by Scott Ronalds
If you just glance at the final performance numbers, 2020 looks like any other year. Yet, the numbers don't tell the full story. In his annual letter to clients (published in full below), Chief Investment Officer Tom Bradley opens his diary to provide some context on what felt like the longest 12 months in a generation.
2020 was like a game of golf. The score on the card doesn’t always tell the story. Drive it in the trees. Chip out into a fairway bunker. Hit it close to the green. Chip in for a par.
Our balanced clients had a par in 2020 but their return doesn’t tell the full story. To fill in the narrative, I’m going to open up my diary. (Note: references to the Founders Fund are relevant to most Steadyhand portfolios.)
January/February – The market is on wheels and valuations are getting stretched. Our 5-year projection for equity returns is coming down and we’re gradually reducing the fund’s stock weight. It’s now below target at 56-57%.
March – I usually love bear markets, but this is no fun. The speed of the market decline and the unknowns around COVID-19 are mind-blowing. Bob Hager’s words are ringing in my ears – “Go up with more than you went down with.” We’re sticking to our disciplines and moving to get Founders’ stock weighting back up.
April to summer – I’m glad we acted decisively. The market didn’t stay down long. Founders is fully invested (62-66% stocks). With so much dislocation in the market, our managers are more active than usual. Joe [Small-Cap Fund] tells me this has been the most intense period in his career.
These pressure-packed times are when we learn the most about our managers. None of them blinked. I’m pleased but also frustrated, especially with the Global Fund. Anne is showing us how compelling the opportunities are for her kind of value stocks, but the market doesn’t care. It’s being carried by a handful of tech stocks.
October – It’s getting silly. Blank cheque companies (SPACs) and loss-making IPOs are the rage. It’s all about the story. I can’t believe how many fund managers are saying they don’t care about valuation. This isn’t sustainable. Valuation is like gravity. You can’t resist it forever. For us, it’s a good news, bad news situation. I’m comfortable having little exposure to speculative companies, but this stance hurt our returns earlier in the year.
The vaccines have turned on a light at the end of the tunnel. Our performance has really picked up despite the continued hype about Tesla, Apple, Airbnb, DoorDash, etc. We’re sticking with a full allocation to stocks. Near zero interest rates are a double whammy – they make fixed income unattractive and companies more valuable.
November – Salman asks whether we’re swinging at the ‘fat pitch’. He’s referring to the extreme valuation gap between the tech darlings and some of the boring stocks we own. Do we own enough of the latter? The answer is yes. We’ll go up with less oil (which hurt us going down) but the companies we sold were replaced with higher-quality ones that have just as much, or more, recovery potential.
A number of important investment principles ooze out of my 2020 diary:
Stock markets overreact.
- When the consensus is extremely bearish, it’s a less risky time to invest.
- Interest rates have a huge impact on how bonds and stocks are valued.
- A good investment plan should anticipate periods of weakness.
- You need to lean on your plan the most when you trust it the least.
In 2021, we’re counting on another principle coming into play – ‘valuation is the best predictor of future returns’. As will be clear in the rest of this report, we remain disciplined on the price we pay and are well positioned for the post-vaccine world.
We encourage you to read the rest of our Q4 Report, where we provide more details on our specific strategies and what we've been doing in each of our funds.
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