Figure World Equity 2020 Year in Review

Author: Figure World Equity Team | January 28, 2021

What started as an innocuous grouping of pneumonia cases in a Chinese city led to a global pandemic and unprecedented restrictions on economic activity outside of wartime. GDP fell by over 30% at a seasonally adjusted annual rate and financial markets temporarily seized up. Government authorities responded globally, as central banks and governments undertook expansive monetary and fiscal stimulus to try and support households, business, and financial markets.

Figure 1: U.S. fiscal response to combat the economic damage caused by lockdowns.

Source: BEA

The Figure World Equity strategy significantly outperformed its benchmark in 2020, returning a net 31.65% while its benchmark, the FTSE Developed Net Total Return Index returned 16.11%. Figure World Equity seeks to outperform its benchmark through active management based on global macro insights. We express our views by varying overall equity exposure through time, overweighting and underweighting regions and currencies, and expressing industry bets via equity index selection or the creation of custom baskets.

Figure 2: 2020 Net returns of the FIA World Equity Strategy vs its benchmark.

Source: FIA Calculations and FTSE

See disclaimers at the bottom of the page for more information regarding performance calculations and the benchmark.

Growth Bias

Much of the outperformance in 2020 stemmed from our expression of U.S. equity exposure through the Nasdaq 100, a position that has been core to the strategy for several years. We believe that investors will pay higher multiples for companies that can reliably grow earnings. While this has certainly always been true (after all, a higher multiple is essentially what defines a growth stock vs a value one) it has become more important, and the sustainable difference in multiples between value and growth larger, since the 2008 Global Financial Crisis.

Part of that is arithmetic: when interest rates fall the present value of any investment goes up, but investments with larger expected cash flows in the distant future go up more. Interest rates have remained low since the global financial crisis, with the 10 -year managing to stay above 3% for only a few months since 2012.

However, the a bigger factor is the current industry composition of multiples and growth expectations. Companies that command high multiples due to expected earnings growth are companies well positioned for the continued transition to the online economy. While one can balk at the valuation of Amazon, or the trailing 12-month return of Shopify, it is clear we are still in the early days of the transition to ecommerce.

Figure 3: The share of total retail sales taking place online.

Source: Federal Reserve Economic Data

As illustrated in Figure 3, the COVID crisis accelerated an unrelenting trend towards online retail. While there will likely be a slight moderation as brick and mortar retail reopens throughout 2021 and 2022, we do not expect a return to trend but instead a resumption of trend from a higher point. While it seems obvious, we think the growth trade, and in tech especially, has room to run. Stocks climb walls of worry, and the current worry is valuations. There is plenty of money waiting for a pullback, citing valuation metrics, their deviations from historical norms, and comparisons to 2000. While one can easily find specific examples of what could kindly be termed “irrational exuberance”, we think, on the whole, forecasted earnings in tech broadly and information technology specifically are, if anything, pessimistic and forward multiples reasonable.

Regional Overweight/Underweights

Figure 4: Regional overweights and underweights in the Figure World Equity Strategy relative to the FTSE benchmark.

Source: FIA Calculations and FTSE

See disclaimers at the bottom of the page for more information regarding performance calculations and the benchmark.

China A Shares

Our position in China A-shares boosted our relative performance. The investment rationale was the asymmetry of the risk-reward. Chinese stocks were trading at extremely low multiples as the Chinese economy was (and remains) at an inflection point in which debt fueled investment and export led growth must, at some point, transition to consumption led growth. Our view, even before COVID emerged, was that Chinese authorities would continue to support markets through that transition. As the crisis developed and looked to be localized to China, we closed that position out. However, as the virus spread globally, we again felt the risk-reward was compelling given the ability for Chinese authorities to manage downside risks in both their economy and financial markets. A-Shares held up extremely well and provided about as close to uncorrelated exposure as one can find in a long equity mandate.

Equity Exposure Management

We have the ability to vary our overall equity exposure. While our benchmark is always 100% invested, we may choose to run at 90% or even 105% equity exposure. The chart below shows how we varied that exposure throughout the year.

Figure 5: Equity Exposure overweights and underweights in the Figure World Equity Strategy relative to the FTSE benchmark.

Source: FIA Calculations and FTSE

We began the year overweight equity, with our equity positions totaling 105% of our strategy aum. We reduced exposure through the market downturn and remained underinvested as risk assets rebounded in Q2. We preferred to see more evidence of a market grinding higher as opposed to what looked like relief rallies that would be short lived. Our analysis became more constructive on the economy towards the end of Q2 even as the likelihood of further stimulus ebbed and flowed. See our thoughts here and here. We increased equity exposure to back to 105% of notional, reducing exposure temporarily later in the year when we felt the probability of a contested election had risen considerably.

Later in the year we added positions to our book that we thought would do well in a post-vaccine world. While the obvious choice would be small-cap value stocks (and they have performed exceptionally well), we don’t think the small cap story will see sustained outperformance. We instead chose a concentrated basket of large financial institutions that would benefit not only from a steeper yield curve, but more importantly, from processing credit card payments. We expect these institutions to see strong earnings in the future as the process by which they set aside capital for future loan losses changes to a more transparent process. More on that in a future blog post.

We also diversified our China position into a broad emerging markets exposure. While we remain somewhat bearish on the long-term outlook for global trade (see more here), we think over the next 6-12 months emerging market equity and currencies should outperform. We expect these markets will benefit from continued accommodation by the world’s large central banks, encouraging capital to flow to markets offering higher returns. In addition, the incoming Biden administration should be a significant change from the populist and autarkic message of President Trump. Lastly, emerging market growth is often tied to the U.S. consumer, and we expect the U.S. consumer to thrive.

Looking forward, we think we are well positioned to capture the return to a COVID-free world. It is never easy to remain fully invested in an equity market that has rallied over 60% from the lows of the previous years. It is even harder when there are sure signs of overstretched valuations in popular names. Still, the conditions for equities to continue grinding higher remain: we have accommodative monetary and fiscal policy across the globe, we have an ever-accelerating move to online business models where the incumbents have extraordinary operating leverage, the U.S. consumer that has plenty of room to dissave, and what looks to be a more stable political situation in the world’s most important economic engine.


All performance figures are internally prepared by representatives of Figure Investment Advisors, LLC, previously known as Cabezon Investment Group, LLC, (“FIA”) and FAM GP 1, LLC (collectively, “Figure”). The results are unaudited and represent past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate as the prices of the individual securities fluctuate, so that investments, when redeemed, may be worth more or less than their original cost. The performance changes over time and currently may be higher or lower than the stated performance results. Unless otherwise noted, returns are net of fees and expenses, and inclusive of dividends and other income. Performance data are net of 0.50% management and 20% performance fees, the latter applicable when the returns outperforms its benchmark, the FTSE developed index - net total return. The 2010 return excludes the returns for part of November 2010 when participation in the program was temporarily interrupted.

The performance results include (1) the actual returns from investments managed by FIA prior to August 1, 2020 for a separately-managed account of a specific client (the “SMA”) and (2) those of a model portfolio for August 2020 and do not reflect the performance of Figure World Equity fund, LP (the “Fund”). However, FIA was primarily responsible for achieving the prior performance results utilizing a substantially similar strategy as those currently deployed by the fund. The SMA was unfunded and included an assumed return on cash (taken from actual overnight commercial paper purchases and/or bank interest earned by FIA in other strategies) during the period. Actual performance of the fund may be materially lower than that of the SMA and the model portfolio.

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