2022 Recap – Reasons for Optimism

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CIO Insights

Public Market Update

Private Market Update

CIO Insights

Happy New Year!

I thought we could kick off the new year with a healthy dose of optimism. Despite our media’s constant negative self-reflection on humans, consider the following:

• Nutrition > The rate of malnutrition globally decreased from 65% in the 1950s to less than 9% by 2019. Over 7 billion people today have access to an adequate food supply.
• Time Savings > More than 70% of Americans worked on farms producing food in the 1800s, whereas today less than 1% of the population is directly engaged in food production.
• Leisure > The average worker in 1830 put in a back-breaking 70-hour work, while today the average is closer to 40 hours.
• Compensation > On an inflation-adjusted basis, income increased 40% over the first 18 centuries, 100% over the next 100 years, and 600%+ in the past 100 years.

While we often get caught up in day-to-day and year-to-year topics of concern, progress continues in many different areas and in many different ways. On the investment front, participants definitely had their fair share of gripes in 2022 with a public market rout.  Inflation and interest rates rose rapidly, while equities and fixed-income investments declined globally.  Growth investors had it particularly bad, enduring 50-90% declines after years of revelry. At LotusGroup, we were fortunate to sidestep most of the declines and protect client capital.  Our public portfolios employed tactical hedges, which protected against the mid-year market slides and participated gingerly in the Q3/Q4 rallies (see Stephanie’s Public Market Update section below for additional detail).  Our private investments remained focused on uncorrelated and recession-resilient sectors, with most sectors producing positive returns (see Louis’ Private Market Update section below for additional details). As we enter 2023, we continue to look for the positives in each situation, including the following:

• After equity market declines, relative valuations now look slightly more attractive.
• Fixed income and money markets now produce 3-5% yields.
• Asset-backed private alts delivered positive results during the recent market challenges.

We look forward to another solid year ahead and working with clients to optimize their circumstances. Cheers Raph & The Entire LGA Team

Public Market Update – Q4/2022

Happy New Year! We hope you all had a happy, healthy holiday and are feeling rejuvenated coming into the new year. For the public portfolios, all of our gauges remain the same from last quarter, with US Equity remaining bearish, a tilt to US vs. Global Equities, and Fixed Income remaining slightly less bearish. In the middle of the quarter, the US gauge had a temporary change, moving US equity from Bearish to Neutral (Yellow zone). In response, we positioned portfolios to partially participate in the near-term equity market rally, shortly thereafter locked in gains and moved back to a bearish position, and ended the quarter as we began. Looking back over calendar year 2022, the market had a high level of volatility (see Chart I below).

Chart I – S&P Percentage of Days with Intraday range >1% (Source: https://lplresearch.com)

As the chart above illustrates, the frequency of large intraday swings in 2022 had not been seen since the Great Recession in 2008-2011. There were many events that contributed to 2022’s market volatility, including elevated inflation, rising rates, geopolitical concerns, a crypto meltdown, and more. Across all portfolios, the LGA public investment team took advantage of higher market volatility by adjusting market exposure through the use of tactical hedges. the team also routinely executed targeted portfolio rebalancing, systematically selling high and buying low to achieve targeted levels of allocation and beta. Chart II below shows how non-indexed LotusGroup portfolios were positioned throughout the volatile year.

Chart II – S&P and Fixed Income Performance & LGA Public Model Positioning

Let’s walk through this chart together:

• The dark purple line is the S&P 500 Index, and the gray line is the Aggregate Bond Index – both down between 15-20% on the year.
• The gray shading in the chart is when LGA public portfolio was partially participating in the market.
• The Green shading is when LGA was fully participating in the market.
• The purple shading was when LGA was hedging against the markets to minimize downside.

Now that we’ve seen how the portfolios were positioned throughout the year, let’s go through the major moves LotusGroup made and how the portfolio performed throughout the year. Chart III below compares a composite of all our Tactical Moderate Aggressive portfolios that include private, against the S&P 500, the ACWI (global benchmark, including Emerging markets and Developed markets), and the LGA Blended Benchmark (including foreign equities and commodities).

Chart III – LGA Tactical Mod-Agg w/ Private Composite against Benchmarks

*Past performance does not guarantee future results. Please see extracted performance disclosure at the end of this document*

Here are the 5 major major moves we made with our public models in 2022:

1. Increased US equity exposure from partially participating in the market to fully participating in the market.
2. Hedged US equity to reduce our market exposure to almost zero beta (hence the flatish green line from May through October).
3. Added exposure to fixed income with a US Treasury allocation to conservative client portfolios (rates exceeded 4% yields).
4. Removed half of our US equity hedges to partially participate in the market rally.
5. Fully hedged US equity again to move back to zero beta, locking in gains from Move #4, and adding protection as the market declined.

As we look ahead into 2023, we will continue to use our internal quantitative models for deciding when it will be appropriate to increase exposure, but for now, the portfolios remain defensive.

Private Market Update – Q4/2022

Happy New Year! While 2022 was a challenging year for public markets, our private investments continued to deliver. LotusGroup uses a model that blends elements of a traditional wealth management firm with those from an endowment-style approach. Specifically, we incorporate traditional public equities and fixed income while also allocating to private alternative investments. This blended approach can show resilience in times when traditional public-only models struggle. FY’2022 was just such a time, with rapidly rising interest rates harming public market returns. Traditional 60% equity / 40% fixed income models suffered mightily (see Chart IV below)

Chart IV 60/40 Portfolio (Source: Empire Financial Research)

At LotusGroup, our private alternatives are predominantly asset-backed, recession resilient, and income-producing. Life settlements, private credit, infrastructure, and litigation finance are examples of allocations that delivered positive returns during 2022. Added to a public portfolio, these assets proved to be a ballast against volatility  (see Chart V from our public section, reprinted below).

