Q4 2020 REVIEW AND OUTLOOK - Advisors Capital Management
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
2020 REVIEW AND OUTLOOK Q4
INSIDE THIS ISSUE
03 INTELLIGENT CAPITAL 12 BALANCED UPDATE
04 MACROECONOMIC OVERVIEW 14 FIXED INCOME UPDATE
06 SMALL/MID CAP UPDATE 18 GLOBAL GROWTH UPDATE
07 GROWTH UPDATE 18 GLOBAL DIVIDEND UPDATE
09 U.S. DIVIDEND 18 INTERNATIONAL ADR UPDATE
11 INCOME WITH GROWTH UPDATE
Provided Quarterly By
ACM Investment Committee
December 31, 2020
www.advisorscapital.com
10 Wilsey Square
Dr. Charles Lieberman, CIO David Ruff, CFA®
Ridgewood, NJ 07450
David Lieberman Randall Coleman, CFA® Phone: 201-447-3400
Dr. JoAnne Feeney Paul Broughton, CFA®
Kevin Kelly Kevin Strauss, CFA® An Investment Advisory Firm
Dr. Alan Greenspan,
Senior Economic Advisor
Intelligent Capital
| Dr. Alan Greenspan, Senior Economic Advisor
Prior to the emergence of COVID-19, as I have previously indicated, the defining characteristic of the 21st century
was the inexorable aging of its population. Almost a fifth of the population of the industrialized countries of
the world were age 65 and older. In earlier centuries, the vast proportion of the population worked until they
died. Retirement as we know it today was a rare outcome. As a political consequence, retirement benefits,
especially Social Security and healthcare, escalated significantly and are now projected to expand materially
further in the decades ahead.
As a consequence, pension funds and individual century phenomenon like it have, after a period
investors nearing retirement have been seeking means usually measured in a year or longer. At that point,
to sustain secure income further into the future, and longer-term economic forces, especially the aging of
thus the demand for safe long-term assets has risen the population, will then again become the dominant
significantly. For example, the yield on the 30-year US factors in the economic outlook. Some of the pandemic
Treasury bond has declined by well over 1000 basis adjustments that have already been made will, even
points since the early 1980s as demand for the security as the virus disappears, remain a formidable force in
has increased. the economic outlook.
For the United States, over the last half century, the Since 1929 and earlier, gross domestic investment for
sum of gross domestic savings and government social the United States has followed gross domestic saving
benefits payments (as a percent of gross domestic very closely. In recent years, however, investment
product) has remained a remarkably stable 30%. has outpaced domestic saving. This gap was made
What has changed is the makeup of that sum—we can up with money borrowed from abroad, reflecting the
see from the data that the increase in social benefit increase in net foreign saving. This money borrowed
payments has coincided with a nearly dollar for dollar from abroad is reflected in the US net international
decrease in gross domestic savings. Thus we infer investment position, which is now approaching $10
that added spending on entitlement programs is trillion annually.
crowding out gross domestic savings. For Britain and In the future, the international competitive position of
the rest of Europe, the relationships are similar. Most the United States and China will, if anything become
unexpectedly, they are for China as well. a more dominant force on the world scene. From
COVID-19 is obviously a once-in-a-century force that a long-term economic perspective, China is saving
has gripped the global economy. The unfortunate and investing a much larger proportion of their GDP
truth of the matter is we know virtually nothing for than does the US, one of the many reasons they’ve
certain and all the “experts” are expressing not much exhibited such a dramatic rise in real GDP per capita
more than informed guesses on where we will end up. and living standards.
One of the consequences of confronting the COVID-19
crisis has been an increase in federal deficits already
large enough to induce inflation. As they have in Alan Greenspan served five terms as chairman
the past, federal budget deficits that are looming of the Board of Governors of the Federal
in our future will increase unit money supply which Reserve System from August 11, 1987, when
inevitably increases the rate of inflation. There is little he was first appointed by President Ronald
change in my long-term outlook, which ultimately will Reagan. His last term ended on January 31,
be confronted with the inflationary increase in the 2006. He was appointed chairman by four
impacts of rising unit money supply on inflation. different presidents.
At some point, the pandemic will fade, as all past
2020 REVIEW AND OUTLOOK | Q4 P3
Macroeconomic Overview
The stock market performed very well in the fourth quarter, despite a widely expected
economic slowdown, as Covid cases worsened over the winter. This makes perfectly
good sense, because investors are looking ahead to a reopening of the economy as the
population becomes vaccinated. One vaccine would have been a game changer. Two
vaccines, with more coming, offer the prospect for a full return to more normal activity
as vaccinations roll out. Investments that were harmed by the pandemic are likely to
experience a recovery, while those that benefitted are likely to lag.
People are already being vaccinated, even as some cities impose additional restrictions
to stem the spread of Covid. After a burst of strength in Q3, with GDP rising 33.4%,
growth is projected to slow to 4% to 5% in Q4 and 1% to 3% in Q1. The latest round of
fiscal stimulus of $908 billion will act as a bridge to better conditions starting in Q2, by
which time as many as 100 million Americans will be vaccinated. Growth in 2021 could
be in the 4% to 5% range for the year, with unemployment falling to as little as 5% by the
end of the year.
Dr. Charles Lieberman
CO-FOUNDER Companies adapted quite well to the difficult economic conditions. The Fed’s massive
CHIEF
INVESTMENT OFFICER liquidity injections kept credit markets open, enabling firms that needed funds to be
able to borrow. So, bankruptcies were far lower than feared and profits held up better
than expected. Airlines, cruise lines, hotels and many other firms that were losing
millions of dollars daily were able to survive, preserving the firms and the jobs of
millions. Banks were very well capitalized even before they were pressed to make large
provisions to their loan loss reserves. They are now typically overcapitalized and IRS
rules will likely force them to reduce their loan loss provisions in the coming quarters,
which will bolster their reported profits in 2021. The Fed has already changed tack
and is already allowing banks to resume stock buybacks to a limited degree. Those
Dr. JoAnne Feeney
restraints will likely be lifted in the first half of the year, possibly within the first quarter.
PARTNER Much of what was experienced in the U.S. is being replicated overseas in developed
PORTFOLIO MANAGER
markets, so the world is likely to see a globally synchronized strong recovery this year as
vaccinations become widespread.
