INTRODUCTION

Stimulus measures throughout the year have helped valuation multiples grow richer, despite a collapse in corporate earnings and economic fundamentals. This dynamic underlines the biggest source of market returns this past year: the expansion of valuation multiples.

In the fourth quarter, positive developments of a coronavirus vaccine improved market sentiment even further, forming the basis for a sustainable return to normalcy and sending stocks even higher. More so, this helped unleash a powerful “pro-cyclical” rotation, and value stocks substantially outperformed growth stocks.

We were able to again outperform in this market environment, aided by changes in portfolios, including taking profits from some high valuation “winners” and redeploying to lower valuation holdings. On the margin, we believe these changes should help mitigate some downside if markets become less hospitable or if the rotation from growth to value persists. We continue to contemplate further adjustments for a more conservative balance of growth, profitability, and valuation in the portfolios.

We thank you for entrusting us with your precious capital. While some uncertainties are resolving, we remain wary of the risks to the market rally, including elevated valuation multiples, over-reliance on central banks, an uneven or shallow economic recovery, and resurgences in coronavirus cases. This is an unprecedented market environment, and we are hard at work navigating these uncertainties. Our investment process is selective and identifies durable and high-quality growth companies, which we believe can ride out and, in many cases, grow through difficult times such as this.

MARKET UPDATE

New vaccine developments, such as efficacy results, initial distributions, and confidence on supply, improved market sentiment substantially. Some degree of coronavirus optimism had been baked into recent market returns, but nonetheless, vaccine news sparked another leg of the rally. Furthermore, market leadership rotated from growth and momentum factors to value and cyclicals. This rotation highlights the potential for a more broad-based rebound in fundamentals, but it was also exacerbated by relative valuation differences that had expanded consistently since March.

Pandemic cases surged in many parts of the world, causing governments to prioritize public health and reissue containment measures. Overall, restrictions are less strict than those imposed in the initial phase of the pandemic. However, they are headwinds for a limping economic recovery, and there is skepticism whether they can direct any sustainable downward trend in cases. Most economies, both developed and emerging, shrunk in 2020; the two notable exceptions are China and India, which grew modestly.