March 15, 2021 – There are several key market themes emerging in early 2021, including increased retail investor participation, the outperformance of value compared to the underperformance of tech / growth / pandemic winners, and rising interest rates.
One unforeseen side effect of the COVID-19 pandemic has been increased retail investor participation in the stock market. Job losses caused by the related economic shutdown, along with Government stimulus cheques and easy-to-use, commission-free trading platforms, gave tens of millions of individual investors the resources needed to become stock traders. Retail investors now account for the largest percentage of US equity trading market volumes, excluding market makers, representing nearly as much as mutual funds and hedge funds combined. According to a recent poll, individuals age 25 to 34 with online brokerage accounts plan to use about 50% of their stimulus cheques to buy stocks. This money will likely find its way into story stocks and SPACs.
Year-to-date, value stocks have materially outperformed growth, a reversal of the trend that has continued unabated for over a decade. The outperformance of value, and concurrent underperformance of growth and glamour stocks, represents a reversion to the mean as attractively valued securities get re-rated given recent economic momentum due to the reopening.
It appears that the great bond bull market is finally over, as the 10-year Treasury yield has increased from its summer-2020 low of 50 bps to a level now above 160 bps. This reversal in rates has also contributed to the outperformance of value over glamour stocks over the past few months.
What are the implications? We expect two major trends to continue:
- We expect to see value stocks outperform growth stock for the foreseeable future, given the combination of record wide valuation spread mean reverting, economic momentum and increasing interest rates. The value factor contributes positively to both ATSX and HDGE in their multi-factor models that drive the securities held both long and short.
- We expect interest rates to continue to rise, leading to a negative outlook for bonds. Investors may want to consider migrating from a portfolio of 60% equities and 40% bonds to a more diversified approach. This more diversified investment portfolio may include a material allocation to alternatives. We are seeing many investors reduce their fixed income allocations while boosting their holdings of alternative investments. The “new 60/40” is looking like 60% equities, 30% bonds and a 10% sleeve of alternatives.
Accelerate manages four alternative ETFs, each with a specific mandate:
- Accelerate Arbitrage Fund (TSX: ARB): SPAC and merger arbitrage
- Accelerate Absolute Return Hedge Fund (TSX: HDGE): Long-short equity
- Accelerate Enhanced Canadian Benchmark Alternative Fund (TSX: ATSX): Buffered index
- Accelerate OneChoice Alternative Portfolio ETF (TSX; ONEC): Alternatives portfolio solution
As noted in last month’s Monthly Update, “given the rally in the SPAC market, the ARB portfolio management team has dramatically paired back SPAC positions. ARB is now the most conservatively positioned since its inception.”
This reduction in risk was timely, given the SPAC market peaked on February 19th and dropped -6.4% over the following five trading sessions. SPACs went from a sellers market to a buyers market within two weeks, and we have been steadily rebuilding our exposure to discounted blank checks as the opportunities arise. Despite the market decline and widening of spreads, ARB finished the month up 1.5%, a tribute to deft risk management and conservative positioning.
After being frustrated by a frothy market for months, we are now reinvigorated given it is currently the best time to put money to work into arbitrage since November, given attractive spreads and numerous low-risk, high-return opportunities available.
Nonetheless, the -2.6% decline in HDGE for the month was caused by the short portfolio, as low quality stocks with poor price momentum outperformed materially. We believe that the recent outperformance of those stocks hardest hit by the pandemic has largely run its course, given many of these securities now sport higher enterprise values than they did pre-pandemic because of their consistent dilutive issuance of equity and debt into a receptive market.
Canadian equities are in full-on rally mode, as high-beta oil and financial stocks come back into vogue with investors after years of underperformance. Given their lower valuations, we expect to see continued outperformance of Canadian equities over their U.S. counterparts.
The long-short buffer portfolio of ATSX, which helps mitigate downside risk during market declines, caused ATSX to lag the index slightly in February. Nevertheless, ATSX bounced back in February with a 3.4% gain.
Newly-minted ONEC finished its first month up 2.0%. The positive performance was driven mainly by bitcoin’s nearly 30% return. Slightly offsetting bitcoin’s surge was a -6.5% decline in gold, a -3.1% fall in risk parity and a -1.8% drop in infrastructure. Leveraged loans, arbitrage and buffered index, rounded out the month with low-single digit gains.
For those scared of the headline risk in owning bitcoin, ONEC provides a novel way to gain exposure to the asset class without necessarily having to look at the daily swings of the leading cryptocurrency. We continue to believe that bitcoin deserves a small allocation in long-term oriented, diversified investment portfolios given its track record of outperformance and low correlation to traditional asset classes.
ALFA completed its last month as a public fund with a strong 7.3% return. It was liquidated and shut down in early March with a 20.7% year-to-date return.
Unfortunately, the concept of low-cost private equity replication in an ETF was before its time. Ultimately, through our discussions with thousands of investors, we discovered that the main appeal of private equity was not the historical market-beating returns (which come with substantially higher volatility), but its appeal is in its lack of mark-to-market accounting.
While many believe liquidity and mark-to-market accounting is a bug, not a feature, we believe that significantly lower costs, and therefore higher net alpha over the long-term, will one day have appeal to investors.
We continue to believe that low-cost private equity replication has a bright future and will continue to offer the strategy to investors via our managed account platform. In addition, we would consider relaunching a private equity replication ETF once the concept becomes accepted by the market. One should note that it took decades for low-cost indexing to be deemed superior by many compared with active long-only mutual funds.
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Disclaimer: This distribution does not constitute investment, legal or tax advice. Data provided in this distribution should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this distribution is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate Financial Technologies Inc. (“Accelerate”) as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Past performance is not indicative of future results. Visit www.AccelerateShares.com for more information.