The Bottom Line

The Bottom Line

IMS had another solid quarter in terms of returns for clients. Our flagship strategy, as represented by the IMS Capital Value Fund, was up a whopping +8.6%. Meanwhile, the broad market, as represented by the S&P 500 Index, was up 5.9%. According to Lipper, the first quarter returns of the fund categories below were as follows: Large-Cap Stocks +5.4%, Mid-Cap stocks +7.8%, Small-Cap Stocks 4.3% and International Stocks +3.1%. The average Gold fund was down -0.6%. This was the best first quarter for stocks since 1998. As usual, mid cap stocks did better than both large cap and small cap stocks, which is why we focus on mid-cap stocks and affectionately refer to them as the “sweet spot” of investing. The average taxable bond fund was up just +1.4% according to Lipper. By contrast, the IMS Strategic Income Fund, which is about 70% bonds, was up +4.4%.

Other than a few short breaks, stocks have basically gone up consistently for over two years now and the S&P 500 index, has now doubled since its March 2009 low. Anyone who has used the upheaval in Egypt, Libya or Japan, the dysfunction in Washington, the weak U.S. dollar, the recession or the ever-expanding national debt as a reason to be out of the stock market has been dead wrong.

We have been consistently bullish the last two years. We continue to hold the view that stocks will remain on an upward trend, even in the face of all of the issues mentioned above and the new issues that will undoubtedly surface. Why? The simple answer is because stocks are in a bull market. It started in March of 2009 and the average bull market lasts nearly 4 years. We are just 2 years into this one. It simply doesn’t pay to fight a bull market, especially when it’s occurring during a global economic recovery. Bad news and worry are normal and expected early on in a recovery. Yes, unemployment is still high, but it is falling consistently, and the economy and stock market have been able to shrug off both high oil prices and commodity inflation successfully. Stocks will take breathers from time to time, and may do just that this summer, but resist the urge to overthink this one. The facts are simple – we are in a bull market, companies are lean and mean after the recession and are starting to make substantial profits. This is driving stocks higher, and it will probably keep happening for at least a few more years. You can talk yourself out of the market too easily by focusing on all the wrong things – oil prices, inflation, unemployment, the dollar, the deficit, the politicians – but U.S. corporations don’t care about any of that, they are focused on making money for their shareholders and they are doing an outstanding job both here and abroad. Since we are in the midst of global economic recovery, many emerging markets are growing at 2 and 3 times our rate of growth and the weak U.S. dollar is helping U.S. companies compete very effectively in the global markets.

This is not a market that requires any magical timing or insight. The best approach is to determine how much of your assets you are willing to commit to stocks for the next few years and get invested. Cash, CD’s and money market accounts are going backwards fast when you consider inflation. Stocks are one of the best inflation protection vehicles ever invented. Yes, there will be corrections along the way, but we see this market significantly higher two years from now. That’s the bottom line.

Want Income but Worried about Interest Rates?

Stocks aren’t suitable for everyone. Therefore, some investors may want a portion, or potentially, the majority of their assets in bonds. The IMS Strategic Income Fund has nearly 70% of its assets invested in bonds with the rest in other income-producing securities such as real estate investment trusts, oil royalty trusts, business development companies and high dividend-paying common and preferred stocks. This fund returned +4.4% during the quarter, which was a nice return considering the average taxable bond fund rose only +1.4%. Some investors are fearful of investing in bonds because they can be negatively impacted when interest rates go up. We are well aware of the risk. It gives us a chance to be strategic in our approach to income. This is not the typical bond fund that holds a portfolio of long-term, investment grade bonds. Our prospectus allows us to be strategic in the way we invest and in the way we vary the Fund’s exposure to different types of income-producing securities. Our strategy for reducing the potential impact of higher interest rates is to invest in the types of bonds and other income- producing securities that should do better in a rising interest rate environment than the bonds in a typical bond fund. There are several strategies we employ: 1. We target bonds with shorter maturity dates, usually 3-7 years. 2. We invest in international bonds that may be on a different interest rate cycle than the U.S., the goal is to be in a flat to falling interest rate environment. 3. We invest in high yield bonds that are more impacted by the improving prospects of the underlying business than by interest rate fluctuations. 4. We hold reverse convertible bonds that are shorter term in duration, usually 6 months or less, and pay a fixed interest rate until maturity, provided the underlying stock doesn’t trade below a certain threshold, usually 25-30% below our buy-in point. 5. We find bonds that pay a floating interest rate, one that adjusts up or down with changes in the Prime lending rate. 6. Finally, we also use other income-producing securities such as those mentioned above, like energy companies that do well with rising inflation and dividend-paying stocks that benefit from a strengthening economy. Remember that when rates finally do go up, it will probably be because the Fed is trying to slow down the economy. If the economy is doing so well that the Fed feels the need to try to slow it down, that’s probably good news for the economically-sensitive, dividend-paying stocks in our Fund, providing a potential counter-balance to rising interest rates. These are all strategies we use to help mitigate the threat of rising rates as we go about the task of generating reliable monthly income for our clients. The point is that we wake up every day fully aware of the risks of rising rates to our portfolio and although we can never fully insulate the Fund from the impact, we can be strategic about how we are positioned.

As always, we sincerely appreciate your business and are very interested in talking with you or anyone you know that we could help. Our staff of 12 dedicated employees are passionate about building wealth wisely. We look forward to our next opportunity to serve you.


The general market views and opinions expressed here reflect the opinions of IMS Capital Management and are not intended to predict or forecast the performance of any securities market, index or fund mentioned. A fund’s investment objectives, risks, charges and ongoing expenses must be considered carefully before investing. Mutual funds are subject to market risk, including potential loss of principal. The prospectus contains this and other important information about the Funds. Obtain a prospectus at or by calling (800) 934-5550. Read it carefully before investing. Matrix Capital Group, Inc.


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