As we enter the last few weeks of 2013, two major trends stand out: (1) Income investments are getting absolutely hammered due to Fed tapering fears and (2) U.S. equities are performing well among major global markets.
Both of these trends have sapped Sizemore Capital’s portfolio performance in the fourth quarter. The Dividend Growth model, which has a primary objective of generating a high and rising stream of income, has trailed the S&P 500 this quarter. Through December 6, it still enjoyed respectable year-to-date total returns after fees of 21.3%. But the more-aggressive S&P 500 is up 29.1% over the same period.
In particular, the portfolio’s investments such as triple-net retail REITs have seen significant price declines as bond investors have reacted to tapering uncertainty by selling first and asking questions later.
Similarly, our Global Macro portfolio has lagged for being underweighted in American stocks and overweighted in Europe. Through December 6, the portfolio had posted year-to-date total returns after fees of 15.6%.
One major highlight has been the stand-out performance of the portfolio’s largest holding, German automaker Looking into 2014, I expect to see the forces that worked against us in 2013 to move into our favor. I believe that investors will rediscover their risk appetites when it comes to non-U.S. securities. Valuations are far more attractive in Europe and emerging markets, and both are currently under-owned by both institutional and retail investors.
Within the U.S. market, I see income-focused investments staging a comeback. Yes, Fed tapering is almost certainly happening. But we have to remember that “taper” does not mean quit. It means slowly reduce over a period of months or years, and Bernanke and Yellen have made it very clear that tapering is not irreversible.
Also, foreign investors—led by Japanese institutional investors—are aggressive buying U.S. Treasuries. Japanese purchases last quarter were the second-highest on record since at least the year 2000.
So, overall bond demand is likely to remain high even while the growth in new supply continues to shrink. The U.S. budget deficit, while still too high, has been shrinking for over a year.
My call for 2014: Underweight non-dividend-paying U.S. securities and overweight income-focused investments and European and emerging-market equities.
DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.