I would like to share with you all the next blog series for physician contract negotiations, through Falcon Healthcare Agency. This third Deadly Mistake for Physician Contracts is one that many might not even consider: Tail Coverage. Most often there are two main types of malpractice converage offered. The language can easily be misinterpreted, if unsure of what to look for. Read what you should know about this particular insurance in the full blog: http://bit.ly/1apyH86
I am excited to share my next piece of advice for physician contracts, courtesy of Falcon Healthcare Agency. In this particular Deadly Mistake for Physician Contracts, I share a personal story about dealing with the negotiations of on-call hours. This is one of the most important factors for physicians to consider, since it will directly affect their working hours and consequentially their off-work hours as well. I invite you to read the entire story on Falcon Healthcare Agency’s blog: http://bit.ly/1e1h673
Dennis Hursh is an attorney for physicians.
For new physicians just completing their residency, the first job they take is of the utmost importance. It has the chance to impact the rest of their career. Navigating the contract side of their first job is not always an aspect of job hunting that many physicians are comfortable with. My colleagues over at Falcon Healthcare Agency are equipped to help residents navigate through the job hunting process and find the position that best fits their needs. To aid Falcon Healthcare Agency, I’ve begun a series of blog posts: The 5 Deadly Mistakes in Physician Employment Agreements. The first in the series discusses the improper reliance on the language in the physician offer letter. I invite you to read the entire blog on Falcon Healthcare Agency’s blog: http://bit.ly/1fgVlAg. I hope that you will continue this journey with me about these 5 deadly mistakes and that it aids your physician job search.
Dennis Hursh is an attorney for physicians.
Although there is no “silver bullet” that can provide physicians total protection from the claims of malpractice attorneys, there are several low or no cost strategies that can provide significant asset protection for physicians, or enhance the asset protection physicians may already have.
First, don’t make it easy for a malpractice attorney to “pierce the corporate veil.” You already know that practicing through a professional corporation can keep your assets safe from malpractice claims against your partners and employees. But are you making it easy for a plaintiff’s attorney to “pierce the corporate veil”? Implement the following immediately:
• Have the corporation hold regular meetings of the board of directors and shareholders, and keep minutes of these meetings.
• Sign documents for the practice only in your capacity as a corporate officer.
• Have an appropriate professional review the legal, insurance, financial and tax foundations of your practice regularly to assure they are appropriate.
Dennis Hursh is an attorney for physicians.
If you are starting a medical practice, you obviously will NEED to accept credit cards. Many consumers put their entire lives on credit cards, and will be slightly more willing to accept a co-pay if it is “on the card”.
Fees and expenses for accepting credit cards in a medical practices are hard to compare – sometimes the lowest percentage fees are combined with other fees that make the processor more expensive.
I can’t do the research for you, but I can tell what works for me. I’m on my third credit card processor, but I think I’m going to stick with PowerPay. I like their HIPAA compliance, and, most of all, I like their customer service.
By all means, do your own research. But take a look at PowerPay.
Hursh & Hursh, P.C. is a law firm for physicians.
It seems like I’ve been waiting for years, but my book, The Final Hurdle – A Physician’s Guide to Negotiating a Fair Employment Agreement is finally out! I wrote the book because I find it incredible that so many physicians don’t realize that a medical contract really is different.
I think the book is fairly comprehensive. It deals with the major issues involveld in negotiating physician employment contracts:
- Physician compensation and benefits (how to know if it is a fair offer, and how to figure out what sort of productivity the employer is likely expecting)
- Restrictive covenants in physician employment agreements (how to make sure you can make a living if this deal doesn’t work out)
- Call coverage issues (how to gauge what’s fair, and what to avoid)
- Miscellaneous pearls of wisdom I’ve gleaned from physician employment contract negotiation as a physician contract attorney since 1992 or so (yes, I’ve been doing physician employment contract review and physician contract negotiations that long!)
The initial response seems to be favorable – but about the only people who really know about it so far are my friends and clients, so they might be just a little bit biased.
Almost every physician employment agreement will provide that the employer, rather than the employed physician, owns the medical records. This provision is completely reasonable during the term of a physician’s employment. However, many first drafts of physician employment agreements also provide that after the physician leaves, the employer will transfer records at the physician’s expense to a patient that wants to continue to be seen by that physician. As a practical matter, most practices do not charge patients for a copy of their charts – so this is really a punitive provision. I usually attempt to negotiate a provision that patients may request that their medical records be moved at the expense of the patient.
The physician should also be given the right to free access to any medical record necessary to defend the physician against any actual or threatened malpractice action or peer review activity. If possible, I also attempt to negotiate a provision that authorizes free copies of any record useful in any legal action – including a legal action between the physician and the employer.
A related issue is the confidentiality the physician is required to maintain. Medical records are obviously protected by HIPAA and similar state laws. Although it is reasonable to require the physician to treat all medical records as confidential, some physician employment agreements go so far as to prohibit the physician from disclosing any information about the employer without the prior written permission of the employer. In these provisions it is important to allow an exception for any information that the physician is required to disclose pursuant to legal process. I would encourage any physician to sing like the proverbial bird if they are subpoenaed or questioned in any legal process.
