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Markets were turbulent in 2023 while generally trending higher. A big summer rally was given back in weeks during October, followed by a fast rebound, which brought the S&P 500 back to nearly all-time highs by the end of the year. However, most of the rally in 2023 had been thin, with gains being driven by what has been coined by the financial media as the Magnificent 7.
|Thematic Growth Composite Returns Through December 31, 2023
|MCM Thematic Growth*
|S&P 500 Total Return Index
|* Inclusive of Dividends and Net of Fees
Fortunately, the Mott Capital Thematic Growth Composite has been a big beneficiary of the rally in mega-cap growth, owning Apple, Microsoft, Alphabet, and Amazon, which have helped to push the composite higher in 2023 by 26.7%, including dividends and net of fees, compared to the S&P 500 Total Return Index gain of 26.3% over the same period. The composite’s long-term approach to investing has helped generate returns over the S&P 500 Total Return Index during the past five years, with the composite rising by 109.9% versus a SPY return of 107.2%. Since its inception, the composite has risen 136.7% versus an S&P 500 Total Return Index of 194.8%.
|Performance of The Holdings In The Portfolio
|Alphabet Inc. Class A
|Boeing Company (The)
|Intuitive Surgical, Inc.
|* Not a current holding the strategy
This past year, Mott Capital Management remained committed to the long-term thematic growth strategy but has focused mostly on holding on to higher quality stocks while carrying a large cash buffer to hedge against downside risks to the market. The table above shows the performance of all the strategies’ holdings over the year. However, Splunk and Veradigm were removed from the portfolio at differing points in 2023 to raise more cash to hedge against broader market risks.
Stocks Appear Expensive
The concern for downside risks remains because rates have surged in 2023, with the 10-year Treasury Note climbing to around 4% by the end of 2023 from around 3.7% at the start of the year. But because the S&P 500 rallied, the current earnings yield for the S&P 500 fell to 4.51% from around 5.40% at the start of 2023. This resulted in the spread between the earnings yield of the S&P 500 and the 10-year Treasury to contract to just 41 bps, which is the narrowest spread since 2002, suggesting stocks are expensive relative to bonds.
Betting on Rate Cuts
Additionally, the market appears to be betting that the Fed will aggressively cut interest rates in 2024, given the shape of the Fed Funds Futures curve, which shows the Fed Funds rate falling to around 3.9% by December 2024. However, the latest Summary of Economic Projections from the FOMC in December showed the Fed expected the overnight rate to be around 4.6% at the end of 2024. The danger is that if that market has bet wrong on rate cuts and the Fed isn’t as aggressive in cutting rates as the market is pricing, it could result in rates moving up and stocks moving down in the first quarter of 2024. Mott Capital thinks that the market is betting wrong on Fed rate cuts in 2024 and that the Fed will deliver fewer cuts than the market has priced in.
Waiting For More Reasonable Prices
It isn’t to say that the strategy is outright bearish on the market or the economy. But it does mean that one needs to be careful not only of what they own but also of not chasing markets higher and paying valuations that make little sense given the present uncertainty and interest rate risk. Because if the Fed doesn’t deliver on rate cuts, the stock market will likely see a steep drawdown.
In 2022, the strategy used drawdowns to buy positions in Intuitive Surgical, Shopify, Boeing, and Amazon because, at the time, the valuations seemed to make sense, while their longer-term growth potential seemed strong. Additionally, the market sentiment had just turned unfavorable due to the fear of how high interest rates may have to climb in a world with high inflation. Those bets paid off in 2023.
Additionally, the portfolio still owns positions in Visa and Mastercard because these two positions seem like good inflation hedges since, as the prices rise, Mastercard and Visa fees rise as well.
While the invested strategy size is smaller at roughly 60 to 65% invested in equities than what it would normally be in a better outlook, the higher cash levels of around 35 to 40% should act to hedge the strategy against downside risk. But more importantly, it should allow the strategy to buy additional names when the time and valuations make more sense, especially given the long-term nature of the strategy, as done in 2022.
