How did Penn Mutual perform in 4Q20 and for 2020 as a whole?
Chuck Royce (Trades, Portfolio) Our flagship portfolio gained 27.1% for 4Q20. This was an impressive absolute showing that nonetheless trailed the record-setting 31.4% advance for the Russell 2000 Index.
Lauren Romeo After Penn beat the small cap benchmark in each of the four previous calendar years, it fell behind the Russell 2000 in 2020, advancing 14.1% versus 20.0% for the benchmark. The Fund held on to certain long-term relative advantages, beating the Russell 2000 for the five-, 20-, 25-, 30-, 35-, and 40-year periods ended 12/31/20. Penn's average annual total return for the 45-year period ended 12/31/20 was 13.7%—and we're very proud of the Fund's long-term record.
What sectors had the biggest effect on 4Q20's performance?
Jay Kaplan Each of the 10 equity sectors where Penn held investments made a positive contribution to performance. Our two biggest sectors—Industrials and Information Technology—made by far the biggest positive impact. The smallest contributions came from Communication Services and Energy—which are the portfolio's two lowest sector weightings.
What made the biggest impacts among the Fund's industry groups?
Steven McBoyle At the industry level, we had two groups in Information Technology making the first and third largest contributions—electronic equipment, instruments & components and semiconductors & semiconductor equipment. Machinery, which is in Industrials and where we have a large weighting, took second place.
Miles Lewis It was a strong quarter on an absolute basis—only two industry groups detracted from 4Q20's results. Each did so pretty modestly, and each was in the Communication Services sector: diversified telecommunication services and entertainment. Following this duo was the hotels, restaurants & leisure industry (Consumer Discretionary), which posted essentially flat results for the quarter.
Yet the news was less encouraging relative to the Russell 2000: what were some of the details on Penn's relative underperformance in 4Q20?
CR Only four of the Fund's sectors had positive results vis-à -vis the benchmark for 4Q20, and its underperformance was entirely due to stock selection—our sector allocation decisions were solidly positive. On a sector basis, ineffective stock picking in Materials and Industrials was the biggest source of underperformance while a combination of lower exposure and savvy stock selection gave us a relative advantage in Real Estate, which trailed the index in 4Q20. Our lack of exposure to Utilities, another index laggard, also helped versus the benchmark.
Turning to the calendar year, which sectors made the greatest impacts of performance?
LR Seven of the portfolio's 10 equity sectors finished 2020 in the black. Information Technology led by a large margin, followed by notably positive contributions for Health Care and Materials. Energy led the three sectors that detracted, followed by Financials and Real Estate.
What did well at the industry level in 2020, and which areas disappointed?
JK Our top three contributors came from Information Technology: semiconductors & semiconductor equipment, software, and electronic equipment, instruments & components. On the other hand, energy equipment & services detracted most for the year, followed by banks and the thrifts & mortgage finance group, which are both in Financials.
What was the portfolio's top-contributing position for 2020?
SM Etsy (ETSY, Financial), an e-commerce retailer that focuses on handmade or vintage items and craft supplies. Its business was growing at a steady pace prior to 2020 before revenues reached triple-digit rates in 2020's fiscal second quarter and stayed high in the third quarter. While much of its sales were attributable to face masks, the company also had success with several other major categories in 2020, including apparel, personal care, and homewares.
Which holding detracted most from performance in 2020?
CR Offshore transport solutions specialist SEACOR Marine Holdings (SMHI, Financial) detracted most at the position level. In May, the company reported that it was anticipating a significant negative impact on revenues through the rest of 2020 as a result of the pandemic, which, along with plummeting oil and gas prices, greatly reduced demand for its services. We made the decision to sell our position in May.
Where were the Fund's advantages and disadvantages versus the Russell 2000 in 2020?
ML Relative to the Russell 2000, the Fund's disadvantage came solely from stock selection—sector allocation decisions were a positive. However, our lower weighting in Health Care, along with a lower impact from poor stock picks, hurt relative results most on a sector basis. We had (and continue to have) a very low weighting in biotechnology, which did very well within the index and was a big source of underperformance in Health Care. Ineffective stock selection hindered relative performance in Industrials—though our higher weighting was a positive—as well as in Consumer Discretionary, where our lower exposure hurt.
LR Conversely, stock picking in Financials had a sizable positive effect, mostly because of our lower weighting, especially in the struggling banks group. Financials lagged within the Russell 2000 in 2020, and banks were a large reason for that. Our low weighting in Real Estate, another lagging sector within the small-cap index, also helped, as did our stock selection in the sector, though not as much. Similar to the fourth quarter, the portfolio's lack of exposure to Utilities gave us another advantage versus the benchmark.
What is your outlook for the Fund?
CR I think the positive news on vaccines has been the critical element in the recent small-cap surge. The reality of vaccines has allowed investors to see past the current economic uncertainty to a tangible return to something like normal. These very encouraging developments seem to have led them to take a fresh look at those companies, particularly in more cyclical areas, that had been relatively neglected for the last few years. Many of these companies should receive an additional boost from ongoing monetary and fiscal stimulus, particularly with the anticipated increase in the latter. These measures will only add to the strength of the global economy, which was beginning to accelerate before the pandemic.
Our outlook for cyclicals in 2021 and 2022 is therefore brighter than it was at the beginning of last year. Following the vaccine roll-out, all of these developments should support higher growth rates than we were looking for a year ago. However, growth is likely to be unevenly distributed—and that is where we think active managers can offer an edge. The ability to recognize patterns, understand industry dynamics, and evaluate management teams should all prove crucial in such a climate.
Mr. Royce, Mrs. Romeo, Mr. Kaplan, Mr. McBoyle, and Mr. Lewis's thoughts and opinions concerning the stock market are solely their own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future.
The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.
