2020 Recap
JAMIE VICECONTE
CHIEF MARKETING OFFICER
CO-CHIEF INVESTING OFFICER
3 min read
While 2020 is a year many of us would like to forget, there were things we took away from the investment world and our management of your portfolios.
First, although it is something we harp on regularly, it is worth reiterating that staying the course is one of the best - and one of the hardest - investment principals to stick to. Anyone who panicked and reduced exposures into the Covid route of March would have likely missed a large part of the market turnaround. The broad Equity market had regained nearly 95% of the initial late winter decline by early June, less than 90 days after hitting the lows. Once again, staying the course was the best course of action.
Second, the relative valuation extremes between Growth and Value sectors persisted in the first half of the year and grew increasingly untenable. Sure enough, just when some prominent players in that space started to throw in the towel, the late third quarter through year-end started to see those extremes reverse. To quote economist Herb Stein, “If something cannot go on forever, it will stop.” And it did. Staying the course paid off, but the retracement still has a way to go to make up for a long period of underperformance by Value, Smaller Size, and Non-US Equities over the last five to ten years.
Third, tax efficiency remains critical to long-term wealth preservation. Given the multitude of similar ETFs, the market allowed us to take full advantage of the decline in March to lock in significant realized losses yet stay fully invested. We also took advantage of the realized loss opportunity to rebalance portfolios with the performance momentum overlay we discussed in our March month-end note.
So, what did this mean for our Equity returns? Our timing on the strategic swap was great for optimizing realized losses for taxable accounts but was less than optimal for the shift in Factor exposures given some of the extremes in valuation that occurred when the market bottomed out in March. This cost the equity portion of portfolios about 4% in annualized performance. Our benchmark MSCI All Country World Index (ACWI) returned roughly 16.3% for 2020, a fixed allocation to the Factor ETFs would have returned about 7.9% and our equity portfolios returned a bit over 3%. A significant underperformance but staying the course should see that performance gap close over the longer term.
The Fixed Income component of the portfolio returned about 4.4% for 2020, behind the benchmark Bloomberg Barclays Aggregate Index (AGG) return of 7.5%. Our more defensive duration position in short- to intermediate-term sectors was in response to the low historical yield levels and the asymmetric risk/return profile we saw in AGG. This positioning should serve portfolios well going forward.
Which is really the final point - it’s a long-term game with just as much uncertainty today as there was a year ago – Covid or not. We were disciplined in our approach and will continue to be so. And if the fourth quarter trends are any indication, this approach should start to bear fruit in terms of better relative performance against both ACWI and the AGG.