For our free report, The Five Deadly Mistakes to Watch out for in Physician Employment Agreements, click HERE.
For our 20 minute webinar on Physician Contract Essentials, click HERE.
For our comprehensive checklist on everything that should be addressed in a physician employment agreement, click HERE.
Hursh & Hursh, P.C. is a law firm for physicians.
It is vital for you to understand that negotiations of a physician employment agreement begin with the first recruitment call. Too many doctors “give away the farm” before the first offer is even produced.
Becoming totally passive and pliant about the negotiations of a physician employment agreement is not recommended. Your employer is likely to conclude that you just don’t care very much about provisions in the contract that are naturally important to the employer. Once that conclusion is made, your chances of getting a reasonable offer are greatly diminished. Obtaining just the right balance between firm but amicable can be difficult for physicians attempting to negotiate their own employment agreements.
I’ve been reviewing and negotiating physician employment agreements for 30 years, and I’ve seen some provisions that were truly atrocious. I’ve also had the benefit of 30 years of negotiations, generally between attorneys who truly care about getting the best deal possible for their client. Win-win negotiations produce variations that work for both parties, and the benefit of these work-arounds can be used in future negotiations, so that the last contract an experienced attorney works on can really be the best one yet.
The “secret” known to all experienced physicians’ attorneys is that all physician employment contracts are negotiable. I have obtained concessions on important provisions from massive health systems, as well as small private practices. When the person you are dealing with tells you the first draft is the “standard” contract for all physicians, he or she is either misrepresenting the situation or is misinformed.
You have developed a massive amount of knowledge and experience in your medical specialty, but that specialty is the practice of medicine – not the business of medicine. You are about to sign the biggest deal of your life. Don’t leave money on the table, or get trapped by a contract you will hate for years.
The purpose of this blog is definitely not to encourage you to “do it yourself”. However, you should understand the basics, so that when you engage an attorney to negotiate your physician employment agreement you are fully aware of the importance of the points the attorney is negotiating on your behalf. Just as your patients will enjoy better outcomes if they become involved in their medical care, you will enjoy a better outcome if you are knowledgeable about the key aspects of your physician employment agreement.
By the same token, you aren’t the right doctor for every patient and every ailment. You have likely concentrated your efforts on mastery of a relatively small field of medicine, and will call in a specialist for issues outside your expertise. Don’t rely on a “jack-of-all-trades” lawyer in this important negotiation. Be certain to engage an attorney who concentrates his or her practice on physician employment agreements.
Most importantly, don’t ever make oral commitments to the recruiter or anybody else you are dealing with. Nobody doubts your ability to be quick and decisive in medical situations. Don’t feel that you need to demonstrate these qualities in physician employment contract negotiations, where you haven’t had the massive training you’ve had in medicine. Even an experienced physicians’ attorney won’t make a snap commitment – they will always condition any concurrence on a review of the documents.
Don’t put yourself in the position of feeling that you can’t let your attorney negotiate a point in your physician employment agreement that the attorney says is unfavorable. The “dumb doc” often gets the best overall contract, without straining the relationship with future colleagues.
To get my free report on 5 Deadly Mistakes to Avoid in Physician Employment Agreements, click here.
Hursh & Hursh, P.C. is a law firm for physicians.
Not that many years ago, every new physician got a guaranteed base salary, with perhaps some sort of productivity incentive program. The vast majority of employers still provide a guaranteed salary to physicians, but the amount of the guarantee and the length of the guarantee period seem to be steadily eroding as employers feel the pinch of declining reimbursement.
In my opinion, an employer should not bring on a new physician unless that employer is certain that there is sufficient demand to keep the physician busy. I don’t think that the risk of having enough work should fall upon the new physician’s shoulders. Unfortunately, you will find that there are employers out there who are willing to take a chance on hiring a new physician – and “cover the bet” by shifting the risk of insufficient work to the physician through compensation based largely (or even completely) on the productivity of the physician.
Within law firms, paying lawyers based upon the business they personally bring in is called “eat what you kill”. For obvious reasons, this terminology is rarely used in medical practices. However, the “eat what you kill” methodology of compensation is becoming increasing common in physician employment contracts, so you must understand how this methodology can affect you.
The concept of paying a physician based on productivity hardly seems unfair at first blush. After all, if you’re not “pulling your weight”, why should you bring in the big bucks? If there is sufficient work to keep you busy, then it seems completely appropriate to penalize you if you are unable or unwilling to perform at the same level as your colleagues.
You know that the practice of medicine requires total dedication. You also know that patients cannot be treated if they are not seen. What you don’t know is how many patients are going to present to a given employer. The hottest practice in town (including a hospital practice) can get hammered when a competitor (yes, this term is used, especially by hospitals) hires a “superstar”, or buys the latest medical gizmo.
