Bullish End to 2023 Lifts Solyco’s Model Portfolios
Significant price appreciation for risk assets through 4Q23 solidly benefited Solyco Wealth’s four model portfolios as well as its investors. The four models averaged a 6.88% return for 4Q23, contributing to an average full-year 2023 total return of 17.87% for the portfolios, each of which holds a mix of individual stocks and debt Exchange Traded Funds (ETFs). As shown in the following table and as one would expect, the Solyco Wealth Aggressive Model Portfolio led the way with an 8.05% 4Q23 positive return and a 27.63% full-year 2023 total return. All four of the model portfolios also posted positive total returns since their September 8, 2021, inception despite the predominantly negative performances for risk assets in 2022. Notably, the Aggressive model accomplished these returns with 15% of its assets allocated to fixed income ETFs and 5% dedicated to cash. Also of note, we present all of our model portfolio performance statistics, which we generated using Morningstar Direct, net of the 1% management fee we charge clients.
In 3Q23 and in early 4Q23, we decided to book gains from several of the portfolios’ growth-oriented holdings and to reinvest those sales proceeds into more value-driven equities. We anticipate in 2024 that broadening equity market upside participation beyond the “Magnificent 7” will disproportionately benefit these value stocks we added to the portfolios. However, these decisions led to 4Q23 underperformance for each of the four models as compared to their respective benchmarks as well as to the S&P 500. Longer term comparisons for the models, however, remained attractive as compared to not only the benchmarks but also to the S&P 500, as relayed in the following graphs and table.
Volatility in 2023 resulted in relatively peculiar quarter-by-quarter performance comparisons for Solyco Wealth’s Model Portfolios. For the two more conservatively allocated portfolios their debt-to-equity allocations substantially impacted comparisons whereas differential stock-picking from the Moderately Aggressive and the Aggressive models resulted in somewhat stark contrasts in returns. As shown in the last column of the table below for benchmark comparisons since Wealth’s 9/8/21 inception, these quarterly nuances largely play out over a longer period of time to narrower outperformances for the more conservative portfolios with widening positive spreads for the more aggressive models. The debt and equity weightings for our models range from a 65% fixed income allocation for the Conservative model to an 80% equity allocation for our Aggressive model, as detailed in the tables below.
Aggressive Model Portfolio
While the Solyco Wealth Aggressive Model Portfolio lagged its benchmark by 324 basis points (bps) and the S&P 500 by 359 bps in 4Q23, it retained impressive comparisons for longer term time periods, as shown in the table below. Generating a 27.63% total return for 2023 and a 19.16% total return since inception, Aggressive, after fees, remain +1.80% vs. the S&P 500 in 2023 and +9.83% vs. that index since inception. While a 1Q23 pivot to add credit and duration exposure to the 15% fixed income allocation led to 423 bps of out-performance vis-à-vis that of the Bloomberg US Aggregate Bond Index, in a very strong year for equities it, alas, would have behooved performance to have forgone any debt exposure in favor of more weighting to stocks.
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.
Three holdings of the Aggressive Model Portfolio appreciated 30%+ in 4Q23: DocuSign [DOCU (+33.33%)], Qualcomm [QCOM (+31.04%), and American Tower [AMT (+30.3%)]. For full-year 2023, the model benefited from out-sized returns from a 5.5%, double-weighting in oil and gas producer Earthstone Energy [ESTE (+37.93%)], which agreed to be acquired in 3Q23, as well as equal-weight positions in Advanced Micro Devices [AMD (+95.97%), Shopify [SHOP (+82.0%)], Splunk [SPLK (+69.4%), which also agreed in 3Q23 to be acquired, and Salesforce [CRM (+67.2%)]. Indicative of not only our rotation toward value in 4Q23 but also our discipline with respect to company valuations, QCOM is the only company of these eight holdings that remains in the portfolio. Notably, DOCU and QCOM replaced the SPLK and CRM positions we chose to exit in 3Q23. Among the other more value-oriented names we added to Aggressive: Realty Income (O), Flour (FLR), Corteva (CTVA), and PayPal (PYPL). In response to Fed Chairman Jerome Powell’s relatively dovish comments concerning prospective future interest rates, we also added US solar panel manufacturer First Solar (FSLR) to the Aggressive Model Portfolio in 4Q23.
Moderately Aggressive Model Portfolio
DocuSign and American Tower holdings in the Solyco Wealth Moderately Aggressive Model Portfolio benefited investors in 4Q23 and in 2023, as did, for the first time since inception, a fixed income holding, Vanguard Tax-Exempt Bond Exchange Traded Fund (VTEB), which generated +7.3% in 4Q23 at a 7.5% weighting. These holdings led ModAgg to post a 7.3% 4Q23 total return as well as a 17.3% positive performance for full-year 2023. Joining AMD and CRM to aid full-year performance for the model were Amazon [AMZN (+80.9%)], Hercules Capital (HTGC (+41.8%)], and Alphabet [GOOGL (+58.3%)].
