In 2023, the Gregorian calendar was designated the year of the rabbit—a symbol of good fortune and rebirth. Perhaps, then, it’s no surprise 2023’s markets closed in a similarly spirited fashion. Fourth quarter returns leaped happily to a banner finish, dodging a handful of obstacles and threats along the way.
More broadly, the whole of 2023 unfolded to reveal gradually improving sentiment, thanks to careful maneuvering from the Fed: The Committee’s thoughtfully timed and ‘just right’ rate hikes throughout the year continued to dampen inflation while avoiding further economic peril in the wake of the March bank crisis.
The markets, further buoyed by growing consumer resilience and the prospect of sooner-than-expected rate cuts, were effectively reborn—rallying into year-end and closing the chapter on what was an impossible-to-forecast yet fortuitous rabbit-y (or hare-y) year.
That said, during times like these we’re reminded that a dividend-oriented strategy looks more like a tortoise, moving slowly and steadily in pursuit of the hare.
With rate hikes on the back burner and adjustments to higher rates baked in, the dividend-payers also celebrated. As mentioned, the growing narrative of a Fed pivot created a strong “everything rally” to close out the year, with the Dividend Achievers Index returning +9.8% in Q4.
Furthermore, the Dividend Achievers matched the nine-week positive run of both the S&P 500 and Nasdaq, a feat achieved only 12 times by any U.S. equity index since 1960.
Over the year, Hilton’s Dividend & Yield Strategy (DIVYS) shifted to a less defensive bias, reflecting the likely end of rate hikes and growing probability of rate cuts.
As a reminder, the strategy remains focused on high-quality names with limited levels of leverage. Additionally, rate of change remains at the forefront of our investment ethos. That is, sectors and companies inflecting for the better—whether improving from good to better or from bad to less bad.
Overall, we see various investment opportunities here: chip cycle inflection, input costs rapidly decreasing in line with inflation, and a more resilient consumer. On the downside, we see incremental risks in high fixed-cost manufacturing and sticky higher wages.
For 2023, DIVYS produced a gross return of +11.04% versus the Dividend Achievers Index return of +11.92%. During Q4, the strategy produced a gross return of +9.19% versus the Dividend Achievers Index return of +9.83%, an underperformance versus the benchmark* of 64bp gross and 75bp net. This was due to the portfolio’s lag during the markets’ December rally, which overshadowed its relative outperformance during the first two months of the quarter when the markets sold off.
Figure 1: Absolute & Relative Performance vs Benchmark Q423
Source: Bloomberg
Figure 2: Q3 Portfolio Sector Weightings vs S&P 500
Source: Bloomberg
Twenty-twenty-three proved to be a challenging year. Despite growing expectations for a “Goldilocks” or soft-landing scenario, it’s difficult to shake the uneasy feeling that the Fed’s rate-hike cycle may ultimately end elsewhere.
Bottom line: We feel more confident about the direction of inflation and growth and continue to monitor the Fed's plans. The Hilton Investment Committee remains patient, with a focus on economic data and the broader macro landscape, and will act accordingly. As clearer signs of a major cycle turn emerge, we can and will do more. Until that point, as always, we remain vigilant.