November 23, 2020
Dear Fellow Shareholders,
The fiscal year 2020 will forever be remembered for the Coronavirus pandemic. During the health care crisis, a narrow set of large cap growth stocks drove US equity indexes to record levels. Following a sharp decline in March 2020, stocks steadily recovered in the second half of the year on the belief that the Covid-19 pandemic would be temporary in nature and that it would be overcome. Fueled by a broad stimulus package, a loose monetary environment and on the prospects of low interest rates for the foreseeable future, stocks discounted the short-term economic concerns and scaled a wall of worry.
The 2020 Coronavirus economy will be defined by the significant outperformance of streaming, working-from-home, video conferencing, and online shopping businesses, versus the underperformance of travel, service, and in-person entertainment industries. As the pandemic accelerated in March, some states issued shelter-in-place orders to help maintain hospital capacity and slow the spread. The resulting economic suppression had dire effects on service-related industries, causing a record-breaking spike in unemployment and producing a sudden recession. In response to the uncertain economic outlook, the Federal Reserve cut interest rates to zero and the Treasury Department coordinated a massive stimulus package of forgivable loans to businesses and direct payments to consumers. This helped avoid economic Armageddon. The combination of low interest rates and loose monetary policy propelled specific sectors. Stuck at home with limitations on travel and vacation options, homeowners renovated and real-estate prices climbed. Others purchased RVs, built home gyms, bought cars or consumed streaming media and online gaming.
While many sectors recovered rapidly following the Great Suppression, others have not. Hotel, airlines, entertainment, restaurants, and brick-and-mortar retailers have disproportionately suffered. A distinct split within the economy developed, where hourly and low-wage workers struggled, while corporate jobs simply shifted to a remote working environment. Ultimately, this divergence will need to narrow for the health of the broader US economy, although a vaccine is needed to fully correct the disparity that has developed.
The headline performance of popular US market benchmarks is overstated by the outperformance of the largest companies in the Index, which has masked broader weakness experienced throughout the rest of the equity market. Indeed, despite the S&P 500 gaining 9.7% during the fiscal year, the average (and median) return was around -0.5%. On an absolute basis, 65% of the S&P 500 companies underperformed the indexes’ return, highlighting the outsized effect the largest companies exert on market-cap weighted benchmarks. Here are the 5 largest stocks in the S&P 500, which account for close to 20% of the index, and their returns for the fiscal year: Apple +76%, Microsoft +42%, Amazon +37%, Facebook +37%, and Google +28%. While the average company suffered a drop in revenues and earnings, this select set of growth stocks drove the popular benchmark indexes higher.
Given the growth focus of Oak Associates’ strategies, our portfolios have performed well, although not as strong as a pure growth approach due to the valuation discipline of our philosophy. We hold several of the leading large-cap growth stocks, but do not own all of the top 5 or top 10 because some have more attractive business models than others. This is also because, historically, owning the largest of the large is usually a recipe for underperformance. At some point, size becomes a limiting factor and smaller companies outmaneuver larger ones by being more innovative or nimble. Yet for 2020 and 2019, owning the top 5 stocks in the index has been a winning strategy. Going forward this may not continue and historical trends could resume.
As the Coronavirus pandemic unfolded in March, we authored a commentary that highlighted one relevant parallel for the stock market. Since there has not been a similar global epidemic in over 100 years, there are no past cycles to study the market’s likely response. However, we did foresee a similar chain of events that often occur in commodity markets. Regardless of the cause of a market disruption, it is common for capital to flood the sector in search of a solution and profits. This can dramatically shift a scarce resource into being oversupplied as the massive capital investment affects the supply/demand dynamics. Similarly, the coronavirus pandemic has seen an unprecedented investment into research, therapeutics and vaccine development. These efforts support the thesis that the pandemic will be a temporary disruption to the global economy and foster a solution.
Nine months into the pandemic, we are already seeing confirmation of this. Several vaccines are in advanced trials, and it’s likely several will be safe, effective and readily available in the first half of 2021. Multiple vaccines will also thwart potential distribution problems, supply bottlenecks, and any resource nationalism that could occur, thereby facilitating an end to the contagion. The stock market understands this and may already be discounting its conclusion. In addition to a viable vaccine, progress in treatment options, such as monoclonal antibodies and antiviral drugs, have also improved the prognosis for those affected by Covid-19. While we certainly cannot claim victory yet, progress is being made.
One underreported transformational benefit of the 2020 crisis is the work-from-home revolution. Prior to the pandemic, telecommuting was endorsed sparingly by businesses. Yet the Coronavirus forced a real-time work from home experiment upon large segments of the economy with successful results. This could have huge benefits for businesses that may now save money on rent, provide a more attractive work environment, access a larger talent pool, or enhance profits. The concerns over productivity, collaboration, accountability were answered through this experiment. We have long believed that productivity gains are at the root of all good things economically.
Looking into 2021, a return to economic normalcy should develop with positive implications for the performance of the broader equity markets, particularly those which lagged in the Coronavirus economy. With a sustained recovery, a reduction in unemployment should also occur. Together, this is beneficial to consumer spending, investor sentiment, and business confidence. In all, the investment backdrop is very favorable, with an accommodative Federal Reserve committed to support the economy and interest rates low for the foreseeable future.
Thank you for your investment in The Oak Associates Funds.
Robert Stimpson, CFA Co-Chief Investment Officer & Portfolio Manager
To determine if this Fund is an appropriate investment for you, carefully consider the Fund's investment objectives, risk factors and charges and expenses before investing. This and other information can be found in the Fund's Prospectus which may be obtained by calling 1-888- 462-5386 or visiting our website at www.oakfunds.com. Please read it carefully before investing.
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Past performance is no guarantee of future results. Investments are subject to market fluctuations, and a fund’s share price can fall because of weakness in the broad market, a particular industry, or a specific holding. The investment return and principal value of an investment will fluctuate so that an Investor’s shares, when redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted.