From its origins in 1951, with the establishment of the European Coal & Steel Community, the European Union (EU) has grown to encompass 28 European countries and territories. From the Arctic reaches of Finland to the subtropical beaches of Cyprus, the EU stretches over 1.6 million sq. miles, and is home to 510 million people. A successful experiment in intergovernmental cooperation in many respects, the EU is predicated on the political and economic union of its member states, to varying degrees. What does this mean for those of us living on this side of the Atlantic? Perhaps two of the most recognizable instruments of the European integrative framework are the Schengen Area and the Eurozone.
 
Since its inception in 1995, Schengen Area member countries have adopted common visa and security policies. Passport requirements and border controls along their mutual borders have also been dismantled. This has resulted in the creation of a free movement zone within the Schengen Area. Third-country visitors to the Schengen Area must still submit to a border control agent and present valid travel documentation at their external point of entry, but can move freely once inside the Schengen Area. For an American tourist, this means that a trip from Lisbon to Warsaw is, for the most part, not encumbered by border guards and checkpoints. It is worth noting, however, that not all EU members are part of the Schengen Area. The United Kingdom, Ireland, Bulgaria, Croatia, Cyprus and Romania are currently outside of its scope. At the same time, various countries outside the EU are active participants, namely Switzerland, Norway, Iceland, Liechtenstein, Monaco, San Marino and the Vatican City.
 
In addition to the Schengen Area, the EU has also moved to a monetary union. The Eurozone was established in 1999, when the euro was first introduced as the common currency. Since then, the euro has grown in importance, despite recent setbacks precipitated by the global recession and the Greek debt crisis. Setting aside the combined economic clout of the entire Eurozone, three of the world’s largest economies (Germany, France and Italy) have adopted the euro as their currency. Additionally, Frankfurt and Paris continue to be major international financial centers, and the European Central Bank (the governing body for the Eurozone’s monetary policy) remains as one of the world’s most important central banks. Not surprisingly, the euro is the second most widely held international reserve currency. Additionally, multiple countries and territories around the world have aligned their currencies to the euro. Very much like the Schengen Area, however, the Eurozone is not analogous with the EU, as various EU members states have yet to adopt the euro: Sweden, Poland, the Czech Republic, Hungary, Croatia, Romania and Bulgaria. These countries have retained their national currencies, although their economies are intimately linked to the rest of the EU and the Eurozone. The UK and Denmark, on the other hand, have opted out of the union, while Andorra, Monaco, San Marino and the Vatican City have adopted the euro as their official currency.
 
The EU and its institutions may appear convoluted, but they reflect the complex nature inherent to all intergovernmental organizations. If anything, in an increasingly globalized world, American travelers and investors would be wise to recognize these nuances. 

Geovanny Vega

The citizens of Great Britain voted on June 23, 2016 to leave the European Union by a margin of 17,410,742 - 16,141,241.  Investors predicted Great Britain would remain a member of the European Union, and they predicted incorrectly.  The market's reaction in the period that followed is an interesting case study of short-term, erratic investor behavior, and another example supporting the buy-and-hold long-term investment approach.
 
The two days following the Brexit announcement, the S&P 500 lost 5%, the NASDAQ lost 6%, the Dow lost nearly 1,000 points, and foreign markets fared even worse (France's CAC fell 10%, Japan's Nikkei fell 8%).  Gold climbed from $1,256/oz. to $1,324/oz. and the 10 year U.S. Treasury Yield fell 16% (both are indications of investors' flight to safety).  Global market cap lost approximately $3,000,000,000,000 in those two days!  This represents the largest two day market event ever.  Prominent and respected economic figures were espousing dooms day-like predictions, with Alan Greenspan, a former Federal Reserve chairman, describing this as 'the worst period he could recall since being in public service,' and rumors began circulating that a recession bigger than 2008 was on its way.  Incredibly, this was all the result of one sovereign country's vote to leave a regional organization.
 
The markets, of course, did not crash, nor did we enter into another recessionary period.  In fact quite the opposite occurred.  U.S. markets rebounded strongly, with the three major market indexes reaching all-time highs on August 15, 2016; the Dow reaching 18,636, the S&P 500 closing at 2,190, and the NASDAQ closing at 5,262.  In foreign markets, the MSCI EAFE Index (a broad, foreign-equity index) climbed to $59.04 from a $52.63 post-Brexit low--a 12.18% increase.  Not only did markets shake off the unexpected Brexit vote, they surged past their pre-Brexit values to reach new performance benchmarks.
 
