Tag: investment services

Jan 8th

Hidden Fees & Hidden Agendas

Who's benefiting the most from your investments?

Many investors choose their financial advisor based on a personal or professional connection. If you’re like most people, you’ve likely stayed with that advisor for years because you trust them, appreciate their guidance, and your portfolio may have even performed well.

But even trusted relationships benefit from a periodic review. It’s essential to understand how your advisor is compensated and whether any hidden fees are affecting your long-term returns. Over time, even small differences in fees can have a significant effect on your overall wealth.

For example, a $1 million portfolio growing at 6% annually over 20 years would reach about $3.2 million. If that same portfolio incurred an additional 1% in annual fees, the growth would instead be roughly $2.6 million—a difference of $600,000.

This isn’t about distrust. The financial services industry is inherently complex, and compensation structures can be difficult to interpret. Understanding these dynamics can help you make more informed decisions about how and where you invest.

Uncover Embedded Fees

If you’re invested in mutual funds or ETFs (exchange-traded funds), those funds typically charge an annual expense ratio to cover operational costs. For most investors, these charges are typically around 0.25%.

For example, if you have $200,000 invested in a fund with a 1% annual fee, that’s $2,000 per year in costs—regardless of the fund’s performance. These fees are automatically deducted before you see your returns.

Some funds also charge sales commissions when you buy or sell, and others include additional expenses, such as 12b-1 fees to support marketing. In some cases, firms may charge higher fees for their own proprietary products. Understanding these costs ensures you know exactly what you’re paying for.

For investors with portfolios over $1 million, mutual funds are often less efficient. Larger investors can typically achieve more flexibility and tax efficiency through separately managed accounts that hold individual securities. This approach allows for more customized management of capital gains and losses.

Understand How Commissions Create Bias

In addition to fund fees, many advisors receive commissions for selling certain products. These incentives can influence recommendations, even unintentionally.

You should feel comfortable asking your advisor for clear documentation of how they’re paid. It is important that you understand how your advisor is compensated. Are they paid through advisory fees, commissions, or perhaps they charge an ad valorem fee (a percentage of assets under management)? The ad valorem structure, for example, helps align your advisor’s success with your own: When your portfolio grows, so does their compensation.

It’s also wise to ask about fiduciary status. Fiduciaries are legally obligated to act in your best interest, though not all advisors operate under that standard in every capacity. It is beneficial to understand when you are being advised by a fiduciary and when you are not.

Stay Engaged

If you discover fees or structures you weren’t aware of, don’t be discouraged. The financial industry can be convoluted, and transparency isn’t always straightforward. The key is to stay informed and ask questions regularly. A trustworthy advisor should always welcome those conversations.

At Whittier Trust, we believe in full transparency. We do not use hidden or embedded fees, and we don’t utilize a commission structure. Our clients hold separately managed accounts with individual securities, designed to minimize costs and taxes while maximizing control.

Our advisors are paid on an ad valorem basis—if you do well, we do well. This alignment fosters long-term relationships, which is why 99% of Whittier Trust clients stay with us, as do their children and grandchildren.

That’s what it means to build trust that lasts for generations.

Written by Tim McCarthy, Managing Director.

If you’re ready to explore how Whittier Trust’s investment services can work for you, start a conversation with a Whittier Trust advisor today by visiting our contact page.

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

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Dec 2nd

Re-Visiting Roth Conversions

A shifting landscape for retirement and estate planning.

Planning for Roth conversions has long been a staple in year-end tax planning. Roth conversions involve taking a tax-deferred account, such as a 401(k) or individual retirement account (“IRA”), and transferring it into a Roth account. By doing so, any tax-deferred amounts, including principal and associated earnings, are converted into taxable income. 

Although filers must accelerate the recognition of taxable income, these amounts are no longer subject to the onerous required minimum distribution (“RMD”) regime that typically plagues retirees with hefty income tax bills and threats of IRS penalties if managed incorrectly. Structured properly, Roth conversions can allow filers to “choose” their tax rate, only converting amounts that avoid their next marginal tax bracket.