I have seen medical practices decimated when one physician becomes impaired, especially when there is a spectacular burn-out. I have been involved in situations where a surgeon was ejected from the OR when a nurse smelled alcohol on the surgeon’s breath; where a security cam picture of the physician breaking into the drug cabinet was introduced into evidence; and even an instance where a physician called to sign a death certificate at a nursing home performed what was presumably meant to be a comedy routine involving treating the corpse as a puppet in front of the family.
When patients or referral sources become leery of a medical practice, patient volume can be drastically reduced. This reduction will impact the less senior physicians most dramatically. The senior physicians are likely to have a patient base that will come to that physician no matter what another physician in the practice may have done (or been accused of having done). It is the less senior physicians who are in the process of building their practices that get hit the hardest in these scenarios.
I passionately believe that an employer should base the bulk of a new physician’s compensation on a base salary. Of course, there can be protections for the employer if the physician isn’t working. For example, most contracts will allow an employer to terminate your employment without cause upon reasonable notice, so a turn in fortunes won’t doom the employer to paying you a salary when you simply aren’t working very hard (if it is your fault or not).
Get our free report, The 5 Deadly Mistakes to Watch Out for in Physician Employment Contracts.
Hursh & Hursh, P.C. is a law firm for physicians.
It took nearly 4½ years, but the cumulative wealth of an S&P 500 strategy with dividends reinvested finally reached an all-time record (measured on a month-end basis) in March 2012, and finished the year 3.3% above the previous high-water mark set in October 2007. Results were slightly better for a small-company Russell 2000 strategy: As of December 2012, cumulative wealth was 8.5% higher than the previous peak in May 2007.
The table below shows how many years were required to achieve a new high in terminal wealth during some of the major market cycles in the past. Although many investors have expressed frustration with stock market fluctuations in recent years, the time required to recover losses from the peak in October 2007 appears broadly consistent with past cycles. We can draw some measure of solace in acknowledging that past generations of investors often found their patience sorely tested, as well.
Market Cycles Based on Month-End Value of S&P 500 Index with Reinvested Dividends
|Peak Month||Trough Month||Loss at Trough||Recovery Month||Years to Recovery|
|Oct 2007||Feb 2009||–50.9%||Mar 2012||4.4|
|Mar 2000||Sep 2002||–43.8%||Oct 2006||6.6|
|Aug 1987||Nov 1987||–29.5%||May 1989||1.8|
|Dec 1972||Dec 1974||–37.2%||Jun 1976||3.5|
|Dec 1961||Jun 1962||–22.3%||Apr 1963||1.3|
|Feb 1937||Mar 1938||–50.0%||Mar 1944||7.1|
|Aug 1929||Jun 1932||–83.4%||Jan 1945||15.4|
Every year brings its share of surprises. Perhaps the biggest surprise of 2012 was the strength in stock and bond prices around the world despite a steady stream of discouraging news events. Individual investors and professionals alike were often flummoxed by markets that failed to behave in accordance with their pessimistic assessment of the future. A few examples are listed below.
(Index performance data represents total return for each respective three-month period.)
First Quarter 2012
S&P 500 Index: 12.59%
MSCI World ex-USA Index: 11.34%
“Investors go into 2012 hunkered down, frustrated, and skeptical. … If there is a common theme among analysts’ forecasts for stocks, commodities, and currencies, it is to brace for more of the wild swings that were the hallmark of 2011.”
Tom Lauricella, “World’s Woes Leave Lasting Scars,” Wall Street Journal, January 3, 2012.
“Morgan Stanley’s chief US equity strategist is the most bearish market strategist at any major Wall Street firm when it comes to forecasting the outlook for stocks in 2012. He took the same pessimistic view last year—and it turned out to be the most accurate.”
Jonathan Cheng, “A New Year But the Same Ol’ Pessimism,” Wall Street Journal, January 7, 2012.
“Clearly we are in a cycle of reaching pinnacle earnings, and at some point we are going to drop.”
Quotation attributed to John Butters, senior analyst, FactSet. Michael Mackenzie and Ed Crooks, “Earnings Growth Falters for S&P 500,” Financial Times, January 9, 2012.
“The world economy will experience a brutal slowdown. … Every European country will be in recession in 2012, and probably in 2013. … Equity markets around the world will top out during this quarter and then enter the next down leg in the cyclical bear market that started last spring.”
Quotation attributed to Felix Zulauf, Zulauf Asset Management. Lauren R. Rublin, “Barron’s 2012 Roundtable, Part One,”Barron’s, January 16, 2012.
“Unemployment in the euro zone jumped to a 15-year high Thursday, while inflation unexpectedly accelerated.”
Brian Blackstone, “Poor Economic Data Slam Europe,” Wall Street Journal, March 2, 2012.
Second Quarter 2012
S&P 500 Index: -2.75%
MSCI World ex-USA Index: -7.38%
“Nearly one Spaniard in four is unemployed, according to data released yesterday, as the country’s financial predicament prompted a government minister to talk of a ‘crisis of enormous proportions.’ ”
Victor Mallet and Robin Wigglesworth, “Spain Jobless Rate Nears One in Four,” Financial Times, April 28, 2012.
“Suddenly it has become easy to see how the euro—that grand, flawed experiment in monetary union without political union—could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed in a matter of months, not years.”
