To Our Investors and Friends,
The S&P 500 Index (S&P 500) finished the year with a robust annual increase of 26.9%, driven by a persistent rebound in the brick-and-mortar economy. Despite signs of a COVID-19-related economic slowdown in the final months of 2021, oil finished the year at $75 per barrel, a 55% increase for 2021. The 10-year Treasury bond advanced 59 basis points for the year, finishing at 1.52%, while the spread between the 2- and 10-year narrowed by three basis points since the start of the year. Small cap value outperformed growth by the most meaningful amount in 20 years, significantly making up for 2020’s value underperformance. In fact, value beat growth across indexes as old-line financials, energy companies and retailers made a stunning comeback. The Bloomberg 2000 Value Index increased 29.4% and the Bloomberg 1000 Value Index expanded 25.4% for the full year. High growth businesses -- including software as a service and the biotechnology complex -- declined, narrowing the participation of growth’s gains to a few select mega cap companies and the semiconductor industry. The Bloomberg 1000 Growth Index expanded by 25.2% and the Bloomberg 2000 Growth Index increased a more modest 9.6% for the year.
2021’s stock performance was driven by a very different group of companies than the previous year, but one thing remained constant…. younger companies continued to perform better than older companies. This is especially notable given the significant outperformance of younger companies in 2020, as can be seen in the chart below.
We believe the continuation of this trend, which really began to materialize after the financial crisis more than a decade ago, is driven by a few notable factors. Young companies are more often founder-led, which generally contributes to strong growth cultures. These companies favor investment spending on new technology, products and salespeople that can reduce near-term returns, but lead to much higher long-term returns. Older companies are led by multi-generational managers that often are appointed to their roles because they are the “safe” choice. They favor stock buybacks and other means of returning profit to shareholders, limiting the long-term potential of these companies.
This puts passive index owners at a considerable disadvantage. In fact, despite significant gains in the stocks less than 50 years old (Apple and Microsoft are celebrating their 46th and 47th birthdays, respectively, in 2022), these groups represent just 49% of the S&P 500. Despite significant underperformance over the last decade, the 101 and older crowd is still 29% of the index. We expect the S&P 500 will continue to add new robust businesses that are shaping our economy, but its gradual approach likely keeps the best returns derived from the digital transformation of our economy out of the hands of passive investors.
We’ve always focused on discovering and owning transformative companies that are changing the global economy. We believe the new intelligent tools of the fourth industrial revolution are helping to accelerate this transformation. Although these companies won’t be embraced by the market every year (2021 is one such year), we are excited about what these companies are doing and think long-term investors may be rewarded.
All the best to you,
Arthur K. Weise, CFA
The views expressed are those of Kingsland Investments as of January 3, 2022 and are not intended as investment advice or recommendation. For informational purposes only. Investments are subject to market risk, including the loss of principal. Past performance does not guarantee future results. The stocks mentioned are for illustrative purposes only and are not a recommendation to buy or sell. There can be no assurances that any of the trends described herein will continue or will not reverse. Past events and trends do not imply, predict or guarantee, and are not necessarily indicative of future events or results. Investors cannot invest directly in an index.