The last few months have been particularly unsettling for a lot of Americans. Many are having to worry about their own well-being, as well as the health of their loved ones. Millions of people are concerned about their jobs (if they haven’t already been impacted) and whether or not their income will be affected by the shutdowns experienced throughout so many different regions. Lastly, many are anxious about their retirement savings, and how the first part of 2020 will impact their long-term goals and objectives.
In light of everything that’s going on, we had a conference call with David Hyland, Ph.D., CPA, to discuss the recent developments and how he views them through the prism of an educator. David, a finance professor at Xavier University for more than 15 years, spends most of his time teaching underclassmen about derivatives, investments and financial modeling. He also oversees the students who are involved with the D’Artagnan Capital Fund — a roughly $3 million “sleeve” of Xavier’s endowment that is exclusively managed by students.
We talked at length about what has transpired throughout the first part of 2020, as well as David’s thoughts about what to possibly expect going forward.
CHRIS: How do you value companies in an environment like this with there being so little earnings visibility?
DAVID: One of our primary approaches to valuations involves the development of discounted cash flow models. So, as we build models, we use the last year or two as our base, and then we forecast sales going out as well as their relationship with margins. What’s so hard, though, is that so much builds off the prior year or two. And with 2020 being such a difficult year for so many companies, what should we use as our long-run base going forward? Is it last year? Is it the last five years? Is there going to be reduced demand in the long run?
NEIL: Are earnings forecasts in the midst of all this uncertainty worthwhile?
DAVID: I think all information is good information. I want to know that management is thinking about what earnings and revenues are going to be. Management is giving me some information when providing these numbers and telling me they’re thoughtful about what the company is trying to do in terms of planning and forecasting. But we have to take it with a grain of salt as they don’t know everything, especially in this kind of environment, and can be overly optimistic or pessimistic. I encourage our students to take these forecasts into consideration, while also doing their own research to see what everyone else (i.e., competitors) is saying.
CHRIS: As we talk about management and their inclinations going forward, do you anticipate management teams doing anything differently throughout the next few years? Less debt? More cash? Fewer stock buybacks?
DAVID: I think so, yes. I think management teams will lean toward the idea of less debt. When there’s a market shock, there’s less of an appetite for risk. So, going forward, management teams will likely want to embrace more financial flexibility — so, maybe that means less debt or fewer buybacks. We already see big U.S. corporations running larger cash balances. All the while, smaller businesses might be less likely to take out loans because they’re more vulnerable in the event of a downturn, or protracted recovery.
CHRIS: Do you have any advice for individuals who have cash to invest right now?
DAVID: People need to realize they might need more cash now than they would have otherwise expected. I think we’re going to want to have the personal liquidity that allows us to weather periods of time without stable employment. The more advanced a skill set someone has, perhaps the more liquidity they might need so that if they’re in between jobs, they’re in a position whereby they don’t have to take a job they don’t want. I’d be hesitant to recommend putting more cash to work right now unless an individual has some money “to play with.”
NEIL: What kind of recovery do you think we’re in store for? A V-shaped recovery? Or is it W-shaped? Or another letter of the alphabet?
DAVID: We just don’t, or can’t, know what the recovery is going to be like. I think it’s been a good sign that the markets have recovered from the first big initial drop, but it’s hard to say how much of that is attributable to the money flooding in from more quantitative easing. The economy is so complex to begin with, and then you throw a wrench in like this — who can know?
NEIL: What kind of long-lasting impacts do you see the government’s interventions having?
DAVID: This is something we’ve really been looking at since the last financial crisis. If everybody has access to cheap capital, everybody can succeed, and this is a notion that, to a certain extent, impedes the free markets system. As negative as this might sound, we want companies that don’t create value and aren’t efficient to essentially fail, so that companies that are more efficient and are more beneficial to society, and can employ more people, have access to more capital. This is one of the consequences of QE. And while we don’t want companies failing in this type of environment because of the virus, in the long run, we want the best companies to succeed and do well.
CHRIS: What has the experience been like throughout the last couple months for the students who are managing the D’Artagnan Capital Fund?
DAVID: What a unique opportunity for these students to have this portfolio to manage in these crazy times. They actually came back from spring break a week early because they take it extremely seriously. I give Xavier a lot of credit for allowing students to have this experience and trusting them. It’s a neat opportunity, and while you certainly wouldn’t wish this kind of senior year experience on anyone, there are definitely a lot interesting things for us to be talking about on a daily basis with the market doing what it has.
NEIL: How have they been managing the fund of late?
DAVID: Our fund is really structured like a large-cap equity fund. We have an investment policy statement and there are guardrails in place, and as long as they’re following the guidelines, I place their trades. We have to be plus or minus 50% of each of the 11 S&P 500 sectors. We have a lot of compliance and reporting requirements. We really do treat it like a professionally-managed fund. And it’s actually one of the larger student investment funds in the country (in terms of assets under management).
CHRIS: What concerns do you have going forward?
DAVID: We do a financial literacy program with a group of seventh- and eighth-graders here in Cincinnati, and I really worry about the kids who are in inner city schools, who typically get two meals a day while they’re in school. We spend a lot of time with them, and our students really miss seeing them. I worry about those families that are really suffering economically and don’t have that school support right now.
The developments throughout the last several months have impacted nearly every single American. Obviously, some more than others. We appreciate David’s willingness to share his insights and encourage you to engage with your trusted advisors to determine what, if any, adjustments should be made on your end in light of some of the threats and opportunities that have presented themselves thus far in 2020.
Chris Brennan, CFP®, with MAI Capital Management, LLC, can be reached at 513.579.9400 or by email at firstname.lastname@example.org. Neil Hantak, CFA, also with MAI Capital Management, LLC, can be reached at the same phone number, or by email at email@example.com. David Hyland, Ph.D., CPA, a professor of finance at Xavier University can be reached at 513.745.3000 or by email at firstname.lastname@example.org.
This interview has been prepared for informational purposes only. Opinions expressed herein reflect the author’s judgment and are subject to change based on economic, market and other conditions. It should not be assumed that this is a forecast of future events or that any security transactions, holdings, or sector discussed were or will be profitable. This is not a recommendation to buy or sell any security. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. MAI Capital Management, LLC (MAI) is a privately held independent investment advisor registered with the Securities and Exchange Commission and headquartered in Cleveland, Ohio with regional offices in Columbus and Cincinnati, Ohio as well as offices in California, Florida, New Hampshire, New York and Virginia. MAI’s Cincinnati office is located at 625 Eden Park Drive, Suite 310, Cincinnati, OH 45202. For more information, call 513.579.9400 or visit www.mai.capital.