Paul Krugman, “Apocalypse Soon,” New York Times, May 18, 2012.
“Feeble hiring by US employers in May roiled markets and dimmed the already cloudy outlook for an economy that appears to be following Europe and Asia into a slowdown.”
Josh Mitchell, “Grim Jobs Report Sinks Markets,” Wall Street Journal, June 2, 2012.
“Greece will be forced to return to the drachma and devalue, and the default will cause bank runs and money flowing into Germany and the United States as the only viable safe haven bet.”
Quotation attributed to Mark J. Grant, managing director, Southwest Securities. Andrew Ross Sorkin, “One Wall Street Seer Says the Greek Tragedy Is Near,” New York Times, June 18, 2012.
“With leading investors shunning shares, a six-decade passion for equities has come to an end—leading to a less flexible, more conservative model of corporate financing.”
John Authers and Kate Burgess, “Out of Stock,” Financial Times, June 24, 2012.
“There is no natural flow into equities for the next five to 10 years. The rules of the game have changed.”
Quotation attributed to Andreas Uttermann, Allianz Investment Management. John Authers and Kate Burgess, “Out of Stock,”Financial Times, June 24, 2012.
“The quarterly rite known as earnings ‘preannouncement’ season is under way—and so far it isn’t boding well for stocks. … The downward revision in [earnings] guidance could portend a long slog for stocks and the overall economy, say analysts.”
Joe Light, “Earnings Bode Ill for Stocks,” Wall Street Journal, June 30, 2012.
Third Quarter 2012
S&P 500 Index: 6.35%
MSCI World ex-USA Index: 7.49%
“Investors already fretting about the health of the world’s biggest economies now face another worry: disappointing earnings. ‘The pillar of strength is US corporate earnings, and now we’re seeing signs that that is cracking,’ [says Morgan Stanley’s chief stock analyst].”
Jonathan Cheng, “New Jolt Looms for Investors: Earnings,” Wall Street Journal, July 9, 2012.
“The US economy slowed sharply in the second quarter, growing just 1.5% as consumers slashed spending and businesses grew more cautious about hiring and investing, underscoring that an already wobbly recovery is losing even more steam.”
Neil Shah, “Weak Economy Heads Lower,” Wall Street Journal, July 28, 2012.
“If small investors needed any more reason to be disgusted with the stock market, they got it Wednesday.”
Neil Shah, “Weak Economy Heads Lower,” Wall Street Journal, July 28, 2012.
“Wednesday’s tumble wasn’t quite as scary as the nearly $1 trillion drop of May 6, 2010, but it conveyed the same sense of markets spinning out of control and trading machinery gone mad.”
Jason Zweig, “When Will Retail Investors Call it Quits?” Wall Street Journal, August 2, 2012.
“The global slowdown in demand is hitting the manufacturing sector in the world’s largest economies, with activity sinking to its lowest level since June 2009, when most industrialized countries were mired in recession.”
Norma Cohen, “Manufacturing Hits Three-Year Low,” Financial Times, August 2, 2012.
“Activity in China’s manufacturing sector—the engine for much of Asia’s economy—shrank at the fastest pace since the depth of the global financial crisis.”
Arran Scott and Alex Brittain, “Manufacturing Downturn Spreads Gloom across Asia, Europe,” Wall Street Journal, September 4, 2012.
Fourth Quarter 2012
S&P 500 Index: -0.38%
MSCI World ex-USA Index: 5.89%
“The slowdown in the global economy and anemic US recovery are expected to result in one of the worst US quarterly earnings seasons since late 2009.”
Mahmudova and Michael Mackenzie, “Slowdown Set to Take Toll on US Earnings,” Financial Times, October 8, 2012.
“This is unquestionably the worst earnings season relative to expectations that we’ve had in two or three years.”
Quotation attributed to Chris Jones, J.P. Morgan Asset Management. Jonathan Cheng and Kate Linebaugh, “Weak Earnings Spark Selloff,” Wall Street Journal, October 24, 2012.
“Wall Street’s post-election stupor is turning into a real headache for some stocks, as many well-known and even ballyhooed names fall into bear market territory. … Nearly a quarter of the stocks in the Standard & Poor’s 500—122—are in a bear market, unofficially defined as a 20% decline from a recent high.”
Matt Krantz, “Big Name Stocks Hit Bear Markets,” USA Today, November 9, 2012.
“China’s main stock index closed at its lowest level in almost four years Tuesday and slipped below a key psychological level, indicating investor worries over the health of the nation’s public equity market.”
Shen Hong, “Shares Hit 4-Year Low in China,” Wall Street Journal, November 11, 2012.
“Fears that Washington will prove unable to avoid looming tax increases and spending cuts have eclipsed concerns about Europe’s debt crisis, top business executives said Tuesday, and they worry that political gridlock might tip the economy into recession next year.”
Damian Palette and Sudeep Reddy, “Business Leaders Spooked by Fiscal Cliff,” Wall Street Journal, November 14, 2012.
