Portfolio Update
Just a quick update on the portfolios for the year.
This year has been an interesting one for us. After have a great year last year on a risk adjusted basis, 2021 has been a bit of a downer. We certainly have underperformed this year, so I thought a quick update was in order.
After an amazing rebound to the markets in the last part of last year after the 35% decline in the spring (which we largely avoided), we had a huge shift in leadership in stocks near the beginning of the year. Leadership this year has been in 2 sectors: Energy, and financials. For us, that’s been a problem, at least for the first half of the year. Because we run an ESG (socially responsible) portfolio, we have no oil and gas assets. Not having any exposure to those areas hurt. Second are financials, specifically the banks. While we have a small allocation to regional banking, we have no exposure to the large investment banks that have had a huge year so far. In ESG investing, one must make judgement calls about what stocks are considered irresponsible, and for us, big banks fit the bill.
During the 2008 financial crisis, I have no doubt that the big banks took positions betting against the mortgage market while still pushing those mortgage bonds on to their clients. During the worst financial crisis of our lifetime, those banks put their own corporate interests ahead of everyone else. In my opinion, the CEOs of those banks should have been charged criminally. However, the only thing that they got were huge bonuses and lavish benefits, while millions lost their homes, jobs, and a good portion of their retirement assets. However, what few people know is that those very same CEOs were some of the largest contributors to the President’s campaign in 2008. In fact, one of those bank CEOs was an overnight guest at the White House over a dozen times in 2009. I could go on and on about how inherently corrupt the big banks are but let me just leave it at this: I agree with Sen. Elizabeth on very few things, but when it comes to breaking up the big banks, I’m 100% on her side.
One other thing that hasn’t helped us is our propensity to mitigate risk with hedges. We’ve had a hedge on all year that has hurt us. As all of you know, sometimes when preventing large losses is your primary goal, when the markets rip up, you tend to lag. We know our process works (see 2020), but sometimes that very process will frustrate us. Looking at returns in a 6-month vacuum tells us very little about how we’re doing.
The final issue through the end of the summer has been our relatively large exposure to large technology stocks (Amazon, Apple, Netflix). In fact, through the end of June, Apple was down for the year. While they have come back somewhat the last couple of months, those larger positions have been a drag, but looking forward, there is no reason whatsoever to sell those positions. We’ll continue to hold those.
While it never feels good to trail market returns, we know it happens, and if the process is sound and achieves our primary goal, patience is warranted.
As always, we appreciate your confidence in us, and are deeply grateful for your loyalty.
-David Melling