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2021 Portfolio Q1 Review

1 John Chapter 1 verse 9 states, "If we confess our sins, he is faithful and just and will forgive us our sins and purify us from all unrighteousness." God's love is expressed unconditionally every day. As I continue to reflect on Good Friday and Jesus Christ's life, death, and resurrection, I am constantly reminded of how far God has gone out of His love. Jesus Christ was despised and ultimately beaten and hung on a cross to die, which He did as payment for all of the sins of humanity. I am thankful that I, like everyone else in the world, have a choice every day to follow and serve God. When it comes to confession of sins and forgiveness and investing, I liken the confession aspect towards always being honest with how tangible actions have performed, based upon expectations. Sometimes it gets tough, as market dynamics shift quickly and things don't go as planned.


I find that this is exactly what has occurred during 2021 Q1. Everything was going well through mid-February, and then growth-oriented equities were selectively sold off. Going through this pain has not been easy, but as I have had the opportunity to evaluate the broader investment horizon, I can see clearly that growth will not only recover, but continue to lead the way. Broad market performance has been lackluster to say the least as the rotation and fears of ten-year note increases have taken hold. Of the 23,650 investment options I regularly monitor, the proportion of higher performing categories has dropped substantially from last year. This makes perfect sense as in a uniform market during economic expansion, growth tends to lead the way as a rising tide lifting all boats.

2021 Q1 Performance

(7.3%) Return for 2021 Q1


Through Q1 2021, my performance was down 7.3%. Q1 2021 can be summed up with one word, volatility. Through mid-February, the portfolio peaked being up 24%, and then the "rotation" finally occurred sending growth plays substantially lower. The NASDAQ did enter correction briefly, and many growth-based individual equities found themselves down 20% or more. As is always the case, sentiment and momentum can change quickly. However, I am confident that the holdings in the portfolio will continue to outperform most, if not all investment options over the mid- and long-term. As a reminder to readers, 2018 serves as an investment baseline. This simply means that since 2017, investment performance has been stable, and/or increasing. Investment performance is defined as cost basis capital. Prior to 2017, life circumstances (marriage, home purchases, kids, etc.) resulted in capital outflows of cost basis capital, so prior years are not being used as a result. The current portfolio under management has an inception date of January 2020, so technically, its performance baseline was 2020. Over longer time periods, these baselines will be further distinguished.


Baseline Annualized Performance

If investors were to have initially invested $10,000 (a general number used as a reference point) at the beginning of 2018, the annualized average return (each year's return 2018, 2019, and 2020) would have been at 20.3%.


20.3% Annualized Return Since 2018

At the end of last year, total investment performance since 2017 stood at 74%. As of Q1 2021, this has declined to 61%. If this level of performance were to remain for the duration of 2021, annualized performance above would drop to 13%. I am not highly concerned right now as the economy's prospects are looking up and the recent sell-off for growth will likely be a temporary event, especially if businesses continue to open up further throughout the year. I have seen divergence in the past with respect to certain investment categories. During economic expansion, rotational trades tend to not last long, with reversion to the mean occurring soon after. The other positive is that the Russell 2000 continues to lead performance for indices. This is important as it reflects growth oriented companies within small/mid-cap categories. This means that over time, other growth peers are highly likely to catch up. My mid-term annualized performance target remains unchanged at a minimum 20%.


Benchmark Analysis


Benchmark analysis is mostly compared against ETF/ETNs and Mutual Funds although many other categories are included such as indices, commodities, currencies including Cryptocurrencies, etc. I provide high-level review of all investment options, and highlight top performing areas as part of the review. Over the course of each year, different investment options often go under and no longer exist.


High-Level Review


23,650 Professionally Managed Investment Options

  • 3.7% Average Return in 2021 Q1

22,225 Professionally Managed Investment Options

  • 12.2% Average Return - 2018 - 2021 Q1

Including all share classes, I track around 22,000 to 23,650 different investment options that investors may choose to select from, if they prefer to have their investment portfolio professionally managed. The average return for 2021 Q1 of all of these options was 3.7%. With my portfolio's performance currently at negative 7.3%, I am within striking distance to still be able to outperform the broad average, especially since the peak of the portfolio in February to the bottom last week equates to nearly 33 percentage points. This is three times the current gap from the broad average. Over the past two years (2019 and 2020), I've consistently outperformed 97% of these investment options. Through 2021 Q1, my performance has fell off a cliff, as I've only outperformed 2%. From a total return perspective as of the investment baseline, I have still outperformed just below 97% of these investment options with the 61% total return versus the 12.2% average. This justifies taking risk in growth equities as even with off-years, total return performance over the mid- and long-term still tends to substantially beat non-growth options.

