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FY Large Cap-2021 vs. R1000V

Market Observations & Portfolio Commentary 

2021 Market Update

US stocks posted another year of double-digit returns and new all time highs. A strong rebound in the US economy in 2021 and historically strong earnings momentum offset concerns over COVID-19 variants, elevated inflation and pandemic related supply chain disruptions. On balance, it was a micro-driven year, and the market rewarded profitability across sectors, size and styles. Large Cap stocks led Smaller Caps. Stylistically, Growth outperformed Value in the Large Cap space, while Value significantly led Growth among Small and Mid Caps. Defensive shares outperformed the more cyclical shares, but the difference in returns was more evident in the Small Cap space. With regard to factors driving performance, most categories had a positive influence on returns, but the results were mixed within Growth, Volatility, and Momentum factors.


Key Performance Takeaways for the Year

  • The London Company Large Cap portfolio returned 27.4% gross (26.9% net) for the year vs. a 25.2% increase in the Russell 1000 Value Index. Outperformance was driven by strong stock selection, partially offset by sector exposure.
  • We are bottom-up stock pickers, but sector exposures influenced relative performance as follows:
    • What Helped: Underweight Utilities (a weaker performing sector) & overweight Cons. Discretionary (a better performing sector)
    • What Hurt: : Underweight Energy (the best performing sector) and overweight Comm. Services (a weaker performing sector)
  • For the year, absolute and relative performance were quite strong. Solid stock selection and a rebound in Quality factors helped the Large Cap portfolio overcome the headwind of being underweight Energy and Banks. For a year when large cap returns were robust and drawdowns were limited, we were pleased to have delivered good comparative results.


Top 3 Contributors to Relative Performance 

  • Alphabet (GOOG) – GOOG rallied throughout 2021 due to the strong growth in online ad spending. GOOG is benefiting from the digital transformation in media consumption, search, and shopping. Management has embraced reporting transparency, refocused spending priorities, and continues to monetize the business via Search, YouTube, and Cloud. Its investments have created a strong ecosystem and network effect.
  • Charles Schwab (SCHW) – Shares of SCHW outperformed the broader market (along with shares of other financial services companies) largely driven by the expectations of rising rates. SCHW has recently experienced improving client engagement metrics, which we believe demonstrates the compelling value proposition SCHW provides to individual investors, which continues to drive asset growth.
  • Home Depot (HD) – Despite supply chain issues, HD was a top performer during 2021. The outlook and fundamentals remain in good shape for home improvement companies. HD saw an acceleration in service business projects, home price appreciation, and the remodeling index suggests demand will continue. HD continues to leverage its supply chain investments and gain share as a low-cost provider.


Top 3 Detractors from Relative Performance 

  • Citrix (CTXS) – A number of internal issues have negatively impacted CTXS in recent quarters including a shift to subscription based sales, a complicated technical selling process and activist led changes to management. CTXS products remain very relevant in cloud computing and work from home environments; meanwhile, margins are attractive and the balance sheet is solid.
  • NewMarket (NEU) – NEU shares declined in 2021 reflecting weaker earnings driven by rising oil and base oil prices combined with growing concerns over the ramp of hybrid and electric vehicles. NEU’s margins tend to suffer in periods of rising base oil prices until they roll over and NEU can capture the lag in spreads. We remain attracted to NEU’s positioning in the consolidated market for fuel additives and lubricants, its valuation and strong balance sheet.
  • Visa (V) – V underperformed along with other legacy payment peers this year on a myriad of concerns across fin-tech disruption, regulation, Omicron variant impacting cross-border volumes, and Amazon bans in select countries (Visa-specific). V and MasterCard form a duopoly in the space because of their massive and non-replicable scale and value-added solutions. This competitive advantage is unchanged. Additionally, we believe V should continue to benefit in the long-term alongside the structural shift from cash to card.


Portfolio Characteristics & Positioning 

We believe the Large Cap strategy is well positioned based on the strength of the companies owned and the overall quality characteristics of the portfolio—measured by sustainably high returns on capital and modest leverage. While the portfolio currently trades at a premium to the Value index, we believe this is justified as companies in the Value indexes have lower returns on capital and higher debt levels.


