Rising 2Q23 Equity Values Benefit Solyco Wealth Model Portfolios
Benefiting from rising equity values in 2Q23, Solyco Wealth’s four Model Portfolios posted an average return for the past quarter of +4.78%, ranging from +3.14% for the Conservative Model Portfolio to +6.68% for the Aggressive Model Portfolio. Alas, as each of our four portfolios not only retained fixed income and cash allocations but also substantially diversified equity holdings across the eleven S&P sectors, each of the Model Portfolios failed to keep pace with the S&P 500’s blistering 8.70% 2Q23 return.
As shown in the graphics below, however, since their inception on September 8, 2021, Solyco Wealth’s Model Portfolios continued to compare favorably, even after our 1% annual management fee, with both their benchmarks as well as with the S&P 500. On average since inception and after fees our four model portfolios outperformed their benchmarks by 10.54% and the S&P 500 by 3.84%. Ongoing strength from the equity portions of these portfolios continued to drive upside performance vis-à-vis consistent but more muted outperformances from the portfolios’ fixed income exposures.
The debt holdings of Solyco Wealth’s Model Portfolios, which we achieve via allocations to a diversified set of fixed income Exchange Traded Funds (ETFs), maintained their pattern of outperformance through 2Q23. In fact the performances of Solyco Wealth’s fixed income allocations exceeded those of the Bloomberg Barclays US Aggregate Bond Index (AGG) for all four of the portfolios across all time periods, as shown in the following tables. Notably, we overweighted ETFs levered to private credit, short duration, and credit holdings, from inception and largely maintain these overweight positions vis-à-vis the benchmark AGG.
Below we detail performance for each Portfolio and highlight the drivers for these performances. We also document notable changes, if any, made in portfolio composition during 2Q23.
Conservative Model Portfolio
Over the past year through June 30, 2023, the Solyco Wealth Conservative Model Portfolio, which carries a 65% weighting to debt securities, posted a return of +9.59%, which was 350 basis points (bps), or 3.5%, ahead of its weighted benchmark. Performance for the equities included in the Portfolio, which made up 35% of the Model, exceeded that of the S&P 500 by 4.43% over the past year; Conservative’s fixed income allocation bettered that of the AGG by 4.41% over the same time period. As shown in the following table, similar outperformance exists for fixed income since inception but with the Technology-driven equity outperformance in 2Q23 and YTD resulting in modestly lagging equity performances for those periods.
The above table reflects a 1% annual management fee, equivalent to 0.25% for 2Q23 and 1.83% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Conservative benchmark = total returns for 10.0% Russell 3000 Index, 65.0% Bloomberg US Aggregate Bond Index, and 10.0% MSCI World ex-US Index and 15.0% cash allocations.
Unlike in 1Q23, when Technology ruled the roost of Conservative’s performance, in 2Q23 two of the top five performing securities in the portfolio – Hercules Capital [HTGC (+18.9% at a 5% weighting)] and Ares Capital [ARCC (+5.48% at a 5% weighting)] – provide private debt to micro- and small-cap companies. While HTGC and ARCC are publicly traded equities we include their weightings in our portfolios’ Fixed Income allocations as debt holdings drive their long-term performances. In addition to solid capital appreciation in 2Q23, ARCC and HTGC also offered the portfolio substantial dividends with recent respective annual yields of 10.1% and 12.8%. Joining ARCC and HTGC in garnering performance accolades for 2Q23 were airliner Delta Airlines [DAL (+36.1% at a 1.08% weighting)], Advanced Micro Devices [AMD (+29.6% at a 1.08% weighting)], and Amazon (AMZN (+26.2% at a 1.08% weighting).
Inhibiting Conservative’s 2Q23 performance were Anheuser-Busch [BUD (-13.9% at a 1.08% weighting)], which bungled marketing for its Bud Light brand, Southeast US utility Entergy (ETR (-9.4% at a 1.08% weighting)], and Nike [NKE (-9.72% at a 1.08% weighting)] which appears to possibly still be suffering from inventory overhangs in China. Vanguard Short-Term Treasury [VGSH (-0.6% at a 15.0% weighting)] ranked as the 4th worst-performing holding in the Conservative portfolio for the quarter. For the 36 securities held in the portfolio at some point in 2Q23, 22 generated a positive contribution offset by relatively very light headwinds from the 14 negatively performing holdings.
