WASIX Commentary (Q2 2020)
As always, 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 6/30/20 | WASIX | MSCI ACWI Index | Bloomberg Barclays US Aggregate Bond Index |
|---|---|---|---|
| Quarter | 18.61% | 19.22% | 2.90% | Year | -13.55% | 2.11% | 8.74% | 3 Years | -1.02% | 6.14% | 5.32% |
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. 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 September 10, 2020, and may only be terminated before then by the Board of Trustees, and is reevaluated on an annual basis.
WASIX’s second quarter featured a strong bounce back from our disastrous first quarter. WASIX was up 18.61%, which is the strongest quarter in our history. Even so, we are still down on the year, which is very disappointing to me. Our exposure to the financial sector is the primary culprit. I continue to like these inexpensive stocks as I believe the market isn’t paying sufficient attention to the value they offer. In fact, the market has ignored any company with a value tilt. Instead, it continues to bid up any stocks with strong growth prospects such as Amazon (AMZN) and Zoom (ZM). Indeed, the market seems to be paying no attention at all to valuation. It is willing to pay more than 100x earnings for AMZN and ZM, but less than 10x earnings for more value-oriented stocks such as AGNC Investment (AGNC), one of WASIX’ financial holdings. While AGNC provides much less growth than AMZN or ZM, it does offer an 11% yield, while neither AMZN nor ZM pay any dividend at all. I’m a believer that dividend-paying stocks provide safety akin to that which makes a bird in the hand worth two in the bush.
Even though the market ended the March quarter with a sharp decline, it became more difficult to find stocks priced to reflect the potential severity of the COVID impact. As a result, early in this past quarter, I decided to sell some of our most expensive stocks. This gave me dry powder for when I could find stocks priced to reflect the risks that still lie ahead. I want to own stocks that reflect the tenuous speed and shape of the recovery from the COVID-induced lockdowns. The optimism of the market is hard to square with the small businesses in our neighborhoods that have closed their doors forever, taking jobs with them. Larger firms such as Hertz, JCPenney, and J.Crew have been forced into bankruptcy. While declaring bankruptcy isn’t the same as closing shop, it is hard to imagine that these businesses won’t operate with a smaller footprint and fewer employees in the future.
While diversified financials were the largest contributors to our slump last quarter, they were the largest contributors to our bounce this quarter. Vakrangee (VKI.IN) was the largest single contributor, adding almost 1% to our results. VKI operates small business centers in rural India, similar to a Kinkos or FedEx center, but also providing ATMs, grocery and pharmacy delivery, and even telemedicine. Investor fears that Vakrangee’s business centers would be deemed “non-essential” and closed temporarily proved to be unfounded. Great Ajax (AJX) also made a near 1% contribution as the market grew comfortable with the health of the residential real estate market, COVID notwithstanding. AJX’ primary business is to buy distressed home loans and then work with the borrowers to help them 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. AJX’ success in Q2 suggests that investors feel confident that government support programs will backstop mortgage payments.
A couple of other large contributors worth calling out are Sarana Menara Nusantara (TOWR.IJ) and momo.com (8454.TT), a new addition to our portfolio this quarter. Their contributions are a reflection of COVID-induced lockdowns benefiting their business, rather than recoveries from poor performance last quarter. TOWR.IJ is Indonesia’s leading independent cell tower company. As the lockdown produced a surge in telephone calls and TV viewing, demand for transmission towers grew. Online shopping has been given a big boost by COVID. momo.com has been called the Amazon of Taiwan. Sales for the March quarter were up 29% over the prior year. After a dip in April, sales for the month of May were up 38% year over year. On the other hand, Golar (GMLP), an owner of ships used for LNG transport and regasification, hurt our performance by about 1% as volatility in oil prices resulted in a declining stock price. We continue to own GMLP as I believe LNG (liquified natural gas) will continue to grow due to its efficiency as a means of transporting gas.
As I mentioned, during the quarter we exited a number of richly-priced large-cap securities, including United Health (UNH), MasterCard (MA), Visa (V), and Comcast (CMCSA) because their prices did not seem to reflect the challenges that lie ahead. We did add some stocks that are likely to benefit from COVID such as Seegene, a Korean molecular diagnostics company that has a single test for the common flu + COVID + other respiratory diseases. Needless to say, demand for this test is soaring.
So far this year has been discouraging as our more value-oriented style has been out of sync with a growth-oriented market. But I continue to believe that focusing on dividend-paying companies will allow us not only to capture current income, but also to provide long-term growth of capital. As promised last quarter, I have adopted a more wary viewpoint. I have trimmed several of our declining stocks. That, plus our sales of expensive large-cap stocks, have led to the near 20% of our portfolio being held as dry powder to take advantage of good buying opportunities that become available in this disrupted stock market.
I remain 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 this dislocation will present. I appreciate your confidence in investing alongside me.
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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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