Markets have figured much of this out, which is why stocks have performed so well,
yet the market’s performance has been extremely uneven. While most indices are
at all-time record highs, don’t tell that to an investor who owns airlines, cruise lines,
hotels, office properties, restaurants, and many other firms that were in the pandemic
bullseye. Those stocks are still well below their pre-pandemic levels. Tech stocks, which
benefitted from the pandemic, soared, with gains of 50% to 100% or even more. So, the
S&P 500 in now highly lopsided, or concentrated. MFAANG + Tesla (Microsoft, Facebook,
Apple, Amazon, Netflix, Google and Tesla) account for 24.8% of the entire index and
trade at rich valuations (see chart below) that are debatably deserved. But the rest
of the index, 493 firms, trade at a modest price earnings multiple of just 13.0 times
expected 2021 earnings, with yet more earnings recovery ahead in 2022.
MFAANG+TSLA vs S&P
Forward P/Es
WEIGHTS 2020 P/E 2021 P/E
MFAANG+TSLA 24.8% 70.4 52.0
S&P ex MFAANG/TSLA 75.2% 13.6 13.0
S&P 500 75.2% 27.7 22.7
Sources: Factset, Bloomberg, and Advisors Capital Management. SPY, the S&P 500 ETF, is used as a proxy for the price
appreciation of the S&P 500 Index.
2020 REVIEW AND OUTLOOK | Q4 P4
The direction of policy remains a key uncertainty. The incoming Biden Administration has
promised considerable further stimulus. While an infrastructure program to help rebuild roads,
bridges, airports and other facilities is long overdue and needed, additional cash distributions to
households would risk overheating the expansion and stoking inflation. The Fed has promised to
keep monetary policy in expansion mode until inflation rises consistently above its old 2% target.
If fiscal policy is too stimulative, that event could come sooner than expected. And tax policy
will also be a focus of the new Administration, but a large increase in tax rates could prove to be
a major damper on growth. These policy issues may take some time to be sorted out, especially
since Biden has only a very slight majority of Democrats in the House and 50 Democrats in the
Senate.
Prospects for the stock market remain positive, and we believe there is additional upside in the
recovery trade. No doubt, some of the recovery we envision is already priced into the market.
But there should be more over the next year or two. With respect to the bond market, interest
rates are extremely low, pushed down by the Fed’s liquidity injections. One Fed Bank President
has already suggested the Fed could start paring its bond purchases before the end of the year
and this seems likely to us. That will, of course, depend on the pace of the economic recovery
and the behavior of inflation. But we expect interest rates to work their way higher over the
course of the year, so we will keep our bond maturities short and look for credit opportunities to
enhance fixed income returns
INVESTMENT PHILOSOPHY + STRATEGY
Founded in 1998, ACM views the markets with a two tiered process,
utilizing a top-down view of the business cycle, coupled with a bottom-up,
fundamental value based analysis.
2020 REVIEW AND OUTLOOK | Q4 P5
Small/Mid Cap Composite Update
The ACM Small/Mid Cap portfolio returned 18.68%, net of fees, for the final quarter of
2020. This puts the year at 25.86% for the strategy, based on preliminary composite
calculations. This is an advantage of 587 basis points over the Russell 2500 advance
of 19.99% for 2020. Almost everything rallied, but optimism that the new vaccines
will harness the disease set off an eruption in more cyclical, higher volatility company
performance. In other words, those companies with business models more sensitive
to the economic environment moved most in percentage terms. Further, leading
performers showed weaker balance sheets, and have posted lower average profitability
throughout the business cycle historically. All these characteristics are captured by beta,
and indeed high beta midcap companies surged 42.11% while higher quality companies
lagged.
Benchmark Return Breakdown
All sectors in the index registered double-digit gains for the quarter but Energy (+45.77%)
ranked first followed by Information Technology (+33.82%) and Financials (+32.97%).
The Energy gains were broad based in the sector, boosted by the jump in crude oil, but
InfoTech received a bigger boost from Technology Hardware (+45.84%) and less from IT
Services (+25.84%). A steepening interest rate curve and hopes for higher rates helped
Banks (+45.78%) power the Financials sector while Insurance (+17.96%) posted the least
return in Financials. Unsurprisingly, the defensive sectors Consumer Staples (+16.88%)
and Utilities (+18.15%) ranked at the bottom for the quarter, although their absolute
returns still impressed. Food Products (+14.28%) dragged down Consumer Staples
and Gas Utilities (+12.16%) hampered the Utilities Segment. Small caps (+28.09%)
and Midcaps (+27.16%) performed comparably. For the first time in 2020, Value stocks
(+28.51%) or those companies trading at lower multiples to current earnings and book
value performed ahead of Growth (+25.89%), but the spread was relatively tight relative
to the previous quarters.
For the year, Information Technology (+51.55%) and Health Care (+49.36%) ranked
first and second while Real Estate ( 8.39%) and Energy ( 39.11%) ranked last.
Understandably, given the pandemic, Retail REITs ( 25.82%) and Hotel REITs ( 27.03%)
punished the Real Estate average. Lower prices in the energy commodity complex
hurt the Energy sector. Brent crude, for instance, finished the year at $51.80 per barrel,
down from $66.00 at the year-end 2019. Despite Value’s fourth quarter, the Growth style
dominated Value for the year (+40.47%) versus (+4.88%).
Portfolio Highlights
Best Sectors Energy (+47.52%) Communication Services (+29.60%)
Worst Sectors Consumer Discretionary (+8.77%) Consumer Staples (+9.10%)
Best Stocks Coastal Financial Corp (+71.43%) Jones Lang LaSalle (+55.10%)
Worst Stocks Penumbra (-9.97%) nCino (-9.12%)
Coastal Financial (+71.43%) surged in the positive environment for banks, but
performed better than most. The bank enjoys a strong position in the prolific Puget
Sound region of Washington state, and also provides banking services to a number of
Fintech partners. This significantly expands the opportunity set beyond the community
bank’s geographical area. Jones Lang LaSalle ranked second in three-month return.
2020 REVIEW AND OUTLOOK | Q4 P6
Investors cheered the Chicago-based real estate broker’s latest results and outlook,
driven by industrial leasing demand for ecommerce and logistic space demands.
Lagging performers include Penumbra (-9.97%) and nCino (-9.12%). Medical device
maker, Penumbra, recalled a stroke aspiration catheter that was causing patient injury
due to doctors use of the instrument contrary to company instructions. We believe
the company will recapture many of the sales attributable to the catheter and believe
the company’s new product launches in 2021 will restore sales and earnings growth.
Bank cloud solutions provider, Ncino, reported strong quarterly sales but weakened as
investors favored banks versus bank service providers. We believe the company’s long-
term opportunity is compelling. The cloud-based software helps banks become more
efficient.
