The global large cap account closed out fiscal 2017 with a unit value NAV of $206.39. This compares to the unit value NAV of $149.76 at the end of 2016.
The net return earned, after all fees and expenses, was 37.8% US. Congratulations are extended to all on a record breaking year.
Since the formation of the portfolio account in August 2000, a $1 million investment had grown to $20.639 million. This represents a compounded return in excess of 19.18% annually. In contrast, a $1 million USD investment in the Dow Jones Industrial Average (dividends reinvested) had grown to $2.42 million, over that same 17+ year timeframe.
Exceeding the return earned of the DJIA, more than sevenfold, since the turn of the century; such absolute outperformance seems difficult for some to grasp. Here is some context to place that return into perspective. Investors often talk up a potential ten-bagger, or on occasion, a twenty-bagger. This solitary top performer is generally lauded, while, simultaneously, overlooking and minimizing the myriad of ordinary investments and bloviating on the flat/losing/wrong positions contained within an average portfolio. It takes MORE than 1 ten-bagger or twenty bagger to turn an average account into a top quartile performer. Instead, for a change, envision an ENTIRE portfolio comprised of “twenty-baggers” (a security that appreciates twenty-fold from the time of purchase) and you’ve got the idea of what is truly achievable, with some legwork and discipline. A portfolio absent of dogs, fallen angels or investments that require rationalization and justification as to why they even remain in the account; that’s what a 2000% + total return portfolio looks like.
2017 was an exceptional year for the global large cap account; broad market averages also produced noteworthy results. The DJIA indicated a return of 25% for fiscal 2017. The S&P generated a return of 19.4% in 2017. NASDAQ provided a return of 28.4% in 2017. Such atypical results were driven by strong economic performance in virtually all industry sectors of the economy. The decline in the US dollar against most global currencies helped multinational corporations and US export driven businesses.
On the heels of the passed American tax reform legislation, corporations that generate the bulk of their profits from US activities appear poised for significant earnings accretion in 2018. Unemployment is at record low levels. Real estate values are rising strongly in most American markets to the point that most true bargains have been picked over. By way of example, faddish real estate TV programs such as “Beachfront Bargain Hunt” are now largely limited to evaluating swampland estuary homes, as their supposed class of “bargains”. The clever marketing team behind this program primarily shows fixer-uppers, located on/near what are referred to as the intercoastal waterways. Only at peaks do saline ditches, located within insect plagued marshlands, get magically rebranded as “beachfront”. An important consumer discretionary sector, retailers, have experienced a sales surge; even retailers in clear death spiral retailers, such as Sears, are hoping for survival. Export growth in America, based upon rising demand and a weaker dollar, appears to be rather evident to all and sundry. Tax relief for roughly 90% of American households should be a major source of economic stimulus in 2018.
All in all, pundits and investors alike appear to be rubbing their collective hands with glee, in anticipation of further economy driven stock market gains. For the most part, however, such drivers are already known to investment analysts. The perfect economy has already been factored into many forecasts, perhaps too many for the comfort of old-timers, such as this author. While 2018 may prove to be a year with few negative economic shocks in store, it should not be considered a given to assume stock prices will continue to produce the same returns as were earned in 2017.
A strong dose of animal spirits, consistent with late (to the party) cycle moves, is starting to spill over into cyclical commodities and alternative asset classes. Investors are looking at commodity asset baskets and appear prepared to pile in with head first. Other, more arcane, asset classes have been “created” (cryptocurrencies) that many would charitably describe as speculations. Speculative ventures tend to command the greatest interest at absolute economic peaks; they are purchased by investors with some surplus capital to “risk” and are generally pursued, over a cliff, by smallish retail investors hoping to get in and get out quickly. The Christmas party and water cooler talk of 2017 centered around Bitcoin, Ethereum and other cryptocurrencies; those conversation threads sounded as manic as were overheard during the dot-com bubble top of 2000. If one theme seems clear, it is that speculating looks to supplant investing for 2018.
The model portfolio has produced a world beating return for more than 17 years through careful, critical and correct appraisal of economic outlooks. Against that backdrop, high EBITDA businesses, well positioned to benefit from secular trends; these are the sensible investments that are selected and held. Such a model typically works quite well until the absolute latter part of a global economic run is underway. It is the view of this author that the global economy is clearly in that latter phase. 2018 might represent a year of deliberate underperformance by the global account.
Commodities represent a 19th century set of industries; despite the appeal for short term profits, the large cap global portfolio is neither backward looking, nor will this investor succumb to a siren song. There will be no wholesale portfolio shifts into low margin industries. With a view that alternative assets do not represent clear-cut secular trends, the portfolio will not position itself, even modestly, into current manias.
In the view of this manager, for 2018, the American economy is set to enjoy the strongest economic year in more than a quarter century. Investors should not take such a macro view and reach a conclusion that such groundwork will produce above average returns for equities. Rising interest rates, a bubble bursting, an overheating of commodities; any or all of these conditions may prove as likely to exert downward pressure on equities for 2018. High returns, average returns, totally flat markets, even losses; all are equally plausible scenarios for the year to come.
As there are no immediate changes to the portfolio composition envisioned in the near term, this author is reminded of the poster produced by the British government in 1939 with the now famous phrase “Keep Calm and Carry On”.