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4Q 2020 Client Letter

Updated: Apr 15, 2021

We launched Heron Bay Capital Management on January 1, 2020 with great excitement and enthusiasm. Our vision was and is to be a boutique wealth management firm dedicated to providing portfolio management to clients in order to match their individual and family circumstances, tailoring investments by incorporating our stock selection and construction disciplines rather than through indexing or allocating to structured products. But 2020 turned out to be a year of unprecedented challenges for every single one of us. As we finally move carefully and hopefully into 2021, we are filled with gratitude for the clients and professionals who have entrusted us with their futures. Thank you all!

Good Riddance to 2020

Curiously, the financial markets began and ended 2020 with enthusiasm, despite the tumult of the months in between. We entered 2020 with a cautiously constructive view of the financial markets, but by March, the COVID-19 related shutdowns wrought havoc on lives and livelihoods. And despite that late winter market correction, speculators and new market participants jumped on the equity bandwagon and “momentum trade” prevailed. This so-called strategy involves buying into the winners without regard for valuation in the hopes that winning trends continue and prices go even higher. Buy high and sell higher is the strategy.

Now we see unprecedented government stimulus coupled with multiple vaccines being administered globally, and we enter 2021 with the markets again reflecting optimism. But we are also witnessing behaviors that typify a speculative environment, and we see many of last year’s winners in “bubble” territory in terms of valuation. Other examples of a speculative environment include: 1) rapid appreciation of initial public offerings (IPOs) and special purpose acquisition companies (SPACs), 2) high levels of margin debt, 3) high volumes of option trading, and 4) high flows of funds into leveraged ETF’s and credit instruments.

Special purpose acquisition vehicles (SPACs) represent the definition of investor naivete; investing without an understanding of the underlying mechanics of the vehicle or how the fund sponsor will generate a return on a merger or thereafter. While SPACs are being hailed as a cost-effective way for a company to go public, the structure of most SPACs subsidize the costs of the company going public to the detriment of the investors. Harvard Law School’s A Sober Look at SPACs documents that SPACs deplete approximately 50% of the capital raised by the time a merger is proposed. Ponzi schemes have a similar structure whereby new investors are required to produce returns for older investors.

There are other examples of the momentum trade during 2020. Perhaps the poster child is Tesla (TSLA) which turned from a controversial firm to one of the darlings of 2021. During the year, Tesla sold 493,000 vehicles, an increase of 34% more cars over the previous year. The company’s valuation however soared over 787% to $668.9 billion, a level exceeding the rest of the automobile industry combined. To put it into perspective, the market capitalization growth represents $1.8 million per car produced in 2020. The company will require tremendous growth, profitability, astute capital allocation and financial management in the future to grow into that valuation.

In the past – such as 1999 and 2007 - these types of investments worked until they didn’t and the result for many was the permanent destruction of capital. This is a risk we are unwilling to take. By contrast, Winston Churchill’s maxim “never let a good crisis go to waste” inspired our team to take advantage of the volatility to restructure portfolios during the pandemic. As certain assets became attractively priced, we added preferred stocks and closed-end-funds for clients who have income or known distribution requirements. We also broadened holdings to include small to mid-cap stocks that have above average internal growth rates and return potential. Each of these assets performed well in the second half of the year and the smaller issues performed particularly well in the fourth quarter. During this process, we maintained our emphasis on high quality issues, the characteristics of which are discussed below.

How does Heron Bay Protect Investments?

At Heron Bay Capital Management, we believe that good businesses that are underpriced may be found at any given point in time. Markets may drop, and all companies may go down in sympathy, but good businesses should fall less and rebound quicker than the average stock. We work with our clients to ascertain the appropriate level of cash and fixed income for their unique situations, taking a time segmentation approach to asset allocation. Building downturn resistant portfolios is at the heart of our investing process. We do not wait for a correction to rotate into ‘safer’ or more resilient businesses; we start with them.

Cautious Optimism

There are a number of reasons to be optimistic about 2021 and the future. We are enthusiastic about the resilience that corporate America demonstrated in the past year, even leading new initiatives in environmental and social causes. With the easy money policy and $120 billion of monthly liquidity from the Federal Reserve and the prospects for more stimulus (in the form of an infrastructure package and further COVID relief), the system is teeming with capital. Our general outlook is positive as we look forward to continued vaccine administration and the country gradually opening again. Any number of things could upend this optimism, but we will keep a careful eye on interest rates and their signals for revaluing risky assets.

As always, if you have any questions or concerns, or if we could be of any assistance to you and your family, don’t hesitate to reach out. Thank you for your ongoing trust!


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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