In February last year, we made a case for a surge in inflation, based on our economic models that included the US government and Fed's response to the Covid crisis, as well as the bottlenecks in production created by supply-chain disruptions. We reasoned that as total spending would go up in 2021, the output would not grow much over the same period, persistently high inflation would arise.

We held our view against markets' and central banks' forecasts until US inflation hit a 39-year high of 7% last December and proved us correct. Fed Chairman Jay Powell admitted that inflation is here to stay, dropping the “transitory” label for inflation and paving the way for interest rates hikes and for the reduction of the Fed's balance sheet, which we expect to start in March this year. Consistently with our economic thinking, early in 2021, we repositioned our portfolios, focusing on those asset classes and investment styles that historically outperformed in an inflationary environment.

Chart 1 summarizes our investment framework that relates various macro scenarios to asset classes and investment styles. We expected an inflationary environment with economic growth and rising real yields and volatility. We decided to avoid traditional bonds and enormously overweight commodities and equity factors such as value, momentum, quality, and low volatility.

Overall, our macro scenario and portfolio asset allocation proved correct, and our portfolios registered a strong performance in absolute and relative terms. In 2021, the balanced strategy in EUR of the GIO mandate returned +11.0% net of fees, ahead of the Morningstar peer group, which returned +9.0% over the same period (Chart 2).

The massive government stimulus measures and pent-up consumer demand supported strong economic growth and boosted markets.

Global stocks continued to climb higher in 2021, with the S&P 500 hitting a series of all-time closing highs and ending the year near a record. Energy stocks generated the largest returns, rising more than 40% as oil prices rebounded from the pandemic lows of 2020. Our value and quality strategy outperformed the corresponding regional indices generating substantial excess returns for the portfolios. Still, the respective performance contribution was nearly flat due to successful fund selection for both emerging markets and China. Emerging markets posted their weakest return in three years, and Chinese stocks fell the most since 2008.

Government bonds and investment-grade corporates declined in the face of soaring inflation while investors were digesting prospects for tighter monetary policy. Late in the year, the Fed, the ECB and the BoE started tightening monetary policy.

Commodities surged the most in over a decade as a rebound in demand from lockdowns was met with constrained supplies.

This excellent year for our investments reminded us of the importance of three tenets of our investment philosophy: planning, perseverance and diversification, which will continue to guide us as we enter 2022.

Francesco Mandalà, PhD

Chief Investment Officer