Key Trades During the Quarter
Trading during the quarter included the purchase of Redball Acquisition Corp and the
sale of Wex Inc. We believe fleet payment card provider Wex, with its exposure to fuel and
travel, will struggle to show the same kind of consistent revenue and earnings growth
going forward that it has historically. With greater cyclicality the company no longer
trades at a discount to its intrinsic value. Redball is a SPAC, that is, a special purpose
acquisition company. SPACs are non-operating companies that raise capital in an IPO
to invest in other, typically private companies. In this case, Redball plans to own a stake
in Fenway Sports Group, the parent of the Boston Red Sox, Liverpool F.C., and their
associated assets. Sports teams have historically been trophy assets, available only to
the ultra-rich, but this SPAC approach opens investment to a greater population. This
should help recognize the inherent value in these franchises.
Growth Composite Update
Macro/Portfolio notes
The Private Growth Composite climbed 24% in 2020, while the S&P 500 Index rose 18%,
and was led higher by delivering twice the return achieved by the S&P 500 Index in the
final quarter of the year. The pandemic sharply curtailed economic activity through much
of 2020, particularly in the travel and leisure sector. The impact spilled over to energy
which was further adversely impacted by OPEC’s decision to loosen supply restrictions
early in the year. That combination of lower demand and higher supply drove many
energy stocks down by 40% or more. We hung onto one position in Growth—Conoco
Phillips (COP)—in anticipation of eventual economic recovery and were rewarded when
COP surged 23% in the fourth quarter. Depressed economic activity similarly impacted
the financial sector, but there we also decided to stay with our positions because we
saw them likely to outperform the market once investors started looking past last
year’s slowdown. The arrival of two vaccines in 4Q allowed investors to do just that, and
Growth benefited from a 42% surge in our financial sector holdings, led by Bank United
(BKU), which was up over 60% last quarter. While energy and financials both saw strong
rebounds, most have yet to fully recover and so we expect these holdings to outperform
the broader market in 2021 as vaccinations continue and the economy begins to return to
normal.
2020 REVIEW AND OUTLOOK | Q4 P7
The arrival of effective vaccines also allowed us to dip back into COVID-central stocks,
despite the fact that infection levels would surely get worse before they got better. Once
again, we recognize that investors are forward-looking and added Six Flags (SIX) and
Cinemark Holdings (CNK) to Growth last quarter. Six Flags would naturally be facing a
slow winter anyway and is likely to be among the first to benefit from warm weather and
rising immunization levels. Cinemark would be a likely survivor among movie theaters
because of its ability to provide upscale accommodations, to survive the ongoing
restrictions, and to benefit first from the desire to get back out to movies with friends
(and dates). We saw these stocks as undervalued and expected investors to recognize
them as such well in advance of reopening. Both those stocks were notable contributors
to outperformance in 4Q.
The largest outperformance in Growth in 4Q came from Info Tech. First, because it
remains our largest sector allocation (just over 32%), and second, because of our specific
focus on Cloud & online retail, 5G, fintech, and cybersecurity while still avoiding the
most overvalued stocks. Growth’s Info Tech group was up 29%, while the S&P’s Info Tech
sector was up 12% last quarter. Stone Co (STNE -Brazilian digital finance facilitator) led
the group, up 59%, followed closely by Zebra Technologies (ZBRA -supports AMZN and
others in package and people tracking), up 52%. Investors also came to appreciate the
rising importance of cybersecurity firms when the infiltration of many government and
private systems was revealed last quarter. Our holding, Palo Alto Networks (PANW), had
already had a strong year, but that renewed awareness allowed it to rise another 45% in
4Q alone. We continue to favor these areas of the technology sector, and expect our most
recent fintech addition, nCino (NCNO), to be among the leaders this year as banks look to
outsource more back-office software systems.
Growth’s healthcare stocks all moved higher last quarter, led by the 36% rise in Bruker
Inc (BRKR -analytical tools), which benefitted as the vaccines signaled the eventual
return to activity in private, government and academic labs. We continue to favor tool,
device, lab and medical supply companies, but we see Abbvie’s (ABBV) Botox franchise
and pipeline offering compelling upside—and it also helped in 4Q, rising 24%, as fears of
the headwinds from Humira’s patent expiration abated when greater resilience in that
product’s appeal became evident.
Our selections in Consumer Staples (led by Darling Ingredients (DAR), up 60%, and
Walmart of Mexico, up 21%) built on gains from DAR and CASY earlier in the year. DAR
continues to benefit from recovery in proteins consumption and also from expansion of
its green diesel joint venture with Valero. This company is making its own good fortune,
regardless of the pandemic, by transforming itself into an alternative energy company.
We also saw recovery begin in Constellation Brands (STZ), up 16%, as beer, hard seltzer,
and wine sales recovered, and as the outlook for cannabis improved.
Consumer Discretionary stocks were mixed last quarter. After the strong performance of
housing stocks earlier in the year, we saw declines in Lennar Corp (LEN) and Home Depot
(HD), but this was more than offset by the 23% increase in TJMaxx (TJX) (and this despite
surging COVID). We recently added SIX (up 15% since addition) to capture the benefit of
vaccinations and a rebound in theme park attendance come next summer. Vaccinations,
even at a slow pace, and warmer weather are likely to help revenues and profits of
outdoor venues such as theme parks recover sharply.
Communication Services also saw a strong surge last quarter, led by Baidu (BIDU-
up 71%), which expanded its stock buyback program and announced its intention
to leverage its strong artificial intelligence platform to enter the EV and self-driving
automobile space. Our sector selections also benefitted from our recent addition of CNK
(up 28%), and long-time holdings, T-Mobile (TMUS - up 18%) and GOOG (up 19%).
2020 REVIEW AND OUTLOOK | Q4 P8
Materials also surged on economic recovery prospects and our Berry Global (BERY up
16%) Ball BLL - up 12%) are favorably positioned for a COVID and post-COVID world.
Because BLL provides food and beverage cans, it benefitted from the stocking up phase
of COVID (which saw a second surge this fall and will likely continue to benefit through
the winter), although further recovery in restaurants and bars, which would help feed
demand for soda, beer and hard seltzer cans, will likely wait until the summer.
Because of the widely divergent moves in stocks within Growth, clients saw position
sizes move materially away from target levels. We executed a major rebalancing in early
January to adjust holdings that had strayed from target weights and to take into account
our changes in outlooks regarding appreciation potential. Clients will have noticed many
trades last week. Note that these included reversals of tax-loss harvesting sales from
December and the adjustments (additions and trims) to position sizes so as to bring
portfolio allocations in line with the weights we have set. We expect these changes to
enhance portfolio performance.
