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2021 Portfolio Year-End Review

John Chapter 16 verse 33 states, "I have told you these things, so that in me you may have peace. In this world you will have trouble. But take heart! I have overcome the world."


What "things" is this verse referring to? It is referring to Jesus Christ explaining His deity, His purpose, and the world's never-ending challenges and difficulties as a result of rejecting God and dealing with consequences. As a Christian, it is very important for me to understand why Jesus sacrificed Himself for the world, and equally important to recognize that some in the world will ultimately reject God.


Trouble comes to every person whether they accept God or not. Jesus Christ as God has overcome the sin of the world through his birth, death, and resurrection. As I believe in Him, I may have peace in knowing this and what it means for my eternity, irrespective of life's circumstances. As Jesus has overcome the world, the world's troubles will not last forever.


As an investor and after going through the past couple of years, it has been very challenging to say the least. This has especially been the case with aggressive growth equities, which is the core focal point of the portfolio under management. My opinion is that most of the recent challenges are manufactured by government through overly restrictive policies. That being said, we are dealing with continued impacts from the pandemic, global supply chain issues, labor challenges, and strong inflationary pressures driven by supply side constraints, while demand remains marginally positive.


I also believe that there are major catalysts that will fundamentally shift consumer habits further, notably the wealth transfer from the Baby Boom generation to generations X, Y, and Z. I am also of the opinion that decentralization will become an ever-increasing theme in lockstep with changing consumer habits and expectations. Today's time is very exciting as the decentralized revolution will inevitably take hold - akin to the industrial revolution's unlocking of economic prosperity.


Below, I have provided an annual update on the portfolio's performance and goals, as well as insights on professionally managed funds, benchmark information, and other thoughts.


2021 & Baseline Annualized Performance

(6.4%) Return for 2021


For 2021, my performance was down just over 6%. I have revised my baseline to 2019, with the current portfolio under management being built in 2020, and inception date being January 2020. The reason why I have adjusted the baseline from 2018 to 2019 is to be consistent with the current portfolio's composition and style. Prior to 2019, the portfolio was blended across varying growth, value, and dividend holdings, versus 2019's shift to pure aggressive growth.


If investors were to have initially invested $10,000 (a general number used as a reference point) at the beginning of 2019, the annualized average return (each year's return 2019, 2020, and 2021) would have been at 24.5%.


24.5% Annualized Return since 2019


During 2019, little to no additional capital was added to the portfolio. During 2020 and 2021, more capital was added, both through Roth-IRA contributions and individual accounts. This is the primary reason as to why I simply cannot use my own values over time to calculate annualized performance. As new capital comes into the portfolio, my cost basis changes during that year, but is not reflective from past years.


As a reminder, my annualized performance goal is 25-30% per year.


Benchmark Analysis


My goal in this section is to achieve two things. First, I will highlight key high-performing products that investors may consider in the event they are interested in a professionally managed approach, versus building their own portfolios, and/or picking select stocks. This includes a comprehensive assessment across ETNs, ETFs, Indices, and Mutual Funds. Second, I will highlight key benchmark comparisons against the portfolio's performance.

4.3% Return for 2021


Including all share classes, I track around 22,500 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 of all of these options was 4.3%, or a 10.7 percentage point gap from my portfolio's 2021 performance, at (6.4%).


There is a major caveat for 2021 in that a significant portion of Mutual Funds distributed capital gains (the majority during the latter part of the year in December), reducing NAV prices. It's nearly impossible to deduce the capital gains portion against the daily performance. In some cases, NAV prices dropped by 21% in one day. This factor likely means that the average return for 2021 is higher, possibly closer to 8-10%. I'm not concerned with ETNs, ETFS, and Indices, and these funds did not experience a similar issue.


That being said, the theme remains the same in that the portfolio is substantially outperforming professionally managed options over the past three-year duration. This theme is consistent across all categories as will be shown below.


8.4% Annualized Return since 2019


In a best case scenario, the annualized return is likely 9-11% with the when factoring for the Mutual Fund issue, specific to 2021.


What Won Out in 2021?


First, let's revisit what won out in 2020. This included Crypto indices and Bitcoin, leveraged Exchange-Traded Notes (ETNs), and Exchange-Traded Funds (ETFs) and a variety of Mutual Funds targeting technology, clean energy, and to a lesser extent, China environmental and targeted healthcare industries.


Performance for these investment options ranged from 50% to as high as 380% for 2020. The top performers by their investment classification were as follows:

  • ETN - MicroSectors FANG+ Index 3X Leveraged ETN (FNGU) - 380% (2021 performance - 30%)

  • ETF - Invesco Solar ETF (TAN) - 234% (2021 performance - (25%))

  • Indices - Z-CMC Crypto 200 Index by Solacti (CMC200) - 3,665% ( 2021 performance - 116%)

  • Mutual Fund - American Beacon ARK Transformational Innovation Fund (ADNIX) - 147% (2021 performance - (23%))

It should be noted that the American Beacon mutual fund is a derivative of the ARK ETF Trust managed by Cathie Wood, with the top ETF in that trust performing nearly 180%.