The massive loss in market value that occurred in the two days following Brexit is an excellent example of irrational investor behavior.  Stock prices should reflect the value of a slice of ownership of the underlying company, after adjusting for all relevant and public information.  In other words, investors will react to all available information and will buy and sell a stock until its price is at its fair value.  When new information becomes available, especially unexpected information, investors react by buying and selling and eventually driving the price of a security up or down accordingly.  With this premise in mind, one way to interpret the post-Brexit data is to conclude that investors believed that the negative consequences of Britain leaving the EU would reduce the value of global stocks by $3 trillion!  This is an amazing outcome considering that Britain's vote is without precedent, as is the process of a country withdrawing from the modern European Union. Investors simply had no knowledge about the actual ramifications of a country's exit from the EU, yet they were placing severe negative price pressure on global equities.  Clearly this was a gross overreaction to unexpected news, and subsequent market performance confirmed this.
 
What did occur in the days following June 23, 2016 was a buying opportunity.  A Warren Buffett quote used in a prior news article perfectly describes the immediate post-Brexit environment, "Be fearful when others are greedy and greedy when others are fearful."  Equities were 'on-sale' because of investors' severe overreaction to the vote result.  An investor who bought the S&P 500 on June 27 and sold on August 15 would have made over 9.4% in just under two months.  Of course, knowing the exact days to buy and sell (i.e. market timing) only works in hindsight, with the luxury of historical data.  The point is that whether an investor had cash ready to invest or was already invested in stocks, the few days following the vote was a great time to own equities.
 
Brexit was arguably the biggest unexpected market event in the last several years, with intense investor overreaction driving global stock markets $3 trillion lower.  The overreaction was not hard to spot, and the markets recovered strongly in the weeks following the vote.  The buy-and-hold long-term investment approach continues to prove successful.  Our clients' portfolios constructed pursuant to a long-term plan are more likely to endure the Brexit-like downturns, which occur in equity markets, while allowing the portfolio to hold those stocks as they reach their historic highs.  

Charles Holder

It is not a secret that active management, on the whole, loses to passive management.  This rings particularly true when transaction costs and other fees are considered; costs that are typically higher with active managers.  And even in that rare instance when the active manager actually beats the market on a consistent basis, it takes more than sixty years of data to state with statistical confidence that the active manager truly possesses the skill to beat the market.  This begs the interesting question, if passive management is the proven winner, why is so much global wealth still actively managed?  The answer lies in human psychology.

One must first understand what is meant by an active manager and how winners and losers are defined in the market.  An active manager is an individual relying on some type of analysis or methodology to select particular securities to buy or sell (stock pickers), to determine appropriate timing of buy and sell orders (market timers), or some combination thereof.  The passive manager constructs portfolios which reflect the broader market or various segments within the broader market, and typically does so at a lower cost.  'Winning' or 'losing' is usually determined by comparing a portfolio's returns to the returns of a comparable bench mark portfolio (e.g. an active manager's large-cap portfolio returns compared to the S&P 500 return over that same period).

The field of study concerned with how humans act in the investment world is known as behavioral finance, and this field offers several good theories explaining why money still chases active managers.  The first reason is a not-unfamiliar concept known as overconfidence.  As humans, we have an innate tendency to overestimate our abilities; to believe that we are better than we actually are at a skill or particular activity.  For example, in a 2014 study conducted by State Street Center for Applied Research, a group of investors were asked about their level of financial sophistication, and almost 70% claimed to be advanced.  The participants later took a financial literacy exam, and the average score was a paltry 61%.  Investment managers are not immune from this overconfidence bias, and this quality leads some to believe that they are smarter than the average investor, or that they can beat the market.  Even amateur investors and day traders show this overconfidence bias when they actively trade, believing that they will beat professional investors who have better and more immediate access to pricing information, or that they will perform better than a passive fund. 

Another trait influencing how we perceive financial risk is known as optimism bias.  This is best described as our tendency to believe that things will work out for the better.  We see this with active managers, the skewed belief that the manager's stock picks will outperform the general market.  Human cognition leans towards positive-result thinking, and this type of thinking fuels the active manager.  Evolutionarily, we are programmed to think optimistically to encourage us to explore new areas, try new ideas or opportunities, and generally advance.  Consider a hypothetical world where humans focus on the negative outcomes of every decision; there would be a complete stalling of human development.  While optimism bias may very well have its uses, in the world of investing, it can lead to irrational and risky investment decisions.

