The iMGP RBA Responsible Global Allocation ETF underperformed its benchmark in the fourth quarter, posting a return of 9.05% compared to a 9.57% return for its style index (65% MSCI ACWI, 35% Bloomberg U.S. Aggregate Bond Index).
Performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Short term performance is not a good indication of the fund’s future performance and should not be the sole basis for investing in the fund. Performance data current to the most recent month end may be obtained by visiting www.imgpfunds.com.
Equity Positioning
The Strategy was slightly overweight equity over the period, holding an average weight of 65.6% (0.6 percentage point overweight) in the fourth quarter. The equity sleeve underperformed the MSCI ACWI Index. This underperformance was driven primarily by decisions within the U.S., namely underweight exposure to information technology companies and overweight exposure to consumer staples companies, as well as an overweight exposure to emerging-markets consumer discretionary and industrial companies. On the positive side, overweight exposure within certain European sectors was the main driver.
Fixed Income Positioning
The Strategy was underweight fixed income over the period, holding an average weight of 33.8% (1.2 percentage point underweight) in the fourth quarter. The fixed income sleeve’s performance neither helped nor hurt the strategy’s overall performance. An overweight exposure to mortgages and underweight exposure to Treasuries effectively canceled each other out. The equity sleeve was the main driver of returns.
Outlook and Positioning
Our “4 for ‘24” theme is largely based on a potential replay of the 2000’s Lost Decade. We envision an extended period during which the Magnificent 7 significantly underperform, but other sectors, industries, countries, and investment themes that are currently being ignored could present excellent opportunities.
With this backdrop, our portfolios enter 2024 with four embedded themes: (1) U.S. Small Caps, (2) U.S. Cyclicals, (3) Non-U.S. and emerging markets, (4) Industrials as a play on deglobalization.
The profits cycle has begun to recover and seems poised to accelerate until at least mid-2024. If profits are accelerating or decelerating, it is typically attributable to cyclical companies’ earnings because stable companies’ earnings are simply too stable to cause a cycle.
Smaller capitalization stocks are more cyclical than are larger capitalization stocks and tend to outperform when profits accelerate. More important, the range of small cap outperformance is skewed positively when profits accelerate.
We are also overweight traditional cyclical sectors such as energy, materials, and industrials. In contrast, according to the latest Bank of America Global Fund Manager Survey, fund managers are underweight these sectors relative to their “normal” portfolio weights.
When the U.S. bull market began in 2009, investors were enamored with non-U.S., particularly emerging market, stocks. Fourteen years later, the opposite is true and investors strongly favor U.S. stocks. Fundamentals and sentiment though increasingly favor non-U.S. stocks, and we have roughly our lowest U.S. equity allocation in the history of our firm.
Lastly, it may be critical for the U.S. economy to rebuild its productive infrastructure as globalization continues to contract. Energy infrastructure, utility infrastructure, private sector manufacturing infrastructure, and related real estate, ports, roadways, and rail are as important to the future of the U.S. economy as artificial intelligence (AI) might be. However, when compared to AI, few investors are paying as much attention to this theme, which suggests greater opportunity.
RBA’s portfolios have typically been diversifiers within an overall portfolio. That role today seems a very good one to play. The speculative rally in the equity markets in 2023 is giving rise to what we think will be a once-in-a-generation investment opportunity in 2024. Like the opportunities after the Technology Bubble, there seem to be plenty of attractive investments. They just aren’t in the seven stocks that are investors’ favorites.