Chart V – LGA Tactical Mod-Agg w/ Private Composite against Benchmarks

*Past performance does not guarantee future results. Please see extracted performance disclosure at the end of this document*

Looking Ahead: There is much speculation about what the economic landscape will look like in 2023. The above notwithstanding, rates are higher today than previous years, and there is low optimism that the Fed will cut them any time soon. These conditions will push investors to continue a pivot away from traditional-style 60/40 models and more toward private alternatives. As your old high school professor once said – “Time to Sharpen your Pencil.” At LotusGroup, we are currently focused on excellent operators vs. asset accumulation and flips. Deal structuring will be imperative for protecting investor principle while delivering attractive returns. We will also continue to concentrate on investments that are asset-backed, inflation protected, and somewhat recession resilient. One space we have recently been following is inland marine equipment. We dive into this interesting opportunity below! Inland Marine Equipment Investment Highlights:

1. Non-Correlated Investment Profile
2. Contractual Double-Digit Cash Yield
3. Attractive Tax Benefits
4. Inflation Hedge

Investment Overview: Inland marine transportation assets primarily consist of barges and towboats which transport commodities along the 12,000 miles of domestic inland waterways, including the Mississippi River and the Gulf Intracoastal Waterway.

Source: Fund Specific Marketing Materials

The inland marine industry is an extremely cost-efficient method of surface transportation, transporting commodities throughout the US at costs ~60% cheaper than rail and ~97% cheaper than truck. Interestingly, foreign competition is restricted by the Jones Act, insulating operators from the international shipping market (see chart below). NNN equipment leases produce a double-digit yield profile and boast almost a 100% utilization rate over the last 25 years (see chart below). Furthermore, our chosen manager estimates that this equipment has a durable 30–50-year useful life.

Source: Fund Specific Marketing Materials

These assets also come with attractive tax benefits, including a 100% depreciation allowance in the first year of ownership (a significant tax shield for investors). Finally, these assets can provide a natural hedge against inflation. Barge replacement costs have steadily increased at approximately 3.5% per year since 1975 (see chart below).

Source: Fund Specific Marketing Materials

As always, we will continue monitoring existing investments, make recommendation on exits where appopriate, and diligently source new opportunities in the upcoming investment cycles.

The information contained herein, including but not limited to research, market valuations, calculations, estimates, and other material obtained from LotusGroup, and other sources, are believed to be reliable.  However, LotusGroup does not warrant its accuracy or completeness.  These materials are provided for informational purposes only and should not be used or construed as an offer to sell or a solicitation of an offer to buy any security.  Past performance is not indicative of future results. 

This blog expresses the views of the author(s) as of the date indicated, and such views are subject to change without notice.  Investment advisory services are offered through LotusGroup Advisors, LLC, a federally registered investment adviser. LotusGroup transacts business only in states where it is appropriately registered, excluded, or exempted from registration requirements. The information contained within is believed to be from reliable sources.  However, its accuracy, completeness, and the opinions based thereon by the author(s) are not guaranteed – no responsibility is assumed for omissions or errors.   The views expressed herein reflect the authors’ judgment now, are subject to change without notice, and may or may not be updated.  Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must make their own evaluation and investigation of any investments considered or of any investment strategies described herein (including the risks and merits thereof), should seek professional advice for their particular circumstances, and should inform themselves as to the tax or other consequences of any investments or services considered or described herein. LotusGroup’s advisory clients will be required to execute an Investment Advisory Agreement and related Account opening documents (collectively, “Agreements”).  If any of the terms or descriptions in this presentation are inconsistent with the terms of the Agreements, such Agreements shall control.  Prospective investors should maintain the financial capability and willingness to accept the risks associated with any investments made, should consult the relevant investment prospectus or legal documents, and should their Advisor Representative before making investment decisions (including but not limited to an examination of the investment objectives, risks, charges, and expenses of any investment product(s) considered).

Extracted performance in this presentation is representative of a subset of investments extracted from a portfolio. Such performance is depicted in this presentation based on accounts that match the following criteria: Tactical 100 model held at TD Ameritrade with Moderate Agg risk that includes private investments. LGA employee accounts are excluded from this extracted performance. LGA will provide full performance information promptly upon request. The performance data provided herein is for information and discussion purposes only. The performance of an individual account may vary substantially based on various factors, including, but not limited to, initial account management start date, risk profiles, cash allocation, and investment restrictions, among many others. This information is unaudited. Please refer to an account’s brokerage statement for individual account information. Past performance does not guarantee future results.

 To better understand the nature and scope of our advisory services and business practices, readers are encouraged to review via the SEC’s website @ www.adviserinfo.sec.gov, the adviser’s Form ADV Disclosure(s), and the Form ADV 2B Brochure Supplement of each LotusGroup Investment Professional (Click on the link, select “Investment Advisor firm,” and type in the firm name. Results will provide you both Part 1 and 2 of the LotusGroup ‘s Form ADV.). 

Additional important disclosures can also be found at http://lgadvisors.redfernmediadevelopment2023.com/disclosures/ by calling us at 720.593.9861, emailing us at info@lgadvisors.com or visiting us at our offices located at 1005 S. Gaylord Street, Denver, CO, 80209.

This blog, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part in any form without our prior written consent.