Growth remains focused on stocks that we expect to deliver above-market appreciation,
but that come at a reasonable price. But we are also finding opportunities in earlier
stage companies, such as NCNO, a recent addition, which offers software-as-a-service for
bank operating systems. As banks look to shift to cloud-based bank operating software
solutions, NCNO, created and run by ex-bankers, is the leader in the space.
The P/E for Growth stood at 22.8 times 12-month forward earnings at the end of 2020,
while the S&P 500 was 22.3 times
U.S. Dividend Composite Update
The ACM U.S. Dividend portfolio gained 10.86%, net of fees for the fourth quarter. This
puts the preliminary return at 14.09% for the year. The fourth quarter and year 2020
performance for the S&P 500 measured 12.15% and 18.40%, respectively.
Benchmark Return Breakdown
As previously explained, sectors with greater sensitivity to the economic cycle scored
the best performances in the fourth quarter. Energy (+27.79%) and Financials (+23.22%)
ranked at the top. An increase in the crude oil price complex supported the Energy
sector move while Banks (+33.27%) helped Financials. A steepening yield curve and
higher absolute rates for longer dated treasury bonds improved investor sentiment
toward bank stocks. The defensive sectors ranked at the bottom. Real Estate (+4.79%),
Consumer Staples (+6.35%), and Utilities (+6.54%) lagged. Storage buildings and digital
server warehouse stocks weighed on the Real Estate segment while food and household
products pulled down Consumer Staples.
Portfolio Highlights
Best Sectors Energy (+27.30%) Communication Services (+16.70%)
Worst Sectors Real Estate (-1.68%) Materials (+4.65%)
Best Stocks Walt Disney Co (+46.02%) Timken Co. (+43.24%)
Worst Stocks Amgen (-8.93%) Lockheed Martin (-6.72%)
2020 REVIEW AND OUTLOOK | Q4 P9
Primary contributors for the quarter included Disney (+46.02%), Timken (+43.24%), and
JP Morgan (+33.19%). Investors cheered Disney’s success and guidance for the Disney+
streaming app. Reaching nearly 87 million subscribers in early December management
expects this number to grow to 230 to 260 million by the end of the year 2024. A large
part of this growth comes from the International segment driven by India. Timken’s
specialty bearing and power transmission business benefits from the shift to renewable
energy. The company continues to gain share as wind turbines increase in size. JP
Morgan jumped with banks, propelled after the election on hopes of a split congress
limiting increased regulatory oversight of big banks. Weaker names included Amgen (
8.93%), Lockheed Martin ( 6.72%), and Equinix ( 5.71%). Amgen announced bad news
for two developmental drugs. One for severe asthma and another for heart failure. This
is disappointing but is an ongoing reality in this industry. We note the biologics giant
has other drugs in the pipeline to deliver future growth drivers. Equinix made a new
high in early October and the company’s earnings release in late October came in strong,
but guidance disappointed most analysts and shares traded sideways to the end of the
year.
Key Trades During the Quarter
We sold McDonald’s Corp, and added Flutter Entertainment, Air Products, and Bentley
Systems. McDonald’s returned 30.51% or 9.78% annualized from first purchase in early
February 2018. The company, of course, has a tremendous franchise, and is one of the
few restaurants to enjoy success globally. However, for portfolio structural reasons we
sold the position, believing we have better opportunities in other investments. One
of those is Bentley Systems (BSY). A newly listed stock in 2020, BSY provides software
to help engineers design, construct, and analyze infrastructure such as bridges, roads,
airports, and power installations. The company should be positioned well as the
government spends to repair U.S. crumbling infrastructure - a rare area where both
political parties agree.
Although based in Dublin, Ireland, Flutter’s recent acquisition of The Stars Group has
added a significant U.S. presence to the undisputed leading global online gambling
company. Key brands include SkyBet, BetStars, PokerStars, FOX Bet, FanDuel,
SportsBet, Paddy Power, Betfair, and TVG. The synergies with Stars will be significant.
Notably, we believe combining Flutter’s legacy FanDuel and Stars’ FOX Bet will lead
to a co-dominant position with fantasy-sports rival DraftKings. State politicians are
becoming more positive toward legalizing online gambling, especially sports betting, to
deal with tax revenue shortfalls. This regulatory tailwind should help transform Flutter
to a higher growth company.
Air Products and Chemicals, Inc. is a global leader in the production of hydrogen,
oxygen, nitrogen, helium, other specialty gases, performance materials, and equipment.
These gases are crucial inputs for production companies across many industries
including chemicals, energy, electronics, food, and medical. We look for consistent top
line growth to resume in 2021 with ongoing margin expansion. This supports propitious
free cash generation, which the company signaled will be returned to shareholders in
share buybacks and cash dividend hikes.
2020 REVIEW AND OUTLOOK | Q4 P10Income with Growth Composite Update
The recovery of markets from the Covid 19 shock continued in December. Our portfolio
gained 4.2% (net of all fees) in December, versus 3.9% for the benchmark, a strong
performance for both measures. For the fourth quarter, the portfolio also edged ever so
slightly ahead of the benchmark, by 19.4% versus 19.3%.
The bond market’s performance was quite mixed. Treasury yields rose in December
and in the fourth quarter, producing negative total returns in both periods. In contrast,
iShares iBoxx High Yield Corporate Bond ETF, the high yield ETF used by our benchmark,
provided a solid positive return for December and for the quarter. We’re barely into
January, but interest rates have risen sharply and the entire positive return on high yield
bonds may be more than wiped out this month.
The Income with Growth portfolio continued to perform quite strongly, driving down
portfolio yields to lower levels for this strategy. We decided to defer swapping into
higher yielding securities until the New Year, especially since we expect our lower
yielding holdings to continue to perform well. But Income with Growth is an income-
oriented strategy, and we will soon start to take advantage of the rally to pick up
incremental yield and to offset some of the dividend decreases from last year.
Our renewable energy stocks were stars. Classified as utilities, they dramatically
outperformed the XLU utility index, which declined slightly in December. In contrast,
Brookfield Environmental, Clearway Energy, and Atlantica Infrastructure each rose more
than 10% in December, capping an outstanding quarter and pushing their yields sharply
lower. The incoming Biden Administration is expected to support renewable energy, so
we will wait a bit longer before shifting capital out of these now lower yielding securities
into higher yielding opportunities.
Our energy holdings, including oil and gas master limited partnerships, were also very
strong performers in the quarters, adding some incremental performance on top of
their spectacular November returns. These holdings still provide very generous yields
with cheap valuations and we expect them to be excellent performers this year, as they
recover from multi-year underperformance.