For filers with taxable estates or those who have already utilized their entire unified gift and estate exemption (in 2025, $13.99m per individual, $27.98m per couple), a recent tax law change has introduced a new planning consideration. Although the population of filers impacted is small (<1% of filers), the dollar amounts could be meaningful.

Beneficiaries of tax-deferred accounts inherited from such filers typically face two layers of taxation: a 40% rate at the estate level when the accounts are valued for estate tax purposes, and an income tax rate as high as 37% upon withdrawal. Historically, beneficiaries could offset the “double tax” on these accounts through the Income in Respect of a Decedent (IRD) deduction, designed to ensure that assets used to settle a decedent’s estate tax liability were not subject to income tax as well.

Recent legislative changes have altered how that deduction works—and may make Roth conversions more attractive.

The One Big Beautiful Bill and Its Impact

In July 2025, Congress passed the One Big Beautiful Bill (OBBB), which, among other provisions, placed a limitation on the tax benefit of itemized deductions. For high-income taxpayers, the tax benefit of itemized deductions in 2026 and onward will be reduced from 37% to 35%. Filers attempting to deduct an amount equal to their highest taxed income will unpleasantly discover they owe residual tax.

Beginning in 2026, beneficiaries who receive distributions from tax-deferred accounts will no longer receive the full benefit of the IRD deduction that offsets income tax attributable to distributions. As a result, a larger portion of inherited retirement assets may ultimately be lost to taxation.

Why Roth Conversions May Deserve a Second Look

Completing a Roth conversion can help mitigate this limitation by eliminating your beneficiaries' reliance on the IRD deduction. This can substantially simplify your beneficiaries’ tax profile, particularly for those who must withdraw the inherited assets within a short time.

By converting, you may be able to reduce your beneficiaries' income tax exposure on retirement assets. In many cases, this can preserve more after-tax wealth for future generations.

Beneficiaries of Existing Inherited IRAs Should Also Double-Check

If you are a beneficiary receiving distributions from inherited tax-deferred accounts and you have been taking advantage of the IRD deduction, it might make sense to accelerate your withdrawals before the new limitation rules come into effect.

Key Factors to Evaluate

An account conversion or accelerated drawdown is not suitable for everyone. Several variables must be weighed carefully in collaboration with your advisors and tax professionals:

  • Current and future tax brackets: If you or your beneficiaries expect to be in a higher tax bracket later, paying taxes now may be advantageous.
  • Tax attributes: a conversion or acceleration of income may allow you to utilize loss carryforwards, creating a more tax-neutral outcome.
  • Liquidity to pay conversion taxes: The ability to pay taxes from non-retirement funds helps preserve the full value of your converted assets.
  • State tax exposure: Moving in or out of a higher or lower-tax state can change the analysis. Certain states may also have state-level estate taxes.
  • Charitable intentions: Planned gifts may offset estate taxes upon your passing or taxable income recognized from a conversion (although charitable gifting in the year of a conversion will also be subject to the same itemized deduction limitation).
  • Your longevity: The decision to convert could be very different depending on whether you are in your 60s or 80s.
  • Beneficiary circumstances: Different beneficiaries are subject to different mandatory distribution timelines on inherited accounts. Consider the potential amount of deferral available. If you have multiple beneficiaries, consider splitting your tax-deferred accounts between them so that no single beneficiary has income taxed at their highest marginal tax bracket (so the itemized deduction limitation won’t apply).

Next Steps

Completing a Roth conversion or accelerating the distribution from an inherited tax-deferred account allows you and your beneficiaries to take advantage of current tax treatment while providing clarity and efficiency for your estate plan.

It is possible that Congress may adjust or clarify this rule in the future; however, given its other competing interests, proactive planning remains the most reliable way to protect family wealth from unnecessary taxation.

Final Thoughts

The intersection of estate tax law, retirement accounts, and recent legislative changes has created new challenges—but also opportunities. A Roth conversion could help minimize the long-term tax impact on your estate and your beneficiaries by removing reliance on a deduction that will soon be limited.