While Moderately Aggressive stayed well ahead of its benchmark and the S&P 500 for the 2-year and Since Inception time periods, it lagged these comps in both 4Q23 and in 2023. Negative performances from lithium miner SQM [SQM (-35.9%)], BioNTech [BNTX (-29.7%)], and fellow biotech Incyte [INCY (-21.8%)], represented the primary culprits for ModAgg’s underperformance. In attempts to make up ground on 4Q23’s lagging performance, in 4Q23 we added shares of clean energy industrial concern Chart Industries (GTLS), Salesforce look-alike NICE (NICE), and semiconductor equipment company ASML (ASML) to the portfolio.
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.
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.
Moderate Model Portfolio
Indicative of a “turning of the tide” for fixed income in 4Q23, three fixed income ETFs generated the largest positive contributions for Solyco Wealth’s Moderate Model Portfolio last quarter, albeit with weightings for each in excess of 10% of the portfolio. At a 15% weighting Vanguard Tax-Exempt (VTEB) moved 7.3% higher last quarter while the 10% weightings in each of iShares iBoxx Investment Grade (LQD) and Vanguard Short-Term Corporate (VCSH) moved up 9.9% and 4.1%, respectively. These holdings drove 248 bps of outperformance for Moderate’s fixed income weighting as compared to that of the Bloomberg US Aggregate Bond Index.However,last quarter shares of Halliburton [HAL (-10.3%)], Alibaba [BABA (-9.4%)], and BorgWarner [BWA (-10.9%)], each hampered Moderate’s performance, leading the model to lag its benchmark by 279 bps for 4Q23.
For the full-year 2023 Moderate benefited inordinately from its Technology holdings, which included AMD, Applied Materials [AMAT (+44.5%)], Arista Networks [ANET (+43.7%)], and Microsoft [MSFT (+40.7%)], as well as Tech-like holdings in AMZN and GOOGL. Healthcare proved to be Moderate’s hobgoblin in 2023, however, as underperformance from BNTX was joined by that of health insurer Centene [CNC (-9.5%)] and pharmaceutical retailer and health insurer CVS [CVS (-5.9%)]. Our rotation to value in 4Q23 led us to add to the Moderate Model Portfolio shares of Tyson’s [TSN], Realty Income [O], PayPal [PYPL], and Qualcomm [QCOM], which we anticipate will improve the 236 bps of lagging performance Moderate booked for 2023 vis-à-vis its blended benchmark.
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.
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.
Conservative Model Portfolio
Our Conservative Model Portfolio, which carries a 65% weighting to fixed income as well as a 15% cash allocation, returned 5.57% in 4Q23 and 12.28% for full-year 2023. While Conservative’s 4Q23 performance lagged that of its blended benchmark by 201 bps, the model remained +73 bps vs. its benchmark for full-year 2023, primarily as a result of 223 bps of out-performance vs. the Bloomberg US Aggregate Bond Index. As shown in the table below Conservative’s 2-Year and Since Inception performances continued to compare well with its benchmark, the aforementioned bond index, as well as the S&P 500 on a risk-adjusted basis as the returns to the 20% equity allocation of the model exceeded those of the S&P 500 by 1300 bps since inception.
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.
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.
Joining VTEB, VCSH, and LQD to propel Conservative higher in 4Q23 was another fixed income ETF, Vanguard Short-Term Treasury [VGSH], which moved 2.5% higher last quarter but at a 25% weighting in the model. On the equity side Conservative enjoyed positive contributions from AMT and AMZN, as well as from JPMorgan Chase [JPM (+18.2%)], Eastman Chemical [EMN (+18.2%)], and The Traveler’s Companies [TRV (+17.3%)]. The gains from these holdings, though, were partially offset by headwinds from BABA, BWA, and Cisco Systems [CSCO (-5.3%)]. In 4Q23, we added ASML and O shares to the Conservative model as we removed AMT and Autodesk (ADSK).
For the full-year 2023 private debt provider Hercules Capital [HTGC (+42.8%)] at a 2.6% weighting led Conservative higher, joined by positive contributions from the 25% weighting to VGSH and 15% allocations to VTEB and to VCSH. Equities AMD, AMZN, and GOOGL, also offered upside with the portfolio retaining shares of AMZN and GOOGL into 2024. As with other models, healthcare presented difficulties for Conservative, which was marred by a 12.5% move lower for CVS as well as a -8.6% move backward for shares of Johnson & Johnson [JNJ]. Alibaba defined the 3rd-worst performer for Conservative with its 1.12% allocation declining 8.1% last year.