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1Q 2021 Client Letter

Updated: Apr 15, 2021

In the first quarter of 2021, we saw very positive market performance in equities that was largely attributable to several factors: accommodative US monetary and fiscal policy as well as government stimulus, positive vaccination trends, and the increasing reopening activity throughout the economy. Smaller capitalization stocks significantly outperformed their larger cap counterparts; the Russell 2000 returned 12.70% compared to the S&P 500’s return of 6.17%. Value stocks also outperformed growth stocks during the quarter (11.26% for the Russell 1000 Value Index versus 0.94% for the Russell 1000 Growth Index). In other words, a rotation occurred.

Looking past the daily market chatter, these are unique, almost anomalous, times. We have now had years of low interest rates, low inflation, and high corporate profitability. These circumstances tend to favor specific types of companies. We believe that future growth will be dependent on the success of bringing the pandemic under control and broadening economic activity. The confidence shown by the market when the first vaccines were approved – Pfizer’s on December 11, 2020 and Moderna’s on December 18, 2020 – has continued as now more than 160 million doses have been administered in the US with 32% of the population having received at least one dose. As vaccine supply improves, inoculations are quickly becoming available to younger individuals. The implications of herd immunity and the hope for a return to pre-pandemic life looms in the not-too-distant future, creating the perception that more freedoms may be enjoyed in the summer months ahead. Risks remain, however, as portions of the population choose not to be vaccinated and new variants continue to cause outbreaks. But on balance, the vaccination trends are very positive in the United States.

Government policy continues to be accommodative in tenor. After the Georgia Senate election in January, the aggressive fiscal policies of the Democratic Party became the expectation. This was cemented by the passage of the American Rescue Plan in early March, a $1.9 trillion COVID relief package that provided much needed relief for victims of the pandemic, significant payments to many families, businesses, and local governments as well as stimulus for the economy. The recently proposed Infrastructure bill provides for substantial and much needed investment while expanding the federal deficit. The current monetary policy of ensuring liquidity as well as very low short-term interest rates has been firmly reinforced by all Fed communications. This form of monetary policy is an unprecedented economic experiment. But it is apparent that the Fed is willing to tolerate inflation running above their 2% target for an extended period in order to pursue higher levels of employment. And in anticipation of higher inflation, the long end of the yield curve has risen, further reducing the valuation of growth equities as shown in the index results during the quarter.

In our last letter, we commented on increased levels of speculation and risky behavior. This continued in the first quarter. A dramatic example was the market volatility of GameStop (GME), an equity highlighted on websites (such as Reddit) which are used by short-term speculative investors. GameStop is a company that has lost money in each of the last 3 years and expected to do so again in 2021 due to outmoded technology (think Blockbuster but for video games). The stock traded last August at $4 and ended 2020 slightly above $19. On January 29, the stock hit $325 only to fall to $199 by quarter-end. Other examples of speculation in the market include Greensill, a lender that built a concentrated portfolio of loans to risky borrowers, and Archegos, a family office that used highly leveraged swaps to hide the size of their positions from bankers and regulators. It all worked until it stopped, and the margin calls came in causing catastrophic losses to the firm, its clients, and its prime brokers. And as we anticipated, the SPAC market has had a meteoric rise and is now experiencing difficulties.

Heron Bay Capital Management believes that our long-term perspective sets us apart when it comes to investing. Although it sounds simple, it is through this lens that we gain perspective on companies. In a world where Wall Street seems myopically focused on the upcoming quarterly results, we are more concerned with the earnings power of a business over time, given the assumption of a normal operating environment. Although there are many reasons why price may deviate widely from intrinsic value in the short run, the long-term price performance should be a function of sustained business operations and the company’s ability to compound your capital over many years.

Once we identify a quality business and we (conservatively) value it, we seek to build a position when the price is right. We initiate a portfolio position when a company meets our price target and hope to continue to build a larger position if the price declines further and offers us a bigger margin of safety. An example of our investment discipline is Discovery Communications (DISCK). We bought Discovery for our portfolios last year around $17. Our hypothesis was that this was a strong franchise that was undervalued. As the company’s streaming service, Discovery+, was announced and the market fell in love with the narrative, the stock moved upward significantly. When the forward returns looked increasingly unattractive relative to other opportunities, we began to trim the position (selling at $65 and $61 on March 25th). On March 26,th the stock price tanked on seemingly no news. Later, we discovered there was involuntary selling to meet margin calls related to the Archegos unraveling. As we had done intensive research ahead of time, and there was no material negative company specific news, we bought the stock back at $31 per share. Having a small, tight-knit team allows us to act quickly as opportunities arise. Hopefully, the above example highlights the process we follow in selecting and monitoring your investments. Warren Buffett wrote in his 2020 Annual Letter, “After decades of management, Charlie and I remain unable to promise results”. At Heron Bay, neither can we. We do, however, promise you a disciplined process of evaluating risk, quality, and price, as well as buying when the odds are in our favor.

As always, we appreciate your trust in us. We look forward to our continued partnership to help you meet your families’ goals in a thoughtful and prudent manner.


Heron Bay Capital Management, LLC (“HBCM") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where HBCM and its representatives are properly licensed or exempt from licensure. For current HBCM information, please visit the Investment Adviser Public Disclosure website at by searching with HBCM’s CRD #305537.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of HBCM strategies are disclosed in the publicly available Form ADV Part 2A. Risk associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions.

The model performance shown was created by HBCM utilizing Portfolio Attribution within Factset for each investment portfolio listed. The model performance shown is not indicative of future performance, which could differ substantially. It does not reflect actual account performance for any specific client or a composite performance for a group of clients. Model results represent what an investor’s returns might have been, had they been invested in the exact investments using the exact same allocation for the exact same time period for the model portfolio reflected. This does not reflect the impact that material economic and market factors may have had on decision making. The results shown were achieved by means of a mathematical formula.

Actual returns will be reduced by investment advisory fees and other expenses that may be incurred in the management of the account. The collection of fees produces a compounding effect on the total rate of return net of management fees. The applicable fees are described in Part II of the Form ADV.

Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.


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