Accretive Q4 2021 Client Letter

Dear Clients and Friends of Accretive,

At the end of the fourth quarter, Accretive managed approximately $252 million for clients on a discretionary basis.  As a result, we are waiving 10% of our management fee for the first quarter of 2022 under our Client Alignment Program™ (CAP).  

In December we crossed into the next CAP tier, which starts at $250 million and results in a 10% waiver.  Whether we remain in this tier in the first quarter is subject to market conditions and the growth of Accretive.  CAP is a program that comes up for renewal at the end of every March.  We are pleased to announce that we are extending the program through March 31, 2023.

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Fourth Quarter Recap

Large-cap US stocks, represented by the S&P 500, closed the year just off all-time highs.  Small US and developed international stock indices lagged but posted positive returns.  Emerging market stocks ended the quarter lower.  Overall, the fourth quarter was a good one for large US stocks, but other indices were mixed.

More conservative bond investments were essentially flat as interest rates rose some, and more risky bond investments got the benefit of relatively stable capital markets.   Taken all together, it was an uneventful quarter for bonds.

As we enter the New Year, market volatility has picked up as treasury yields have risen across the curve.  Inflation appears to be the chief concern impacting interest rates, liquidity expectations, and asset prices.  Thus far, stocks and bonds have moved in tandem based on the direction of rates along the yield curve.  Growth-oriented equities have seen the most pressure so far, as rates have been mostly up.  We think market pullbacks and corrections are healthy and a good thing, as they keep speculative desires in check, though they can be difficult to live through.

2021 Recap

In many ways, the fourth quarter was merely an extension of what had occurred in prior quarters.  As we review the year there is a bit more to the story.  Smaller company stocks and emerging markets peaked early, while the large company stocks tended to grind higher through year-end.  

Both growth and value stocks in the US had pretty good years.  In value, the rally was broad-based, while in growth stocks, the rally was far less broad.  The chart and table below will help illustrate what we mean by this observation.

                                                                                                                                                                                                                                      Source: YCharts!

For major growth indices, the largest companies have a disproportionate impact on the outcomes.  As of this writing, the seven largest companies in the Russell 1000 Growth comprise nearly 45% of the index.  The Russell 1000 Value does not appear to have a similar concentration issue, with the top seven holdings comprising less than 14%.  Lest clients think we are cherry-picking index providers, the large-cap Standard & Poor’s growth and Nasdaq-100 indices have even greater concentration.  

In the second half of the year, we observed that the rally in growth stocks became more and more concentrated in the companies with the largest weightings in the growth benchmarks.  This rally had the effect of making them even larger and further increasing their influence.  

This index construction issue creates some interesting investment questions going forward.  We observe that most growth managers are not as concentrated as the benchmarks, and, as of right now, most major indices do not have constraints on position sizes.  When these two observations combine with the reality that more and more money is invested according to these indices, it can create a feedback loop in certain shares that persists; until it does not for some reason.  One reason may be an eventual shift in investor preferences to more value-oriented stocks.

Accretive’s Portfolios

Overall, our allocation strategies were more or less in line with the broader markets.  Asset allocation strategies generally met our expectations, with more aggressive portfolios holding up better than more conservative ones.  This is true of both the fourth quarter and the whole year.  

In our individual equity portfolios, the year (and quarter) varied by strategy.  Our equity income portfolio had a good year in both absolute and relative terms and we feel good about the positioning going forward. Our equity growth strategy had a challenging year on a relative basis, which contrasted with 2020 in a bit of a reversal.  Some positions were frustrating to own, but we think some of the positions that were most frustrating to us in 2021 could be the positions that we are most pleased with going forward.    If that were not the case, or should that opinion change, we would simply move on.

Concluding Thoughts

2021 was a good year overall for Accretive and our clients.  It was nice to see many of you in person again, and in 2022, we are hopeful to see more of you.  

As always, we appreciate the trust and confidence our clients have in us. If you have any questions or concerns, please feel free to contact us.  We would welcome hearing from you.

Sincerely,

Gary C. Ribe, CFA, CFP®

Chief Investment Officer, Managing Partner

gary[at]accretivewealthpartners.com

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