Since our 9/8/21 inception the most positive drivers for the Conservative Model Portfolio remain the same, for the most part, as those of 2Q23 with the +84.1% return for since-sold oilfield services company SLB supplanting AMZN from our list of top performers. Other notable positive contributors that remain in the portfolio include energy company TotalEnergies (TTE) and defense contractor Lockheed Martin. The worst-performing holdings for the Since Inception period include Vanguard Emerging Markets Government Bond [VWOB (-25.1%)], iShares iBoxx Investment Grade Corporate Bond [LQD (-15.1%)], and iShares Mortgage-Backed Securities [MBB (-10.9%)]. Of the 49 holdings in the Conservative Model Portfolio since inception, 24 generated a negative contribution while 25 offered a positive input for return calculations. Currently, the Portfolio retains nine debt securities and 24 equity holdings.
Moderate Model Portfolio
While the Moderate Model Portfolio remained 9.20% ahead of its benchmark and +1.75% versus the S&P 500 since inception, in 2Q23 this Model lagged its benchmark by 0.40% and the S&P 500 Index by 489 bps. The tactical decision entering 2023 to underweight the Technology sector, which looked relatively expensive to us on all fronts – historical price-to-earnings, future price-to-earnings, ratios to other sectors’ price-to-earnings multiples (and continues to do so) – explains roughly one-half of Moderate’s underperformance for 2Q23 and YTD as compared to its benchmark. However, with a 45% Fixed Income weighting in the Moderate Model Portfolio, no conceivable way existed for the fund to keep pace with the performance of the all-equity S&P 500.
Double-digit positive contributions from Tech stocks AMD, Microsoft [MSFT (+16.8%)], and Applied Materials [AMAT (+14.3%)], performed yeoman’s work offsetting the overall underweight to Tech versus the S&P 500 and the benchmark. Significant upside performances on a relative basis from HTGC, DAL, and AMZN, offset more than the double-digit losses from BUD, biotech BioNTech [BNTX (-3.4% at a 1.8% holding)], and a 9.4% loss for ETR, but not to anywhere close to a sufficient degree to make up for the portfolios Fixed Income allocation in combination with its Tech underweight.
The above table reflects a 1% annual management fee, equivalent to 0.20% for 2Q23 and 1.83% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Moderate benchmark = total returns for 22.5% Russell 3000 Index, 45.0% Bloomberg US Aggregate Bond Index, and 22.5% MSCI World ex-US Index, and 10.0% cash allocations.
Since inception two energy and two health care holdings define two of the top five positive contributors for Moderate: SLB and Pioneer Natural Resources [PXD (+65.9% at a 1.76% weighting)] on the energy side and Vertex Pharmaceutical [VRTX (+63.52%] and AbbVie [ABBV (+49.7%)] on the health care side. Tech company, of course, AMD rounds out the Top 5 performers since inception for Moderate. Headwinding performance since inception, again, was VWOB, streaming media company Paramount [PARA (-53.6% – ouch!], LQD, and BNTX. The China situation also washed us out of Taiwan Semiconductor [TSM (-30.9%)], not only creating an ugly loss but also disallowing Moderate’s participation in 1H23’s AI-driven euphoria for semiconductor stocks.
Since inception Moderate’s ratio of winners to losers proved to be somewhat better than Conservatives as it posted 30 winners to 22 losers. Notably six (out of seven) of these losing positions originated in the Fixed Income space. Thus, on the equity side Moderate comes quite close to a two-to-one ratio of winners to losers: 29 winners to 16 losers. In our mind this ratio underpins the +12.46% outperformance vs. the S&P 500 since inception for the equity portion of the Moderate Model Portfolio.
Moderately Aggressive Model Portfolio
The Solyco Wealth Moderately Aggressive Model Portfolio returned +5.45% for 2Q23 and +11.23% YTD, driving Since Inception performance to +9.92%. While Moderately Aggressive outperformed its benchmark and the S&P 500 since inception by 15.22% and 8.66%, respectively, it posted mixed near-term performance comparisons, as shown in the following table. Consistent for our Model Portfolios across the risk spectrum, outperformance from the more heavily weighted Technology sector, the Fixed Income allocation, and our management fee, represent the three primary drivers of these negative short-term comparisons.
The above table reflects a 1% annual management fee, equivalent to 0.25% for 2Q23 and 1.83% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Moderately Aggressive benchmark = total returns for 32.5% Russell 3000 Index, 25.0% Bloomberg US Aggregate Bond Index, and 32.5% MSCI World ex-US Index, and 10.0% cash allocations.