Who's Winning Out in 2021? As is always the case, there have been clear winners in 2021 Q1. This has included commodities, international value, dry bulk shipping, levered energy and banks, Bitcoin and other Crypto indices, among others. All the rotation talk has finally come to fruition. I am going to keep consistent with last year's review, focusing on investment options performing 50% or better. Before getting into each area, I'll also do a break down of relative proportional performance. The top performers by their investment classification were as follows:

  • ETN - iPath Exchange Traded Notes Bloomberg Tin Subindex Total Return ETN Series B (JJT) - 33%

  • ETF - Breakwave Dry Bulk Shipping ETF (BDRY) - 120%

  • Index - CMC Crypto 200 Index by Solacti (CMC200) - 124%

  • Mutual Fund - PIMCO CommoditiesPLUS Strategy Fund (PCLIX) - 128%

Growth has fallen off the radar for the most part with some exceptions. Ms. Cathie Wood's funds have fallen as well with the core ARK Innovation ETF (ARKK) down 4%. Despite growth's fall out of favor, divergence has not been as strong as some would have hoped for. Below is a breakdown of top performance out of the total 23,650 investment options:

  • 50% or higher - 0.2%

  • Less than 50% and higher than 19.98% - 2.3%

  • Less than 19.99% and higher than 9.99% - 11.6%

  • Less than 9.99% and higher than 4.99% - 17.9%

  • Less than 4.99% and higher or equal to 0% - 35.7%

  • Less than 0% and higher than -5% - 28%

  • less than -5% - 4.3%

This is highly telling as the "rotation" has not led to as great performance as many would have hoped for. In fact, nearly two-thirds of overall investment performance is from -5% to 5%. Only 2.5% of all investment options have performed greater than 20%, with nearly 30% performing from 5% to 20% (with the majority of that performing from 5% to 10%).

Top ETNs

No ETNs witnessed a return in 2021 Q1 greater than 50%. Eighty-four ETNs averaged a 2.8% return in 2021 Q1.

Top ETFs

Just below 1,400 ETFs Averaged a 5.1% Return in 2021 Q1

Top Mutual Funds


Just above 21,300 Mutual Funds Averaged a 3.3% Return in 2021 Q1.


Portfolio Drivers

The portfolio ended 2021 Q1 with 50 holdings, and performance for all holdings within the table above is based on April 1, 2021 SPs. Clearly, 2021 Q1 performance has been rough for the substantial majority of holdings. This has especially been the case for new positions initiated through the early part of the year.


Fine-Tuning for 2021

As markets peaked (especially for growth) in mid-February of this year, I must admit I was not completely prepared for the aggressive sell-off that would occur shortly afterward. I did take the opportunity to accumulate on many holdings within the portfolio. But soon-after, I decided to temper the buying spree and revisit my financial models.


Upon doing so, I have tightened up my forecast information and mid-term projections. This has led to a more specific accumulation strategy with select holdings meriting more patience. After what has transpired the past six weeks, I feel that we really didn't get a full-blown correction, let alone a recession for growth plays. Based on this, I'll be waiting to see if this occurs later in the year, while at the same time, I'll continue focusing on the limited opportunities that remain.


Summary


I remember the days when investors would joke about volatility. During 2020 and so far in 2021, there's been plenty of it. While a lot of talk has focused on the "rotation" and the duration of the ten-year note moving higher, I really think that growth equities are still stuck in a prove-me-wrong position from last year's COVID-related developments.


Specifically, companies that won out big during the pandemic essentially saw years of growth condensed into one short period. Many have argued that these companies would lose these gains over the next year or two. This is already a wrong assumption, but now the logic has shifted towards the "slowing growth" concern.


As clear leaders for growth continue to succeed and perform, a resurgence from investors will follow - the floodgates are holding right now, but they won't hold for long. Growth winners, have something that no other companies can match - the combination consists of a pristine B/S, sustainable robust top-line growth, and Cash Flow inflection.


While the portfolio is down with the first quarter complete, the path to catch up and/or exceed is not as far as some would have expected to see. For those pounding the table for the rotation one thing has become clear. Without growth as a leader, broader markets will continue to be challenged in performing at a high rate, especially when compared to the past decade.

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