“Moody’s downgrades France sovereign debt rating, citing its ‘persistent structural economic challenges.’ ”
William Horobin, “France Loses Another Top Rating,” Wall Street Journal, November 20, 2012.
Throughout 2012, nervous investors did not have to look hard for reasons to avoid the financial markets. The daily headlines provided abundant gloom to feed their doubts, but investors who acted on impulse could have missed a potential opportunity to participate in strong returns across the global financial markets.
The year opened with lingering concern about the weak US recovery, the debt crisis in Europe, and political uncertainty around the world. Many financial pundits had predicted another lackluster year for stocks and more market volatility. Some predicted a euro zone breakup triggered by impending debt defaults in Greece and Portugal. The global economy was showing early signs of a slowdown, and many investors were weighing the potential economic impact of the US elections and so-called “fiscal cliff.”
Despite a steady diet of bad news, most markets around the world climbed the proverbial “wall of worry” to log strong returns. Major market indices around the globe delivered double-digit total returns, and as a group, the non-US developed and emerging markets outperformed the US equity market. The total market value of global equities, as measured by the MSCI All-Country World Index, increased by an estimated $6.5 trillion in 2012, while market-wide volatility fell to its lowest level in six years.
The above graph highlights some of the year’s prominent headlines in context of broad US market performance, as measured by the Russell 3000 Index. These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily news events from a longer-term perspective, and avoid making investment decisions based solely on the news.
The world stock market performance chart below offers a snapshot of global stock market performance, as measured by the MSCI All Country World Index. The global headlines show that despite an abundance of negative news during the year, global stocks had an exceptional year.
Sluggish US Recovery
The current expansion, which started in mid-2009, has been deemed the weakest in postwar history. In past cycles, strong recessions were followed by strong recoveries. But the current rebound has produced economic growth of just 2.4%, compared with a 3.4% postwar average. In 2012, investors watched eagerly for signs that the US recovery was gaining steam. The weak economy was the central focus in the presidential election, and the debate raged over what combination of fiscal, tax, and regulatory policies would lead to higher growth and job gains.
Overall, there was continued weakness in job growth, real wages, consumer confidence, and spending. Positive news also surfaced throughout the year, including healthy corporate earnings and strong balance sheets, continued low inflation, falling oil prices, historically low mortgage rates, a strengthening housing market, and upticks in auto sales and manufacturing activity late in the year.
Continued European Debt Troubles
The euro zone continued its struggle to contain the sovereign debt problems of several member nations, including Spain, Italy, and Greece. The inability of these governments to pay interest on their debt has impacted the banks in stronger European countries, notably France and Germany, which have large exposure to the sovereign bonds. The European recession prompted banks that are holding the troubled assets to reduce lending, which contributed to lower growth across the region.
During 2012, the euro finance ministers agreed on a second bailout package for Greece, which included a 53% write-down for investors in Greek bonds. In May, concern grew over Spain’s fiscal health when a major bank requested a massive bailout and disclosed troubled assets. Following the Greek election in June, the European central bank pledged to provide monetary support to protect the euro, triggering a rally in stocks and bonds.
Rising Global Economic Worries
According to International Monetary Fund estimates, the global economy grew 3.3% in 2012—down from 3.8% in 2011 and 5.1% in 2010. There was concern that the worsening euro debt crisis would spread to other economies and markets. Europe accounts for a large portion of global demand, especially for export-dependent China. Germany’s economy is the fourth largest in the world, followed closely by France. Together, the combined economies of all 17 euro-area countries are nearly equal to that of the US, in GDP terms.
During the first half of 2012, China’s economy showed signs of weakening, with growth expected to fall to around 8%—a significant drop from its historical growth rate. China exports heavily to the euro zone. The crisis also threatened to reduce China’s exports to poorer emerging economies in Africa and Latin America, where nations rely heavily on European banks for trade financing. In the latter part of 2012, concerns over slowing growth in emerging markets had begun to ease as economies appeared to bottom out.
Stabilizing Actions by Central Banks
Many investors did not appear to anticipate the degree to which markets would positively respond to central bank actions. Many analysts credit the US and European central banks with boosting investor confidence in both markets, and in the case of the European Union, helping avert a euro breakup. The injection of liquidity into the respective economies also helped mute volatility between currencies. In September and October, the Bank of Japan announced measures to provide monetary stimulus through 2013 in response to slowing economic activity.
A Search for Higher Yield
Interest rates dropped slightly to near-record lows during the year. The rate move drove up bond market prices and total returns. But with the Fed and other central banks committing to keeping the financial markets liquid for an indefinite period, some investors found appeal in riskier fixed income securities, such as junk bonds, emerging market debt, and collateralized loan obligations that offer higher yields.
Wall Street responded to rising demand with new offerings. Junk bond issuance hit a record $350 billion in 2012, with many of the issues carrying fewer protections for bondholders. Investors also flocked to high-yielding alternative investments, such as energy partnerships and venture capital funds. Observers warned that the combination of unchecked risk appetites, low interest rates, and high bond prices may present danger for investors who are pursuing yield in markets they do not understand.