Lastly, our financial positions had a solid December, following their spectacular
November returns – most notably our banks and mortgage REITs. We still believe the
banks have considerably more upside potential and the have continued to rally in the
first week of January. The Federal Reserve buyback prohibition was loosened slightly
for Q1, but we expect the restraints to be removed by the middle of the year, unleashing
sizable buyback programs and dividend increases.
Most of our trading effort in December was to get as much cash invested as possible and
to keep cash at the lowest possible level.
We believe yields on the portfolio will continue to decline, as the prices of our holdings
continue to rally and dividend increases won’t happen fast enough. Accordingly,
we will soon start reallocating into higher yielding names of companies we consider
undervalued.
Current yields:
• K1 : 5.7%
• No K1: 5.7%
• Model: 5.6%
2020 REVIEW AND OUTLOOK | Q4 P11Balanced Composite Update
Private Balanced Composites rose roughly 12%, net of fees, in 4Q as the recovery in
November continued into December. Particularly strong appreciation in financial and
energy stocks complemented ongoing appreciation in our selection of Info Tech stocks. All
sectors contributed positively to performance in 4Q and helped portfolios rebound from
the sharp selloff in the spring. Full 2020 performance in Balanced varied depending on the
extent to which portfolios were invested in higher yielding stocks. T4 and T5 Balanced, with
yields close to 4% and 5%, respectively, are exposed to more financials and energy stocks
which remain significantly off their pre-pandemic highs. Despite the challenges those
companies still face, the dividends for our selections remain well covered by cash flows and
are providing above-market income streams for clients. We expect economic recovery in
coming quarters to add further to the share price recovery which began last quarter.
The stocks we hold in Balanced can be thought of as falling into a few different categories:
secular growth opportunities, smart cyclicals, defensives, and COVID-central. We select
individual stocks in each category to deliver primarily appreciation or higher yield. Secular
growth stocks include, for example, Apple, Broadcom, Alphabet (Google), Qualcomm,
Trane, XPO, Williams Sonoma, and Thermo Fisher. Smart cyclicals are those which are
leveraged to economic recovery, but are less exposed specifically to COVID (like airlines,
cruise lines, theaters, most restaurants are), and include companies from the energy
and financials sectors, consumer names such as TJ Maxx, and health care names such as
Bruker. We also select some stocks for their defensive attributes, such as Phillip Morris,
General Mills, McDonalds, and Target. Finally, we have begun to add some exposure to
COVID-central names, such as Cinemark.
During the last quarter of 2020, we saw a strong rebound in smart cyclicals as hopes for
an eventual economic recovery were fueled by the arrival of vaccines. But we also saw a
continuation of secular growth themes. Defensives were weak in the quarter as investors
pivoted to take advantage of that impending recovery. COVID-central stocks began to
rebound from their March and April depths.
Smart cyclicals were led higher in Balanced by energy, financials, consumer, and industrial
stocks. With the expected return in consumer and business demand—even though it
may not begin until the second half of this year—oil prices began to rise and that helped
integrated oils (Chevron Corp. - CVX) and pipeline and storage providers (Oneok - OKE and
Kinder Morgan - KMI) to rebound between 10% and 50% last quarter. This helped offset 1Q
declines and added to the attractive dividends those companies have been paying (yields
of 6-10%). These stocks remain well off pre-pandemic highs, however, and we expect
them to continue to appreciate as economic recovery solidifies. Financials are likely to
follow a similar dynamic. Our selections among banks, insurance companies, business
development companies, and mortgage trusts all rose more than 20% last quarter (and
some over 40%) as investors gained confidence in the coming recovery. These stocks
were simply too cheap relative to book value, cash flows, and future earnings potential.
Investors finally decided that long-term drivers justified perhaps suffering further near-
term volatility. Consumer and industrial cyclicals also surged last quarter, even with the
rise in COVID cases. TJX (up 23%) is seeing better traction online, but also from some return
of customers to brick-and-mortar locations. But, more importantly, investors anticipate a
return of customers later in the year. And Honeywell and Trane both continued to add to
gains since we added them to Balanced.
Despite the sector rotation in November, the secular growth positions in Balanced
benefited from further strength in 4Q, led by those in Info Tech. Recall that our technology
2020 REVIEW AND OUTLOOK | Q4 P12selections favor the long-term trends in Cloud/datacenter, 5G, fintech, and cybersecurity.
We continue to avoid stocks where P/E multiples are based on challenging growth
expectations and so are vulnerable to sudden declines (i.e., we are avoiding AMZN, FB,
NFLX, TSLA, etc.). We are finding outsized growth without taking on concentrated positions
in expensive stocks. In all sleeves of Balanced, for example, contributions from Taiwan
Semi (TSM, up 35%), Qualcomm (QCOM, up 30%), and Broadcom (AVGO, up 20%) helped
push 4Q return to 12% (and that is for current approximate 65%-35% equity-to-fixed
ratio in Composites). T3 also benefitted from Zebra (ZBRA, up 52%), Palo Alto (PANW, up
45%), and PayPal (PYPL, up 19%), while T4 and T5 benefitted from Seagate (STX, up 26%)
and Texas Instruments (TXN, up 15%). Secular growth drivers also helped Disney (DIS, up
46%), as streaming success helped restore investor confidence that Disney could offset the
slowdown in theater, theme parks, and ESPN subscriptions.
Defensive positions delivered mixed results last quarter. At one end of the spectrum, the
stocks many investors used to carry them through the worst of the pandemic risks, such
as McDonalds and General Mills, saw low-single-digit declines in the quarter, while staples
like Phillip Morris made up for underperformance versus other staples earlier in the year.
And some companies that offer a mixture of exposure—staples that could still benefit
from reopening—such as Target (TGT)—continued to appreciate. Housing-related stocks
(HD, William Sonoma - WSM), however, tailed off at the end of the year, following several
months of superb performance. We see further value in retaining some defensive positions
for several reasons. First, they offer some stability from the volatility that could plague
markets over the next several months. Prices of these stocks tend to be less volatile than
the market and our selections pay attractive dividends, further cushioning portfolio value.
Second, COVID cases are rising and shutdowns growing: household income at the lower
end of the distribution will be constrained which will drive up demand for cheap MCD
meals, more stay-at-home food from General Mills (GIS) and more deliveries from TGT.
The final quarter of 2020 was again a strong one for the fixed income portions of Balanced.
The ACM Fixed Composite was up 3.5% versus the benchmark which was up approximately
1.8%. Note that the selection of assets in this composite forms the basis of the fixed side
of T3 Balanced, while T4 and T5 fixed components include some high-yield or non-rated
preferred shares and high-yield bonds. Fixed benefited from credit selection as well as the
overall market rally and bond prices rose and yields on investment grade bonds reached
their lowest levels in history. While clients can see the benefit of higher bond prices,
delivering yield in T3, T4, and T5 on the fixed side has become increasingly challenging.
