2022 Economic Re lection and Outlook

The year 2022 was marked by signi icant turbulence in the inancial market, characterized by a notable surge in equity markets in January. This is depicted in Figure 1, created on TradingView, whichwasthenswiftlyfollowedby a decline over the subsequent months due to heightened in lation and Russia's incursion into Ukraine. Consequently, in lationary pressures necessitated the implementation of monetary policy tightening measures, thereby marking the endofquantitativeeasingfour(QE4).

the 1980s, as shown in Figure 2, presented by TradeEconomics and the U.S. Bureau of Labor Statistics. This in lationary pressure was primarily attributed to rising energy prices, which consequently drove up costs across the economy, largely as a result of heightened geopolitical tensions between the East and West. Despite the sustained in lationary pressure, the Federal Reserve Open Committee (FOMC) maintainedthatthein lationwastransitory,with factors such as ongoing supply chain disruptions and geopolitical tensions between Russia and Ukraine being the main culprits. However, as in lationary pressure persisted and transitioned from goods to services, the Fed's credibility was calledintoquestion.

Quantitativeeasingisamonetarypolicytoolused by governments to stimulate the economy by increasing the money supply. This is completed by purchasing government bonds or other securities from inancial institutions, thereby increasing their reserves and encouraging economic growth. Quantitative tightening functions oppositely. It is a monetary policy tool usedbygovernmentstoreducethemoneysupply in the economy. This is typically done by selling government bonds or other securities back to inancial institutions, which reduces their reservesandmakesit lesslikelyforthemtolend money. The goal of quantitative tightening is to control in lation and prevent the economy from overheating, but it can also lead to slower economic growth and higher unemployment in theshortterm.

In lation, Interest Rates, and Federal Funds Rate

Throughout 2022, multiple economic indicators experienced volatility, with June witnessing a surge in in lation to 9.1%, the highest level since

The Federal Reserve took measures to combat in lation in 2022. In March, theyended QE4after injecting $4.5 trillion into the economy, and increased the federal funds rate by 25 basis points.QT3beganinJune,butwasacceleratedin September with a plan to reduce the $9 trillion balance sheet by $90 billion per month. This is signi icant as the US Money Supply (M2) has consistently increased every year since 1959, with the smallest increase being 0.3% in 1994 and the largest being 25% in 2020. However, 2022 was on track to be the irst year in over 60 years where the Money Supply has decreased by 0.6% YTD (Figure 3). Some criticized the FOMC for delaying action and only beginning QT and hiking the federal funds rate when in lation had already reached 8.5%. The delayed action taken by the FOMC, while understandable, contributed topersistentin lation.

Fixed Income

In 2022, the ixed-income market was characterized by a combination of economic indicators that both supported and challenged the performance of bonds. On one hand, the global economicrecoveryandlow -interest rate environment created favorable conditionsfor ixed-income investments. The gross domestic product (GDP) growthinseveralcountries increased which led to higher consumer and business con idence, consequently boosting demand for ixed-income securities. However, the ixed-income market was also impacted by several negative indicators in 2022. We witnessed in lationary pressures rise due to increases in commodity prices, which led to further concerns of interest rate hikes by global centralbanks.Asaresult,theyieldon10-yearUS Treasuriesrosetolevelsnotseensincebeforethe COVID-19 pandemic (Figure 4). The attractiveness of bonds as an investment option tends to decrease in an environment where interest rates are increasing due to the inverse relationship between rising rates and bond prices. When interest rates rise, the value of previously issued bonds decreases, because investorscanearnahigherreturnbyinvestingin new bonds. Furthermore, the price of any asset, including bonds, should be equal to the future cash lows discounted back to the present. Increasing the discount rate would inherently lower the bond's current price, while lowering the discount rate would increase the bond's value. Also, the increasing sovereign debt levels in some countries created uncertainty in the market and added to the risk associated with ixed-income investments. Despite these challenges, the ixed-income market remained crucial for many portfolios, offering stability and a relatively low level of risk compared to other investmentoptions.

Overall, the ixed-income market in 2022 was in luenced by a combination of economic indicatorsthatbothsupportedandchallengedthe performance of bonds, creating a complex investmentenvironmentforinvestors.

Commodities

In 2022, the commodity market saw a signi icant rebound from disruptions caused by the COVID19 pandemic in previous years. Some commodities such as copper, iron ore, and oil increased in demand due to global economic recovery, coupled with infrastructure investmentsmadebyseveralcountries,leadingto increasing production costs. The rapid growth of the renewable energy sector also drove the demand for commodities such as lithium, cobalt, and nickel. However, challenges also emerged in this period. Trade tensions between countries, such as China, the USA, India, Brazil, and others created uncertainty in the market leading to luctuations in prices. Despite the challenges facingthecommoditymarketin2022,themarket remained strong due to robust demand from various sectors, and concluded the year with positive returns in the commodity sector. The market is expected to continue its upward trend in the coming years as the global economic recovery continues, China ends its zero-Covid policy, and investments in infrastructure and renewableenergyremainstrong.

