Solyco Wealth Model Portfolios Generate Stellar 3Q24 Results
Three phenomena propelled Solyco Wealth’s four model portfolios significantly higher in 3Q24:
- Holding long-duration debt positions into the August 2024 market swoon and subsequently selling those positions;
- Rotating the investment capital from monetizing those debt positions into heavier equity weightings, particularly in Tech stocks; and
- Chinese stimulus substantially buoying holdings in that country.
Active management combined with opportune timing led to our four model portfolios, which range in risk level from Aggressive through Conservative to generate an average 3Q24 return of 9.5%, ranging from Conservative’s 6.53% to Aggressive’s 13.61%. The following table offers returns figures for these portfolios for the 3Q24, Last 12 Months, 2023, 2022, and Since Inception periods. Notably, these figures each include our 1% annual management fee.
Indicative of the potential value of holding fixed income positions in risk-balanced portfolios, the +6.53% 3Q24 return for our Conservative Model Portfolio exceeded the all-equity S&P 500’s +5.87% return for the same period. As detailed in its section below this Conservative Model Portfolio allocated 65% of its investment capital to debt securities. Cash also composes a significant portion – 15% – of the Conservative Model Portfolio.
Outsized upside volatility midway through 3Q24 afforded us opportunities to harvest substantial gains on several long-held positions in our portfolios. Also, downside intra-quarter volatility subsequently motivated us to buyback several of these holdings at large discounts to those sales prices and thus, to our estimated values for these holdings. First Solar (FSLR), Citizens Financial Group (CFG), and Chart Industries (GTLS), which we held at a double-weight position in our Aggressive Model Portfolio, proved to be particularly fruitful for holders last quarter.
Special Note: Discontinuation of stock quote, company news, and research access from one of our service providers necessitated a change in the prior provider for our price and performance; we transitioned to FactSet from Morningstar Direct. This change forced us to adapt from using index-level information for our benchmark comparisons to utilizing price and performance data from Exchange Traded Funds based on these same indices: iShares Russell 3000 ETF (IWV), iShares Core US Aggregate Bond ETF (AGG), MSCI ACWI ex-US ETF (ACWX). The cash component utilized in our benchmarks, however, remains the same: Charles Schwab Family Federal Debt Securities mutual fund (SWGXX). The fact that these ETFs incur management fees as compared to the absence of such fees for the indices on which they are based defines the only known difference to our knowledge between the components. Notably, this difference translates into misaligned past performance figures vis-à-vis our prior published performance results, notably for 2022 and 2023.
AS ALWAYS, WE ARE HAPPY TO DISCUSS PORTFOLIO AND PERFORMANCE SPECIFICS WITH INVESTORS AND POTENTIAL INVESTORS: PLEASE CONTACT US IF YOU WOULD LIKE TO DO SO.
The following two graphs illustrate the degrees to which 3Q24 performances moved our portfolio significantly higher as compared to 2Q24 and year-to-date metrics vis-à-vis both their respective benchmarks as well as the S&P 500. Late in 2023 we made a concerted effort to rotate portfolio holdings out of growth-oriented positions and into value-driven equity holdings and longer duration fixed income exchange traded funds (ETFs). While these efforts led to lower risk levels for each of the four portfolios entering 2024, growth equities, particularly Tech stocks, thumbed their noses at our value tilt and rocketed higher. As a result and as shown particularly in the “L12 Months” data of the right-hand table below, Solyco Wealth Model Performance suffered as growth-producing Tech stocks vastly outperformed our expectations.
The table below details Solyco Wealth Model Portfolios’ relative performances to that of their respective benchmarks. In our write-ups for each of the model portfolios, we detail the composition of these benchmarks: the proportion allocated to stocks, bonds, and cash. We also convey details on the primary drivers of downside and upside performances for each portfolio.
Our models, by rule, contain a maximum of 32 total holdings, generally holding between 24 and 28 individual equities, three to six fixed-income exchange traded funds (ETFs), and a tactical allocation to cash. This limited number of holdings, representative of our level of conviction in our investment opinions, necessarily results periodically in substantial volatility (like in 3Q24) and deviation for returns vis-à-vis those of major indices, like the S&P 500 (such as year-end 2023 and earlier in 2024). Comparisons between returns for 3Q24, L12 Months, and Since Inception, periods quite effectively illustrate the impacts of periodic volatility. Again, each of these figures includes our 1% annual management fee.