Mott Capital Management, LLC
The Thematic Growth Strategy is also made available by Interactive Advisors through a licensing arrangement with Mott Capital Management; performance may differ from the Mott Capital Composite.
Mott Capital Thematic Growth Composite
MCM Thematic Growth Composite Annualized Performance
|S&P 500 TR Index
N.A. – Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year.
† Performance reflects the non-annualized performance from 8/1/2014 to 12/31/2014.
** For periods with less than 36 months of composite performance, no 3-year ex-post standard deviation measurement is available.
Disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.
An investment may be risky and may not be suitable for an investor’s goals, objectives and risk tolerance. Investors should be aware that an investment’s value may be volatile and any investment involves the risk that you may lose money. Investment performance of a model depends on the performance of the underlying investment options and on the proportion of the assets invested in each underlying investment option over time. The performance of the underlying investment options depends, in turn, on their investments. The performance of these investments will vary day to day in response to many factors. Asset allocation strategies are subject to the volatility of the financial markets, including that of the underlying investment options’ asset class. Diversification does not ensure a profit or guarantee against a loss. Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.
Mott Capital Management, LLC, is an independent registered investment adviser. Mott Capital Management, LLC (“Mott”) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Mott has not been independently verified. GIPS is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
The All-Cap Growth Composite is a blend strategy of different market capitalizations, which is approximately divided equally among three sectors. The Core Growth sector includes large multi-national companies, the Growth Sector includes mid- to large-cap companies, and the Aggressive Growth sector includes small- to mid-cap companies. The strategy is concentrated, and typically includes approximately 20 positions, and 5% cash. The portfolio may hold fewer positions in times of market uncertainty, when raising cash as a hedge. The strategy only invests in stocks, ADRs, and ETFs denominated in USD. The All-Cap Growth Composite was created June 2015. The inception date of the strategy is August 1, 2014.
The S&P 500 is a free-float capitalization-weighted index of 500 large-cap common stocks actively traded in the United States. The index is shown as a general market indicator, and may not reflect the same exposures as the composite.
The investment management fee schedule for the composite is 2% on the first $250,000, 1.5% on the next $750,000, and 1.0% on the remainder. Actual investment advisory fees incurred by clients may vary. Further information regarding investment advisory fees is described in Part II of the firm’s Form ADV.
Past performance is not indicative of future results. The U.S. Dollar is the currency used to express performance. Performance shown represents total returns that include income, realized and unrealized gains and losses. Net of fee performance was calculated using actual fees. Composite performance is presented net of foreign withholding taxes on dividends, interest income, and capital gains. Withholding taxes may vary according to the investor’s domicile.
Policies for valuing portfolios, calculating performance, and preparing GIPS reports are available upon request.
The annual composite dispersion presented is an asset-weighted standard deviation calculated using net returns of accounts in the composite the entire year. The 3-Year Standard Deviation represents the annualized standard deviation of actual net composite and benchmark returns, using the rolling 36-months ended each year-end.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your managed account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Mott capital accounts; and, (3) Mott Capital’s relationship with Interactive Advisors is that of a third-party Portfolio Manager licensing trading data to Interactive Advisors
Mott Capital provides data to Interactive Advisors for use in its recommended portfolios. Interactive Advisors, an SEC registered investment adviser. Mott Capital is not affiliated with Interactive Advisors. Interactive Advisors uses data provided by MOTT Capital to create a portfolio for its clients. Additionally:
- Only investors matching a specific risk profile determined pursuant to Interactive Advisors’s risk questionnaire may invest in Mott Capital’s model portfolio on the Interactive Advisors platform;
- Interactive Advisors clients that qualify for and subscribe to Mott Capital’s model portfolio on Interactive Advisors platform are clients of Interactive Advisors. They are not Mott Capital clients.
- Mott Capital has a financial incentive (and therefore, a conflict of interest) in a current or prospective client investing with Interactive Advisors and investing in its portfolio on the Interactive Advisors platform because Mott will receive a portion of the annual management fee (and, if applicable, performance fee) Interactive Advisors charges clients who invest in Mott’s portfolio, so Mott will receive more money the more investors sign up with Interactive Advisors and select the Model based upon data provided by Mott Capital.