Investor Commentary Q1 2022


Risk markets moved in a W shape last quarter: down-up, down-up to end slightly down for the quarter. This is good news for those concerned with beating the S&P 500, many of whom outperformed the index. In addition, they held their wealth at comparable levels to those at the beginning of the year. This is remarkable given the “not seen since WWII” market conditions in which we saw war, inflation, first time Fed rate increases, and the end of the latest Covid-19 wave.

The world is the investment scientist’s laboratory and last quarter’s volatility enabled us to test our “making more by losing less” approach.

Why do we care about losing less?

If we rebalance to buy low and sell high, this characteristic will generate dollar profits from volatility even in directionless markets. We may not outperform the index as the market goes up but there is more value in protecting assets when it goes down.

How did we achieve this?

First, we owned natural resources or commodities which blew away other asset classes by returning 30% last quarter. Within this asset class, we rotated away from industrial metals and towards both renewable and nonrenewable sources.

Second, within stock allocations, we emphasized energy which gained during the Ukrainian calamity. We did not see this happening, but we ended up in the right place at the right time. Our rationale for rotating towards energy was based on our prediction that interest rates would rise. As you can see in the table below, energy is the best sector to hedge against rising rates. Notably our other overweight sector, financials, is the third best out of eleven.
Sector
Energy
Materials
Financials
Industrials
Cons. Disc.
Tech.
Comm. Services
Real Estate
Healthcare
Cons. Staples
Utilities
QTD Return
39.0%
-2.4%
-1.5%
-2.4%
-9.0%
-8.4%
-11.9%
-6.2%
-2.6%
-1.0%
4.8%
JP Morgan Guide to the Markets Q2 2022, data as of March 31, 2022

This was all facilitated by our bond holdings which held their value because they were shorter in duration and higher credit quality than the index.

Looking forward, Google searches for the word inflation hit their highest number ever last quarter. It appears that despite all-time peak supply, pent up demand—a consequence of the huge amount of money printed during the past 2 years—is driving up prices. Additionally, the Fed is indicating they will raise rates by as much as 3% to slow the economy; possibly fostering a recession. All of which is challenging for investors.

What is our outlook going forward?

Looking to this year's Credit Suisse 2022 investment returns yearbook, a few things stood out during historical inflationary periods. First, there was almost nowhere to hide as far as asset classes; all suffered declines from inflation. However, asset allocators—those holding a combination of stocks and bonds—managed to lose less, outperforming all asset classes including cash. This combination also served to make the overall portfolio more resilient against inflation especially on a risk-adjusted basis—another benefit of diversification—which you can see in the graph above.

Within stocks the better performers were those in the more mundane and value-oriented sectors like energy, financials, and industrials.

Copyright 2022 Camelotta Advisors, All Rights Reserved. The commentary on this website reflects the personal opinions, viewpoints and analyses of the Camelotta Advisors employees providing such comments, and should not be regarded as a description of advisory services provided by Camelotta Advisors or performance returns of any Camelotta Advisors Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Camelotta Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Camelotta Advisors is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Camelotta Advisors and its representatives are properly licensed or exempt from licensure.  This website is solely for informational purposes.  Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Camelotta Advisors unless a client service agreement is in place.

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