Sterling Partners Equity Advisors Portfolio Commentary – Winter 2022
2022 and Beyond!
Sometimes patience is useful. Had I written this letter a month ago, my optimism for the future would appear so much more incorrect than is likely now, with most indices at least touching correction territory a few days ago. It appears that concern about inflation and what the Fed may do about it has caught up with actual inflation, an issue we explored in our Spring 2021 Letter, “All is Good Except This M2 Chart.” It’s worth remembering that January has always been a bit of an odd month for many reasons, hence the phrase “January effect.” We certainly saw a January effect this year, although maybe not the namesake.
Last year was a fascinating year as cross-currents of new supply/demand patterns, unprecedented levels of money printing and new non-fundamentals driven entrants into the stock market made for a crazy brew. It reminded me of a college football game where about ⅓ of the crowd is screaming wildly about stuff that has nothing to do with the game on the field yet may impact the players’ ability to hear the play called. Needless to say, it was an interesting year. Our strategies, like many, had a pretty good absolute year, and so in terms of our primary goal of delivering good returns to clients, we feel pretty good about that. There is detail about our performance and the best and worst contributors among our holdings later in this letter.
One thing to note, this Winter of 2022, the impact of the pandemic appears to have normalized. It may not be the winter of content, but at least it seems to no longer be the winter of discontent. The worldwide lurch to a more internet centric life has become mainstream. Grandma can deposit a check with her phone and get a medical checkup via Zoom. Her knowledge worker buddies can now work from an RV in the woods and maintain their weekly bridge game with her. As we’ve pointed out in past letters, the potential for a sustained period of rising productivity is apparent. The actual costs of supporting a commuter infrastructure are falling and that unproductive time and capital will be redeployed into more productive pursuits. We expect leisure to be one of them, but on the other hand, generally when new roads are built, people follow. Shifting long-term capital spending trends are something we pay attention to. So, while predicting the intermediate future well remains our core task, predicting the immediate future is not a core competency, and hence, a post-January letter is working better than an early-January letter, at least this year.
This time of year, market participants love to read prognostications about the year ahead. With January behind us, I feel we have a bit of an edge over our competitors in that our rosy view won’t be immediately rendered incorrect. Our view is only partially due to our colored glasses, the rest is due to the engine of productivity gains that has driven human activity for millennia. We like charts, so here is one that shows the long march of real GDP per capita, real disposable personal income per capita and real personal consumption expenditures. These are real numbers, and in the long run, this is a great source of conviction about the future, maybe not next year, but the next five years.
We do feel good about 2022, but it’s hard not to. Over most of the history of those rosy charts, interest rates were higher, sources of capital were limited, knowledge sat in silos and computing power was tiny. We believe a lurch in productivity is underway because of low rates, abundant capital, global collaboration in real time and game changing computing power. Will that happen in 2022? Really, we don’t know, but it’s likely one of two things.
If 2022 turns out to be a tough year in the market, our turnover is likely to be muted. When the market offers us prices below our estimates of intrinsic value, we pass. Manager research teams may say we had a bad year, and unfortunately the argument that we didn’t sell many holdings would fall on unsympathetic ears. Meanwhile, we would in fact be paring our best performing names to add more quality to the portfolio at what often in a bad market can be a steep discount.
If 2022 turns out to be a good year in the market, then our turnover is likely to be higher as more holdings reach our estimate of intrinsic value. We would re-deploy capital into our highest expected return names at that time. Researchers might say we had a good year, but we might be having trouble finding great expected returns.
Either way, we own well-capitalized companies that earn good returns over cycles. They sell differentiated products and services that serve a niche, with a “moat” to quote Morningstar, and we buy them at what we believe are attractive prices. We will be looking for more of them in 2022.
Click here for our most recent performance and please keep reading to see our thoughts about our best and worst contributors to our performance in the quarter.
Thank you for your interest in Sterling Partners Equity Advisors.
See PDF below for a discussion of our top and bottom contributors to performance.
Kevin E. Silverman, CFA
Chief Investment Officer
John A. Schattenfield
Head of Distribution
Lara M. Compton
Director of Platform Marketing
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