Before delving into how SineCera Capital’s All-Weather Core strategy performed in 2021, I think it’s important to first recap our expectations going into the year. In short, we weren’t expecting a repeat of 2020. That’s because on a rolling 10-year basis, the All-Weather model has a back-tested average 7% long-term annualized net return [i] and, in 2020, our portfolio generated a 15.70% net return.[ii] Understandably, we were quite happy with how All-Weather performed, but knew that the law of averages could come into play in 2021. During a year of marked volatility thanks to COVID-19, risk parity strategies like ours were truly put to the test. But thanks to our portfolio construction process, which focuses on the long-term risk and correlations rather than short-term fluctuations, our All-Weather model generated balanced monthly returns on its way to a double-digit year. And as we noted in last year’s recap, being well diversified was the real highlight of our risk parity strategy.

Risk Parity in 2021: Diversification Shines (Again)

Following a year in which both long-term Treasury bonds and equities generated returns north of 20%, we were justifiably preparing for below-average returns in 2021. We certainly were trending in that direction as we ended Q1 ‘21 with long-term Treasuries (ticker: TLT) down ~14% year-to-date and down ~20% from peak to trough. To exacerbate the issue with bonds falling (and yields rising), the usual risk parity alarmists started chiming in again.

So how did the performance quilt fill out in 2021 for our All-Weather investments? See below:

As you can see, the All-Weather target portfolio again generated balanced returns. But, more remarkable, was that while long-term Treasuries went from the top performing underlying asset in 2020 to the worst in 2021 (though, TLT was only down 4.6% for the year), the portfolio was still able to hold up and generate a better-than-we-expected net return of 6.93%.[iii]

Again, diversification was key, but not thanks to our fixed income positioning like in 2020. Rather, it was exposure to inflation-hedging assets, specifically energy stocks that shined in 2021. In 9 of the 12 months last year, either energy stocks, materials stocks, or gold, was the top-performing investment in our All-Weather portfolio. Inflation was at the top of everyone’s mind last year, and for good reason. With the Consumer Price Index (CPI) hitting highs not seen in several decades, it was a justifiable concern for both Main Street and Wall Street. On a weighted average basis, our underlying inflation-hedging assets were up 12.8% in 2021, which outperformed TIPS, though it trailed commodity futures and REITs. However, when you look at the last two years, with commodity futures and U.S. REITS falling ~24% and ~12%, respectively, in 2020 [iv], our inflation-hedging strategy did well.

While gold did lose value in 2021 (IAU was down 4%), that performance was not surprising given two key metrics: 1) the U.S. Dollar strengthened on the back of higher interest rates, and 2) real yields (nominal interest rates minus inflation), moved very little year-over-over. Gold typically rises when real yields fall and drops when the U.S. dollar strengthens. Further, gold’s two-year return of 9.5% made it the third-best performing asset in our portfolio, trailing only global materials stocks (MXI returned +18.6%) and U.S. stocks (VTI returned +23.3%).

Looking Toward 2022

Equities, as noted, had another double-digit year—its third in a row. Unfortunately, if history is any guide, it’s very rare for the U.S. stock market to have four consecutive years of double-digit growth. So where does that leave our All-Weather Core portfolio? Kevin and I discussed at length our views on the portfolio on our podcast, and I encourage readers to take a listen for a more in depth recap. As we note at the end of the recording, we’re not in the business of making forecasts at SineCera Capital. Rather, as the past two years have shown, we’ve built a risk-balanced portfolio that we think serves our clients well without relying upon any particular market prediction.

As always, if you have any questions, or would like to learn more about how SineCera Capital has helped clients build a core investment portfolio using our All-Weather strategy, please do not hesitate to contact us.

Best Regards,

Adam J. Packer, CFA®, CAIA®

Chief Investment Officer | SineCera Capital