Performance Highlights (Gross)

Total Return Balanced 8.10%

Total Return Equity 9.25%

Global Macro 16.40%

Smart Alpha 24.40%

Past performance is not an indicator of future performance. Performance displayed is gross. Smart Alpha performance is derived from points-in-time simulated back test, independently conducted, and verified by Invisage from Q1 2013-Feb 2021, live thereafter.

‣ In a year which left many prevalent investment themes and respected peers struggling, we are pleased to have grown the value of our clients capital in real terms across our range of strategies.

‣ Our Smart Alpha strategy outperformed all Quantitative Hedge Funds in 2021, delivering an extraordinary increase in portfolio value, and providing evidence of the proficiency of its stock picking system.

Comments from Portfolio Advisor Paul Sedgwick:

As we wrote our concluding letter for the year 2021, we looked back at the start of the year. Equity sentiment was bullish, as the new vaccine program was starting to be rolled out to combat the effects of the virus and global central banks remained firmly behind risk assets.

The global economy was forecast to grow circa 5% and earnings around 20% year on year as we continued to recover from the virus-induced deep recession in early 2020. Both of those expectations were met and beaten, which helped global stocks continue their recovery during the year.

The S&P 500 started the year looking expensive, as it does again this year, despite solid earnings growth, and this remains a concern for many investors. As we started 2021, no asset class looked particularly cheap, which remains the case as we begin another calendar year. Despite the strong earnings growth last year, the S&P 500 trades on 21x forecast earnings. Although this comes back closer to 18x when you strip out the tech sector, accounting for nearly 30% of the index trading on 30x forecast earnings.

Bonds look more exposed than ever as inflation rates have soared far above economist forecasts. As a result, real interest rates run deep into negative territory. Gold continues to be considered a haven, although possibly surprisingly, as the price fell this year despite the substantial rise in inflation. US Treasuries total return was -2.8% in 2021. Aside from the ever-present virus threat, several events in the past year threatened to knock risk assets, the rising cost of oil, and the defaults of the world's largest property company Evergrande. The collapse of the Archegos, the overleveraged hedge fund, another.

As we start 2022, the global economy is forecast to grow again this year but slower than last. Inflation rates are running well ahead of central banks targets, and we will see some of the liquidity introduced to support the global economy removed. The Federal Reserve will finish its QE program in the first half of 2022, and markets are starting to price in the possibility that the Federal Reserve will raise interest rates three times next year. The Bank of England raised interest rates at the last meeting in December, against ours and others’ expectations, and are likely to do so again during the coming year.

The latest variant suggests the threat of Covid remains but is diminishing as vaccine programs continue. However, its impact on the global economy still lingers. Supply chain issues were a focus in the last quarter’s earnings reports but there are indications these are improving. Inflation should dip if for no other reason than comparisons will get easier. However, there may be some structural changes to the global economy which could have inflationary consequences in the longer term. In an uncertain world equities would appear the best option to protect one’s capital, bonds the worst, at this moment in time. Bond yields are likely to rise but will remain well below current inflation rates.

As we look to the year ahead, the start of any tightening cycle will add volatility to risk assets. Despite a change in President, China-US relations remain fragile with the threat of greater state control under the leadership of Xi Jinping. Markets often discount geopolitical risk, but it still exists. President Putin continues his build-up of troops along the Ukraine border as Europe threatens sanctions against Russia. Russia provides up to 80% of the gas consumed in Europe, any restriction in supply could send prices higher.

One would assume central banks will not want to have spent many trillions of dollars supporting the global economy, only to withdraw that support too quickly and undermine the recovery. They will also continue to be mindful of the rising cost of living. US fiscal spending will increase as the President has already signed a 1.5 trillion dollar stimulus package bill last November. The likelihood is that a further bill will be passed to increase social spending by around 2 trillion dollars sometime in the coming months. The US consumer has saved over 2 trillion dollars in the past two years, hopefully providing further demand for goods and services.

Next year, the most significant risk to the economic recovery is probably not central banks but energy prices. Should the price of oil spike again, this always negatively impacts growth. Central banks will tighten policy at a moderate rate if oil prices remain stable, and the forecast recovery should continue. As was the case last year, January can be difficult for global equities, and they often suffer something of a New Year hangover. However, when one considers the alternatives, equities remain the asset of choice.

Smart Alpha

Our quantitative equity strategy, applied its systematic, factor-based approach to superb effect in its first year of live trading, producing a gross return of 24.4%. Comparison to the peer group (MPI USD high-risk) and the Hedge Fund 500 Index returns of 12.11% and 11.9% respectively highlight the strength of the performance.

A comparison to the best performing hedge funds globally would place Smart Alpha in the top five overall, and as the top performer among Quant strategies (Bloomberg Performance Table); further evidence of the efficacy of Smart Alpha’s process.

Total Return

Our TOTAL RETURN portfolios returned 8.1% and 9.25% respectively in 2021. Top performing stocks were Hermes (75%), Diageo (40%) and IMI (50%). Other notable contributors came from Nestle, National Grid and Royal Dutch, returning over 20%. Our underperforming stocks were THG, which we have spoken about frequently in these letters, and PayPal, Johnson Matthey, and Walt Disney have given back circa 15%.

Johnson Matthey suffered as a result of weak car sales and the decision to exit the battery business. The stock now trades on less than 10x forecast earnings, a dividend yield that is covered by earnings, a strong balance sheet as well as a share buy-back program. Several of the directors have also been buying shares in the past month.

Walt Disney was out of favour with investors as subscriber numbers came in below expectations, however with several blockbusters expected to be released on Disney plus this year, hopefully that will improve. PayPal had a very strong 2020, after the failed takeover of Pinterest and a weak revenue quarter the stock gave back some of the previous years’ returns.

Both portfolios have grown the value of our capital in real terms. Protecting value for the long term is our goal, with the appropriate level of risk.

2022 and Onwards

Those of you who have been a part of Cube Capital for some time will know that we view ourselves as being in partnership with our clients, where the advisory team invest their own money in the strategies we operate, alongside clients, and that we are committed to producing investment outcomes of the highest standard.

Our investment approach is characterised by discipline and robust academic processes, and is implemented by a team of experts who possess experience at the highest levels.

We do not offer any predictions for 2022. Instead, we offer commitment to a prudent, rigorous and disciplined approach. We look forward to another year of successful partnership, and hope to see you face to face as the year unfolds.

Best Wishes

Chris, Robert & The Team