Solyco Wealth’s Aggressive Model Portfolio Generates Stand Out Performance

October 10, 2023 By Curtis Trimble

Solyco Wealth’s Aggressive Model Portfolio Generates Stand Out Performance

Positive impact from 3Q23 mergers and acquisitions activities significantly affected Solyco Wealth’s Aggressive Model Portfolio. Permian Resources (PR) bid for portfolio holding Earthstone Energy (ESTE) resulted in a 35.1% uplift over the quarter, while Cisco Systems’ offer for co-holding Splunk (SPLK) saw its shares move 38.2% higher in 3Q23. Notably, Aggressive held a double-weight, 6% position in ESTE shares as compared to the typical 3% weighting for individual equity positions in the portfolio. These positive forces propelled the Aggressive Model Portfolio 2.5% higher for the quarter and 18.8% thus far in 2023, after fees, leading to respective outperformances of 5.9% and 8.5% vs. the S&P 500’s 3.2% loss for 3Q23 and 10.0% gain thus far in 2023.

Overall, each of Solyco Wealth’s four model portfolios, after our 1% annual management fee, were positive since their September 8, 2021, inception as shown in the table below. For each of the 16 periods observed, the four models outperformed their respective benchmarks as well. Prescient stock-picking since inception and a pivot to higher fixed income weightings mid-2023 strongly positioned all of the portfolios to compete with the S&P 500 despite the significant fixed income weightings of the Conservative (65%), Moderate (45%), and Moderately Aggressive (25%) portfolios. The inverse impacts of these higher fixed income weightings and, thus, lower equity weightings in the more conservative models show up in the S&P 500 relative performances for the YTD and 1-Year periods.

Aggressive Model Portfolio

As relayed in our opening comments above, our Aggressive Model Portfolio enjoyed significant outperformance vs. its benchmark as well as the S&P 500 across the 3Q23, YTD, 1-Year, and Since Inception, time periods. Shown in the following table, Aggressive returned 2.5% in 3Q23, 18.8% YTD, 32.1% over the past 12 months, and 10.6% since its 9/8/2021 inception. As one would expect from an aggressive portfolio, equities drove the vast majority of this outperformance but with the fixed income allocation also outperforming as compared to the Bloomberg US Aggregate Bond Index for three of the four observed time periods.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q23 and 2.09% 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.

Takeout-driven upside moves from Earthstone [ESTE (+35.1% at a 6% weighting)] and Splunk [SPLK (+38.2%)] accounted for much of Aggressive’s outperformance as both companies agreed to be acquired by larger suitors in 3Q23. With ESTE agreeing to an all-stock takeout and shares of SPLK trading within 7% of its all-cash acquisition price (with an estimated closing date of as much as 12 months away) we booked the gains and fully exited these positions. In exchange for these holdings, we added shares of oilfield services giant Halliburton (HAL) and Israeli customer relationship management (CRM) software services firm Nice (NICE). Aggressive also garnered double-digit 3Q23 upside contributions from YETI [+24.2% (YETI)] and CrowdStrike [+13.2% (CRWD)], the latter of which we also chose to sell in exchange for beaten-down communications semiconductor firm Qualcomm (QCOM). Overall in the portfolio, 20 positions generated positive contributions for the quarter while 19 swung to the darkside.

Thus, 3Q23 was not all puppies and candies for our Aggressive Model Portfolio. Delta Air Lines (DAL) declined 22.0% over the quarter in response to the spike in crude oil prices and the probable spillover impact on jet fuel expenses. Sociedad de Quimica (SQM), our chosen play on increasing lithium demand for battery electric vehicles also so an outsized 3Q23 loss as its shares dropped 17.0% in response to declining lithium prices and Chilean geopolitical turmoil. Celltower REIT American Tower (AMT) also incurred an ugly quarter, declining 15.2%, as other investors responded to the rise in long-term interest rates by heading for the exit door on AMT shares.

Moderately Aggressive Model Portfolio

In 3Q23 Solyco Wealth’s Moderately Aggressive Model Portfolio followed the overall lower trend for risk assets as it declined 1.74% for the quarter. This negative performance, though, proved to be 141 bps better than its benchmark and 155 bps ahead of the S&P 500 for the quarter. Since inception Moderately Aggressive remained 16.28% ahead of its blended benchmark and 10.07% better than the S&P 500.

Generally, Moderately Aggressive holds a 25% fixed income weighting with another 10% strategically weighted to cash. Tactically, however, we may deploy some or all of this cash position in client accounts in order to take advantage of what we deem to be attractive mis-pricings on a balanced risk-reward basis in portfolio securities.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q23 and 2.09% since the 9/8/21 inception of Solyco Wealth’s model portfolios.

