Annual 2021 Investment Summary
Market Recap
It’s been another remarkable year for the S&P 500 Index, with the index of large-cap U.S. stocks returning a stunning 28.7%. It also dominated U.S. small-cap stocks (the Russell 2000 Index was up 14.8%), developed international stocks (MSCI EAFE Index, up 11.3%), and emerging-market (EM) stocks (MSCI EM Index, down 2.5%) for the year. Much of this outperformance occurred in the fourth quarter, with the S&P 500 gaining 11.0%, compared to 2.1%, 2.7%, and -1.3% for small caps, developed international stocks, and EM stocks, respectively.
A strong dollar, the renewed surge in COVID-19 infections late in the year (particularly in Europe and emerging markets), and China’s policy-induced economic slowdown and stock market decline drove the disparity of returns. The MSCI China Index sank 21.7% for the year and lost 6.1% in the fourth quarter. Chinese stocks comprise roughly 35% of the MSCI EM Index. The MSCI EM ex-China Index gained 10.0% for the year.
Turning to the bond markets, the core bond index (Bloomberg US Aggregate Bond Index) lost 1.5% for the year, as interest rates rose moderately. The benchmark 10-year Treasury bond yield ended the year at 1.51%, compared to a 0.92% yield at the end of 2020. Given the very sharp rise in inflation, most pundits would not likely have predicted such a mild increase in bond yields.
Credit markets fared much better than core bonds in 2021. The U.S. high-yield bond index returned 5.4% (ICE BofA ML High Yield Cash Pay Index) and the floating-rate loan index gained 5.2% (S&P/LSTA Leveraged Loan Index). These returns were consistent with our expectations for a recovering and growing economy.
Portfolio Update
For 2021, our model portfolios generated solid absolute performance but trailed their strategic benchmarks on a relative basis.
Our alternatives positions in trend-following managed futures significantly outperformed core bonds and added beneficial portfolio diversification. Our position in digital assets such as bitcoin materially outperformed both stocks and bonds.
The main detractor from our portfolio performance was EM stocks. After outperforming early in the year, the EM stock index suffered from a one-two-three punch of (1) China’s regulatory crackdown/property–market deleveraging, (2) rising inflation and tightening monetary policy across EMs, and (3) the renewed surge in the pandemic. Still, our manager selection for the emerging market space materially outperformed the broad EM index.
Our 2022 Outlook is Cautiously Optimistic
Our base-case scenario is that the pandemic recedes (but doesn’t disappear), the global economy slows but still grows above trend, corporate earnings growth slows but is still solid, the U.S. rate of inflation remains elevated but is falling, and U.S. interest rates rise moderately.
That would be a positive scenario for the economy and global equity and credit markets, although not for the core bond market. But even in the best case, it likely won’t be a smooth journey: The pandemic remains uncontained, domestic and global political and social tensions are elevated, the risks of an economic policy mistake have risen, and any number of unpredictable bumps in the road or worse may occur. And were we to see a sharply inflationary environment it would undoubtedly be damaging for both stocks and bonds, as interest rates rise and equity market valuations fall.
All these considerations (and more) factor into our analysis and current tactical portfolio positioning. We would benefit in the base case but our portfolios are also strategically balanced and well-diversified. We believe they would be resilient should a shock outside our base case occur.
Overall, our portfolios are positioned with (1) an overweight to hard asset royalty companies and innovative growth companies; (2) a large overweight to flexible, actively managed fixed-income; (3) material exposure to alternatives like trend following managed futures, precious metals, and digital assets; (4) a large underweight to mega cap stocks and traditional core bonds (interest rate/duration risk).
Our fixed-income positioning reflects the poor return outlook for the core bond index. Our active, flexible fixed-income managers have a strong likelihood, in our view, of outperforming the index without taking imprudent risks. But we still maintain a meaningful core bond allocation in our more conservative balanced portfolios as ballast in the event of a recessionary scenario, which would hurt flexible, credit-oriented bond funds as well as stocks.
We are confident in our long-term investment process, discipline, and ability to navigate whatever comes our way, with the objective of achieving your investment and financial goals. We sincerely appreciate your confidence and trust as well.
From all of us at TYME Advisors, we wish you and yours a healthy, happy, peaceful, and prosperous New Year.
TYME Advisors subscribes to AdvisorIntelligence, a leading research service for investment professionals that is published by Litman Gregory Asset Management, an independent, fee-only wealth management firm based in the San Francisco Bay Area. AdvisorIntelligence provides our firm with asset class research, manager due diligence, and risk-managed portfolio construction guidance with a 27-year proven track record. Utilizing the resources of Litman Gregory as an outsourced investment strategist and research arm provides significant benefits to our clients, and is a complement to our own work. It allows us to cover more investment opportunities in greater depth than we could on our own, and helps us make decisions on how to allocate your assets to achieve your long-term goals.
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RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
