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4Q 2021 Client Letter

Updated: Jun 27, 2022

Despite facing unprecedented stresses due to another year of COVID-19, the equity markets experienced outstanding returns in 2021. Who could have predicted another twelve months of investor confidence in the face of a global pandemic that has claimed over 5.4 million lives, upended employment models, snarled supply lines and dramatically increased costs for most businesses? The global environment continues to reinforce our view that markets – in the short-term – are erratic and unpredictable.

During 2021, the S&P 500 returned 28.66%. while smaller issuances represented by The Russell 2500 (small- and mid-cap stocks) and Russell 2000 (small cap stocks) returned 18.05% and 14.62% respectively. Accommodative fiscal and monetary policy were supportive of riskier assets throughout the year while also depressing fixed income investments. The Barclays US Aggregate (or AGG, which broadly tracks the US investment-grade bond market) returned -1.77% in 2021.

If we analyze market performance by size and style, we can tease out some interesting nuances. In the first quarter, as vaccinations became accessible, smaller equities outperformed larger companies. However, this trend reversed in the second quarter and maintained that pattern throughout the year. By year-end, the largest companies had significantly outperformed their smaller counterparts. Within the small-cap and mid-cap markets, value stocks outperformed growth stocks. But this trend was not consistent across market capitalization. For large cap equities, value outperformed growth in the first quarter alone, then reversed whereupon growth stocks considerably outperformed. By year-end, many of the top performing growth companies in the market had commanding index weights and market leadership had become very concentrated in the S&P top 10, accounting for 28.89% of the index and much of the total return.

*1 is the best relative performer and 4 is the worst relative performer.

The best performing sectors of the year were Energy and Real Estate, which are not sectors where we typically find ourselves investing due to many factors: poor long-term economics, reliance on commodity prices and interest rates, and hard-to-manage external forces. The worst performing sectors of the year were Telecommunications and Utilities, again, sectors we rarely find ourselves investing due to their poor long-term economics and excessive regulation. While we avoided some catastrophes in Telecommunications and Utilities, we also missed some revitalization in Energy and valuation increases in Real Estate.

At Heron Bay, we typically utilize a blend of our propriety investment portfolios as a mechanism to achieve the best outcome for each client, consistent with their needs and tolerance for risk. For a majority of our clients, Heron Bay’s Large Cap portfolio provides about half their equity exposure. Heron Bay’s Small and Midcap (SMID) portfolio represent a smaller proportion of most clients’ equity exposure. An even smaller portion of equity exposure is allocated to international equities, which adds diversification to U.S. markets. This type of blended asset allocation, utilizing multiple portfolios, increases diversification, increases risk-adjusted returns and smooths out return patterns. Asset allocation models can change (and do) based on market dynamics, valuations and individual needs. For example, after the first quarter in 2021, we opted to increase exposure to the SMID portfolio and diversify using our international portfolio as our valuation metric suggested favorable timing. However, the SMID and international portfolios didn’t perform as well as large cap equities through year end. While we added diversifying stocks to client allocations, this allocation shift watered down the meteoric rise in large cap equities for 2021. Importantly, while the S&P 500 may be one of the most accessible indices to reference in the news or in conversation, it is not the benchmark that emphasizes quality, valuation or agility, which is where Heron Bay’s emphasis has been historically focused.

After three years of double-digit returns, we now approach a mid-term election year and anticipate a period of high market volatility. However, market volatility allows the disciplined, active equity investor to do focused research and opportunistically position portfolios. We will continue to express our long-term investment strategy by buying companies that generate cash from ongoing operations. While such businesses do well in favorable conditions, they have the potential to really shine in times of distress by taking up market share and becoming more advantaged relative to competitors.

A major development within the private wealth arena that differentiates Heron Bay was our adoption of the Global Investment Performance Standards (GIPS®) for performance reporting. GIPS® are voluntary, ethical standards for calculating and presenting investment performance based on the principles of fair representation and full disclosure. Integrity is the core on which HBCM is based; we are proud to hold ourselves to these highly regarded standards that we believe should be commonplace in our industry and not just in institutional investment management.

The past year was a successful one for Heron Bay Capital Management. We continue to grow in order to serve you, our clients. This year we have expanded our team by two:

Chet Rastogi joined us from Seizert Capital Partners where he was a Quantitative Research Manager. Chet trained at the India Institute of Technology and Ohio State University, where he obtained Bachelor’s and Master’s degrees in engineering before working at GM for a decade. He then built his own engineering and manufacturing firm. Chet brings extensive quantitative research methods and fundamental research disciplines to HBCM.

We also welcomed Robert George Jr. this year. Rob was a founding member and President of UrthTech, a chemical technology firm specializing in antimicrobial chemicals and lipid science. He also serves as Chief Information Officer for GeorgeCo – a family office. Rob is a graduate of University of Michigan with a degree in Business Administration. He will focus on client relationships and new business development.

As always, we are grateful for our relationship with you, our clients, for the trust that you place in us, and for the ongoing communication we have with you. We are pleased to have had positive equity performance and we hope that you are equally pleased with your portfolio’s outcome for the year.


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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