Note also that many bonds and preferreds are trading above par, so that the relevant yields
(yield-to-worst) are below the coupon-based yields. Be aware that when we add a bond or
preferred to portfolios, we are doing it on the basis of coupon and the expected decline in
price back to par.
Fixed Income’s strength reflected the beginnings of the economic recovery, from increased
expectations for a vaccine, and the continued impacts of the Federal Reserve’s actions
taken through this year. Yields on Investment Grade bonds declined marginally in the
quarter. Credit spreads declined across the fixed income market as investor confidence
increased during the quarter. This increased confidence was reflected across bonds,
preferreds, and stock prices. Meanwhile, interest rates were relatively stable during the
quarter and remain close to historical levels given the Fed’s actions and macro uncertainty.
As yields have fallen, hitting target ranges for yields on the fixed income sides of T3, T4, and
T5 Balanced has become increasingly challenging. We have been restricting fixed income
in T3 Balanced to investment grade securities only and have decided to continue to adhere
to this restriction, despite falling yields. We think it better to maintain the stability that
2020 REVIEW AND OUTLOOK | Q4 P13investment grade provides rather than increase risk (and volatility) that adding high-yield
securities would deliver. This means that yields are likely to be lower than the 2.5%-3.5%
range typical of T3 Balanced on the fixed side. However, our yields are still twice those
delivered by the broader market of investment-grade securities.
Yields and P/E:
The three tiers of Balanced offer different mixtures of targeted yield, both from dividends
and fixed income holdings, and so offer a trade-off between appreciation goals and income
goals. Market conditions impact our targets and dividend yields have fallen as stocks have
appreciated, while fixed income yields have dropped as interest rates have declined. Our
T3 Balanced is currently generating just under 3% yield, while T4 fell below 4%, and T5
remained a bit under 4.5%. We executed some changes in target weights for individual
stocks in early January in T4 and brought yield just over 4% on the equity side. We still
focus on selecting relatively conservative stocks, diversified across sectors, and less
expensive than the market (our forward 12-month P/E on equities was 19.1 times at the end
of 4Q, while the S&P 500 traded at 22.3 times).
Fixed Income Update
The fourth quarter of 2020 was a strong quarter for fixed income across investment
grade bonds, high yield bonds, and preferreds. The ACM Fixed strategy was up over
3.5% gross versus the benchmark which was up approximately 1.8%. The Fixed Strategy
benefited from solid credit selection as well as the overall market rally.
What is worth noting is that investment grade yields finished 2020 at the lowest levels
in history, yet most investors do not realize the magnitude to which their future yield
has declined on ‘traditional’ investment grade bonds. High yield securities also had
a strong quarter with the average high yield bond up over 6%. Regarding preferreds,
one benchmark, iShares Preferred and Income Securities ETF (PFF), was up over 7%.
This index includes a substantial amount of investment grade and non-investment
grade rated preferreds so the performance across individual preferred securities varied
substantially.
2020 – What happened?
2020 was a very volatile year given the Covid pandemic that we are all still dealing with
both personally and professionally. From an economic perspective, the Federal Reserve
and Federal government took extraordinary actions to try to provide assistance during
such challenging times. From a fixed income perspective, these actions combined with
increased consumer confidence as a result of the positive vaccine news resulted in a
very rocky, but overall solid year for fixed income portfolios. Going forward investors will
have to be mindful of interest rates and be sure they maintain active portfolios to seize
opportunities that arise across bonds and preferreds. Passive investors are likely in for a
disappointing result if they continued to hold portfolio that they held the last few years.
The years of mid-single digit returns on plain vanilla Investment grade bonds are over.
2020 REVIEW AND OUTLOOK | Q4 P14So how exactly did the Fed help?
As a reminder, while the Federal Reserve always has a major influence on short-term
rates since it controls the Fed Funds rate (the overnight lending rate for banks), as Covid
concerns intensified, the Fed took a series of significant steps to help the economy. The
first action occurred on March 15th as the Fed cut the low end of the Fed Funds target
from 1% to 0% and began a $700 billion asset purchase. Since the Global Financial Crisis
(GFC), and now during the Covid crisis, the Fed’s actions and potential actions have
impacted not only short-term rates, but also medium- and longer-term rates through its
purchase of Treasury bonds, asset-backed securities, corporate bonds, municipal bonds,
and a range of other fixed income securities. The Fed’s asset purchases during the Covid
crisis has been both more rapid and substantially larger than during the GFC, as is
obvious from the sharp expansion of the Fed’s balance sheet from roughly $4 trillion to
$7 trillion, as shown below. As a result of the series of Fed actions, as well as investors’
demand for safety, interest rates have declined significantly to previously unthinkable
levels. The 10-year Treasury bond ended the year yielding 0.9% after starting the year at
over 1.9%.
Total Assets of the Federal Reserve
The Federal Reserve’s balance sheet has expanded and contracted over time. During the 2007-08 financial crisis and
subsequent recession, total assets increased significantly from $870 billion in August 2007 to 54.5 trillion in early 2015.
Then, reflecting the FOMC’s balance sheet normalization program that took place between October 2017 and August
2019, total assets declined to under 53.8 trillion. Beginning in September 2019, total assets started to increase.
6M
4M
2M
0
2008 2010 2012 2014 2016 2018 2020
2010 2015 2020
Total Assets (In millions of dollars)
Source: https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
2020 REVIEW AND OUTLOOK | Q4 P15Given yields are a combination of interest rates and credit spreads, fixed income
investors must also analyze credit spreads. Credit spreads, which reflect the difference
in yield between a Treasury and corporate bond of the same maturity, are generally the
main driver of yields and bond volatility in times of turmoil. Three main drivers of credit
spreads are liquidity, investor confidence, and the economic outlook. While the Fed
can only do so much to impact the economic outlook, it can do a tremendous amount
to impact liquidity in the fixed income market and to bolster investor confidence. In
2020, Fed purchases touched an unprecedented range of fixed income securities. These
actions allowed companies to raise cash through debt issues and made investors
more comfortable holding securities they already own. At a systemic level, this also
helped prevent massive forced selling which would have exacerbated the decline in
fixed income asset values. Portfolio liquidations can be forced in down markets when
investors are subject to margin calls (the companies simply did not have enough cash
and other assets to provide the lender assurance that their loan would be paid back in
full). This would have set off a vicious cycle of asset liquidations triggering further price
declines. The Fed recognized the risk as liquidity evaporated and credit spreads widened
across all fixed income markets driving bond prices down dramatically. Therefore,
the Fed stepped in to provide liquidity, allowing credit spreads to tighten. In 2008, the
Fed failed to recognize early enough during the GFC how forced asset liquidations can
exacerbate market panic. Fed members learned from the GFC experience and they acted
promptly this time.
