Bitcoin Vigilantes

Market Recap

Anticipating strong economic and earnings gains in 2021 after the COVID inspired recession in 2020, broad stock indices continued their hefty rally in 2020’s fourth quarter. I believe resolved political, economic, tax and virus uncertainties inspired investors to the riskier, cyclical and ignored parts of the market like small-caps (Russell 2000 up 31%) and value (Russell Large Value 16.2%).

From the March 23rd, 2020 lows to January 8th, the S&P 500 and NASDAQ are up 70.9% and 92.4%, respectively, reaching record highs. Historically, increased visibility/less uncertainty has provided fuel to markets as it is easier to make business decisions and model cash flows.

To this end, moderate Democrat Joe Biden has begun his peaceful transition to the White House and will lead a unified Democratic Congress, likely leading to additional fiscal stimulus, a greater push towards green infrastructure/energy, and potentially higher taxes.

Moderna and Pfizer COVID-19 vaccines (both with over 90% efficacy per Phase 3 results) began administration in December and bode well for a return to normalcy. Finally, monetary policy also appears clear as Fed Chairman Powell has offered no indication of reversing the current stimulative approach to fulfill the Fed’s full employment mandate. Taken together, vaccine administration, increased mobility, strong economic fundamentals, earnings, employment gains and stimulative fiscal and monetary policy should provide a solid foundation for equity investors.

Fourth Quarter Performance Highlights

  • The Navigator® International Equity/ADR strategy delivered annualized gains of 6.86% gross (3.71% net) vs. the gains of 4.88% for the MSCI All Country World ex-USA Index over three years ending December 30, 2020.
  • For the fourth quarter of 2020, the strategy had a gain of 16.45% gross (15.62% net) versus the 17.01% gain in the MSCI All Country World ex-USA Index.
  • For the 10 years ending September 2020, International Equity/ADR is in the top 3% of Morningstar peer group managers in the Foreign Large Blend category.
  • Our positioning in Information Technology and Communication Services helped relative performance while positioning in Energy and Materials acted as a drag.
  • Our holdings in Tokyo Electron and Baidu helped performance in the quarter as positions in SAP SE and AngloGold Ashanti dampened performance.
  • From a country perspective, the portfolio benefited from strong performance in our positions in Japan and Switzerland while performance in South Korea and the Netherlands lagged.

Positioning and Outlook

Big punchbowls often attract irresponsible behavior. Improving economic expectations have increased the slope of the U.S. Treasury yield, lifting the 10-year Treasury from its record low of 0.51% in August to 1.13% by early January. This yield advance nearly mirrors the outperformance of cyclical and financial stocks versus the previously dominating large-cap companies as part of the latter’s previous gains can be attributed to their high duration characteristics.

Blockchain tool Bitcoin has also exploded from $4,904 to $40,858 since global monetary authorities have expanded their balance sheets and driven real rates negative thus reducing the relative cost of owning zero cash-flow assets.

Just as bond vigilantes protested monetary or fiscal policy, which was considered inflationary by selling bonds thus driving up interest rates, my (newly coined) “Bitcoin Vigilantes” are driving down the dollar index in protest to an excess of fiat currency issuance around the globe. While stimulative fiscal and monetary policy have historically been effective counter-cyclical tools during periods of excess capacity/recession, I have a longer-term fear that a unified Congress and a Fed which has indicated a willingness to allow the economy to “run hot,” may ultimately drive asset prices to bubble levels.

International Equity/ADR Top Contributors as of December 31, 2020

Company Name Average Weight (%) Contribution to Return (%)
Tokyo Electron Ltd. Unsponsored ADR 3.15 1.21
Baidu, Inc. Sponsored ADR Class A 0.88 1.13
Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR 3.51 1.13

International Equity/ADR Top Detractors as of December 31, 2020

Company Name Average Weight (%) Contribution to Return (%)
SAP SE Sponsored ADR 0.41 -0.44
AngloGold Ashanti Limited Sponsored ADR 1.05 -0.34
China Mobile Limited Sponsored ADR 1.17 -0.12

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