2021 End of the Year Portfolio Review

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January 9, 2022
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The first post of the new year will focus on 2021-annual AVI portfolio review.

When I did 2020-annual portfolio review, Covid-19 was still raging strong. However, there was optimism in the air as vaccines were becoming available to critical workers and senior-citizens of the nation. Amidst the debate on the shape of market recovery, K-shaped recovery was quite evident and the millions willing to participate in the markets were beginning to reap the benefits of the bull-run.

As we start the new year, the pandemic is transitioning into an endemic state. The following charts offer a convincing data point on this view.

While the number of reported Covid-19 cases have exponential shot up, courtesy of the Omnicron variant of the disease, the number of death have thus far not followed this trend. As such, Covid-19 is no-longer the big worry for the masses. The dreaded economic I-word, the inflation has now surpassed as the biggest societal worrying factor and for a good-reason. Have a look at the inflation chart for the United States in 2021

Inflation rose 6.8 % from year ago in Nov of 2021, fastest rate of acceleration in inflation since 1982. Surging prices for housing, food and energy account for much of this gain. The Federal reserve was recently forced to acknowledge that the inflationary pressures are real and portent a big threat to the economic-state of the nation.

The debate around the source for this sudden acceleration in inflation will continue on in 2022 and there certainly are many culprits— supply chain constraints, spending splurge by consumers to name a few! But the monster source in my mind is the Fiscal spending policy enacted by the governments around world.

To date, ~$10.8 Trillion (with a T) in fiscal stimulus have been implemented worldwide, which stands at about 10 % of global GDP.  To get a sense of this gargantuan number, hear this out (source: exhibitcitynews.com): If you were to spend $40/second, it would take 289 days to spend a billion dollars. And that’s at a spending rate of almost $3.456 million per day. At the same spending rate of $40/second, it would take 792.5 years to blow through one trillion dollars. No wonder, we must expect some consequences of the massive spending spree!

Returning to the topic of AVI-annual portfolio review, lets start with performance numbers:

AVI Portfolio and Performance

The table below provides a summary of returns across various AVI-investment portfolios. Numbers from last year are presented as well for comparison. In addition, I present the numbers for S&P 500 index performance. Highlighted in green are performance number that beat the S&P 500 index for the year.

A few things stand out:

  • The consistency of total AVI investment portfolio in the last two years– overall gain of 13.45 % in 2020 and 13.91 % in 2021
  • In 2020, three of my investment portfolios-beat the S&P 500 index for the year. In 2021, S&P 500 produced a massive 26.6 % annualized returns, a number that is truly hard to beat with any actively managed portfolio as we will see below. As such, none of my investment accounts produced these-outsized market returns
  • Active Brokerage-2 investment portfolio took a massive beating in 2021, courtesy Alibaba stocks in that portfolio. 2021 was a massive let down for BABA stock and my concentrated bet in BABA was clearly painful for the the portfolio in question.
  • Mrs AVI Roth, which mimics the Applied Value Portfolio (balanced once annually) has produced super-consistent annualized returns of ~ 14 % for two-years in a row!

Value stock geek put out a nice chart summarizing the performance of several hedge funds in 2021, I am reproducing the table below:

My total investment portfolio return of 13.91 % suddenly seems quite respectable, especially as we will see below, I have ~60 % net equity exposure in my portfolio. For kickers, look at Melvin Capital return -41.5 % yikes!! or Bridgewater Pure Alpha II (with alpha in the name you would think numbers should be better) producing 0.3 % annualized returns!

AVI Portfolio Distribution

Table below presents the distribution of assets in AVI Portfolio as of this writing. For comparison, I also included the distribution for assets at the beginning of last year.

At the start of last year, I was holding significant portion of liquid cash in my portfolio. The change in cash holdings is the biggest different for asset allocation in one year. With inflation kicking tires, holding cash, even though finding attractive parking spot for cash being hard, seems anathema!

