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1Q 2022 Client Letter

Updated: Dec 7, 2022

The first quarter of 2022 was remarkable for a couple of events: the persistent pressure of inflation on the economy and the Russian invasion of Ukraine at the end of February. Both events rattled markets. After the S&P 500 posted a positive 11% return in the fourth quarter of 2021, the same index declined 4.60% in the first quarter after the Federal Reserve announced a more hawkish plan to tackle inflation. Previously dismissed “transitory” inflationary pressures were finally acknowledged as the Fed detailed its intentions to make price stability is highest priority. Some have argued that the Fed has been successful in facilitating the economic recovery during COVID and stimulating inflation after a persistent lack of inflation for years. Others contend that the Fed was lax in its policy and got behind the curve as evident by the consumer price index (CPI) reading over 8%. Both opinions may be correct.

Market anxiety has increased further while the world watches Russia’s military campaign against neighboring Ukraine. As Ukrainian civilians fled their homes or took up arms, the tech-heavy NASDAQ led the markets lower. The S&P 500 peaked on January 3, 2022, then declined 12.8% through March 8 before rising over 7% into quarter-end. The Russell 1000 Growth – an index that tracks the large-cap growth segment of the U.S. equity universe – declined 9.6% during the first quarter. An even more speculative subset of stocks, exemplified by the ARK Innovation ETF, declined 29.9% during the same time.

The first quarter provides an example in which the “defensive” fixed income portion of a portfolio did not provide the hoped-for protection against volatility in the securities market. Historically, and when interest rates were higher, the 60/40 portfolio (made up of 60% equities and 40% fixed income) was a straightforward asset allocation that was thought to participate in the general equity market uptrend while also protecting against market downturns. In times of distress, a “flight to quality” would push bond prices higher offsetting equity declines. Interest rate declines over the past 40 years have supported a sustained fixed income bull market, making fixed income allocations additive to many portfolios. However, with interest rates near zero and inflation rampant, the probability of large and sustained interest rate increases by the Federal Reserve during forthcoming meetings is high. In this case, being invested in long bonds could arguably be worse than being invested in stocks. The Barclays US Aggregate (or AGG, which broadly tracks the US investment-grade bond market) returned -5.85% in the first quarter of 2022 providing little diversification or defense for a balanced portfolio. For this reason, market analyst Peter Schiff describes the bond market as “return free risk”.

At Heron Bay Capital Management, we believe quality companies bought at attractive prices provide the right balance between preservation and growth. Quality businesses, by our definition, produce current and consistently positive free cash flow as a byproduct of their competitive advantages, industry dynamics, and astute management. These cash flows can often self-fund the business leading to more durable enterprises. As a research organization, we focus on the numbers, not narratives. While there are many reasons stock prices may fluctuate, in the long term the market is a weighing machine. In times of excessive pessimism or euphoria, the markets may reward other company characteristics more. However, focusing on well capitalized businesses with durable and relatively predictable models earning more than their cost of capital significantly reduces our greatest risk: the permanent loss of capital loss.


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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