Camelot Portfolios: Special Market Update and Performance Commentary
by Darren Munn, CEO/CIO
In October, 2020 we published a performance commentary highlighting:
The tremendous divergence in the market – growth strongly outperforming value & dividend stocks.
Our belief this trend would reverse at some point.
The strong performance of our strategies not focused on value/dividends.
Our plan to improve the performance of the value/dividend-oriented strategies.
We now have another six months (November through April) of performance data to update our progress and the changes in the market. We believe the results show the change in the market we were expecting is in process and our investment plan has produced excellent results!
Progress Update - Perfection is the Goal but not the Expectation
Since we started this process back in the second quarter 2020, we can report significant progress. We believe the absolute and relative performance has been excellent!
100% (10 out of 10) of our Core SMA strategies outperformed their benchmark for the trailing 12 months through April 30, 2021 (net of our 50 bps management fee).
9 of the 10 outperformed by at least 1000 bps (10%)
Over the last 12 months, on average 8.00 of our 10 core strategies have outperformed their benchmark each month, which we believe shows consistency.
Based on the asset levels in our strategies, approximately 90% of our AUM have outperformed their benchmark for the trailing 12 months.
Premium Stock Dividend has outperformed by 16% over the last 12 months.
Premium Stock Growth has outperformed by 38% over the last 12 months.
Opportunities Income has outperformed by 13% over the last 12 months.
Core Income has outperformed by 20% over the last 12 months.
The Camelot Event Driven Fund (EVDIX) is 1st percentile in its category for the trailing 1, 3, 5, 10, and 15 year periods (as of April 30, 2021) according to Morningstar!
In October we wrote:
“At the same time, we believe investors have the insatiable desire to “do something” even if the action provides little discernable value. Right now, investors are giving up on some of the high dividend parts of the market. We are not giving up on the high dividend part of the market, but we are going to change our assumptions & our selection process because some things will never change:
We believe earnings & valuations still matter and will eventually be recognized by the market.
We believe speculative investing behavior will eventually be punished.
We believe parts of the market left for dead will adapt & recover.
We are determined to “do something that adds value.”
We believe the results of our strategies prove the strength of our discipline and investment process. Instead of chasing performance in Large Cap Growth & Technology, which many did, we “did something” we believe added value. We will continue to strive to manage our strategies with discipline and excellence.
Market Update
In our last update, we showed 1, 3, and 5 year heat maps showing the strong outperformance of Large Cap & Growth over Small Cap and Value. Here is an update.
Source: Morningstar.com/markets 05/18/2021
The strong outperformance in Small Cap and Value over the last 6 months has completely flipped the 1-year chart and has significantly narrowed the divergence over the past 3-5 years. Even better, the absolute performance is now nicely positive for the Small Cap and Value parts of the market versus the negative numbers shown last time.
Based on valuations and historical precedent, we believe this relative performance shift in the market is likely to persist for an extended period of time, maybe even several years.
But what about absolute returns & risk?
Sometime here in Q2, 2021, the U.S. GDP will recover to where it was pre-COVID. However, the S&P 500 is nearly 30% higher that it was last year when U.S. GDP was at the same level, which seems challenging to reconcile. We believe there are three primary reasons:
Corporate earnings growth – margin expansion
Lower Interest Rates
Quantitative Easing & Stimulus
While we continue to expect very strong earnings growth in 2021, we believe the margin expansion many companies experienced has likely peaked and will be pressured by higher labor and materials costs. As interest rates have already started to recover from the historic lows in 2020, be believe the greater likelihood is for rates to move higher from today’s levels over the next 1-2 years. We also believe the liquidity created by QE and government stimulus will start to taper in the coming months. So the tailwinds to market growth over the last year will all likely dissipate or even reverse over the next few quarters.
We believe this means there is an elevated level of risk in the market, especially in the more speculative & highly valued areas like Technology, SPACs, Electric Vehicles, and other companies that benefited from COVID shutdowns or from the massive influx of liquidity in the system.
We are still finding opportunities in companies that traditionally pay higher dividends and expect continued recovery, both in the level of dividends and market prices. With real yields on Treasuries currently negative, these types of stocks will likely attract investors as their economic recovery takes hold.
This could lead to the opposite scenario from what we saw last year – strong GDP growth but weak market growth; positive returns for Value but negative returns for Growth.
In summary, we believe the market growth over the next 1-2 years will be less exciting than the last 3 years and may struggle to get to double digits. There will likely be extended periods where the market chops around in a range without making much progress as the valuations catch up to market prices. We also believe this choppiness will provide opportunities for our investment process to further prove its’ value.
Conclusion
We believe our performance results indicate the bold action we took last year helped restore and build on the strong, dependable track record we strive to maintain at Camelot. Our Portfolio Manager team is more integrated and collaborative, providing additional opportunities for us to capture in our strategies.
We will work diligently to build on the current momentum as we strive to deliver a great investment experience for the clients you serve. Thank you for the trust you place in us and for the pleasure of serving you.
With Extreme Gratitude,
Darren Munn
Disclosures:
• Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.
• This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
• Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC. Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach. Only your professional adviser should interpret this information.
• Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client's investment portfolio.
• Approved – B224