Where are yields now?
In 2020, the dramatic interest rate declines combined with credit spread recently
tightening have caused yields on 5-year high quality investment-grade securities to
fall to extremely low levels: a benchmark that tracks 5-year A+/A/A- rated bonds now
yield less than 1% compared to 2.15% at 12/31/19. The BBB+/BBB/BBB- benchmark
yields just over 1% compared to over 2.5% at 12/31/19. Among high-yield bonds, yields
declined but not as significantly, as expected, given the continued macro uncertainty
and negative impact 2020 had on weaker balance sheets.
Please see below to appreciate the massive decline in investment grade yields. We think
low yield often goes unnoticed by investors as the coupons and therefore, the current
cash flow on a fixed income portfolio are much higher than the actual return or yield
being earned. (Please see the Fixed Income Bonus Feature below for an explanation)
***Important: Note these yields are based on a large basket and not necessarily
indicative of the yield of our strategies.
Yield Decline
Yield on basket 5 yr. Investment Grade bonds
5 year Bonds 12/31/17 12/31/18 12/31/19 12/31/20 % decline
usgg5yr index Treasury 2.21% 2.51% 1.69% 0.36% -79%
IGUUACO5 Index AA+/ AA / AA- 2.54% 3.24% 2.00% 0.64% -68%
IGUUACO5 Index A+/ A / A- 2.68% 3.42% 2.15% 0.78% -64%
IGUUBCO5 BVAL Index BBB+ / BBB / BBB- 3.04% 3.98% 2.53% 1.04% -59%
IGUUC505 BVAL Index BB+ / BB / BB- (High Yield) 4.37% 6.20% 3.54% 2.97% -16%
Source: Bloomberg. LLC.
Note: Please note we quote benchmark yields which are a based on a large basket of bonds and not necessarily indicative of the yield of our
strategies.
2020 REVIEW AND OUTLOOK | Q4 P16What have we done and where do we go from here?
During the quarter, we continued to buy several high quality, investment grade bonds
with yields typically above the benchmark yield for a similar maturity and credit rating.
This is where carefully selecting bonds can consistently provide incremental potential
returns. We also purchased multiple investment grade preferreds that we think provide
attractive additional yield in excess of investment grade bond yields. Additionally, given
the dramatic decline in yields, a few bonds were redeemed early (called) by the Issuers.
Additionally, we sold select securities to capture gains, reduce risk, and/or improve the
overall risk / reward for the portfolio.
Going forward, we are focusing on maintaining a portfolio of attractive, high quality
bonds and preferreds. As always, we will continue to monitor existing positions
to determine if we should move on to more attractive opportunities. We think it is
important that as investors we remain disciplined and extremely selective when
purchasing new securities.
Fixed Income Bonus Feature:
Do not let a High Coupon deceive you --> Yield and Coupon are VERY different concepts
We also think it is worthwhile to remind investors that coupons and yields are often extremely
different. For example, if you own a 1-year bond maturing that has a 6% coupon and trades at
$105, you only net approximately 1% profit for the year, not 6%. Please see below for two detailed
examples. This simple example applies to the vast majority of investment grade bonds currently, as
almost all investment grade bonds are trading well above par.
Please let us know if you would benefit from a review of your non-ACM fixed income holdings.
We are confident many investors do not know how low the future yields are on their existing,
traditional investment grade bond portfolios. While these bonds have performed well during
the past decade and in 2020, the majority of the returns have already been realized (and are
now reflected in higher bond prices). Please see the table above which highlights the decline
in investment grade bond yields versus history.
Coupon versus Yield: 2 Illustrative examples
Total profit = $ received -
Assumed Maturity Cash flow Total Coupon Redemption (Coupons + Par) (Price Paid) Price paid (Bond Price)
Examples Bond Price Coupon (in years) per yr. Payments value Total $ received Bond Price interest earned (profit) Interest /Year Yield
1 yr. 4% kind $103.00 4.00% 1 $4.00 $4.00 $100 $104.00 $103.00 $1.00 $1.00 0.98%
2 yr. 5% Bond $106.00 5.00% 2 $5.00 $10.00 $100 $110.00 $106.00 $4.00 $2.00 1.93%
Note: Yields are lower than the Interest / yr. because the Bond Price paid was >$100.
2020 REVIEW AND OUTLOOK | Q4 P17Global Dividend Composite Update
Global Growth Composite Update
International ADR Composite Update
Outlook
Our investment philosophy states “invest long term in attractively-valued,
conservatively-structured, competitively-advantaged dynamic companies with growing
free cash flow and honest, competent leadership”. We’ve had to sell some investments
which will no longer generate sufficient free cash flow in this new pandemic enveloped
world, but note most of our companies are doing relatively well. We’re also identifying
several new areas of opportunity in this environment and are excited about their
potential.
Portfolios: International ADR / Global Growth / Global Dividend
Vaccine-engendered optimism powered global equities to fourth quarter double-digit
gains, and the ACM international and global strategies reflected this strength. Net
of fees, International ADR, Global Growth, and Global Dividend portfolios returned
16.62%, 17.61%, and 14.36%. The benchmark results registered 17.01%, 15.70%, and
14.68%, respectively. The benchmarks are the MSCI ACWI ex USA Index, MSCI ACWI IMI
Index, and MSCI ACWI Index. (“ACWI” stands for All Country World Index. IMI stands for
investable market index which includes small and mid-cap sized companies.)
For the year 2020, International ADR advanced 15.50% or 485 basis points above its
benchmark return of 10.65%. Global Growth (+18.63%) also registered a notable
2020 performance advantage versus its benchmark (+16.25%). While Global Dividend
(+14.22%) posted a return shy of its stated benchmark (+16.26%), the strategy
significantly outpaced the dividend-oriented MSCI ACWI High Dividend Index which
gained just 1.73% for the year. (Note: The strategy returns are preliminary and are
usually adjusted upward in the final accounting as foreign dividend details become
known.)
