- Sean Rapley
December 2021 - Luke's Global Fund Performance Update
Luke's Global Fund achieved a return of -13.2% (in constant currency) return over the month of December, and a 3.2% gain to date for FY22 on a constant currency basis Our International Benchmark, the S & P 500, returned 4.4% for the month of December, and the benchmark returned 10.9% to date this financial year.
Our portfolio as at December 31, 2021 is outlined in Figure 1 below:
Figure 1- Portfolio Pie Chart
Our contribution analysis for the month of December is outlined in Figure 2 below:
Figure 2 – Contribution Analysis Bar Chart
As we foreshadowed in our November report, the portfolio performance for December was rather ugly, and few holdings were spared in the portfolio, as investors pivoted away from high beta, high growth companies as an inflationary environment took hold in November.
We were pleased to reduce our exposure to high beta holdings over the month, but it was a case of too little too late, as we began overlaying our macro risk framework which we will outline below.
Portfolio Construction - Macro Risk Framework
The breakdown of the portfolio from a macro risk perspective, is outlined in Figure 3 below. The portfolio remains predominately exposed to a Goldilocks / Reflationary macro environment, which does not reflect the most probable outcomes for 2022. To be clear, inflation is defined as an environment when growth rate is decreasing, and inflation rate is increasing. Deflation is defined as an environment when growth rate AND inflation rate are decreasing. So, deflation, in our definition, does not mean inflation will fall to zero, but is falling (i.e. inflation falling from 8% to 6% is a deflationary environment).
At present, our macro advisers are guiding for a deflationary environment macro environment from Q4 2022 as the most likely macro outcome, with the following probability guidance:
Goldilocks / Reflation: 7% *
* Note: A brief, post Omicron reflationary environment is possible over Q3 2022. We will get an indication of whether this will eventuate by the January FOMC meeting on January 26, 2022.
Figure 3 – Macro Risk Segment Pie Chart
As Figure 3 demonstrates, our portfolio construction remains exposed to significant macro risks in 2022. If we are fortunate, we will get a second chance over late January, and February to rebalance our portfolio to be better positioned for what we expect to be a challenging year for investors, within a macro environment we have not experienced before in our lifetimes.
During the month of December, we were very active, exiting some of our goldilocks / reflationary holdings, including selling our entire Ethereum ETF, Bitcoin ETF, and Galaxy Digital Holdings positions, reducing our Crowdstrike, Datadog, Sea Ltd, and Snowflake Inc. positions.
We added long dated US Treasuries to our portfolio, through the TLT, and VGLT ETFs. These two ETFs will form the cornerstone of our deflationary regime holdings.
We will continue to rebalance the portfolio, with a view to adding healthcare businesses to the portfolio. Healthcare holdings will also form part of our deflationary regime holdings.
COMPANY NEWS & REPORTS
There was little news of note over December to report.
KEY LEARNINGS THIS MONTH:
The past month has demonstrated to us how difficult it is to change one's investment strategy effectively on the run, which was our focus over the month of December. Despite our efforts over December, we are still well behind the prevailing macro regime. We have learnt it takes time to effectively re-position a portfolio, and is the reason why one must be implementing one's portfolio construction strategy before the 'next play'. Not during 'the play', as we have done over the past month.
This is why we are presently focussing on reconfiguring our portfolio so it will be resilient in a deflationary regime. We have abandoned our attempt to build positions for an inflationary macro regime, as the inflationary regime has been underway for some time now, and may be drawing to a close in a relatively short space of time. Such short term investments are generally inconsistent with our investment time horizon, and we presently have satisfactory inflationary regime exposure in Luke's Fund.
If you have any opinions on the companies we hold, or would like to know more about our investments, we would love to hear your feedback.