2023 Economic Outlook

Although 2022 has been a turbulent year, we anticipate a markedly different economic landscape in 2023 as in lation persists and interest rates are raised further. The Federal Reserve Open Committee has stated their intentiontomaintainhigherratesforaprolonged periodwhileaimingtoachieveasteadydeclinein in lation. In spite of this, we expect equity markets to remain relatively strong in the irst half of 2023 due to robust consumer spending, labor market strength, and better-thananticipated earnings. However, we anticipate volatility in economic indicators due to elevated revisions that will be underestimated by the markets. Furthermore, we foresee economic weaknessemerginginthesecondhalfoftheyear (inQ3andQ4)asaresultofthedelayedimpactof ratehikes,whichtypicallytakesabout12months to manifest. Moreover, should excess consumer savings continue to decrease, this will likely lead to a decrease in consumer expenditures. This reduction in consumer activity could lead to a negative impact on corporate earnings. Despite these challenges, we anticipate that M&A activity will persist in industries such as healthcare, industrials, andtechnologydue to low valuations andsubstantialcashreserves.

While we expect globaleconomic growth to slow down in 2023, we believe that there are regions andindustriesthatwillcontinuetoshowrelative strength.Forexample,wehavestrongconviction that commodity-driven companies will bene it going forward. Following a decade of underinvestmentincommodities,ESGfactorsare becomingincreasinglyimportanttoinvestorsand consumersalike.Oneparticularareagrowingata record pace is electric vehicles. Electric vehicles are heavily dependent on several metals, such as lithium,cobalt,andcopperforvarioususesinthe production of batteries. In addition, we believe Emerging Markets will continue to show relative strength to developed countries. The reasons behind this include reduced levels of dollardenominated debt, currencies that have strengthened against the dollar, slower relative growth relative to developed markets over the last two decades, and future growth prospects buoyedbyrapidtechnologicaladvancements. Furthermore, escalating geopolitical tensions continuetopromptconcernsabouttheimpacton global economic conditions and the threat to globalization. The ongoing con lict between Russia and Ukraine has reached a heightened state as it enters its second year. Additionally, rising tensions between China and Taiwan are apparent. However, the West continues to decrease dependence on items made in China. Meanwhile, according to an economist from John Hopkins, Steve Hank, Turkey accelerates its exports driven by its currency devaluation, weakening economy, and sky-high in lation. GivenChina's irstpopulationdeclineinacentury and the aforementioned increase in geopolitical tensions,itisprobablethatthistrendwillpersist, enabling further growth for other developing economies.

In summary, 2022 was a turbulent year for the inancial market, with signi icant luctuations in manyeconomicindicators.In lationarypressures persistedthroughouttheyear,withrisingenergy prices and geopolitical tensions being the main culprits. The Federal Reserve took measures to combat in lation by ending quantitative easing and implementing quantitative tightening measures. The ixed-income market experienced a decline in performance due to increasing interest rates. This resulted in one of the worst recorded performances for the debt market. The commodity market saw a signi icant rebound from the disruptions caused by the COVID-19 pandemic in previous years, with strong demand fromvarioussectorsdrivingthemarket'supward trend.

As we re lect on the challenges of 2022, we anticipate the economic landscape in 2023 to remain similar, characterized by persistent in lation and further increases in interest rates. The Federal Reserve Open Committee has stated its intent to maintain elevated rates for an extended period while striving for a steady decline in in lation. Despite these headwinds, we expectequitymarketstoremainrelativelyrobust in the irst half of 2023, buoyed by resilient consumer spending, a strong labor market, and better-than-expected earnings. Nonetheless, we foresee elevated volatility in economic indicators due to underestimated revisions, potentially leading to economic weakness in the second half of the year, with a concomitant decline in consumerspendingandcorporateearnings.

2022 Fund Performance and Best Performer

In 2022, the Bowden Investment Fund returned -11.10%, outperforming the benchmark (SP500TR, -18.11%) by 7.01%. The nominal return resulted in a loss of $33,196.32. With the biggest nominal return coming from DFAT (+$46,769.27), and the lowest nominal return attributedtoHD(-$17,845.43)(Figure1). negative (Figure 6), with the worst performing sectors beingCommunication Services (-26.31%) with holdings in GOOGL, DFAT, IWM, and IVV. followed by consumer discretionary (-14.83%) withholdingsinAMZN,HD,AAP,DG,DFAT,IWM, HEAR, DIS, and IVV. However, our holdings in both of these sectors outperformed their respective S&P sector returns. The bestperforming sectors in the portfolio were energy (+17.02%) with holdings in SHEL, followed by industrials (+5.80%) with holdings in AGCO. The S&P500hadthesameworstandbest-performing sectors as the Bowden Investment Fund with communication services down -37.63% and energy up 64.17%. Our portfolio outperformed seven of the eleven sectors in the S&P 500, only underperforming in healthcare (CVS and SYK), energy (SHEL), Utilities (DFAT, IVV, and IWM), andconsumerstaples(KO).

