WASIX Commentary (Q1 2020)
Q1 2020
As we did last quarter, we begin our report this quarter with a presentation of WASIX and benchmark returns over the past quarter, year, and three years. We believe that a quarter is such a brief period of time that the results presented are mostly random noise; they can’t be used to evaluate how the fund is performing. Even the results for a year are largely noise. For this reason I like to include results for the trailing three years as this longer period provides better information for assessing fund performance. Three years typically is sufficiently long to include both rising and falling markets. The relevant performance numbers for the Strategic Income Fund for the past quarter, year, and three years are in the table below.
| Periods ended 3/31/20 | WASIX | MSCI ACWI Index | Bloomberg Barclays US Aggregate Bond Index |
|---|---|---|---|
| Quarter | -32.84% | -21.27% | 3.15% | Year | -25.05% | -11.26% | 8.93% | 3 Years | -5.78% | 1.50% | 4.82% |
Data shows past performance. Past performance is not indicative of future performance and current performance may be lower or higher than the data quoted. For the most recent month-end performance data, visit www.sevencanyonsadvisors.com. Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost. The Advisor may absorb certain Fund expenses, leading to higher total shareholder returns. Total Expense Ratio: Gross 1.70%; Net 1.40%. Seven Canyons Advisors, LLC, the Fund’s investment adviser (the “Adviser”), has contractually agreed to limit the amount of the Fund’s total annual fund operating expenses. Seven Canyons Advisors, has contractually agreed to limit the amount of the Fund’s total annual fund operating expenses, exclusive of interest, dividend expense on short sales/interest expense, taxes, brokerage commissions, other investment related costs, acquired fund fees and expenses, and extraordinary expenses such as litigation and other expenses not incurred in the ordinary course of business, to 0.95% of the Fund’s average daily net assets. This agreement is in effect through January 31, 2021, and may only be terminated before then by the Board of Trustees, and is reevaluated on an annual basis.
WASIX posted an awful quarter, the worst in the fund’s history. I apologize and commit to doing my best to ensure this never happens again. I am disappointed in myself for allowing WASIX to be so vulnerable to the Corona Crisis. Early in the quarter I deemed the potential spread of the coronavirus in China would turn out to be similar to SARS or swine flu. As the market declined mid-quarter, my optimistic “buy the dips” outlook guided my reactions. By the end of the quarter, the inadequacy of my optimistic “buy the dips” view was revealed. Over the years, buying the dips has been additive to our returns. But during this sharp market decline, buying the dips cost us money. It proved to be picking up dimes in front of a steamroller.
Our holdings of diversified financials were the source of most of our pain. All five of the largest “contributors” to our poor performance were financial stocks. Great Ajax (AJX), Simon Property Group (SPG), Starwood Property (STWD), Ares Capital (ARCC), and Vakrangee (VKI IN) each hit our returns for a loss of 1% or more, a total of more than 6 ppt (percentage points) of our 7 ppt shortfall in financials and our 10 ppt total shortfall from the bench. All of these companies have suffered during the Corona Crisis not only due to fear of weakened business, but also due to their use of debt to support their business.
Ajax’ primary business is to buy distressed home loans and then work with the borrowers to help them have the ability to make consistent payments on their loan. If that payment pattern can be established for many months, the loan becomes more valuable and can be resold for a higher price than was initially paid. Of course, the current fear is that, due to the crisis, borrowers who were previously distressed are likely to have renewed problems making their loan payments. Atop this problem is that if Ajax’ business declines, they will have their own difficulty making payments on the loans they have used to finance their business.
Simon owns shopping malls, almost all of which are currently closed, which will make it difficult for mall tenants to pay the rent owed to Simon. Further, some of these tenants will likely not survive the Corona Crisis. As the crisis recedes and malls are able to re-open, Simon will be left with fewer tenants. And, like Ajax and the rest of these financial companies, as Simon’s business encounters problems, concerns arise about Simon’s ability to pay what is owed on their loans.
Starwood lends to a variety of borrowers ranging from construction loans on commercial properties to energy-related projects. Ares lends to medium-sized businesses not large enough to access public markets. Their prices were hurt by the same factors that hurt both Ajax and Simon: the potential inability of their borrowers and renters to make timely loan payments, and as a result, the potential inability of Ajax and Simon to make their own loan payments.
Vakrangee is completely different, as they do not lend and do not borrow. They operate small business centers in rural India, akin to a Kinko’s or FedEx center, but also providing ATMs, online grocery ordering, online pharmacy, and even telemedicine. Investors, fearing that Vakrangee’s business centers will be deemed “non-essential” and closed temporarily, have driven the stock price down.
Investor fear was the theme for most of the companies in our portfolio. Only two companies we own gained during the quarter: MSCI and Granules. All of the rest were down. And this was true for the market. The only really safe place to hide was in cash. While we did hold a moderate amount of cash, we remain committed to the stock market. As this quarter reminded us, the market can be volatile. But over the long run, stock owners have been well rewarded.
Though the past quarter has been a discouraging one, I continue to believe that our investment objectives will allow us to capture current income and provide long term growth of capital. I commit to you that I will shed my rose colored glasses and adopt a more wary viewpoint. When the market dips, as it often does, rather than rosily seeing buying opportunities, I will also consider Bill Fleckenstein’s approach of “shooting them in the back” — trimming stocks as they decline. My response will depend on careful consideration of what might be causing the dip. In retrospect, as the scope of the economic shutdown became clear, I should have recognized that this was no ordinary dip, and done more trimming and less buying.
I am a large shareholder in WASIX with a significant amount of my personal wealth invested in the fund. I am committed to returning the fund to a less volatile, more rewarding path forward. Towards that end, I have reduced the risk in our fund and prepared it to take better advantage of the opportunities which this dislocation will present. I appreciate your confidence in investing alongside me.
DEFINITIONS
ACWI (MSCI All Cap World Index) is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI ACWI is maintained by Morgan Stanley Capital International (MSCI) and is comprised of stocks from 23 developed countries and 24 emerging markets
Barclay’s aggregate bond benchmark is a broad- based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bondmarket
All investing involves risk. Investments in securities of foreign companies involve additional risks, including less liquidity, currency-rate fluctuations, political and economic instability and differences in financial reporting standards and securities market regulation. Investing in small and micro-cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds.
Dividends are not guaranteed and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.
Past performance is not indicative of future performance and current performance may be lower or higher than the data quoted. For the most recent month-end performance data, visit www.sevencanyonsadvisors.com. Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost.
For a current list of top ten holdings and performance charts, please click here.
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