The market’s shaky start in 2022 unsettled many investors. In turbulent times like these, it is important to maintain one’s perspective on the investment style in the face of adversity. We remain steadfast in our commitment to aggressive growth investing. Why? First, the aggressive growth style, while sometimes volatile, has proven to be the most rewarding style over the long term. Second, we have entered into what we believe will be a period of high inflation. In looking back at the worst period of inflation in U.S. history during the 1970’s, the aggressive growth style proved to be the best hedge against inflation. Finally, we believe the methodology that we have built at Golden Eagle Strategies to identify the world’s fastest growing companies will produce a strong recovery the coming year and foreseeable future.
Golden Eagle Strategies has constructed investment style indices which date back to 1958. As seen in the table below, a $100 investment in aggressive growth funds would have grown to approximately $170,100 before taxes. The same $100 investment in the S&P 500 would have grown to approximately $55,700. Of all investment styles, the aggressive growth style has proven to be the most rewarding over the long term.
This advantage still holds when looking at recent history. Aggressive growth bested all investment styles in the last 5 years with an annualized return of 30.9% vs 18.5% for the S&P. This story is the same when looking at 10 and 15 years – aggressive growth delivered annualized returns of 22.6% and 16.4%, respectively, versus just 16.6% and 10.7% for the S&P
Inflation spiked from 3.3% in 1972, rising to a peak of 12.5% by the end of 1980. During this period, inflation increased 95%. The aggressive growth investment style was the only style to outdistance inflation by advancing 130%. The U.S. has again entered a period of high inflation which will persist for years to come, in our view. Golden Eagle Strategies was early in sounding the alarm on inflation by publishing an article last July titled “Transitory Inflation Is Wishful Thinking”. Since then, the majority of the investing public has come to the same conclusion. However, it is important to note that the current inflationary period is different in many ways than that of the 1972-1980 era. Interest rates rose along with the inflation rate during this period. The 10-year Treasury Bond peaked at 15.1% whereas the 30-year T-Bond reached a peak at 17.7%. Today the current yield on the 10-year T-Bond is an anemic 1.7% with inflation running around 14%, according to our findings.
The Department of Labor reported that the Consumer Price Index (CPI) increased at an annual rate of 5.9% for the Federal fiscal year ending September. All government expenditures geared to cost-of-living allowances (COLA) will increase 5.9% in the current fiscal year. With inflation running at least twice that rate according to our findings begs the question., “Why then is Labor underreporting the true inflation rate?”. In one word: money.
Many government entitlement programs are indexed to inflation including Social Security, the Civil Retirement System, Disability Retirement System, and Military Benefits. Also falling under this government umbrella are Supplemental Security Income, Temporary Assistance for Needy Families, and the Supplemental Nutrition Assistance Program. Taken as a whole, more than 140 million people are covered under various government COLA programs with annual outlays that exceed $1 trillion dollars. By underreporting the CPI, the U.S. government has held down the cost of entitlements and shortchanged recipients by roughly $100 billion in the current year.
What does all this mean for the capital markets? It means that bond investors are being eaten alive and have lost 12% of purchasing power when a more accurate rate of inflation is considered (a 14% inflation rate combined with 1.7% yield on the 10-year T-Bond equates to a real loss in capital of 12.3% per year before taxes). The best chance for investors to deal with inflation lies in the aggressive growth style, according to investment style history. Again, aggressive growth was the only investment style to remain ahead of inflation from 1972-1980 by achieving a cumulative return of 140% compared to an advance of 102% in the CPI.
It is regularly reported in the media that high inflation is bad for growth stocks. Let’s consider the following. On average, nominal corporate profits grow at a 7% rate each year. With inflation running at our assumed rate of 14%, the general view would hold that real corporate profits are declining, but this is not necessarily so. One distinguishing characteristic of the Golden Eagle methodology is its “explosive profits growth” metric. Quarterly profits growth for the underlying 25 stocks held in the Fund have ranged between 88-137% over the two-year life of the Fund. Despite the amp up in inflation, enormous real profits growth is being produced by the companies in the portfolio.
In light of the recent sell-off of high growth stocks, which impacted the Golden Eagle Growth Fund, it is worth noting that a drawdown of similar magnitude occurred during the mortgage debt debacle during 2007-2008. Coming off the bottom of that bear market, aggressive growth funds that comprise the Golden Eagle Aggressive Growth Fund Index returned 85% in the next twelve months. In addition, these funds produced a cumulative return of 648% over the next ten years.
In closing, the recent market turbulence does not diminish our enthusiasm or commitment to the aggressive growth style. In fact, we view the recent drawdown as a rare opportunity to add to positions in anticipation of a strong rebound by both the style and our Fund in the next twelve months and beyond.