The fourth quarter of 2020 was a strong continuation of the recovery that began mid-year. The market welcomed economic data which showed domestic GDP up 33% in the previous quarter as the growth in personal consumption staged an incredible comeback, finishing up over 41% for the year. The record-breaking quarterly print was exactly what the market needed to welcome risk back into portfolios. Treasury yields climbed 24 basis points, carrying housing prices, commodities and inflation expectations higher as well. Equities followed in lockstep as the S&P 500 finished up 12.2% for the quarter and 18.4% for the year with every sector of the market ending in positive territory. The standouts for the quarter were the energy sector, propelled by the rebound in commodity prices, and the financial sector which benefited from an increase in interest rates. From a market-cap and style perspective, small- and mid-cap names outperformed large caps, while value was bested by growth despite showing glimpses of its former self through break-out periods of strong performance. Value’s bouts of outperformance led many to call it the beginning of the rotation from growth to value stocks however those calls went unanswered.
The incredible recovery staged by the equity markets appears to be completely disconnected from the economic reality that still grips the nation, leading many to believe stocks are fully valued and offer limited upside potential. Nominal bond yields are at abysmal levels, with real yields even worse. Yet, given the Fed’s commitment to let inflation run above its 2% target before triggering rate cuts, the stage may be set for another strong year in equities. Economic growth could have a break-out year as shutdowns are lifted and consumers potentially unleash pent up demand, leading to a rebound in earnings that could propel stocks even higher in 2021.
Fourth-Quarter 2020 Performance Highlights
- The Thornburg Long/Short Equity Fund underperformed its benchmark during the fourth quarter of 2020, returning 2.5% versus a return of 12.2% for the S&P 500 Index. The portfolio captured 20% of the upside of the S&P 500, below expectations given the portfolio maintained 40% net exposure over the quarter.
- The long book outperformed the index by returning 13.1% versus the 12.2% of the S&P 500. Key contributors on the long side were growth at a reasonable price (GARP) names which did well during the quarter. Long holdings may have performed even better had it not been for the changing regulatory landscape in China.
- The short book struggled during the quarter as the S&P index posted a return that would make for a good year, let alone a good quarter. Better yet, small-cap names had a jaw-dropping quarter as risk taking was ratcheted up following Biden’s victory and renewed talks of a massive stimulus package.
Current Positioning and Outlook
While markets have recovered swiftly since the decline in March, the climate is likely to remain uncertain until there is more clarity surrounding the COVID-19 vaccine roll-out and its long-term impact on the economy. Until then, we expect monetary and fiscal stimulus will continue to bolster valuations, with riskier assets benefiting from a zero-interest rate policy. Similarly, investing in speculative stocks will likely continue as the search for outsized future earnings is juxtaposed to bonds that are at historically low yields.
Returns during the fourth quarter were exceptional, with performance in some areas of the market rivaling the best years, let alone quarters. Returns continued to be driven by high-growth names, especially those sharing the limelight of recent events. Value names offered glimmers of a resurgence, but that quickly faded as growth held its rule. While running a high-quality balanced portfolio that shorts single name stocks is challenging in this environment, the dispersion of sector performance has created opportunities for long/short managers as the winners and losers amongst various sectors become more apparent in the near term.
The market forces investors to adapt, and current market conditions have accelerated many changes that were already in motion. We welcome market volatility, which plays to our strengths, but it has become more fleeting with every day. The soaring valuations on growth stocks ultimately lead to thin margins of safety within the portfolio. We continue to closely monitor the investment theses supporting our positions and reassess our conviction levels, but that process has expanded to include all positions across both our long and short books. We’re staying disciplined about culling the portfolio of those names that don’t meet our milestones for thesis evolution, with a watchful eye on our main objective to provide superior downside protection as we did earlier in the year.
Investor sentiment and the willingness to pay-up for growth, even in the absence of earnings, has skewed the risk/reward trade-off on both sides of the book. In the fourth quarter, we continued to cover short positions in speculative, high-growth names while removing low-quality and leveraged businesses from the long book. We have positioned the portfolio to mitigate risk, protecting on the inevitable downside, while participating in any broad-market advance.
We thank you for your support and investing in the Thornburg Long/Short Equity Fund.
Performance data shown represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate so shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than quoted. For performance current to the most recent month end, see the mutual funds performance page or call 877-215-1330. The maximum sales charge for the Fund’s A shares is 4.50%.