Before acting, work closely with your advisors, CPA, and estate attorneys to model potential outcomes based on your income, residency, estate value, and long-term goals. While the right approach depends on each family’s circumstances, understanding and acting on this unique planning window may help preserve a greater portion of your legacy for those you intend to benefit.

Written by Vikram Ganu, Senior Vice President and Director of Tax at Whittier Trust.

If a Roth conversion or accelerated drawdown seems like a potential opportunity for you, let’s start the conversation now. Visit our contact page, and Whittier Trust can help develop a plan that adjusts your tax profile in response to upcoming legislative changes.

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

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Oct 16th

How Family Governance Protects Generational Wealth

Clear communication and structure are essential for high-net-worth families to protect their assets.

Even the best players need a coach—and a playbook. For ultra-high-net-worth families, that playbook, called family governance, is the key to successfully stewarding wealth and family businesses from one generation to the next.

Of course, each family is unique, so there are no set plays. But advisors at a multi-family office have the coach’s advantage of seeing the entire playing field, observing interactions, knowing which players to call in for different situations, and enlisting trusted experts to keep everyone in top form and build a strong team culture. 

To create strong, functional family governance, it’s vital to take four key steps (in this order, since subsequent steps build on the previous ones): 

Step 1) Establish a shared vision and mission.

Some families already have a mission statement for their business, but they've never articulated a personal mission from a family standpoint. Creating shared objectives is crucial to ensure that all family members are aligned, and it’s often helpful to have an unbiased advisor who individual family members can speak to in private. 

Step 2) Create a family governance structure.

Once shared values and goals have been identified, families can start to create a more formalized structure to guide future decision-making. This may include a family council or board of directors as well as policies, procedures, and practices for successful communications. It could even take the form of a family constitution.

Step 3) Develop a family education program.

A customized financial literacy program can bring the next generation or new family members (such as spouses) into the fold and help them take an active role in wealth management discussions. Depending on what level is needed, advisors can provide tailored lessons to cover everything from managing credit card debt to hiring guidelines for those working in the family business. 

Step 4) Set up your family office.

If your wealth is causing infighting or confusion, or your business is strained by family dynamics, it’s probably time to offload personal matters to a family office. Some ultra-high-net-worth individuals create their own single-family, brick-and-mortar office with staff and resources they personally oversee. Others choose a multi-family office solution that provides comprehensive services to multiple clients at a time. The latter offers a much more economical structure and has the advantage of more resources and a broader perspective. 

Working with Advisors to Create Structure: A Case Study For Why It Matters

Not long ago, a new client at Whittier Trust asked us to manage the investment of $32 million in earnings from their family manufacturing business. Soon after, they requested help with their personal finances as well. As part of that process, our team was doing an estate plan review and identified a major issue. With nine family members involved in the family business, significant shares of the company would change hands if anyone died—enough to potentially destroy the business. Yet each of them had created their own separate estate plans without considering these ramifications.

We discovered that some of the family members weren’t even on speaking terms, so repairing those dynamics had to be the first priority. After selecting one of our consultants to mediate, each family member got to speak their mind and share their individual concerns. In the meantime, the Whittier team was working behind the scenes with the estate planning attorneys. We eventually got all family members, attorneys, and consultants to the table to discuss business succession, which seemed like a small miracle.

Three generations were working in the family business and had established a rule that no one could own shares unless they worked there. One of the brothers had four children, none of whom worked for the family business, so none of his ownership could be passed down when he died; it would have to be bought back by the company. Another sister had no kids and planned to donate her shares to charity through the family foundation. But because of the buy/sell agreements, the company would have to buy those shares. 

Under the current structure, we showed them that there wouldn’t be enough cash on the balance sheet to buy all the shares within their natural lifespans. The company couldn't survive. It was a jaw-dropping moment for them to realize their structure was not sustainable. 

In the end, they all made a decision to move forward collectively as a family unit and align their estate plans. The business is no longer in danger from the necessity of buybacks and can continue to thrive. And we got word later that all three generations went on a family ski trip together, something they hadn’t done in 15 years. 

