Sometime in October 2023, Santa Claus happily surveilled the North Pole. All the elves were busy, but gratefully employed. Almost all the presents were finished and costs were under budget. The reindeer were relieved that Santa had converted his sleigh to a hybrid utilizing solar power, energy that could even light up Rudolph’s nose. Santa shared his merry outlook with the Fed, who provided a moderating outlook on inflation and interest rates. Between the Fed and Santa, equity investors got some nice presents a bit early! Most developed markets yielded positive returns, but investors in China, which the IMF considered a drag on the global economy, got coal in their stocking.
Although the strong returns across asset classes have led the media to consider 2023 the “Everything Rally,” there was dispersion within asset classes. This phenomena was summed up by Morningstar’s January 2, 2024 article by Tom Lauricella and Lauren Solberg entitled: “15 Charts on the Surprise ‘Everything Rally’ for 2023.” As they point out, growth stocks led the US rally with the Magnificent Seven responsible for 47.8% of their US benchmark’s return. On the other hand, stocks with good yields, including utilities, and energy stocks lagged. Bond yields were volatile with some segments experiencing round trips. Credit sensitive bonds did better and leveraged loans did very well. Continuing the risk-on attitude, cryptocurrencies also had a very good run.
International returns were competitive versus the US broader market. The Invesco S&P 500 Equal Weight ETF had a total return based on NAV of 13.65%; whereas the relevant international developed markets MSCI index was up 18.6%. Interestingly style performance flipflopped internationally, with value indices outperforming growth across capitalizations.
Frigate performed well versus its benchmark in 2023. On the “coal” side of Frigate, patent expirations and feared impact of the Medicare Drug Price Negotiation Program resulted in negative returns for some pharmaceutical stocks, including Bayer and Astellas. Prudential remained a major detractor, and Burberry joined the “coal” group, after announcing a slowdown in luxury group spending and lowering sales aspirations for 2023. On the “candy cane” side of Frigate, hospitality provider Accor remained a great contributor and Adidas rejoined a spot in the top four, which it held at the half-year. Joining this elite group for the full year was Swiss-based staffing firm Adecco, whose stock especially gained ground after its Capital Market Day and third quarter earnings sales report. SAP also yielded high returns as growth in the cloud business is expected to be driven by the launch of RISE with SAP, which should drive sales in the ERP (enterprise resource planning) software space. Since inception, Folio estimates Frigate’s time-weighted, cumulative, gross returns as 87.52%.
Treasure Harbor underperformed its refined benchmark. It didn’t have too much “coal” in its model, but two stocks – packaging manufacturer Amcor and premium spirits producer Diageo – remained among the worst performers. Telcom providers BCE and Vodafone also had slightly negative returns for the full year. Same as in the nine month report, ASE technology and HSBC Holding PLC were positive leaders. Banco Santander was a welcome addition to the top four as investors digested the news of its improved profitability in the third quarter and its purchase of a 20% stake in the Signature Bank Portfolio from the FDIC. DHL (aka Deutsche Post), a leader in the first half of the year, was also among the best performing stocks for the full year. Since inception, Folio estimates Treasure Harbor’s time-weighted, cumulative, gross return as 54.09%.
After reading numerous strategy pieces, my outlook for 2024 is mixed. Inflation is moderating but lurking behind the curtain in most developed countries, whose economies are bumping along. Interest rates may be peaking, but, like inflation, might be stickier longer than expected. China is not expected to be the driver of the global economy as it was in the past. In the meantime, eopolitical tensions can upend any well thought out prediction. Investment success at the portfolio level will likely rely on diversification and rebalancing; at the model level, on stock selection based on macro sensitivity and deep company knowledge.
Please let us know how we can assist you in your investment needs. In the meantime, we wish for you a wonderful 2024.
– Lauretta “Retz” Ann Reeves, CFA AWMA
(i) Performance figures are estimated and unaudited. Estimated Benchmark Returns are in the column to the right of its respective Folio. Net Returns are after international taxes on dividends, management fees and trading fees, when necessary. Historical returns are available on request and at Callan and Investment Metrics.
(ii) Gross Return
(iii) Benchmark was formally 15% SPDR S&P Emerging Markets Dividend ETF + 85% SPDR S&P International Dividend ETF. Now 100% of the latter as DWX now incorporates emerging market stocks. Returns estimated based on NAV.
Disclaimer: This post nor any of the material linked to herein in any way constitutes investment advice. Historical performance data above represents performance results as reported by the portfolio identified. Performance results are for illustration purposes only. Historical results are not indicative of future performance. Positive returns are not guaranteed. Individual results will vary depending on market conditions and timing of initial investment. Investing may cause capital loss. The publication of this performance data is in no way a solicitation or offer to sell securities or investment advisory services.