2012 Investment Overview
After a flat 2011, the US stock market posted a strong first quarter as the US economy showed signs of improvement and perceptions of the European debt crisis improved. The S&P 500 had its best first-quarter rally in 14 years, closing near a four-year high and a 12.6% total return. When the second quarter began, markets retreated as Europe’s debt crisis returned to center stage and signs of slowing global growth emerged—especially in China, where lower world demand had begun to affect exports.
By June, US stocks had surrendered all of the year’s gains as markets weighed how credit problems in Spain and the anticipated Greek elections would affect the euro zone’s sovereign debt problems. The US economy showed more signs of weakness. Stock markets around the globe stumbled in the second quarter, with non-US stocks suffering the most. During the summer, the markets improved, as European tensions eased on increased European Central Bank loans to Spain and Italy. There was also rising speculation that the Federal Reserve was prepared to deliver additional monetary stimulus to the US economy. Throughout the summer, analysts reduced their estimates of expected corporate earnings growth as an economic slowdown threatened to reduce profits.
In September, the Fed announced its third round of quantitative easing to push long-term interest rates lower and encourage more borrowing and investment. The Bank of Japan also announced an ambitious plan to stimulate its economy. These central bank actions helped drive the markets during the third quarter. The S&P 500 surged 14% from its June 1 low and reached a five-year high on September 14. US economic indicators sent mixed signals, but the economy reportedly expanded at a 3.1% rate for the quarter—the fastest pace since late 2011. Mortgage rates reached historical lows, and year-over-year home prices rose for the first time since the 2007 financial crisis. Heightened inflation fears led to a modest decline in Treasury prices, while gold and most other commodities rallied.
In the fourth quarter, investor attention turned to the close US election and the prospect of gaining certainty regarding future government spending, taxes, growth policy, and regulation. Stocks fell in the weeks following the election as investors gauged the prospects of continued political gridlock and the economic impact of spending cuts and tax hikes, known as the “fiscal cliff.” The S&P recovered its earlier losses by late December, however, and as the year ended, lawmakers scrambled to reach a compromise.
All major US market indices were up substantially for 2012. The S&P 500 gained 13.4%, and with dividends included, logged a total return of 16%. The NASDAQ Composite Index gained 15.9% for the year, and the Russell 2000, a popular benchmark for small company US stocks, returned 16.3%. The Dow Jones Industrial Average gained 7.3%. The market’s strong performance came with lower volatility, as gauged by the CBOE Volatility Index, which had its largest annual decrease since 2009.
Non-US developed market indices performed even better. The MSCI World ex USA Index, a benchmark for large cap stocks in developed markets outside the US, returned 16.4%. The MSCI Emerging Markets Index returned 18.2%.
Most country market returns were positive, although the dispersion of returns was broad. Among the 45 equity markets tracked by MSCI, only three—Chile (–0.1%), Israel (–6.2%), and Morocco (–12.6%)—posted negative total returns (gross dividends) in their local currency. Turkey, Egypt, and Belgium were the top three performers, with returns of 55.8%, 54.6%, and 38.5%, respectively. Greece (4.1%), Portugal (3.3%), Spain (3.1%), and the Czech Republic (0.2%) had the lowest positive total returns (gross dividends; local currency).
The currency markets were relatively stable for the year due to the offsetting effect of US, European, and Japanese central banks. The US dollar lost ground against the euro and many emerging market currencies, which boosted equity returns for US investors. The dollar gained against the yen as a result of Bank of Japan’s monetary easing.
Small cap and large cap stocks had similar performance in the US, but small cap substantially outperformed large cap in both the non-US developed and emerging markets. Along the price dimension, value stocks outperformed growth stocks in the US and non-US developed markets, while slightly underperforming growth in emerging markets.
In the fixed income arena, US TIPS performed exceptionally well, returning 6.9%, and short-term government bonds returned 2.1%. Investors seeking a safe haven from global market uncertainty poured money into US Treasury securities, which pushed down yields.
Real estate securities in the US also had a strong 2012, returning 17.1%. Global real estate had a banner year, with a total return of 31.9%, which was the highest-ranked return of major world asset classes. Commodities were the only group to show negative returns for the year, at -1.06%. The decline was their second annual drop, which had not occurred since the late 1990s.
Russell data copyright © Russell Investment Group 1995-2013, all rights reserved. Dow Jones data provided by Dow Jones Indexes. MSCI data copyright MSCI 2013, all rights reserved. S&P data provided by Standard & Poor’s Index Services Group. The BofA Merrill Lynch Indices are used with permission; copyright 2013 Merrill Lynch, Pierce, Fenner & Smith Inc.; all rights reserved. Citigroup bond indices copyright 2013 by Citigroup. Barclays data provided by Barclays Bank PLC. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio.
Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities.
Judging by the headlines in the financial press, investors spent much of the past year anxiously awaiting one calamity after another that failed to occur. The plunge off the so-called fiscal cliff was averted. The euro zone did not fall apart. China’s economy and stock market did not crash. The bond market did not implode. The re-election of President Barack Obama did not derail the US market. The “flash glitch” in early August did not lead to further trading disruptions. Doomsday did not arrive on December 21, as some interpreters of the Mayan calendar suggested it would.