The current holdings of the fund are made up of many Bowden group pitches, with the oldest stockbeingGOOGL,boughtinJanuaryof2011.In the past year, the fund bought: KO, MSFT, DIS, BLK, MLM, DFAT, and increased our IVV position and the fund sold: LMT, STLD, HEAR, IWM, DIS, CRM,FB,HD,XLF,AAP,andSYK(Figures2&3.)

STLD was our best performer of 2022, earning 39.42% in January through March when it was sold. Our worst performer of 2022 was AMZN (-49.62%)(Figure4).Thispoorperformancewas largely due to its Q1 and Q3 earnings. The company missed earnings due to high in lation, rising rates, and a slumping economy. The Bowden Investment fund outperformed the S&P 500 almost every month this year, only underperforming in March, July, and November (Figure5). Thisislikelyduetothefundhavinga lower beta than the benchmark, therefore underperforming when the benchmark had positivereturns.

Most sector returns in our portfolio were a negative allocation effect in all the sectors that the fund was overweight, with the exception of Energy, incomparisontoourbenchmark. Thisis duetoourbenchmarkhavingnegativereturnsin allthesesectorswiththeexceptionofenergy,and bythefundbeingoverweightinthesesectors,we saw more losses. Those sectors include: consumer discretionary, inancials, industrials and materials. However, we saw a positive selection effect in over half of the sectors including: consumer discretionary, information technology, communication, industrials, and consumer staples, meaning that the equities chosen in each sector did better than our benchmark in that sector. We believe that this positive selection effect has to do with having morestablestocksinthesesectorsincomparison toourbenchmark.

During 2022, we saw many active funds outperforming passive strategies which has been unusual for some time. With that being said, we wereabletooutperformmanyactivemanagersin addition to our passive benchmark. According to MorningStar, the average loss for large active growth funds was 30%. We see this with American Funds The Growth Fund of America, Fidelity Contrafund Fund, BlackRock Large Cap Focus Growth Fund, and BlackRock Mid-Cap Growth Equity Fund which had returns of30.72%, -28.26%, -38.06%, and -37.52%, respectively. In addition to this, we were able to outperform many large blend funds such as American Funds The Investment Company of America, Strategic Advisers Fidelity U.S. Total Stock Fund, Vanguard PrimeCap Fund, and Morningstar Large & Mid-Cap U.S. Equity ETF ILCB with returns of -15.51%, -17.95%, -15.15%, and-19.48% respectively(Figure7).

We performed an attribution analysis on the portfolio in order to understand how our sector weightings compared to our benchmark returns aswellashowourspeci icholdingscomparedto thebenchmarkineachsector. (Figure8).Wesaw

Finally, we calculated up- and down-capture ratios for the portfolio to analyze the fund’s ability to avoid market losses and capture market gains. We found that the portfolio had a down-capture of 87.26% for 2022, which means that theportfolioonlycaptured87.26%of the negative returns of our benchmark, the S&P 500. In this analysis, we also found that our portfolio had an up-capture ratio of 107.31% for 2022, meaning that we capitalized on 107.31% of our benchmark’s positive returns. This resultedinthefundhavingatotalcaptureratioof approximately 123% which compares the upcapture ratio to down-capture ratiotoshowhow the fund captured returns in total to the benchmark.

The 2022 Stock Pick of the Year was Steel Dynamics (STLD). Steel Dynamics, Inc. manufactures steel and recycles metals, holdingapproximately7%ofthemarketshare in the domestic steel manufacturing industry. The industry is cyclical and luctuates heavily in correspondence with the commodity price of steel. The company was founded in 1993 and headquartered in Fort Wayne, Indiana. Steel Dynamics was added to the portfolio on December 8th, 2021 and sold onMarch23, 2022. Thiscompanywaspitched by Bowden Alumni Zack Marciniak and Matt Ramundo with a target price of $82.00pershare. Itquicklyexceededthe target price andwassoldat $86.54. The thesis for this pitch was to diversify the portfolio’s exposure in commodities and industrials, capitalize on STLD’s vertically integrated and closed-loop business model, and bene it from Steel Dynamicsbeinganenvironmentalleader in the steel industry. STLD was our best performer of 2022, returning 39.42% in JanuarythroughMarch,whenitwassold. Steel Dynamics provided the portfolio withanominalgainof$4,990.76in2022.