For all our new clients who might be unfamiliar, Change of Seasons is our quarterly update for clients. Here we hit some highlights of our various investment strategies, offer a quick take on the market as well as provide updates on our wealth management service offering. There is a little something for everyone in here and regularly worth your reading time.
Market Environment – Quick Take
I will say again what we have been saying since early 2020. Active management is back, passive indexing is going to lag other methods for longer than most will believe. Our results are showing clearly that investors who are capable and willing to allocate their hard-earned capital into sectors of the market showing clear relative strength while avoiding laggards, have the potential to generate outsized returns with a fraction of the broad market volatility.
Winners and losers have become pronounced in the financial markets since late 2019 and especially since the fall of 2020. Gone are the days of a rising market tide lifting all boats. We are now solidly in a new environment where making money (at all) relies on some relatively unconventional allocations. I will give you a few examples.
Technology and the Growth side of the market gave up market leadership in early September of 2020. Technology and growth represent the “conventional” trade, held widely by all. Amazon (-10.50%), Apple (-6.09%), Netflix (-2.43%) or FB (-1.27%) have lagged since September. Meanwhile, in the same time period, we have seen value (+13.6%), small caps (+54%), energy (+48%) , financials and banks (+37%/ +75%), industrials (+14%), basic materials (+12.5%)and many other sectors rise from the ashes with dramatic gains. Normally bonds would do “ok” in an environment like this, but new inflationary fear is driving all bonds deep into the red thus far in 2021. The 20 – Year Treasury bond (TLT) is down -15.2%! the 10- year (IEF) is down -6.3% and the Barclays Aggregate bond (AGG) is down -2.64%. On the other end, asset classes that benefit from inflationary pressure like Commodities are up +36%!
We are also cognizant of the obvious signs of excess and frenetic investor behavior that often presents itself in the end stages of long bull markets. These are the emergence of SPACs (aka Blank Check IPO facilitators), NFT (Digital Collectibles), 10:1 leverage offered by the banking system to the likes of Archegos Capital, social media guys becoming investment icons with their Meme stocks, Robinhood options day traders, etc. If I sounds like an old curmudgeon, it is because I’ve been here before, seen it all and I recognize the signs of the past repeating itself. The last few years of long bull markets are often the strongest return years of any (i.e., 1999, 2007).
With strong conviction, we will also say that the next 10 years will look nothing like the last 10 years. There are new opportunities in very strong sectors of the market. At the same time, there are disasters waiting to happen in the high growth overvalued side. We are still bullish and have every reason to remain fully invested for now, but it will not be as easy to make money looking forward as it has been in the past. Selection decisions and some unconventional asset allocations will determine your success, now more than any time in recent history.
So how are our various strategies adapting to this new environment? Quite well, thank you for asking!
Investment Strategy Highlights
Here is a quick overview of our investment strategies listed from most aggressive to most conservative. Any numbers presented below are preliminary estimates only as our third-party service is calculating actual composite returns now.
New Power
New Power is an aggressive growth stock strategy. Naturally, we would expect it to suffer in this environment. New Power finished the first quarter up a little over 3% adding to the 80.45% gain in 2020. Growth comes in many forms and our holdings in New Power hanging on to ETFS and select names that are becoming real players in new technologies like blockchain, smart grid, electrification of transportation, Five G, digital payment systems, artificial intelligence and so forth. We are also taking new positions in companies poised to benefit from the great reopening of global commerce post COVID, like Air BNB or pending infrastructure spending in solar and wind. Finally, we are taking advantage of some emerging technology companies that might shake up the worlds of renewable energy and energy storage including solid state battery technologies and hydrogen power. I think New Power has legs despite last year’s incredible gains and the recent consolidation. The energy evolution is accelerating now. This strategy is in the right place at the right time.
Worldwide Sectors
We made an opportunistic decision in late 2020 to commit 20% of the portfolio into the “Dogs of the Dow” (https://www.dogsofthedow.com/) stocks. This is a well-known strategy that has been put on the backburner in most investment shops for the better part of the last five years. Late in 2020, we recognized the developing opportunity in deep value. What better place to look than the “dogs” of the Dow Jones Industrial Average? Historically, if one were to buy the worst performing Dow stocks paying the highest yields at the end of each calendar year and held them for 12 months, your odds of outperforming the market are very high. I will save you the Google Search. These are the Dogs for 2021. On the “Sectors” side of Worldwide Sectors, we own 6 of these, waiting for better entry points in VZ, MRK, AMGN and KO.
We (you) also own JP Morgan (JPM), Boeing (BA), Cardinal Health (CAH) and Delta Airlines (DAL) as additional deep value “dogs”. All the “Dogs” are ripping higher and contributing to Worldwide Sectors outperforming the S&P 500 by more than 10% since January of 2020 with a fraction of the downside volatility. The rest of the strategy is invested in leading global stock index funds.
Multi-Asset (MASS) Income
This is that moment when I say I told you so. MASS income is going to be one of our best performers for the next 3-5 years as it did in the first quarter of 2021, outperforming all stock market indices handily. It is a diversified growth strategy with very strong regular dividends and income. Our last post covered this strategy in detail but I’ll just let results speak for themselves. Investors in this strategy should treat this money as long term and willing to always accept stock market risk and volatility. In return, you can expect between 5-7% in annual income from dividends and interest as well as capital gains. Most importantly, MASS income is designed to perform exceptionally well during periods of higher inflation. This is that time!