Hindsight bias and attribution bias describe how we relate to events of the past.  With hindsight bias, we tend to remember the positive past events, while downplaying the negative events.  Applying this to investing, we are likely to remember more vividly the stock pick that turned out to be a winner, while forgetting all of those stock picks that turned out to be losers.  Attribution bias pairs nicely with our hindsight bias, and it is our tendency to attribute positive past events to our own skill while attributing negative events to luck or other forces.  These biases would lead one to think that, not only was the active manager's winning stock pick memorable, but it was because of his skill, whereas the active manager's losing picks are less memorable and were caused by some other outside force, or even just bad luck.

A final bias, confirmation bias, provides that we assign more weight to information that supports our already-held conclusions and discount information that is contrarian.  A common theme among these biases is the resultant belief that we are better than we actually are at a particular skill, and that our successes are because of that superior skill.  Why we think in this manner is answered by our evolutionary history; it is the type of thinking that allowed humans to experiment, expand, and develop.  The remarkable jump from caveman to space-explorer occurred in a relatively short period of time, owed in no small part to overconfidence and optimism.  Unfortunately, there is very little place for this in the world of investing.

Investing is more cut and dry than our minds would like to believe.  Securities can be valued using mathematical formulas and discounted cash flow models, and even the trading of securities is boiled down to computer algorithms.  The transaction of securities in competitive markets, in theory, should be completely rational-basis, and without emotional thought.  However, people have the impossible task of overcoming their inherent biases, which explains why we still see active managers, stock pickers, and market timers.  These individuals think they can beat the market, even against overwhelming odds (and proven statistics) that they are no more likely to do so than if you threw darts at a board to select your portfolio.  We cannot predict the future, and in competitive markets, this is the only information that affects securities prices.
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For every buyer in the market, there is a seller.  When active managers buy or sell to construct a portfolio, the passive manager is on the other side of that transaction.  Active managers are overconfident (although they are hardly to blame for this flaw), believing they can profit from unknown future events, whereas passive managers are indiscriminate, capturing the returns of broader market segments.  This difference explains why the strategies we employ are 'winners' while those chasing active strategies are the comparative 'losers.'  This strategy is not a secret (2015 saw the largest shift of money to passive strategy funds yet), but until investors can overcome innate human psychology, there will always be comparative advantage in the passive strategy approach.

​Charles Holder

While often centered on controversial issues like immigration and border security, the US-Mexico relationship is actually deep-rooted, multifaceted, and economically significant to both countries. The US and Mexico share a 2,000 mile border—the most frequently-crossed controlled border in the world— in addition to a rich, unique and involved history that dates back to the 1820s. In most recent times, the nature of this relationship was expanded in 1994, when the North American Free Trade Agreement (NAFTA) came into force, welding their economies together and reinforcing the uniqueness of the US-Mexico partnership.
 
Since the adoption of NAFTA, the economic relationship between the US and Mexico has been one of growing integration and mutual importance. In 2015, the total bilateral trade (goods and services) between the US and Mexico reached $583.6 billion USD. Accordingly, every minute, more than $1 million USD’s worth of goods and services crosses the US-Mexico border. The US stands as Mexico’s largest trading partner, with Mexican exports to the US totaling $316.4 billion USD in 2015. Mexico, on the other hand, is the US’ third largest trading partner, yet it remains the second largest market for US exports, which totaled $267.2 billion USD in 2015. Today, Mexico is the main export destination for Arizona, California, New Mexico, Texas, and New Hampshire; and it is the second most important export market for another 17 states across the US. Not surprisingly, it is estimated that 6 million US jobs depend on trade with Mexico, or 1 in 24 American jobs. As for bilateral foreign direct investment (FDI), Mexican FDI in the US stood at $17.7 billion in 2014, while US FDI in Mexico topped $107.8 billion USD in 2014. Lastly, Mexico is an important energy supplier to the US, providing roughly 8% of all US petroleum imports in 2015.
 
The US-Mexico relationship is certainly significant, and commerce with our southern neighbor is undoubtedly important to both national economies, as well as to the livelihood of many on both sides of the border. It is a partnership bound by geography, history, demographics, and economics.

Geovanny Vega