Instead, the belief that owning a share of the world’s businesses is a sensible idea appears to be alive and well, despite suggestions from some observers that the “cult of equity” is dead. For the year, total return was 16.42% for the MSCI World Index in local currency, and 16.00% for the S&P 500 Index. Among forty-five global stock markets tracked by MSCI, only three posted negative results in local currency (Chile, Israel, and Morocco), and twelve markets had total returns in excess of 25%, with Turkey leading the pack at 55.8%. Although much of the financial news over the past year highlighted Europe’s fragile financial health, most of the region’s equity markets outperformed the US, including Austria, Belgium, Denmark, France, Germany, the Netherlands, Sweden, and Switzerland. For US dollar-based investors, results were further enhanced by a modest decline in the US dollar relative to the euro, the Danish krone, and the Swiss franc.
As is so often the case, earning the rewards offered by the world’s capital markets may have required a combination of discipline and detachment that eluded many investors.
2012 Index and Country Performance
Total return (gross dividends) for 12-month period ending December 31, 2012.
|MSCI Index||Local Currency||USD|
|WORLD ex USA||16.73||17.02|
|EMERGING + FRONTIER MARKETS||17.15||18.35|
The holiday season encourages media retrospectives about financial markets. It’s fun to match these up with what people were saying a year before.
In December 2011, Barron’s told investors to “buckle up.” The consensus prediction of its panel of ten stock market strategists and investment managers was for the S&P 500 to end 2012 some 11.5% higher, at about 1,360.1
“That sounds like a big gain, but a lot of things have to go right for the market to make such impressive headway,” the writer said. “Even the most bullish of these Street seers fears stocks could be more wobbly in the next six months than in the six months past.”
There was so much for forecasters to get right—the negotiation of the euro zone crisis, uncertainties over the growth of earnings, the roadblock of the US presidential election, and the challenge for emerging economies to sustain high economic growth rates.
Twelve months later, markets are still grappling with many of the same issues, though from different angles. Much of Europe is either in recession or growing only modestly, unemployment is high, and a number of countries that use the euro are unable to pay their debts. The US presidential election gave way to worries over the “fiscal cliff,” while Chinese exports have been hit by the slowdown elsewhere.
In the meantime, however, there have been solid gains in many equity markets, including parts of Europe and Asia, as well as North America. That Barron’s panel forecast of the S&P 500 reaching 1,360, which the magazine said was ambitious, now looks conservative. The index was 4% above that level by mid-December. What’s more, some of the strongest performances have been in emerging and frontier markets.
The table below shows performances for 2012 (through November 30) and annualized returns for the past three years for twenty developed and twenty emerging markets, using MSCI country indices. Returns are ranked on a year-to-date basis and expressed in US dollars.
TOP PERFORMERS IN 2012
Source: MSCI country indices through November 30, 2012.
Among developed markets, three members of the seventeen-nation euro zone—Belgium, Germany, and Austria—were among the top ten best-performing equity markets this year. Leading the way among emerging markets was Turkey, which regained its investment grade ranking from agency Fitch in November.
While not one of the top performers, the US market still delivered positive returns in what many observers judged as a highly uncertain economic and political climate.
And while much of the media focus has been on the so-called BRIC emerging economies of Brazil, Russia, India, and China, the real stars in the emerging market space the past three years have been the Southeast Asian markets of the Philippines, Thailand, and Indonesia.
There are a few lessons here. First, while the ongoing news headlines can be worrying for many people, it’s important to remember that markets are forward-looking and absorb information very quickly. By the time you read about it in the newspaper, the markets have usually gone on to worrying about something else.
Second, the economy and the market are different things. Bad or good economic news is important to stock prices only if it is different from the information that the market has already priced in.
Third, if you are going to invest via forecasts, you need to realize that it is not just about predicting what will happen around the globe, but it is also about predicting correctly how markets will react to those events. That’s a tough challenge for the best of us.
Fourth, you can see there is variation in the market performance of different countries. That’s not surprising given the differences in each market in sectoral composition, economic influences, and market dynamics. That variation provides the rationale for diversification—spreading your risk to smooth the performance of your portfolio.
So it’s fine to take an interest in what is happening in the world. But care needs to be taken in extrapolating the headlines into your investment choices. It’s far better to let the market do the worrying for you and diversify around risks you are willing to take.
In the meantime, many happy returns!
Fixed income can play an important role in a portfolio. But its role may vary according to a physician investor’s financial needs and concerns. For example, many physician investors look to fixed income for safety, income, and more stability in their portfolios. They must weigh these priorities against their concerns over future interest rates, inflation, government debt, and other factors that might affect fixed income returns.
Striking this balance can be a challenge in any market environment, but especially now, as low interest rates have sent many physician investors on a quest for higher-yield bonds or alternative investments. Depending on your approach, this pursuit of yield may invite more risk—some of which may be hard to see or understand.1
So, what’s an investor to do? How can you make prudent fixed income decisions while also addressing today’s low interest rates? Consider these principles:
Remember How Markets Work
The same core investment principles apply in any market environment. One key principle is that in a well-functioning capital market, securities prices reflect all available information. Today’s bond values reflect everything the market knows about current economic conditions, growth expectations, inflation, Fed monetary policy, and the like. So, according to this principle, the possibility of rising interest rates is already factored into fixed income prices.
This is one reason investors should view future interest rate movements as unpredictable. Even the market experts who have access to vast amounts of research have a hard time predicting the direction of interest rates. For instance, despite regular predictions of rising interest rates over the past two years, nominal yields on US Treasuries and longer-term bonds have continued falling and now are at historic lows.
Rather than trying to predict macroeconomic forces that are difficult to foresee, investors can look to the market to set prices and focus on the variables within their control.
Start with a Clearly Defined Goal
Fixed income choices should follow a broader investment strategy that defines the role of fixed income in a portfolio. The portfolio can then be customized to meet those specific goals while managing tradeoffs.
The chart below illustrates how portfolio objectives can influence a fixed income approach. An investor who wants to seek to avoid losing market value might have a different fixed income allocation from someone who wants to take a balanced approach, needs immediate income, or is seeking higher returns. Investors with different objectives typically have different tradeoffs regarding risk, expected return, and costs.
Know What You Own
Strive for transparency in a portfolio. This means understanding an investment manager’s basic strategy and knowing how the instruments held in the portfolio might respond in different economic, market, and interest rate scenarios.
Unfortunately, investors who chase performance often make their investment decisions based on the past performance and perceived popularity of the strategy. For example, some of the mutual fund categories experiencing the heaviest inflows of cash in the industry are in asset groups that have recently experienced higher than average yields. Higher yields are typically accompanied by higher risks. But do investors know what risks their managers are taking to deliver those attractive yields?
Understand the Tradeoffs
When reaching for higher yield, investors should carefully consider the potential effects of their decisions on expected portfolio performance and risk. In the fixed income arena, investors have two primary ways to increase expected yield and returns on bonds. They can:
- Extend the overall maturity of their bond portfolio (take more term risk).
- Hold bonds of lower credit quality (take more credit risk).
These may be reasonable actions. But pursuing higher income means accepting more risk, as measured by interest rate movements, price volatility, or greater odds of losing value if the issuer defaults.
As shown in the graph below, higher yield can also bring potentially higher volatility. Note that high-yield bonds (as represented by the Barclays Capital US Corporate High Yield Index) have exhibited more volatility relative to other bonds.
Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Barclays Capital data provided by Barclays Bank PLC. CRSP data provided by the Center for Research in Security Prices, University of Chicago. BofA Merrill Lynch indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation.2
Pay Attention to Costs
Investors typically do not realize that investment-related costs determine a large part of a portfolio’s yield and return. This applies especially to fixed income securities. In fact, research has shown that a bond mutual fund’s expense ratio helps explain much of its net performance—and funds with the highest expenses tended to have the lowest performance within their peer group.3
Consider a Global Fixed Income Strategy
Investors have other tools to enhance risk and expected returns in fixed income. You can expand your opportunity set by moving beyond your domestic fixed income market to access yield curves in other country markets. By owning bonds issued by governments and companies from around the world, investors can enhance diversification in their fixed income portfolios. After hedging against currency risk, bond markets around the world have only modest correlations. (Correlation refers to how similarly two investments perform in the same period.) As a result, a global hedged portfolio should exhibit lower volatility than a single-country portfolio or a global portfolio that does not hedge currency risk, and offer the opportunity to take advantage of more attractive yield curves abroad.
No one really knows when and by how much interest rates will change. Many market pundits have forecasted an upward move for several years now. Investors looking for higher bond yields should understand the higher risks tied to their decisions. Most investors might be best-served by building a fixed income strategy to complement their broader portfolio objectives, understanding the sources of risk and expected return, paying attention to fees, and looking beyond their own country to capture yields in other countries’ markets.
1. When interest rates rise, the value of an existing bond declines; when rates fall, existing bond values rise. The market adjusts a bond’s price to match the yield available on a new instrument. Investors who hold fixed income securities with longer maturities are exposed to the amplified effects of term risk. A long-term bond is more exposed to rate changes than a short-term instrument, and usually (but not always) offers a higher yield to compensate investors for the extra risk. Also, lower-coupon bonds are more affected by interest rate changes than higher-coupon bonds. For example, if rates move 1%, a bond that pays 3% will experience a greater gain or loss than one paying 5%.
2. CRSP data includes indices of securities in each decile as well as other segments of NYSE securities (plus AMEX equivalents since July 1962 and NASDAQ equivalents since 1973). The Barclays Capital US Corporate High Yield index measures the performance of fixed-rate, non-investment grade debt. The Barclays Capital US Aggregate Bond Index measures the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market. The BofA Merrill Lynch One-Year Treasury Note Index measures the performance of US Treasury notes. The index is representative of the universe of fixed-rate, non-investment grade debt. Indices are not investment products available for purchase.