Accretive Q1 2021 Client Letter

Dear Clients and Friends of Accretive,

At the end of the first quarter, Accretive managed approximately $186 million for clients on a discretionary basis.  As a result, we are waiving 5% of our management fee for the first quarter of 2021 under our Client Alignment Program™ (CAP).  

CAP is subject to renewal by March 31st of each year which lines up with the deadline to file our annual ADV update.  We are excited to renew the program and share that we expect to cross into the next tier of the program, which starts at $200 million and results in a 7.5% waiver, later this year.

First Quarter Recap

The first quarter was a good one for stocks and a rough one for bonds.  That said, there was wide dispersion in return among equities and fairly volatile trading.  Stocks considered to be more exposed to the economic cycle tended to fare better than companies considered to be growth-oriented.  Small companies are generally considered to be more exposed to the economic cycle than large companies, so their relative outperformance fits the pro-cyclical narrative.  

In the bond market, longer term rates continued to rise through the quarter putting downward pressure on bond prices.  There’s a saying in markets that narrative follows price action.  In the case of interest rates, we heard many narratives that attempted to explain why yields marched upward.  

We believe the most popular explanation is that inflation expectations are rising.  That is a true enough observation, as market-based instruments linked to inflation have risen, but whether that inflation both materializes and sticks is another matter.  The Federal Reserve has had a 2% inflation target for some time. Other major central banks around the world have similar targets, but broad measures of inflation have generally undershot the mark.  

With round after round of stimulus, the Federal Government may be successful in generating inflation, but whether it persists could be dependent upon something more permanent and structural in nature emerging from Washington.  As far as we can tell, nothing like that is currently on the table.  While we think the government can create inflation as long as it is unified, we observe that unified government tends to be short lived.  Should the branches of government become divided at some point, we think the economy could revert to its less robust pre-pandemic state.  

Quarterly Topic:  Process vs. Outcome in Decision Making

The investment profession is one where assessing outcomes is challenging.  Many different factors can influence the success or failure of an investment, with some element of luck (either good or bad) playing a role.  This makes evaluating decisions difficult, as it can be hard to distinguish luck from skill.  Aside from having a repeatability issue, we think that over the long-term luck tends to even out.  

At Accretive, we focus on the one thing we can control, our investment process.  As we wrote about in a prior letter, we keep logs of the investment decisions we make and the rationale.  The process of keeping an investment journal in real-time promotes intellectual honesty.  It also helps keep us from “resulting,” which Annie Duke defined in her book “Thinking in Bets” as equating the quality of a decision with the quality of the outcome.  We find the matrix below to be helpful in evaluating decisions, so much so that it is pinned to the wall next to the CIO’s desk.

Over time, we have had outcomes that have landed in each category of this matrix.   There are times when we were beneficiaries of dumb luck or suffered a bad break.  We have also had some deserved success and our fair share of poetic justice.  We believe that the only part within our control is our process, so that is where we focus.  Our goal is to critically evaluate our process to compound our knowledge and improve our investment process over time.  

“Success is a lousy teacher. It makes smart people think they can't lose.” ~ Bill Gates

Intellectual honesty in evaluating outcomes can provide valuable feedback about our investment process.  We spend a lot of time evaluating outcomes and asking, “Irrespective of the outcome, was the investment process good or bad, and are there opportunities to improve it?” To the extent luck is a contributor to an outcome, one way or another, we try to acknowledge it.  While we enjoy it when there is a success, the lessons are usually less valuable.  We are more interested in instances where there is an opportunity to learn something new that improves our process.  The lessons tend to be in the mistakes.  

“Victory has 100 fathers and defeat is an orphan.” ~ John F. Kennedy

Investing is a field where everyone makes mistakes.  Human nature typically results in attributing success to one’s own skill and failure to one’s poor fortune, psychologists call this self-serving bias, and it helps protect the ego.  Organizations tend to downplay or cover up their mistakes.  It is also our experience that professionals in the investment field tend to dislike discussing their mistakes.  

We are more inclined to take the opposite view by owning mistakes and using them as a tool to improve our decision making in the future.  While mistakes happen, we view each one as a learning opportunity with a goal of not making the same mistake twice.  That goal is difficult to achieve in practice because oftentimes the same mistake in a different context is hard to identify.  

Over time we used mistakes to identify areas for improvement in our analytical process and blind spots in our behavioral tendencies.  We have also identified the types of situations we wish to avoid in the future.  While not enjoyable to experience, we find that we ultimately learn more when things do not work out as we hope.  As investors, we try not to let a mistake go to waste.  

Accretive’s Portfolios

Overall, our portfolios had a good quarter.  Asset allocation strategies participated the way we would expect, with conservative portfolios lagging more aggressive portfolios due to increased bond exposure.  Our individual equity strategies differed in their relative performance, with our growth stock portfolio doing well in relation to its benchmark, while the equity income portfolio lagged its benchmark.  Most clients with individual stock portfolios have exposure to both strategies, and we were satisfied with the blended outcome.  We expect to have quarterly performance reports uploaded to client portals over the coming weeks.  

We have had some activity in the first quarter, but we would describe it as normal.  As markets evolve and opportunities arise, portfolios invariably need some upkeep.  That generally characterizes the nature of our activity in the year thus far.  

Concluding Thoughts

2021 is off to a good start and we are hopeful that it carries through the rest of the year.  Currently over 110 million American adults have had an initial COVID vaccination.  The pace of vaccinations should allow for a return to travel and in-person meetings soon.   We are looking forward to seeing clients in person this year, it has been too long.  

To our clients, we appreciate the trust and confidence you have in us. If you have any questions or concerns, please do not hesitate to contact us. To our friends, if there is anything we can do to help you, please reach out to us. We would welcome hearing from you.

Sincerely,

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Gary C. Ribe, CFA, CFP®

Chief Investment Officer, Managing Partner

gary@accretivewealthpartners.com

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