at least appear to be willing to sell non-core assets? Mike Stivala I think the M&A market is going to really develop over the next 12 to 18 months as the effects of lower for longer commodity environment continued to take shape. Obviously, the credit markets, the equity markets have been a challenge for those that need to raise capital. So as you’re seeing, Brian, as well as we do a lot of companies are beginning to seek alternatives to raise capital and we think that bodes well for us as opportunities can come out of that process. So I think there are opportunities ahead, the next 12 to 18 months will tell us a lot. Brian Brungardt Lastly, as it relates to distribution and I appreciate the longer-term viewpoint taken by you guys, but how should we think about the sustainability of the current distribution, given seasonality of cash flows and the impact on the — with your credit facility covenants? Mike Stivala I think look, Brian, I said it in my remarks, this is a short-term weather-driven event, okay? If you look back just six months ago, we ended the fiscal year of 2015 with leverage around 3.7 times and very strong coverage. So we’re only six months removed from that and that was in line with our leverage following our leverage targets, following the integration of Inergy Propane. So, yes, when you look at our trailing 12 of March, our leverage appears elevated relative to a more normal scenario as of the end of 2015. But I think that as we said, it’s all of a short-term weather-driven scenario which we can point to. So as we get out of the heating season now, the back half of the year becomes a little bit more predictable and as we enter the first quarter of next year, all you need is a little bit of improvement in weather and you’ll see an improvement in those metrics. So for us, we’ve been through these scenarios before 2012, it was the previous record warm. The business is built for these types of environments where we can flex our expense base as needed, as well as to ensure that we have adequate liquidity to provide the kind of protection to the sustainability of the distribution. So I think, as evidenced by the fact that we haven’t even needed to borrow under our working capital line to help fund this year’s heating season should give the comfort of the strength of our liquidity and financial position to continue to withstand this kind of an environment and as weather normalizes, we’ll get back to the type of metrics that we were able to see in 2015. Operator [Operator Instructions]. And allowing a few moments, no further questions coming in. Mike Stivala All right, great. John, thank you for your help and thank you all for joining us today and we’ll see you at the end of our third quarter. Operator Ladies and gentlemen, this conference is available for replay. It starts today at 11:00 AM Eastern Time and will be going until tomorrow at midnight May 6. You can access the replay at any time by dialing 800-475-6701 and the access code 391794. That number again, 1-800-475-6701 with the access code 391794. That does conclude your conference for today. Thank you for your participation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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