Gain Keeper Variable Annuity
Our managed variable annuity strategy continues to impress as a fully diversified stock, bond, commodity program. We are using leveraged mutual funds inside the annuity from Profunds and Rydex fund families which does add some regular volatility to returns. However, as I like to say, volatility is your friend if it’s the right kind of volatility (positive returns). This variable annuity is best used by individuals who need to shelter larger taxable assets from capital gains which might become quite a valuable tool as we head into a higher tax rate environment under the new administration. There are no contribution limits with variable annuity accounts, but contributions are after tax. Furthermore, Gain Keeper has no surrender charges, no commissions, and none of the heavy sales costs or expenses found in most other investment insurance products. This is a bare bones contract designed for clients of fee only advisors like us. We managed the assets inside the annuity generating “Gains” and “Keeping” them from the IRS. The 5- and 10-year average annual performance for this diversified strategy is over 9% net of all fees with strong downside risk controls in place.
All Season
All Season is doing exactly what it has done for investors since the mid 90’s. The strategy is generating very consistent returns through all market conditions. Long term returns are in line with the broad US and international equity markets since inception 23 years ago, while successfully avoiding those pesky 40-50% bear market declines. We describe All Season as a durable portfolio and that is a fact. Durable means it goes where it needs to go and adjusts holdings and the asset allocation to adapt to market environments like we are seeing today. Durable means you will be in the right place at the right time, sometime that means cash. Durable means staying truly diversified and avoiding crazy (and there is a lot of crazy in the market today). All Season is a core holding for almost all our clients… as it should be.
Retirement Income
Retirement Income is our Income strategy designed for tax deferred retirement accounts. Bonds of all sorts have been under tremendous selling pressure since the beginning of 2021. During these periods, our income models will simply step aside in cash and wait for more attractive levels to invest. Retirement Income can own Income producing securities of all types, not just Treasury bonds. But even outside of Treasuries, the environment is just terrible. High Yield corporate bonds are paying barely 3% above a 10-year Treasury – definitely not worth the price risk. Emerging market debt is in a death spiral, floating rate funds are now paying less than 1%/ year and even mortgage-backed securities are losing ground on a total return basis. As we finish the end of Q1, we are celebrating the fact that Retirement Income is still sitting on the zero line. Not losing in this bond hurricane is a huge victory! By the late summer and early fall, I suspect we will see some attractive opportunities, and these are often the best buys after periods like this. Hold the line here and you’ll be pleased.
Freeway High Income
Freeway High Income runs parallel to Retirement Income but uses High yield municipal bonds in greater percentages in order to generate high tax-free income for taxable accounts. Freeway is also sitting right at the zero-line YTD waiting for the right time to get reinvested. It’s going to be a great second half of 2021 and 2022 for both income models but investors need to be a little patient here as well.
Full Steam Ahead with Financial Planning
Will Brennan, CFA and CFP and I are meeting daily with our clients. Don’t worry, we’ll get to you soon! In these meetings, we are working through a lot of questions and providing solutions for everything from proper registration of accounts to retirement projections, tax savings plans, cash flow analysis, management of Required Minimum Distributions, Social Security choices and so forth. Those who are going through the process know that we are working from a top down, planning first, perspective now. From there, we can determine risk capacity and return objectives leading us to evaluate if you are allocated properly within our investment strategies. Some are asking what they can expect to pay for planning. The answer is zero. All this work and analysis is included within your fee for assets under management. The planning process is also fully integrated in with our tax and estate wealth management partners, collaborating regularly as a team on your behalf. Most investors need to work with their financial professionals in disconnected silos. They might work with their investment advisor, tax preparer, estate attorney separately often taking responsibility to coordinate all their collective work. We have developed a system of shared documents, meeting jointly with our clients across disciplines and finding solutions that satisfy from all perspectives. The magic lies in the collaboration and this is a unique offer in our industry.
Adding to our Technology Stack
Our technology solutions continue to help us custom serve our clients efficiently and quickly. Today, we are regularly using best of class software in tax planning (Holistiplan), a Social Security analyzer, E-Money for planning projections/ aggregation of assets as well as Orion for reporting and our very own All Season Financial mobile app (ASFA Connect). We have also recently added Calendly to help us automate our scheduling functions for zoom, phone and in person meetings, making it convenient for you to pick a time that works. Deploying technology is helping us save on time and expense allowing us to keep our management fees low and competitive. All good stuff!
Welcome and Thank You
We would like to extend a warm welcome to all our new client households who have joined us in the last 3-4 months. There seems to be a lot of new wealth looking to become more productive in the financial markets but there is also a sense that conditions are changing quickly with some new challenges like inflation! We would also like to thank the many households who are adding aggressively to their investment portfolios with us or referring us to their friends and family. We are humbled by your continued trust and confidence and know that you always have a choice of whom you work with. Thank you!
Best of luck to us all in Q2.
Sincerely,
The All Season Team
