Investment Commentary: Q1 2022

After a relatively calm 2021, volatility emerged from its slumber during the first quarter of 2022.

After a relatively calm 2021, volatility emerged from its slumber during the first quarter of 2022. The broad equity markets swooned under the pressure of lofty valuations, historically high inflation, the Russian invasion of the Ukraine, and the specter of the Federal Reserve raising interest rates. To illustrate the intra-quarter volatility, the Nasdaq was down nearly 20% at its lows, before rallying over 10%, only to close the quarter roughly down 9%.

While the Russian invasion of the Ukraine dominated the headlines, second-order ramifications for food supplies, fertilizers, and energy caused inflation and inflation expectations to rise to historic levels with the Consumer Price Index (CPI) showing an 8.5% rise year-over-year ending March. Equity markets, not only under pressure from rising inputs’ costs, suffered additionally as the Federal Reserve acknowledged a myriad inflationary pressures and began to increase rates, with a 50 basis point hike being telegraphed for the near future. To wit, the 2-year Treasury Note jumped 155 basis points in the quarter, causing the yield curve to invert, which is typically a harbinger of recessions. Despite the troublesome developments, there remain bright spots as the economy continues to reopen from the effects of COVID; unemployment remains low, and household balance sheets remain healthy.

The Community Foundation’s Corporation return for the first quarter of 2022 was -6.9%, trailing the benchmark’s return of -4.2%. In these choppy markets, our equity managers underperformed their benchmark, down -7.9% vs -5.4%. These short-term drawdowns have historically led to strong bounce-backs as the underlying managers have proven their ability to navigate opportunistically and take advantage within their longer time-frames. The collective of hedge fund managers underperformed their benchmark as well, resulting in a loss of -9.0% vs -2.6% for their benchmark. This result is clearly disappointing as the type of hedge funds employed are equipped to be both long and short markets, and critical role of dampening portfolio volatility was not achieved. Our fixed income portfolio was down modestly at -3.5% for the quarter as interest rates rose, but outperformed its benchmark which was down 6.5%. The portfolio, while not immune to the short term machinations of the markets, remains well-positioned vis-à-vis its different asset classes and ability to create value for the longer term. Historically, the portfolio’s brief periods of underperformance have been followed by longer periods of favorable asymmetric returns, and we remain confident that the underlying managers are positioned for those opportunities.

Questions? Contact A.F. Drew Alden
SVP and Chief Investment Officer, The Community Foundation for Greater New Haven;
President and CEO, TCF Mission Investments Company

*The Corporation is a Connecticut registered investment adviser and part of The Community Foundation for Greater New Haven.