Aggressive Model Portfolio
The Solyco Wealth Aggressive Model Portfolio, of which we allocate 80% to equity 17% to Fixed Income Exchange Traded Funds (ETFs), and 3% to Cash, declined 2.6% in 2Q24 In 3Q24, Solyco Wealth’s Aggressive Model Portfolio posted a very attractive 13.61% total, after-fee return. Heading into last quarter, we allocated 80% of Aggressive to equity, 17% to Fixed Income Exchange Traded Funds (ETFs), and 3% to Cash, which represented a measurable underweight to equities as relayed in the benchmark disclosure at the bottom of the table below. As previously discussed, midway through 3Q24 as fixed income markets moved higher and equities sagged we exited long-duration debt ETFs in favor of cheaper and more attractive equities. These activities resulted in the Aggressive Model exiting the quarter with a 90% equity weighting and only 7% in fixed income and 3% in cash.
The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 5.0% iShares Core US Aggregate Bond ETF (AGG), 45% MSCI ACWI ex-US ETF (ACWX), and 5.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
The largest contributors to Aggressive’s 3Q24 upside include:
- Independent power producer Vistra (VST), an intra-quarter addition to the portfolio: +52.0%
- BioNTech (BNTX), a provider of mRNA-based drugs targeting communicable diseases and cancer: +47.8%
- Chinese e-commerce giant AliBaba (BABA): +47.4%
- Kentucky Fried Chicken and Pizza Hut franchiser in China, Yum China (YUMC): +46.7%
- VF Corp (VFC), parent company of Vans, North Face, and Dickie’s: +42.3%.
Notably, industrial Chart Industries (GTLS), a name held in Aggressive since our September 8, 2021, inception and at a double-weight, 6% level, spiked to $170 per share in late July. With a $170 price target for GTLS, we chose to sell shares into this upside move, only to witness the shares plummet back to the $110 level after reporting disappointing 2Q24 earnings and full-year 2024 guidance the first week of August. As the value proposition again appeared compelling at this lower price point we re-bought GTLS shares at a 3% weighting. We allocated the other 3% from our previous GTLS doubleweight to farm and construction equipment provider CNH Industrial (CNH), parent company of Case and New Holland brands. We executed a similar strategy to the benefit of Aggressive performance with Citizen’s Financial Group (CFG), which offered the portfolio a 29.9% upside bump over the quarter, albeit to a somewhat less dramatic extent than GTLS.
Comparing the magnitude of its upside performers to Aggressive’s overall 13.61% 3Q24 return means it was not all wine and roses for the model. Three holdings, including its two Energy positions, posted double-digit declines last quarter with a couple Industrial Tech companies also stinking it up:
- STMicroelectronics (STM), which provided microchips and microcontrollers to automotive and industrial manufacturers, declined 24.1%,
- Crude oil and natural gas producer APA (APA) moved 16.3% lower,
- Halliburton (HAL), which provides well construction and completion services to companies like APA, gave back 13.5% in 3Q24, and
- Sensata (ST), a look-alike to STM, dropped 3.8%.
To be honest economic data volatility leaves us a little perplexed entering 4Q24 and 2025 as to which direction the 11 sectors that compose the S&P might move. Our valuation-based discipline necessitated that we exit some favored holdings late in 3Q24 and early in 4Q24 (CFG, BABA, VFC) for which we have to identify worthy replacements. So we choose, for now, to sit on a little larger cash allocation than we typically would. With a plethora of data likely forthcoming from 3Q24 earnings season over the next few weeks we remain confident that we will identify attractive replacements and put this cash back to work sooner rather than later.
Moderately Aggressive Model Portfolio
The Moderately Aggressive Model Portfolio posted a +10.01% total return for 3Q24, pushing its Since Inception (9/8/21) total return to an attractive 28.85%. These figures resulted in comparisons to ModAgg’s benchmark of +6.01% for the quarter and +12.01% Since Inception. All of these figures include our 1% annual management fee.
The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 25.0% iShares Core US Aggregate Bond ETF (AGG), and 32.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
A 10% weighting and a 9.6% move higher in 3Q24 for the iShares 20+ Year Treasury Bond ETF (TLT) for the quarter translated that that holding being ModAgg’s biggest absolute upside driver: +1.25% on a weighted basis of the portfolio’s +10.01% total return. Joining the aforementioned BABA and BNTX to move the model higher were PayPal (PYPL), which appreciated 34.5% in 3Q24, as well as contributions from CFG and VST.
