We sold our remaining position in Charles Schwab (NYSE:SCHW) after reducing the position during the first quarter. Schwab remains an exceptionally well-run company that we think is coming to the tail-end of a couple of favorable multi-year trends. First, as the Company expanded profitability and compounded earnings over the past several years, Schwab's balance sheet capacity expanded, which allowed it to transfer over $70 billion in off-balance sheet client assets into Schwab deposits. Those deposits provided the capital for Schwab to meaningfully expand their interest earning assets and revenues in a lower-risk manner. We think the Company still has opportunity here, longer-term, to grow their balance sheet, but more in-line with the mid-single digit rate consistent with its asset-gathering growth.
In addition, the multi-year tailwind of favorable monetary policy, relative to Schwab, has leveled out and is at risk of turning into a headwind. For example, 10-year U.S. treasury yields have retreated over 100 basis points in the last six months - after a multi-year march higher. Further, as we have chronicled in recent Letters, the Federal Reserve halted its Fed Funds rate hiking spree earlier this year. We are not sure what the Federal Reserve targets, despite what they say, as inflation isn't much different today than any of the past 5-7 years along with mostly robust macroeconomic data – at least in early 2019. While neither the backup in 10-year yields, nor the pause by the Fed are unprecedented by any means, we are concerned that they represent future, and significant, headwinds to Schwab's growth rates.
Bullishly, over the past several years, Schwab has diligently managed expense growth to be below revenue growth. We would expect the Company to be able to continue this practice despite slowing top-line growth, and supplement earnings per share growth with buybacks, given the stock is trading at undemanding, though potentially understated, multiples. However, and in conclusion, we recognize a couple of multi-year tailwinds to the Company's growth rate have faded, so we sold our remaining position.
From David Rolfe (Trades, Portfolio)'s second-quarter 2019 Wedgewood Partners letter.
