The iMGP RBA Responsible Global Allocation ETF outperformed its benchmark in the fourth quarter, posting a return of 8.14% (NAV) 7.69% (Price return) compared to a 7.03% return for its benchmark index (65% MSCI ACWI, 35% Bloomberg US Agg). For the year 2022 (since inception on 2/1/22), IRBA also outperformed its benchmark, posting a return of-10.88% (NAV), -11.75% (Price) vs. -13.22% for its benchmark 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 and Performance Attribution
The Strategy was slightly underweight equities over the period, holding an average weight of 60.2% (4.8ppt underweight versus its benchmark) in 4Q22. The equity sleeve outperformed by 1.9% vs. the MSCI ACWI Index. This outperformance was driven by underweights to long duration growth names in the tech, consumer discretionary, and communication services sectors as well as an overweight to health care. From a regional allocation perspective, overweighting Europe relative to its weighting in the ACWI was also accretive to the portfolio.
Fixed Income Positioning
The Strategy was overweight fixed income throughout the period, holding an average weight of 38.1% (3.1ppt overweight) in 4Q22. The fixed income sleeve underperformed by about 0.21%. Underweighting mortgage-backed securities detracted from performance for the quarter as did an overweight allocation to IG corporates.
Outlook and Positioning
RBA’s investment process remains focused on the three pillars of corporate profits, liquidity and investor sentiment/valuation, all of which suggest that we remain in a weakening fundamental backdrop.
2023 may be another difficult year for investors who hope to relive the speculative markets of 2020 and 2021. Consensus seems poised for a signal from the Fed that they will lower interest rates and reignite investors’ interest in more speculative investments. But with inflation the highest in 40 years and the entire credibility of central banking being challenged, the odds seem to favor too much tightening of monetary policy rather than too little.
We focus on three themes going into 2023:
(1) Play defense and worry later about playing offense
The US, and many other countries, are in the early stages of profits recessions, yet both equity and fixed-income markets have been very slow to anticipate the potential falloff in corporate profits. We believe a defensive posture in the portfolio is prudent to combat this.
(2) Diversify geographically
Investors should consider increasing geographic diversification. Today, consensus among investors favors US equities, but profit fundamentals for the US are among the worst of the major regions. We continue to have lower-than-normal exposure to US equities within our portfolios because of the combination of US sector weights in the most speculative sectors (Technology, Communications Services, and Consumer Discretionary) and the deterioration in US profits fundamentals.
(3) Accept that the world is changing
Growth investors should not become mired in the old growth themes and should be on the lookout for new ones. Consensus is still focused on the leadership of the last 5-10 years. However, the global economy is changing and leadership within the financial markets is likely to reflect that changing economy.
Investors should probably never invest purely for short-term or long-term opportunities. Every secular theme can be influenced by the cycle, and every cyclical theme can be influenced by secular forces. Our portfolios at RBA attempt to balance the cyclical AND the secular economic influences.