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June 2021 Performance Review

July 3, 2021

The great reversal of investment laggards from the past few years beating tech and growth stocks has come to a grinding halt in recent weeks. Larger-cap U.S. stocks and tech stocks were the top performers last month after lagging for much of the year. Value stocks were at the bottom of the heap. While the S&P 500 was up 2.33%, this disguised the big split. Large-cap growth and tech funds were up around 5—7%, while value funds were down slightly. Our focus on yesterday's losers and some shorts on tech dragged at our returns last month, though some hot areas, like energy and Brazil, kept us in the game with the drag of value stocks.

Our Conservative portfolio gained 0.67% , and our Aggressive portfolio gained 0.85%. Benchmark Vanguard funds for June 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 2.33%; Vanguard Total Bond Index (VBMFX), up 0.77%; Vanguard Developed Mkts Index (VTMGX), down 1.11%; Vanguard Emerging Mkts Index (VEIEX), up 1.19%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.73%.

Specific hot areas in our portfolios last month included Franklin FTSE Brazil (FLBR), up 6.29%, perhaps Brazil may be appealing to contrarians (those who want to buy out-of-favor investments) looking to get in after years of rough returns and a still very much out of control Covid situation. Vanguard Energy (VDE) was up 5.19% and is one of the hottest funds of the year, as investors realize that not only were last year's hit to energy and predictions of a dying oil industry a little overblown, but the current inflationary rebound, fueled by twin monetary and fiscal stimuli in a not recessionary economy, as ill-fated as that may be, is a perfect environment for this down and out industry. That said, we're going to need to refocus to other areas, perhaps more utilities, to have additional downside protection.

Everything else we owned underperformed the S&P500, as did about 85% of mutual fund categories, notably Vanguard Value Index (VTV), which is down 1.25%, showing that the growth versus value fight had a clear winner last month, though, for 2021, value is still ahead. Inflation fears seem to be abating as gold-related funds were the worst performers last month (the only fund category to drop double-digits) and interest rates drifted further down, into the negatives adjusted for inflation.

This boosted our recently repurchased and very interest-rate sensitive Vanguard Extended Duration Treasury (EDV), which climbed 5.48%, followed by a 3.86% jump in Vanguard Long-Term Bond Index ETF (BLV). Interestingly, higher credit risk iShares JP Morgan Em. Bond (LEMB), which we had cut back on a bit recently after a big run-up, slid 1.13% as inflation fears are very much affecting emerging markets and weighing on currencies, since we are essentially exporting inflation as we create money here and buy stuff.

This inflation phenomenon is dangerous for many markets abroad, as they are still dealing with serious Covid issues and can't necessarily raise rates or tighten monetary policy to fight the inflation we are dumping on them without risks to their own economies. This situation could be a drag on foreign markets.

Such relative swings, particularly between growth and value, do raise the question, why bother? Just own the S&P 500 and you will get some average of the value and growth. First, note that, back in the overpriced value markets from 2006 on, we were heavy in larger-cap growth funds. Our problem back then, at least after the initial rebound in the market off the 2009 low, was generally having too little in stocks, but a focus away from small-cap, value, commodities, and foreign markets was a winner that we, unfortunately, didn't stick with long enough. These relative performance wins tend to go on way too long and you can't walk away too soon. The pendulum swings too far.

But now is not too soon; larger-cap tech and growth are near the end of an outperformance cycle. Even if we don't get ongoing outperformance of value and foreign stocks relative to U.S. growth and tech, the best case for growth is that it moves with everything else—and everything is basically overvalued and goes up or down mostly in reaction to rates, recessions, and wavering risk appetite.

One reason the indexing phenomena may finally be nearing a breaking point is that the whole concept works best as a free ride off all the active stock-picking going on, only without the fees and transaction costs. This has been a smart move for basically 50 years. The problem now is that as more and more buying as a percentage of the market is indexing (or passive), the rest of the "actives" are becoming relatively more important. Unfortunately, that is a world fast being overrun by morons less experienced investors trading more on narratives than numbers. So powerful are all the pocket day traders that expert, or sometimes just a little crooked, investors who short stocks are having to cut back on their questionable yet important work of repricing overhyped or even scam stocks.

If this keeps up, we're going to have a market of Robinhooders reading chat boards and index investors following along for the ride. This doesn't mean you have to avoid all indexes, just the ones with more popular momentum and so-called meme stocks.

The danger for the funds is less in the meme bubble of idiocy than in the question, how much does the real economy and market tank when the speculative mania collapses? The last two crashes were essentially the result of a collapse in speculation, tech stocks in 2000, real estate in 2007. You didn't have to be over-allocated to these areas to feel the pain. When two trillion in cryptocurrencies collapses 90% and so does perhaps another five trillion in blatant market overvaluation, on top of perhaps another one to five trillion in outright future bankruptcies, it's likely that at some point, you are going to feel that, even if you don't have a Robinhood account.

Stock Funds1mo %
Franklin FTSE Brazil (FLBR)6.29%
Vanguard Energy (VDE)5.19%
[Benchmark] Vanguard 500 Index (VFINX)2.33%
Franklin FTSE South Korea (FLKR)1.85%
VanEck Vectors Pharma. (PPH)1.26%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.19%
Franklin FTSE China (FLCH)0.57%
Vanguard FTSE Developed Mkts. (VEA)-0.94%
Vanguard Small-Cap Value (VBR)-1.02%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-1.11%
Vanguard Value Index (VTV)-1.25%
Homestead Value Fund (HOVLX)-1.34%
Vanguard FTSE Europe (VGK)-1.39%
Vanguard Utilities (VPU)-1.85%
Invesco CurrencyShares Euro (FXE)-2.84%
Franklin FTSE Germany (FLGR)-3.35%
ProShares Decline of Retail (EMTY)-3.41%
ProShares UltraShort QQQ (QID)-12.02%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)5.48%
Vanguard Long-Term Bond Index ETF (BLV)3.86%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.77%
Vanguard S/T Infl. Protect. (VTIP)0.04%
iShares JP Morgan Em. Bond (LEMB)-1.13%