This is why, putting on our coaches’ hats, we remind clients that each of the four steps is essential: creating a shared mission, structure, education plan, and family office. Since 1989, Whittier Trust has used this model to help wealth generators pass down their assets and businesses with confidence to their children and grandchildren. Establishing solid family governance practices takes time and patience, but once the standards are developed, they can last for generations.

Featured in Family Business Magazine.

Written by Brian Bissell, Senior Vice President and Client Advisor at Whittier Trust. Brian is based out of the Newport Beach Office where he provides a full range of wealth management, family office, philanthropic, real estate, and trust services.

To learn more about how a multi-family office can help steward your family's wealth, start a conversation with a Whittier Trust advisor today by visiting our contact page. 

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
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Jul 29th

The Art of Stock Selection

Understand you are buying a business, not trading a stock.

The casual investor tends to focus on the wrong thing when investing. Most will think of the stock as the investment while forgetting the most important part.

The most important thing to remember about investing in stocks is that you are not just buying a stock. Rather, with every purchase, you are investing in a business. Investing in businesses and owning companies is at the heart of how we at Whittier Trust think about investing.

Too often, I hear analogies that try to equate investing with throwing darts or, even worse, gambling. If you divorce stock prices from business fundamentals, it is easy to understand how the average person can be confused by short-term volatility. However, conflating short-term price movements as markets digest new information with the odds at a roulette table can lead to suboptimal outcomes. This is one of the reasons we eschew even using gambling terms such as “going all in” or “double down.”

This subtle shift in mindset about owning a business allows us to truly think about the long-term consequences of our decisions and not react to the “daily gyrations of Mr. Market,” as Professor Benjamin Graham famously described the erratic swings of optimism and pessimism.

Owning Stock is Business Ownership

Thanks to this simple mindset shift, we can begin to do our homework. Understanding a business means understanding how a company actually makes money, so we need to have a very strong understanding of how a dollar of revenue translates into a dollar of profit. This basic act of tracing revenues through the income statement will elicit questions and allow us to understand the fundamentals of how a business operates. Things like margins and how they are impacted by both fixed and variable costs will allow us to understand the health of the business and the dynamics of the industries in which they compete.

On the other side of the ledger, we also need to focus on how a business and management team has decided to fund operations. Debt levels and borrowings need to be understood and analyzed. People often think of higher debt loads as universally being a bad thing, but for us, debt financing is a function of the certainty and consistency of cash flows. Said another way, if market cycles will dramatically impact cash flows, as is the case with semiconductors, then those companies should have a more appropriate level of debt financing. When thinking about fundamentals, we look for quality companies that have strong operations, and we think about how they will function during different economic cycles.

Finally—and most importantly—we need to assess the quality of the management team. Quality businesses do not happen accidentally; it’s a consistent and continuous process that allows a culture to take shape. However, this most important component is the most difficult to quantify, and we think this helps give our active approach a very significant edge.

Exchange-traded funds (ETFs) and mutual funds have their place in the investing universe. However, we at Whittier Trust believe that investing in a company where you can actively analyze long-term viability and the quality of management, rather than blindly investing in a stock, will ultimately lead to a much better outcome. We make it our mission to do that kind of deep due diligence on behalf of our clients, so that our investment strategies are just that—strategic, based on data and our expectations for the future.

So much has been written about investing in stocks, bonds, and a myriad of other asset classes. It seems a new way of increasing wealth is created with each new generation of investors. Yet if you look through so much of the noise and focus on what is actually driving the value of the investment, you can begin to form a track record of success. For us, understanding that a stock price is the outcome of the health of a business has allowed us to focus on creating wealth for the long term.

Written by Teague Sanders, CFA, Senior Vice President and Senior Portfolio Manager at Whittier Trust. Based in our Pasadena office, he is the co-manager of the company’s Small Cap and SMID investment strategies.

If you’re ready to explore how Whittier Trust’s tailored investment strategies can work for you, start a conversation with a Whittier Trust advisor today by visiting our contact page.

