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Osborne Partners 2017 Year-End Review

By Justin McNichols, CFA
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We are pleased with OPCM’s 2017 returns.  The OPCM Global Moderate Growth Composite was within a few percentage points of the return of the S&P 500, with less than 65% allocated to global equities, while the Global Balanced Composite returned approximately 14% net of fees with around half of the portfolio allocated to global equities.  In most cases, OPCM was well above the corresponding benchmarks in U.S. Equities (S&P 500), Foreign Equities (MSCI World ACWI ex U.S.), and Natural Resources (Bloomberg Commodity).  And generally at the benchmark in Fixed Income (Barlays US Govt/Credit Interm Bond) with low-single digit returns.  Our underweight in Real Estate performed well, but was shy of the NAREIT Global Index due to a higher weighting in U.S. REIT’s which underperformed.  Alternatives were up low single digits as hedges were negative and private equity was strong.

DOMESTIC EQUITIES:  Positive sector attribution from Materials, Energy, and Financials (nearly every strategists top sectors for 2018).  Negative attribution from Consumer Discretionary.  We enter 2018 with overweights in Materials (OW 5%) and Energy (OW 4%), and underweights in Staples, Utes, TCom, and Real Estate.

FOREIGN EQUITIES: Up about 30%, beating the MSCI ACWI ex U.S.  Every holding beat the benchmark individually, except Japan. Continue with 60% DM and 40% EM with the team examining South America for new positions. We continue to favor foreign equities, due to the combination of discounted relative valuations, a similar earnings growth profile, and generally more accommodative monetary policy versus the U.S.

NATURAL RESOURCES:  2017 was led by our overweight in Timber, Industrial Metals in general, delivering an outsized return versus the Natural Gas E&P universe which fell.  OPCM’s long-term Natural Resources returns are interesting to note: Over the last 9 calendar years, OPCM’s Natural Resource asset class is up 40% versus the Bloomberg Commodities Index down 23%.

REAL ESTATE: Our least favorite asset class rose about 13% in 2017 versus the benchmark up 15%. Our underweight positioning is unchanged as REITs possess the negative combination of low cap rates, high valuations, and a compressing relative yield versus U.S. Treasuries (“UST”) and high quality corporates.  Commercial real estate is peaking in our opinion, while Homebuilding is  likely in the last leg of the cycle with low supply being a tailwind.

ALTERNATIVE ASSETS: OPCM is “long USD and short USTs”.  Both are used as hedges in the portfolio.  Private equity is now neutral to us after a multi-year run, however firms have ample capital to invest on pullbacks, and the European cycle has elongated.

FIXED INCOME: We continue to believe low single digit returns will be the norm over the coming year.  2yr USTs now yield nearly 2% while the 10 yr UST yields sub-2.5% – only a 50bp 10/2 spread.  Historically, when the spread has closed in on zero, the stock market has a difficult time rising – Ex: 1990 (0bp spread), 1994 (10bp), 2000 (-40bp), 2007 (0bp).


  • Inflation – Watch PCE (breaks above 2.3%) and wage growth (1.50%-2.90% range since 2009).
  • Fed Funds – How many Fed rate hikes? – presently 1.25-1.50%
  • Benchmark 10yr UST rates. Higher rates compress equity multiples and reduce ERP.  Interesting fact, the SPX has never traded above 18.5x fwd earnings with 10yr UST <4%.  Aggressive 2018 EPS 150-153=2775-2830.
  • New SPX EPS estimate with tax reform. 140-143 rises to 150-153?
  • Sentiment – Arguably THE most bullish period in history. VIX 9, II Bulls this high 4x in 30 years, II Bears this low 5x in 30 years, numerous bubbles, investment strategists consensus bullish, lowest mutual fund cash levels, Rydex Bull Fund assets versus Bear Fund assets 25-to-1, low P/C, consumer confidence highest since 2000 internet top, “FOMO and BTFD”.



Asset class performance is representative of the OPCM Global Moderate Growth Composite. If you would like more information regarding this composite or any of our other composites, please contact us at


Justin McNichols, CFA

Justin McNichols, CFA

Justin is the Chief Investment Officer for OPCM, and has over 25 years of experience. Justin is a member of the OPCM Investment Management Team, and became a principal of the firm in 2000. Justin is a member of CFA Society San Francisco and CFA Institute. Justin received a Bachelor of Arts degree in Economics in three years and a M.B.A. in Finance from the University of California at Irvine. Additionally, he is a CFA Charterholder.
The opinions expressed herein are strictly those of Osborne Partners Capital Management, LLC ("OPCM") as of the date of the material and is subject to change. None of the data presented herein constitutes a recommendation or solicitation to invest in any particular investment strategy and should not be relied upon in making an investment decision. There is no guarantee that the investment strategies presented herein will work under all market conditions and investors should evaluate their ability to invest for the long-term. Each investor should select asset classes for investment based on his/her own goals, time horizon and risk tolerance. The information contained in this report is for informational purposes only and should not be deemed investment advice. Although information has been obtained from and is based upon sources OPCM believes to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. Past performance is not indicative of future results. Inherent in any investment is the possibility of loss.