The same three culprits that clipped Aggressive’s performance provided headwinds for ModAgg as well: STM, HAL, and APA. However, software leader Adobe (ADBE), which we anticipate ultimately being a substantial beneficiary of artificial intelligence investments, also moved to the downside (-6.8%) and hurt ModAgg’s performance, as did Walt Disney’s (DIS) 2.3% negative performance. Of the 40 positions held in ModAgg for any period in 3Q24, however, only seven moved to the downside.
Moderate Model Portfolio
With a 45% debt allocation and a 10% cash weighting, Moderate’s performance understandably lagged that of its far more equity-weighted sister model portfolios Aggressive and ModAgg. Notably, however, Moderate’s +7.85% total 3Q24 return still exceeded that of the S&P 500 (+1.98%) as well as that of its benchmark (+2.13%). Just as with ModAgg, only seven of Moderate’s 39 holdings over the course of 3Q24 were negative, meaning 84.6% of its holdings generated a positive return for the quarter.
The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 45.0% iShares Core US Aggregate Bond ETF (AGG), and 22.5% MSCI ACWI ex-US ETF (ACWX), and 10.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
As a function of their outsized, 10% weightings TLT, the long-term Treasury bond ETF, and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) provided ModAgg’s biggest tailwinds to the upside as they, respectively, moved 9.55% and 6.04% last quarter. BioNTech, a 1.56% weighting in the model, contributed 79 basis points (0.79%) to Moderate’s +7.85% total 3Q24 return by virtue of its 47.8% move higher last quarter. Joining BNTX, PYPL, and BABA, as upside drivers on the equity side for Moderate were Real Estate Investment Trust (REIT) Realty Income (O) with a +21.7% move higher and Fiserv (FI; +20.5%), which provides digital payment processing technology all over the world.
Among the seven negative returns for Moderate in 3Q24 were cross-over holdings with the other strategies STM, APA, ADBE, and HAL. Interestingly, however, a look-alike (in our view, at least) to FI, Global Payments (GPN), which was an intra-quarter addition to Moderate, rounded out the top-five negative returns for the model as it moved 6.6% lower on disappointing commentary at its analysts’ day concerning its 2025 growth expectations.
Conservative Model Portfolio
An anomaly to say the least, Conservative’s 3Q24 return exceeded that of the S&P 500 as well: 6.53% vs. 5.87%. With a 65% allocation to fixed income ETFs, Conservative in no way, shape, or form is designed or managed to outperform the all-equity S&P 500, as exemplified by its massive underperformance versus that index since inception: -23.37%. Nonetheless, we will take it as and when it comes!
The above table reflects a 1% annual management fee, equivalent to 0.25% for 3Q24 and 3.1% 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% iShares Russell 3000 ETF (IWV), 65.0% iShares Core US Aggregate Bond ETF (AGG), and 10.0% MSCI ACWI ex-US ETF (ACWX), and 15.0% Charles Schwab Family Federal Debt Securities mutual fund (SWGXX).
Predictably, given their much more sizeable weightings in the Conservative Model, fixed income ETFS drove the portfolio’s upside last quarter:
- TLT’s 10% weighting resulted in a +1.21% weighted contribution with its 9.6% move higher;
- A 17.5% weighting to Vanguard Short-Term Corporate Bond ETF (VCSH) with a +3.8% return resulted in a +0.6% contribution;
- Similarly, a 17.5% allocation to Vanguard Short-Term Treasury ETF (VGSH) and a +2.8% return yielded a +0.5% contribution; and
- The 5% average weighting to LQD netted a 0.5% weighted addition as it moved 6.0% higher last quarter.
On the equity side of Conservative’s holdings, a 19.8% move higher for defense contractor Lockheed Martin (LMT) joined contributions from already-highlighted BABA, PYPL, O, and FI, to move Conservative higher.
To the downside Conservative suffered from underwhelming performances on the parts of STM, APA, ADBE, GPN, and DIS. From a weighted contribution standpoint, long-term holding TotalEnergies ADR (TTE), the Paris-based energy giant, joined the fray with a weighted negative contribution despite its 4.3% annual dividend yield.