2020 Q4 Mid-Quarter Update
By Nick Fisher, Portfolio Manager
With the election behind us, many are wondering what’s next in a year that has proven to be a very volatile market. As such, I thought it would be helpful to review what we own and some recent performance. In our last letter I mentioned that we were in a stock market bubble. Why weren’t we reducing our exposure to stocks then? Recall I described a Jekyll and Hyde type scenario where large tech-oriented companies were approaching record over valuation, while other industries and broad asset classes were very reasonably valued.
The divergence in prices is not all that uncommon. We saw this in the 1999/2000 bubble for example. While the potential return from the S&P 500 is not very attractive, the smaller value-oriented companies and emerging market value stocks continue to be quite attractive.
To be clear, we underperformed the S&P 500 during the 2nd quarter and first half of the 3rd quarter. But I believe we may be seeing a regime shift with what worked well at the beginning of the year beginning to lag now. Consider the chart below with our five largest Exchange Traded Funds (ETFs) compared to the S&P 500 in red. These ETFs represent a very meaningful portion of your stock market exposure. Since the beginning of September the rough outperformance has ranged between 9-13%.
While we are not keen on short-term results, we think it’s important to recognize that institutional investors are beginning to move significant amounts of capital to much cheaper international and emerging markets. I suspect with the dynamics of rebalancing and institutional fund flows that this trend will continue. We shall see. In the meantime, we are happy with the tail wind.
Wishing you all the best,
Nick Fisher, Portfolio Manager