Benchmark Return Breakdown
The Energy sector (+24.27%) led global equities in the final quarter 2020, powered by
the Oil and Gas Equipment industry, as crude oil jumped more than 30% in the last two
months of 2020. Despite the Q4 performance, Energy (-27.56%) suffered a dreadful 2020,
registering a drop much worse than Real Estate ( 5.52%), the second worst performing
sector for 2020. Health Care (+7.56%) ranked last for the quarter, weighed down by
Pharmaceuticals (+3.67%) as investors favored cyclically-oriented investments. For
the year, Information Technology (+46.26%) recorded the best return, driven by strong
performances of infotech companies in Taiwan, South Korea, the Netherlands as well as
the mega-cap U.S. names.
Regionally for the quarter, better performances were achieved outside North America
(+13.04%) where the U.S. (+12.92%) was the notable laggard despite the double-digit
return. South America jumped 37.65%, epitomized by Brazil’s gain of 36.44%. Vaccine
optimism and a three-month period of atypically few corruption revelations propelled
the country’s equities. Central Asia (+20.40%), Asia Pacific (+17.60%), and Western
2020 REVIEW AND OUTLOOK | Q4 P18Europe (+15.88%) also posted better-than-average results. For all of 2020, Asia Pacific
(+21.43%) led the major regions boosted by China (32.61%). North America (+18.66%)
placed second. Western Europe (+7.38%) under the twin clouds of Brexit and the
pandemic lagged.
Currency contributed 1.74% to non-U.S. equity returns in the fourth quarter. Notable
strength by the euro, British pound, Japanese yen, and Australian dollar against the
dollar contributed most to the foreign equity returns. For all of 2020, foreign currency
contributed 4.78% for foreign equity returns.
Mid-sized companies (+23.37%) in the global index recorded significantly better
returns compared to large (+14.65%) and small companies (+14.74%) for the October
through December period. For all of 2020, however, large caps (+14.14%) trounced
midcaps (¬+6.81%) and small caps (-1.51%) which failed to register a positive 12-month
performance.
Portfolio Highlights for the Quarter
Bangkok-based Krungthai Card (+80.78%), held in all three portfolios, benefited from
the Thailand government’s “Shop Dee Mee Kuen” or “Shop and Payback” stimulus
program. Under the scheme, Thai consumers purchasing specific products like hotel
accommodations receive a tax discount. Regional shipping company, SITC International
(+56.37%), steamed higher and helped the ADR portfolios. Investors pushed up the
shares on news of the RCEP free trade deal. The Regional Comprehensive Economic
Partnership includes the ASEAN countries plus China, Japan, South Korea, New Zealand,
and Australia. This agreement solidifies China as the primary trade partner in the
region. The global strategies received a boost from Jones Lang Lasalle (+55.10%).
Investors cheered the Chicago-based real estate broker’s latest results and outlook,
driven by industrial leasing demand for ecommerce and logistic space. Weaker names
included Kirkland Lake Gold (-14.93%) and Santen Pharmaceutical (-20.83%). Kirkland
suffered with the gold price advance stall in the quarter. We note the company has one
of the best production growth profile and mining margins in the industry and believe the
investment thesis remains intact. Osaka-based ophthalmic medicine company Santen
Pharmaceutical fell on news it failed to win a China contract for bacterial infection eye
drops. While disappointing we note the company’s strong market position globally in
eye medicines.
International ADR Global Growth Global Dividend
Best Sector Consumer Discretionary (+38.67%) Energy (+31.62%) Financials (+24.33%)
Worst Sector Materials (+2.61%) Materials (+2.86%) Materials (+0.69%)
Best Country Taiwan (+35.07%) Thailand (+80.78%) Thailand (+80.78%)
Worst County Canada (+0.25%) Canada (-0.37%) Canada (-14.93%)
Best Stock Krungthai Card (+80.78%) Krungthai Card (+80.78%) Krungthai Card (+80.78%)
Worst Stock Santen Pharmaceutical (-20.83%) Kirkland Lake Gold (-14.93%) Santen Pharma (-20.83%)
Key Trades During the Quarter
For International ADR we added Tokyo Electron and Dassault Systèmes (DASTY), the
French software company. We sold SAP due to concern about SAP’s management
changes and length of time required to move to a subscription-based software model,
away from licensing. Dassault’s software is mission critical for their customers’ product
design processes. DASTY provides a realistic 3D experience for clients to take them
2020 REVIEW AND OUTLOOK | Q4 P19on a virtual tour from product specification, design, user simulation as well as sales
scenarios. The software elegantly connects several departments, linking engineering,
marketing, accounting, and supply chain teams, for instance, to better coordinate new
product developmentWe look for ongoing growth in revenues and earnings believe the
shares trade at a significant discount to its intrinsic value derived by our estimate of
long-term earnings power.
Tokyo Electron (TEL) is a key vendor of semiconductor fabrication tools, and commands
impressive market share in several elements of the semiconductor manufacturing
process including deposition (applying thin coatings to surfaces), etch (selectively
removing materials), and lithography (a mask which exposes areas for materials to
be added or removed). The company serves the who’s who in leading-edge foundry,
logic, analog, and memory chipmakers including Taiwan Semiconductor, Samsung,
Texas Instruments, SK Hynix, and Semiconductor Manufacturing International Corp
(SMIC). We’re impressed with the propitious free cash generation, and capital return to
shareholders in the form of cash dividends, growing double-digit yearly, as well as the
recent move to buy back shares.
For Global Growth and Global Dividend, we sold McDonald’s Corporation. McDonald’s
returned 10.73% or 9.79% annualized from first purchase in early November 2019. The
company, of course, has a tremendous franchise, and is one of the few restaurants to
enjoy success globally. However, for portfolio structural reasons we sold the position,
believing we have better opportunities in other investments. For Global Growth we
purchased Bentley Systems. A newly listed stock in 2020, BSY provides software to help
engineers design, construct, and analyze infrastructure such as bridges, roads, airports,
and power installations. The company is in the center of the digital transformation of
the infrastructure industry, and we note BSY strong presence in the faster growing Asia
region.
For Global Dividend we added to the Energy sector by purchasing Lukoil, the Moscow
based oil and gas company. Lukoil has the largest reserves per share versus any other
major oil company and enjoys one of the best production growth profiles. LUKOY
is hyper-focused on profitability and returning cash to shareholders with an ultra-
conservative balance sheet and sound capital allocation policy. The dividend yield at
7.5% is not only attractive but sustainable since Lukoil has one of the best dividend
coverage ratios in the industry. The relatively cheap ruble gives Lukoil a significant
advantage bidding for international exploration projects, and corporate governance is
very good, probably the best in Russia. With oil prices and economic activity stabilizing
we believe the stock’s undervaluation will start to be better appreciated by investors.
2020 REVIEW AND OUTLOOK | Q4 P20You can also read
