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Q1 2022 Quarterly Letter – The Sunflower Portfolio

Sunflowers are a symbol of optimism and longevity: They are extremely hardy and resilient and are adept at finding the sun.

The national flower of Ukraine (it is the world’s largest producer of the sunflower), it even became a symbol of nuclear disarmament when the Ukraine planted fields of sunflowers in 1996.  More recently, the world has witnessed the resilience, resolve, and courage of the Ukrainian people as they fight for their country’s survival.

I would love to construct portfolios of sunflowers. Optimism, longevity, resilience, resolve, and courage are wonderful portfolio attributes. But is it possible to construct such portfolios in the twilight of a pandemic and the dawn of the largest armed conflict in Europe since World War II? 

I think the answer to that is yes. Sunflowers have two very important features that are also important for long-term investors. They diversify, and they seek opportunities.

Made up of more than 1,000 separate flowers, with each head producing more than 1,000 seeds, sunflowers are well diversified. They are never too dependent on any one flower or seed. Likewise, our portfolios are made up of more than 1,000 underlying positions of individual stocks, bonds, and the underlying holdings of ETFs and mutual funds. We don’t want to be too reliant on any one company or security. By spreading out our holdings into so many positions, we are reducing the level of risk in the portfolio. The future is uncertain, and diversification is a fantastic way to build a resilient portfolio. 

Sunflowers also seek opportunities to maximize their return. The heads of the flower follow the sun across the sky. They begin the day pointing east, and they follow the sun, soaking up as much sunshine as they can, until the sun sets in the west. This sun-seeking behavior maximizes their growth potential, and this is why the largest sunflowers can reach a height of 30 feet.

Like sunflowers, we make adjustments to our portfolios in order to seek a maximum potential return. This year we have made three major adjustments to our portfolios—one in bonds and two on the stocks side. To our bond portfolios we have added more floating rate notes, which reset their interest rates upwards when interest rates increase. This has the potential of adding return to the portfolio during rising interest rate periods, while traditional fixed rate bonds tend to face risks during periods of rising rates. 

The Federal Reserve has increased rates once this year. We anticipate more interest-rate increases as the Fed tries to bring down inflation. Rising interest rates tend to dampen demand by increasing the cost of borrowing. 

So we have adjusted our stock portfolios to emphasize value stocks more. Value stocks tend to be more asset-intensive companies whose value may increase more in line with inflation. Value gives us more of an emphasis on financial companies, which may benefit from a rising interest rate environment.

With the war in Ukraine, we believe international small stocks will struggle to produce profits, due to increased inflation and energy prices. This has increased the risk in this allocation, and we have eliminated international small companies from our portfolios. The allocation was shifted to international large stocks, as we believe larger companies are in a better position to deal with supply chain issues and rising inflation. Our overall allocation to foreign stocks remains at 25 percent of the stock portfolio. 

The spirit the Ukrainian people have shown reminds me of one of my most important investing maxims: Never underestimate the ability of human beings to find a way to survive and to flourish. A long-term investor should always keep this in mind and never get too pessimistic. Yes, there will always be short-term volatility, but by keeping a long-term perspective, we can flourish. 

I saved one last attribute of sunflowers until the end: Happiness. We would like to wish you a very happy and joyous spring. Please contact your wealth advisor or me with any questions. 

Best Regards,

Chris Cordaro

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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