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.

Aiding performance for Moderately Aggressive in 3Q23 was a 14.2% return for publicly-traded private debt provider Hercules Capital (HTGC), which carries a 11.9% annual dividend yield. Joining shares of HTGC on the positive side of the ledger last quarter were Pioneer Natural Resources (PXD) and Alphabet (GOOGL), which moved 14.8% and 9.3% higher respectively. Overall, of the 40 positions held at some point over the three months of the quarter, 22 were negative and 18 positive. Since inception Moderately Aggressive has held 55 total positions with 30 positively contributing offset by 25 negative performers.

The same three stocks that presented performance headwinds for our Aggressive Model Portfolio also hamstrung Moderately Aggressive’s 3Q23 performance, albeit at a lower level of portfolio weighting: Delta Air Lines (DAL), Sociedad de Quimica (SQM), and American Tower (AMT). With a 7.5% weighting in the model, the 3.6% drop in the fixed income exchange traded fund (ETF) Vanguard Tax-Exempt Bond ETF (VTEB) also exacted an outsized negative impact on Moderately Aggressive’s 3Q23 performance.

Moderate Model Portfolio

The Moderate Model Portfolio also failed to generate a positive, after-fee return in 3Q23 as it declined 0.88%. It did, however, modestly outperform both its benchmark and the S&P 500. Relatively balanced outperformance for the 45% fixed income weighting, which performed 180 bps better than benchmark, and the same-size equity weighting, which outpaced the S&P 500 by 241 bps, reflected constructive securities selections from both asset classes. Moderate’s lifetime performance remained positive after fees through 3Q23 at +2.10%, 1112 bps better than its benchmark and 417 bps ahead of the S&P 500 (despite only a 45% equities weighting).

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q23 and 2.09% since the 9/8/21 inception of Solyco Wealth’s model portfolios.

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.

As with Moderately Aggressive shares of Hercules Capital (HTGC) and Pioneer Natural Resources (PXD) led Moderate’s performance as they moved 14.2% and 14.8% higher last quarter. Sliding in just ahead of Alphabet’s (GOOGL) positive 3Q23 9.3% return, however, was a 6.2% contribution from another publicly-traded private debt provider held in the portfolio, Ares Capital (ARCC). Whereas Moderate allocates 1.35% to its equity positions, like GOOGL, we allocate 2.5% of the portfolio to both HTGC and ARCC, explaining ARCC’s greater performance contribution vis-à-vis that of GOOGL.

These differential weighting levels also account for much of Moderate’s 3Q23 downside. The 15% holding in Vanguard Tax-Exempt Bond ETF (VTEB) at a 3.6% loss and the 10% weighting in the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), which experienced a 4.3% 3Q23 drop, defined Moderate’s two most challenging positions last quarter. Delta (DAL), though, still declined enough to rank as second-largest loser in the portfolio, down 22.0% for the quarter. Twenty positions in the Moderate model were negative in 3Q23 while 19 posted positive contributions.

Conservative Model Portfolio

Our Conservative Model Portfolio, which offers a 65% fixed income weighting, fell 39 bps after fees in 3Q23. Since its inception Conservative’s 488 bps of fixed income outperformance versus the benchmark Bloomberg US Aggregate Bond Index would be sufficient to rank it among the few bond-heavy positive performers before fees. Alas, the 209 bps of accumulated management fees over the past two years decidedly pull it into the after-fee loss category: -0.84%. This was 123 bps better than the all-equity S&P 500, however, and at a significantly lower level of volatility.

The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q23 and 2.09% since the 9/8/21 inception of Solyco Wealth’s model portfolios.

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.

Hercules Capital and Ares Capital, which composed 5% of the Conservative Model Portfolio in 3Q23 (down from 10% earlier in the life of the portfolio), accounted for 108 bps of Conservative’s weighted upside last quarter. International energy leader TotalEnergies (TTE), which posted a +15.5% return for the quarter, ranked as Conservative’s 3^rd-best performer, just ahead of cash’s +1.26% return. Conservative carries a strategic 10% cash allocation.

Downside drivers for Conservative were the same as for Moderate, just at difference weightings: Vanguard Tax-Exempt Bond ETF (VTEB), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), and Delta (DAL). Fixed income positions account for the five worst-performing holdings over the life of the Conservative Model Portfolio while, interestingly, the two private debt providers, HTGC and ARCC, rank as the Portfolio’s two top-performing holdings with respective total returns of +25.6% and 19.8%. Six of Conservative’s nine fixed income holdings generated a positive performance contribution in 3Q23 while 9 of the 27 positions held in the portfolio at some point over the course of the quarter were positive.