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
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Jun 10th

Separating Signal from Noise

Staying focused on what drives long-term returns.

Filtering the Noise

Markets are in a constant state of change—it's a natural characteristic of a dynamic, evolving economy. With that change often comes a steady stream of headlines, opinions, and predictions. From shifting policies to economic speculation, the volume of commentary can feel overwhelming. But amid the noise, long-term investors must focus on what truly matters: the underlying signals that shape lasting market performance.

Noise vs. Signal

Much of what dominates the financial news cycle is short-lived—noise that captures attention in the moment but has little bearing on long-term outcomes. Signals, on the other hand, reflect durable economic forces. These include productivity trends, demographic shifts, technological innovation, consumer behavior, and the direction of monetary and fiscal policy. These elements play a far more significant role in shaping market returns over time.

As Nielsen Fields, Vice President and Portfolio Manager at Whittier Trust, puts it: “The highs and lows in the market are normal and temporary. Over the long term, stock prices track the earnings power of businesses.” Decades of data support this view. Over the past 70 years, the vast majority of market returns—over 90%—have been driven by fundamentals such as earnings and dividends. Meanwhile, valuation shifts, measured by the price-to-earnings (P/E) ratio, have accounted for less than 10% of returns.

Figure 1: S&P 500

Source: Bloomberg, Data from June 1955 through May 2025.

Volatility Is Part of the Journey

Periods of market volatility can be uncomfortable, especially when they affect long-term financial plans. But volatility is not a flaw in the system—it’s a feature. Markets reflect the evolving expectations of millions of participants reacting to new information in real time. What matters is not avoiding volatility but maintaining discipline and clarity amid it. Long-term investing success depends on the ability to tune out the noise and stay focused on enduring fundamentals. The challenge is real—but so is the reward.

The Risk of Reactionary Decisions

“Reacting emotionally can be more damaging than any downturn itself,” says Whittier Trust Executive Vice President and Chief Portfolio Manager Caleb Silsby. “Historically, missing just the best 5 days in the market can reduce overall returns by nearly 40%. Those days typically happen in or around bear markets, so if you're getting out and you miss the recovery early on, it can make a significant difference in your total return profile. It brings your whole average down quite a bit.” 

“The COVID-19 lockdown was a perfect example of when some investors wanted to sell everything,” Silsby continues. “In the end, government stimulus completely turned the market around. And because it occurred on a Sunday, there was no way to trade ahead of that. So even if you were right about everything from an economic perspective with COVID, the policy response was so swift and dramatic, that if you had sold and missed out on the recovery, that was more damaging than if you decided to ride out the storm.”

“If you could have seen the headlines that were coming for the first three months of 2020, you would have surely thought no way should I invest,” Fields adds. “But then stocks were up 18% that year. So even if you had perfect news and headline visibility, it doesn't necessarily give you certainty on your equity return. In fact, periods of high uncertainty and volatility have historically led to the best forward short- and long-term returns.

Figure 2: S&P 500 Returns vs. Volatility Index

Source: FactSet. As of April 15, 2025. Data since 1990.

The Whittier Strategy

At Whittier Trust, our long-term perspective on markets creates latitude that can help shield client portfolios against temporary downturns. “For example, we encourage clients to keep one year's worth of spending in a cash reserve,” Fields says. “We aim for another 3 to 4 years worth of fixed income to shore up against any short- to medium-term storm on the equity side. This way, a client’s spending needs are covered for the next handful of years, and there’s no need to make a rash move at the wrong time in the equity market.”

Market growth occurs as a series of highs and lows—it’s not a straight line. “Investors will inevitably experience drawdowns in their portfolio at times. Historically, market downturns, while concerning in the moment, have proven to be an opportunity in the fullness of time,” Fields says. “If you own quality businesses with durable competitive advantages, strong balance sheets, run by capable management teams investing to grow the business for the long term, then the noise is a less important factor than the enduring pursuit of fundamental investing.”