During 2021, top performing investment options ranged from 50% to as high as 185%. The top performers by their investment classification were as follows:

  • ETN - iPath Exchange Traded Notes Bloomberg Tin Subindex Total Return ETN Series B (JJT) - 120%

  • ETF - Breakwave Dry Bulk Shipping ETF (BDRY) - 185%

  • Indices - Z-CMC Crypto 200 Index by Solacti (CMC200) - 116%

  • Mutual Fund - ProFunds UltraShort China ProFund (UHPIX) - 95%

Key thematic areas that led performance included energy funds, leveraged funds for shipping, building, real estate, FAANG-M, Crypto, semiconductor funds, among others. Much of this is to no surprise as 2021 witnessed further government manufactured supply chain challenges benefitting extreme pricing increases, ala inflationary pressures.


Top ETNs:

Just over 70 ETNs Averaged a 22.5% Return in 2021



Top ETFs:

Just above 1,300 ETFs Averaged a 10.5% Return in 2021



Top Indices:

Just above 850 ETFs Averaged a 10.4% Return in 2021



Top Mutual Funds:

Just above 11,000 Equity-Based Mutual Funds Averaged a 6.7% Return in 2021



Benchmark Comparison:


These peer funds all saw extreme volatility over the course of 2021, with the portfolio doing better than most. The reason why these funds have been highlighted is that they have performed very well from the 2019 baseline:

  • ARK Next Generation Internet ETF (ARKW) - 3-Yr. Annualized Return, 41%

  • ARK Innovation ETF (ARKK) - 3-Yr. Annualized Return, 36.5%

  • Amplify Online Retail ETF (IBUY) - 3-Yr. Annualized Return, 30%

  • Zevenbergen Genea Fund (ZVGIX) - 3 Yr. Annualized Return, 45%

  • Baron Partners Fund (BPTIX) - 3 Yr. Annualized Return, 61.5%

  • Morgan Stanley Inception Portfolio (MFLLX) - 3-Yr. Annualized Return, 37%

  • Morgan Stanley Discovery Portfolio (MMCGX) - 3-Yr. Annualized Return, 35%

  • Zevenbergen Growth Fund (ZVNIX) - 3-Yr. Annualized Return, 40.5%

  • Baillie Gifford US Equity Growth Fund (BGGKX) - 3-Yr. Annualized Return, 34%

I'm clearly lagging them all, but I'm still in the running with my annualized 24.5% return. These funds all exhibit risk taking in investing in aggressive growth equities, with most holding around 50 or so holdings.


Portfolio Drivers


The portfolio ended the year with 26 holdings, much more lean versus the 54 ended the previous year. Overall performance was choppy across the board, with the top ten fairing very poorly in 2021 with Roku, Teladoc, and Vroom all down greater than 20% during the year. Other laggards included Opendoor, Coupang, and MercadoLibre all down near 15%, while Coinbase was down just under 10%. Lucid was the big winner up 80%.


The positions in Bakkt and SoFi warrants were big winners for the year returning 170% and 82% respectively and providing a much needed boost versus the top ten. Other very strong performers included Tesla, Roblox, and GlobalFoundries up 60% and 48% and 41% respectively. Palantir was another major laggard down 23%, while The Trade Desk and Rivian were up over 30% a piece.


Initial Thoughts for 2022


For 2022, I do see a continued and disconnected pressure stance against aggressive growth companies, notably many of the portfolio's holdings. The issue is centralization but unlike the industrial revolution, the collusion between government and Big Tech and Big Everything is daunting. The competitive landscape is more intense as well making things much more murky. Regardless, aggressive growth plays looking to grow their market leadership over the mid-term are facing pressures on two fronts - Big Tech and legacy/incumbents. This sets up a dicey scenario where Wallstreet has too much at their discretion to force narratives.


The first four days of 2022 have been extremely volatile as inflation has pushed higher. It has served as a reset of valuation multipoles for growth plays. And yet, the Ten-Year Note is still down 33% from three years past in 2019. And at the same time, a company like Roku has witnessed a 33% multiple contraction (EV/Revenue) from 2019 levels. The talk of the pace of inflation has been a core focal point, as well as the conventional thought on reduced future Cash Flows from inflation. I view this all as highly premature. In 2020, the markets through exuberance increased valuation multiples too high. Now as momentum shifts towards reducing valuation levels, the opposite is occurring right before our eyes.


I don't see this lasting through the entire year. I will be very interested to see Q4 2021 earnings reports as I remain bullish on the holdings in the portfolio seeing very robust Revenue growth estimates through the mid-term. At some point, the market will need to reassess discounted valuation multiples and adjust the overreaction reset.


Summary


I am not thrilled with the portfolio's performance in 2021, obviously. With the portfolio already down near 10%, it's been a very rough start to 2022. I have already been accumulating selectively as it is highly challenging to continue buying all holdings throughout the year. I remain committed with ample capital to deploy, but I can't buy "everything" on a weekly basis.


Last year was a refining/accumulation year. This year is beginning to be a sustained accumulation opportunity. I continue to see much more risk for many legacy/incumbent companies that are currently getting a free pass. Big Tech has a free pass, notably FAANG-M as many of these companies are growing EVs in the trillions and if not broken up, will be on track to become the largest entities in the world (larger than most countries). These days are numbered and those seeking mid- and/or long-term investment potential through Big Tech and/or legacy/incumbent companies will not see annualized returns anywhere close to today's leading innovators and aggressive growth plays.


It's no fun right now, but I will remain motivated and excited to continue building portfolio positions further.



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