2021 The London Company Large Cap vs the Russell 1000 Value Performance

Source: FactSet


Looking Ahead

We remain positive regarding the economic outlook. As we enter 2022, we expect solid, but moderating economic growth. COVID remains a risk; but fortunately, the latest Omicron wave appears to be having less of an impact on the broader economy than prior variants. Meanwhile, inflation is still elevated, and the Fed is set to reverse accommodative monetary policy, which could further weigh on economic growth. In terms of the equity market, we recognize valuations are on the rich side, while interest rates will likely remain low vs. history. The Fed is expected to begin increasing the funds rate later in 2022, but the increases will likely be in small increments. At current valuations along with various short term risks to the economic outlook (rising inflation, higher interest rates, potential tax increases), we expect greater volatility and possibly more muted returns in the near term. Given this backdrop, we believe a long term-approach, with a focus on Quality factors that help dampen volatility, will reward investors.



As of 12/31/2021

2021 The London Company Large Cap vs Russell 1000 Value Performance

Inception date: 6/30/1994. Past performance should not be taken as a guarantee of future results.

The Large Cap product is typically compared to the Russell 1000 Index. Any comparison to the Russell 1000 Value, or its corresponding ETFs, is for illustrative purposes only.


Disclosure Notes

The London Company’s performances are size weighted and annualized based on calculations for the period ending December 31, 2021. The characteristics discussed herein relate to a representative account, and not every client’s account will have these exact characteristics. As London manages its client portfolios according to each client’s specific investment needs and circumstances, London cannot affirm that the characteristics of the account shown are similar to all accounts participating in the strategy. This is due in part to the timing of trades by the Advisor, market conditions, cash availability, and the timing of client deposits and withdrawals. Therefore, prospective clients should not assume that similar performance results to those shown would have been achieved for their accounts had they been invested in the strategy during the period. None of the information contained herein should be construed as an offer to buy or sell securities, or as investment recommendations. An investment in a London Company strategy is subject to risks, including the loss of principal.

Definition of Firm: The London Company of Virginia is a registered investment advisor. Registration does not imply a certain level of skill or training. More information about the advisor, including full descriptions of its investment strategies, fees and objectives, can be found in the firm’s Form ADV Part 2, which is available upon request by calling 804.775.0317 or visiting The London Company claims compliance with the Global Investment Performance Standards (GIPS®). GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Please visit or contact us at 804.775.0317 to request a complete list and description of The London Company’s composites and/or a presentation that adheres to the (GIPS®) standards.

Composite Creation/Inception Date: June 30, 1994

Composite Definition: The Large Cap strategy invests mainly in conservative, low-beta, large-cap equities with a focus on above-average downside protection. Primarily we seek profitable, financially stable, quality large-cap companies, which consistently generate free cash flow, high returns on unleveraged operating capital, trade at rational valuations, and are run by shareholder-oriented management. Positions are generally in the market capitalization range of the major domestic large-cap indices. Accounts included in this product composite are fully discretionary taxable and tax-exempt portfolios with a minimum of $1 million in assets. The product is measured against the Russell 1000 Index and has a creation and inception date of June 30, 1994. There is no use of leverage, derivatives, or short positions. All actual fee-paying discretionary portfolios are included in one or more composites that have been managed for a full calendar quarter with limited restrictions and similar objectives. Composite may include accounts under dual contract.

Benchmark Description: Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. The Russell 1000 is a subset of the Russell 3000 Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market. Benchmark returns are not covered by the report of independent verifiers. The Large Cap product is typically compared to the Russell 1000 Index. Any comparison to the Russell 1000 Value, S&P 500, or their corresponding ETFs, is for illustrative purposes only.

Performance and Fees: Gross of fee returns are calculated gross of management and custodian fees and net of transaction costs. Net of fee returns are calculated net of actual management fees and transaction costs and gross of custodian and other fees. Returns may be net of miscellaneous fund expenses. The gross figures do not reflect the deduction of investment advisory fees. For example, an account that earned 15% per year for 10 years would have an accumulated return of 305% before fees and 270% after fees, assuming a 1% fee. Returns are calculated and stated in U.S. dollars. Returns are calculated gross of withholding taxes on foreign dividends and interest. Dividends are reinvested. Policies for valuing investments, calculating performance, and preparing GIPS Reports are available upon request.

Past performance should not be taken as a guarantee of future results. The report is for informational purposes only. Data, while obtained from sources we believe to be reliable, cannot be guaranteed and all statistics are subject to change. The statements contained herein are solely based upon the opinions of The London Company and the data available at the time of publication of this report, and there is no assurance that any predicted results will actually occur. Information was obtained from third-party sources, which we believe to be reliable but are not guaranteed as to their accuracy or completeness. This report contains no recommendations to buy or sell any specific securities and should not be considered investment advice of any kind. In making an investment decision, individuals should utilize other information sources and the advice of their investment advisor.

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