In that vein, the Whittier Trust team uses a two-tiered approach to investing, integrating macroeconomic analysis with stock-specific security selection. On the macro side, we look for broad economic health by tracking various information such as inflation, overall economic growth, and consumer health. We analyze consumer purchasing behavior, default rates, delinquencies, as well as savings and employment rates. The Whittier Investment Committee then assimilates this top-down macro information with the bottom-up, company-specific insight generated by the investment team to form a view on the fundamental direction of the economy and businesses and how that compares to all the “noise” in the headlines.

Headline Noise & Opportunities

“Here's one example of how we sift through the media noise to get to the heart of an issue,” Fields says. “A recent headline reported that a North Carolina bridge project had been defunded at the federal level, and this caused a significant stock market reaction for related stocks. But the reality was that a small amount of grant funding related to a few initiatives had been pulled, not the entire project. That was an opportunity for our clients.”

Silsby adds: “Once you understand how much the public overreacts to news, the perceived threat of a short-term swing can be transformed into new investment opportunities. When people are becoming bearish, and getting out of the market because they're fearful, that's often a good time to be adding capital to that asset class.”

The indisputable upward growth of the S&P 500 over more than 70 years demonstrates how it continues to perform despite the world’s most challenging moments—wars, recessions, pandemics—and how long-term investors are rewarded for their patience.

S&P 500 Total Return

Source: Bloomberg. Data from June 1955 through May 2025.

Trusting in their Whittier advisor and the longstanding upward trend of global markets, clients can stay grounded and navigate uncertainty with confidence. Patient capital investing—owning businesses that can compound capital at an attractive rate over the long term—is Whittier Trust’s core philosophy, and it has served our clients well, with strong returns on their investments, for more than 40 years.

If you’re ready to explore how Whittier Trust’s tailored investment strategies can work for you, start a conversation with a Whittier Trust advisor today by visiting our contact page.

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
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Oct 25th

Identifying the Key Traits of Market Disruptors

Typically, in portfolio asset allocation, the concept of diversification is deemed beneficial to avoid stock-specific risk.  There have been many academic studies supporting this concept.  Although diversification makes sense from a “risk-return” perspective, to have robust performance and beat benchmarks consistently, investors should find stocks that they are willing to hold in a sufficient portfolio weight that will consistently outperform benchmarks.  With the S&P 500 averaging 8-10% annual returns, finding stocks that provide upside over the index is not an easy task.

Nevertheless, the one way we have found to accomplish this objective is to take positions in stocks that are disruptors - disrupting their industries or even creating new ones and fulfilling customer needs better than the competition.  This means companies that are innovating in such a unique way over the longer term that the competition just cannot keep up.  These companies rapidly gain market share from incumbents or even establish new end markets where there is little competition.   

The modern-day example of such disruption is Nvidia. Most know the semiconductor industry was dominated by Intel for the majority of the late 20th century and into the 21st.  Intel focused on central processing units (CPUs) that were the “brains” of personal computers, notebooks and servers.  Intel relied upon Moore’s law, created by former Intel CEO Gordon Moore, which involved the doubling of computing power every two years. This worked well as the personal computer (PC) proliferated in global society and, later, as internet usage grew.  Intel dominated its end markets and had few viable rivals.

But as Moore’s law reached its peak, Nvidia has taken the crown of the world’s largest semiconductor company by making its graphics unit processors (GPUs) more functional to manage the demands of artificial intelligence (AI).  Nvidia’s semiconductors can work together in an array to create massive computing power and exceed the limits under Moore’s law.  In addition, Nvidia management has indicated a doubling of computing power essentially annually with each generation of AI-based GPUs.  

Such innovation has led to massive revenue growth with FYQ12025 (April) sales growth of over 262% and adjusted earnings per share growth of over 573%.  Nvidia has been a clear disruptor in the semiconductor industry and remains at the forefront of AI innovation likely for many years in the future. 

This is akin to Apple Inc.’s performance under former CEO Steve Jobs.  On June 29th, 2007, Apple introduced the iPhone which clearly took the smartphone concept to a new level.  Apple sales growth and stock price appreciation have been phenomenal from that date forward with an annualized revenue run rate just for iPhones of almost $200 billion (as of June 30, 2024) and the stock up 6000% (60x return) since the introduction.

