2022 proved to be a difficult year for many investors with U.S. equities, as measured by the S&P 500 Index, down -18.3%, international equities, represented by the MSCI EAFE Index, down -14.0%, and Fixed Income, as measured by the Bloomberg U.S. Aggregate Bond Index, down -13.0%. Our CIG Dynamic: Growth Strategy Composite avoided 59% of the growth benchmark’s return while the CIG Dynamic: Balanced Strategy avoided 65% of the balanced benchmark’s return.[ix]
How did we outperform in such a difficult year? Active Management. We underweighted U.S. equities, especially the technology sector which fell -28.2%[x]. We overweighted international equities, which outperformed U.S. equites. We underweighted fixed income, which offered equity-like losses in a bad year. Most importantly, we overweighted alternative investments which included a long/short fund that gained +49.9% in a down year.[xi]
In his book Think Again: The Power of Knowing What You Don’t Know, noted Wharton business school professor and thought leader Adam Grant discusses the scientist’s frame of mind – “doubt what you know, be curious about what you don’t know, and update your views based on new data.”[xii] As we turn the page on 2022, here is an overview of our thinking throughout the past year we navigated:
“Don’t Fight the Fed” (December 14, 2022)
We explored what happened after the Fed Funds Rate exceeded the yield on a 10-year U.S. Treasury bond which is what just occurred in November 2022. In three modern cases, it wasn’t good.
Are We Experiencing Another Bear Market Rally? (November 14, 2022)
In our opinion, the stock market is still overvalued based on historical measures. The charts suggested a Bear Market Rally which seems to be unwinding now.
What Matters Now: Active Management and Alternative Assets (October 18, 2022)
Active Management and the use of alternative asset classes allowed CIG’s two largest investment strategies to outperform in 2022 their respective benchmarks.
Pain Points: What Can Be Learned; What Can Be Done? (September 12, 2022)
The theme of learning continued, with active management and possible strategies and implementations to relieve pain as we headed deeper into the stock market lows of the year.
Think Different (August 16, 2022)
Using Apple’s 1997 advertising campaign, we highlight the wisdom of Howard Marks, the legendary investor, “unconventional behavior is the only road to superior investment results, but it isn’t for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while.”[xiii]
Quantitative Tightening: The Fed, its Tools and Policies (July 29, 2022)
“Will the Fed do what they say they would and reduce their balance sheet?” We continue to monitor the Fed’s balance sheet to see its progress and test our thesis that they will.
Stagflation – Is a Perfect Storm Forming? (June 29, 2022)
How the economy may be heading toward a period of stagflation and discussed how to be careful ahead of a possible period of no growth and high inflation.
The Choice for Today’s Investor: Red Pill or Blue? (May 17, 2022)
A homage to “The Matrix” and whether investors will wake up to how equity valuations are still expensive and equity duration remains historically high.
Prudent Risk Management is Prudent Investment Management (April 19, 2022)
How a differentiated view and alternative assets can add value in difficult markets.
Uncertainty About How Much Risk You May Be Taking Is a Risk unto Itself (March 14, 2022)
Do you know what hidden risks may be buried in your portfolio? Interestingly, later in 2022, investors began finding out.
We believe we got many aspects of the market right in 2022 and feel investors benefited in the portfolios that we manage. But “the first rule of the Dunning-Kruger club is you don’t know you’re a member of the Dunning-Kruger club.”[xiv] Unfortunately, the investment markets have a punishing way of letting you know when your confidence is greater than your competence.
As “scientists” of the investment markets, we would appreciate you telling us where you feel we got it wrong as we begin 2023 together. Please reach out to Brian Lasher (firstname.lastname@example.org) or Eric T. Pratt (email@example.com) or share a dissenting opinion via voice with either of us at (248) 827-1010.