All Cap Value – Q4 2021 Commentary
During the second half of 2021, equity markets continued to move higher at a steady pace allowing the S&P 500® to finish the year up 26.9%. Equity market appreciation for 2021 fought through numerous headwinds including supply chain disruptions, increasing inflation and disruption from the new COVID-19 pandemic variants of Delta and Omicron. Support for the equity market appreciation stemmed from low interest rates, government stimulus, strong corporate and consumer balance sheets, improving employment and a bit of speculative euphoria. The overall improvement in equities was broad based with the Russell 1000® Value index up 25.16% and the Russell 1000® Growth index up 27.60%. Overall, 2021 was another very strong year for most equity markets.
The All Cap Value product increased 34.80% (gross of fees) and 33.88% (net of fees) for 2021 vs its benchmark, the Russell 3000® Value Index, increasing 25.37%. Positive stock selection helped drive the positive performance for the quarter and the year. For the quarter we saw strong contribution from Consumer Discretionary, Materials, Health Care, Industrials and some modest headwinds from Energy, Financials, Consumer Staples and Communication Services. Even with the strong appreciations in equity values, our investment approach, which focuses on bottom-up analysis on change in return on invested capital, continues to uncover good companies at reasonable valuations.
As the global economy begins to emerge from 2 years of COVID-19 disruption, it’s creating short-term demand-pull inflation. US inflation increased to a 39 year high in November as strong consumer demand overwhelmed a depleted supply chain. From a demand perspective, consumers are flush with high savings rates, government transfers, appreciation of equity and real estate markets and higher wages. From a supply-chain perspective, COVID-19 has temporarily disrupted global production of commodities, cars, homes, appliances, etc. and has left inventories of autos, housing, appliances, and commodities at historic lows just as demand kicks in with a lot of buying power, post-COVID.
This demand-pull inflation is expected to be temporary with the supply chain expected to increase production to capture the higher prices. We are starting to see this happen in a few areas. Long-term inflation should also be held in check by the strong deflationary forces of globalization, cheaper energy from fracking and solar, aging populations in developed economies, artificial intelligence, and driverless trucks. Long-term bond yields seem to be baking in these muted inflation expectations with the 10-year bond yield hovering below 2%. The dollar has also appreciated relative to other currencies indicating that the inflation issues may be overblown.
Over the near-term, it appears that the economy will continue to run hot with the supply chain frantically trying to catch up to the strong demand. The supply-depleted auto and housing markets are undersupplied and need to be replenished. In addition, Federal spending on infrastructure should create steady visible demand for construction and building products over the next several years. Reshoring production capacity from overseas to the US to avoid future supply chain disruptions is also creating strong demand for domestic industrial construction. Finally, aerospace should see some recovery, post COVID. The strong tailwinds in the industrial and construction economies should provide a strong jolt to the US economy over the near term.
As always, we want to thank you for the confidence you have placed in Kennedy Capital, and we appreciate the opportunity to manage your accounts.
|Frank Latuda, Jr. CFA®
Chief Investment Officer & Portfolio Manager
|Thomas Leritz, CFA®
Assistant Portfolio Manager