International stock holdings have gone up in the last year. The primary contributors to the increase are equities in Chinese stocks, Alibaba and Tencent.

Yet another noticeable difference is the addition of SPAC and Crypto assets in my portfolio. In combination they now make up ~2.5 % in my portfolio. While crypto in the form of Bitcoin and Ethereum are a very small fraction of this number, Bill Ackmans SPAC, Pershing Square Tontine Holdings (PSTH) represents the bulk of of the holdings in my SPAC/Crypto assets.

Alternatives now represent a smaller fraction of my asset holdings. The change was a natural consequence of Gold struggling to perform in 2021.

In the coming year, I want to increase my exposure to Crypto, if opportunity presents itself and alternatives — which may include private equity, farmland or rentals!

The chart below presents the distribution of top 10 equities in my portfolio.

  • The top two spots remain unchanged since last year. However, the percent gain in unrealized profits for BRK-B has grown from 15.37 % to 53.16 %
  • Wells Fargo was a big dud and number 4 largest position in my portfolio in 2021. Rising inflation and Fed talks on increasing rates forebode good-times for banking sector and is duly reflected in the gains for WFC share price. From a loss position of -22.29 % at the start of 2021, I now see gains of 42.63 % as of this writing. The result, WFC has displaced DIS as my third largest holding.
  • Merck (MRK), PSTH and Verizon (VZ) were added to my portfolio in 2021 as new holdings. While MRK has eked out some gains for portfolio, PSTH and VZ are currently in the red.
  • The stocks that were booted out from top 10 this year are: Anheuzer Busch (BUD), JP-Morgan Chase (JPM) and Graftech International (EAF). In 2021, I completely sold out of EAF and took some profits from sale of JPM.
  • Last year there were 3 losing positions in top 10 equity holdings in my portfolio: WFC, INTC and EAF. This year I have only two losing positions: PSTH and VZ, both new entrants in 2021

On the Efficiency Frontier curve, as seen below, my portfolio is quite aggressive and the risk-reward profile is slightly- skewed towards higher expected risk for given expected returns.

Lower return with higher risk is never a good place to be! Skew towards equity investing with very low bond holdings may be partly the reason for higher risk.

Finally, here is a snapshot of equity holdings in AVI portfolio and the returns. Note, stocks with greater than 1 multiple (>2X returns) are separated.

  • The number of investments in RED are 6, going down one from last year. I sold out of DAL and BA stocks at loss for tax-loss harvesting purpose. I completely sold my holdings in EAF as soon as it turned green. INTC and WFC, the downers from last year are now in the green! Magnella Partners (MMP), is the only stock that is in my portfolio that has remained red through last year into the new year
  • Alibaba has been a huge sink on my portfolio. The losses in BABA are now close to 50 %. While, I did realize some losses in BABA for tax-loss harvesting, I continue to hold onto a non-trivial size given my belief that BABA offers the best tech-bargain out there and I fully expect BABA to recover all its losses and then some in 2022!
  • Four equities in my portfolio are now multi-bagger. One of those, ROCC (which changed its ticker from PVAC) is a 10 bagger!
  • AAPL was the highest return stock in my portfolio last year and into the new year it remains very much on the top, at second position, to be surpased by ROCC, an energy stock, that saw massive gains in 2021.
  • Of the six stocks in red, five are new additions to the portfolio in the last year: Tencent (TCEHY), PSTH, VZ, Paypal (PYPL) and Alibaba (BABA).

Synposis

  • 2021 has also turned out to be a profitable year for AVI portfolio, producing net unrealized annual gain of ~14 %.
  • I feel quite comfortable with my equity allocation, in preparation for coming interest-rate hikes in 2022.
  • I remain well diversified across asset classes overall. Though, it would be nice to increase some exposure to alternatives into the new year

If market action in the first week of 2022 is any indication of whats in store for 2022, bring it on!

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