Moderately Aggressive exhibited comparatively wide breadth across asset classes and economic sectors in its 2Q23 out-performers. From the Industrials space airliner DAL led the portfolio higher with its +36.1% move for the quarter while Tech companies AMD (+29.6%) and ServiceNow [NOW (+19.8%)] posted outsized contributions alongside AMZN (+26.2%) from the Consumer Discretionary sector and private debt provider HTGC (+18.9%). Downside drivers showed similar diversity as well with drug developers Incyte [INCY (-13.9%)] and BNTX (-13.4%) providing the most significant headwinds, followed by Citizens Financial [CFG (-12.8%)] from the banking sector, utility ETR (-9.4%), and NKE (-9.7%) from the Consumer Discretionary sector.
Despite the fact that we sold shares of SLB (+84.1%) out of the portfolio several quarters ago, it remains the largest positive contributor to Moderately Aggressive’s returns for the Since Inception period. Fellow oil and gas company PXD (+65.9%) also ranks highly as an upside driver as does international lithium mining concern Sociedad de Quimica y Minera [SQM (+55.6%)]. Rounding out the top five performers since inception for the portfolio are Industrials concern Wesco [WCC (+58.6%)] and semiconductor provider AMD. Downside drivers for Moderately Aggressive since inception largely were the same as for the less aggressive Moderate Model Portfolio: PARA (-53.6% – ouch, again), VWOB (-25.1%), CFG (-34.7%), BNT (-32.7%), and TSM (-30.9%).
Aggressive Model Portfolio
The combination of greater equity exposure and relatively strong stock-picking enabled performance for the Aggressive Model Portfolio to overtake that of its sister Moderately Aggressive Model Portfolio for Aided substantially by the decidedly “risk on” tenor of asset markets in 1H23, Solyco Wealth’s Aggressive Model Portfolio posted relatively very strong respective YTD and 1-Year returns of +15.8% and +24.8%. Notably, these returns include 5% allocations to both fixed income securities and to cash which typically act as stiff inhibitors to performance vis-à-vis that of the S&P 500 in investing environments like that of 1H23. While Aggressive lagged the S&P 500 by over 200 basis points (bps) in 2Q23, it outdistanced that index by 528 bps over the past year and by 667 bps since its inception on 9/8/21, including the impacts of the portfolio’s 1% annual management fee.
The above table reflects a 1% annual management fee, equivalent to 0.25% for 2Q23 and 1.83% since the 9/8/21 inception of Solyco Wealth’s model portfolios.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Aggregate benchmark = total returns for 45% Russell 3000 Index, 5.0% Bloomberg US Aggregate Bond Index, 45% MSCI World ex-US Index, and 5.0% cash allocations.
In 2Q23 Aggressive’s higher beta (i.e. higher risk-higher reward) holdings fulfilled much of their rewards’ profiles as e-commerce company Shopify [SHOP (33.3%)], small-cap oil and gas producer Earthstone [ESTE (+9.8% at a 6% weighting)], and engineering and equipment manufacturer Chart Industries [GTLS (+27.4%)] all outperformed. Aggressive also benefited from positive contributions from its 3% weightings in DAL and AMD. International equities offset a portion of Aggressive’s gains in 2Q23 as Chinese equities Alibaba [BABA (-8.1%)] and YUM China [YUMC (-10.7%)] joined BNTX in going the wrong way after our initial purchases. Previously mentioned CFG and ETR also traded down in 2Q23.
The 52 holdings in the history of the Aggressive Model Portfolio have almost been symmetrical with respect to their positive-negative contributions as 25 moved higher against 27 moving lower during their holding period in the portfolio. To the upside SQM, ESTE, SLB, WCC, and VRTX led, each with contributions since inception in excess of 55%. Downside movers since inception, four of which we retain in the Aggressive Portfolio, are YETI (-60.0%), CFG, BNTX, PARA, and cell tower owner American Tower [AMT (-31.8%)], which is a component of the Real Estate sector. Notably, while the top five positive contributors to Aggressive since its inception all posted contributions >55%, the five largest negative returns averaged -39% with YETI’s -60% drop defining the most negative return. Also potentially of interest, by virtue of actively managing our client accounts and prudently dollar-cost averaging client capital into our model portfolios, the largest recent effective loss from YETI in a client portfolio was -2.6%.