The first quarter of 2021 was marked by a sea change in financial markets around the world. Equities continued to power higher on the back of a recovering global economy, and the MSCI All-Country World Index gained +4.57%. Conversely, improving growth expectations contributed to a significant increase in interest rates, pushing the broad bond market down by over 3%.
In addition, stock market leadership rotated away from the giant growth stocks like Amazon and Microsoft, which have outperformed for years and which rebounded quickly from 2020’s COVID crash. Instead, “value” stocks and smaller companies have outperformed by wide margins this year. Many of these value stocks in the financial, industrial, and materials sectors tend to be highly sensitive to cyclical shifts in economic activity. As a result, their earnings are expected to rise as growth accelerates, fueled by vaccine rollouts, last month’s $1.9 trillion stimulus bill, and the Biden Administration’s policy priorities.
Our LongView client portfolios were well-positioned for these shifts. In stocks, we have long maintained a structural tilt towards value and smaller companies, which have historically offered superior returns. We accentuated this bias early in the year by adding the socially responsible Nuveen ESG Large Cap Value fund to our portfolios.
In fixed income, we have maintained a cautious stance, emphasizing shorter-maturity bonds. This is an expression of our concern about the likelihood of rising interest rates in a strengthening economy, and it helped to cushion portfolios from falling bond prices these last few months when the Bloomberg Barclays US Aggregate Bond Index fell -3.37%.
During the quarter, we added the PIMCO ESG Income fund (PEGIX) to our portfolios. PEGIX is a new socially responsible fund that has been long in the making. Three years ago, we participated in a UN conference hosted by PIMCO, where many of the largest Wall Street firms gathered to discuss creating a green bond market. There, we learned of PIMCO’s plan to launch an ESG version of their flagship Income Fund. This multi-sector fund has the flexibility to outperform in periods when rising rates can hurt less nimble funds.
We were among the early investors when the new ESG Income fund finally launched last September. Somewhat to our surprise, we received a call in January informing us that LongView was (for a few weeks at least) the largest shareholder of the newest fund from the biggest bond fund manager in the world! This made us smile. True to its mandate, PIMCO ESG Income posted positive returns during a quarter when most bond investors lost money.
Finally, our Alternative Strategies funds largely held their ground, providing stability to our portfolios’ conservative, capital preservation side, with minimal interest rate risk.
The global economy appears to be moving into a phase of rapid expansion, ushered in by the early recovery of Asian manufacturing and propelled by widening COVID vaccination programs, easing social restrictions, and the gradual waning of the pandemic. This recovery is also boosted by historically low interest rates, enormous pent-up consumer demand, and massive government stimulus programs. Despite the worrying rise of COVID variants and stumbles in the AstraZeneca and Johnson & Johnson vaccine rollouts, the overall trend remains decidedly positive.
These economic currents should be positive for equity investors as corporations post higher earnings in the coming quarters. Passage of a Biden infrastructure bill would only add fuel to the fire.
Our market outlook is tempered by the fact that good news is already baked into high stock prices, and investors could be vulnerable to disappointing data, unexpected geopolitical tensions, or a resurgence of COVID in new forms. Long-term interest rates have already risen sharply, and while we would not be surprised to see them take a breather for a while, stronger inflation numbers could present bond investors with ongoing headwinds. That being said, our overall outlook is constructive, and we continue to see opportunities in value stocks, small-cap, and international markets.
Wishing you and your loved ones a healthy, beautiful Spring season,
The LongView Team:
David Cantor Harlan Flint Doug Lynam Maria Motsinger