So, what are some common denominators to successfully invest in disruptive companies?

We focus on the following:

  • A Visionary CEO 
  • High Growth or Nascent Industry That Will Be Very Large
  • Company’s Approach to Industry is Disruptive to Incumbents
  • Advantage(s) Will Last for Long-Term – Creating a Moat
  • Growing Free Cash Flow & Improving ROIC

1. Strong CEO Who is A Visionary

A visionary CEO is one of the most important things to look for when investing in the stock of any company, no matter the sector.  There have been many instances where a visionary CEO was replaced by one who was not so prescient or insightful.  These instances have typically led to the failure of the stock. We can point to many examples, with one of the most recent being Disney.  CEO Bob Iger led Disney from March 2005 and retired at the end of 2021.  Disney’s board chose Bob Chapek as Iger’s successor.  The company went from a well-run entertainment conglomerate to one that had lost its competitive advantages in many end markets.  Disney stock declined about 40% in less than a year under Chapek. Luckily, Iger returned in November 2022 with Chapek’s inauspicious dismissal.

2. High Growth Industry

A strong company in a weak industry is usually a poor investment.  Rather, the “secret sauce” is to own a “strong company in a strong industry”.  This typically indicates a market share gainer with a large total addressable market (TAM).  Nike’s rise to become the premier athletic shoe supplier was based on taking market share in an industry with an exceptionally large TAM. The same has been true for other disruptors like Nvidia, Meta, Eli Lilly and other stock success stories.

3. Disruption of Incumbents

On the introduction of the iPhone in June 2007, cellphone market leaders included Nokia, Motorola, Samsung, and LG.  As discussed above, the iPhone was a giant leap forward in terms of both communication and computing.  Apple’s growth under both CEO Steve Jobs and Tim Cook has been astounding, allowing Apple stock to surpass $3 Trillion in market capitalization.  The first iPhone disrupted the cellphone market and created the world’s largest company by market capitalization.  An investment of $100,000 at the introduction would be worth almost $5,800,000 today!  There are many other examples of such industry disruption from Netflix for consumer entertainment to Chipotle for burritos.

4. Advantage(s) Will Last for Long-Term – A Moat

Any investment that does not offer a long-term advantage is arguably a trade.  Trades are attractive to many investors but will not typically provide outsized gains, especially after short-term capital gains taxes are paid.  Companies that are disrupting need a large “moat” to make sure their competitive advantages remain intact over the long term to generate outsized stock returns.  This can be through patents and licensing (although enforcement internationally has been difficult), a superior customer interface or proprietary software (such as iOS for Apple or Cuda for Nvidia), or other means.  Nvidia’s annual product cycles which entail massive improvements in performance and efficiency for AI systems (as seen with the transition from the Hopper generation of GPUs to Blackwell late in 2024 and with Rubin planned in 2025) are the latest method demonstrated to maintain a long-term technological lead over competitors.

5. Growing free cash flow & Improving ROIC

Ultimately, companies that are disrupting their industries should show extraordinary improvement in their financial metrics i.e. they need to generate outsized returns for investors.  Some metrics to judge success are growth in free cash flows and return on invested capital (ROIC).  These metrics allow an investor to monitor company progress in an impartial fashion.  Improvement in both metrics over time should result from a successful industry disruption. Improvements in net margin also should be tracked.

Conclusion

Companies that are disrupting their industries have the possibility of adding outsized equity performance in a diversified equity portfolio.  There are many historical examples including Apple, Starbucks, Nvidia, Nike, Netflix and others whose CEOs and/or founders out-innovated and tactically outperformed peers to either create massive new markets or garner massive shifts in existing market share.  Undoubtedly, there will be new examples in the future.  Finding such companies early in their growth cycles is a key to future investment success.

To learn more about Whittier Trust's market insights, investment services and portfolio philosophies, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

From Investments to Family Office to Trustee Services and more, we are your single-source solution.

Contact Us
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