WASIX Commentary (Q3 2021)
September 2021
As always, we begin our report this quarter with a presentation of Seven Canyons Strategic Income Fund (WASIX) and benchmark returns over the past quarter, one, three, five, and ten years. A quarter is such a brief period of time that the results presented are mostly random noise; they can’t be used to evaluate the fund. Even the results for a year are insufficient. For this reason, along with short term results, we also like to include the performance of the fund over the longer periods which are more likely to encompass both rising and falling markets, providing better information for assessing fund performance.
| Periods ended 9/30/21 | WASIX | MSCI ACWI Index | Bloomberg Barclays US Aggregate Bond Index | MSCI World Small Cap Index |
|---|---|---|---|---|
| Quarter | 1.28% | -0.95% | -0.01% | 1.52% | Year | 51.66% | 27.99% | -0.96% | 40.60% | 3 Years | 13.46% | 13.12% | 5.28% | 11.09% | 5 Years | 12.62% | 13.75% | 2.83% | 12.12% | 10 Years | 12.21% | 12.32% | 2.95% | 12.15% |
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. The Advisor has contractually agreed to reimburse Total Annual Fund Operating Expenses in excess of 0.95% until at least January 31, 2022. This agreement is in effect through January 31, 2022, may only be terminated before then by the Board of Trustees, and is reevaluated on an annual basis.
The market was sedate this quarter, returning to more temperate behavior. Instead of going straight up, “ups” were offset by “downs.” As a result, the market was down slightly for the quarter. WASIX posted a modest gain. Even though our margin over the market was slim, it is encouraging to be up in a down market.
One of our primary portfolio themes is an increase in cash due to the paucity of opportunities to buy good companies at reasonable prices. The strong market rally off the Covid bottom has produced a near-doubling of stock prices. Good companies are costly these days. Buying expensive stocks yields only meager returns, even if the companies continue to do well. And if they don't, there is a long way to fall.
We tried to improve the focus of WASIX by shrinking our name count. We took profits in several companies in which we had lower confidence. Examples include Aubank (up almost 3x while we owned) and Tokai Carbon (up more than 2x). We sold Aubank because both its Chief Risk Officer and Audit Head resigned. While Aubank provided assurances that these resignations had nothing to do with the company, we deemed it better to be safe than sorry. We sold Tokai due to both their loss of a patent infringement claim, as well as the emergence of new competition.
Geographically, we are overweight India both due to the size of the country and its growth prospects. India will soon overtake China as the most populous country in the world, and is more than 4x the size of the US. Some analysts believe that Indian companies have the opportunity to grow at 20% for 20 years. Our largest holding in India, GTPL Hathway, provides color on these growth prospects. GTPL is a provider of cable and broadband internet. Currently more than half of India lacks internet access, compared to 90% lacking internet a decade ago. There remains a long runway for growth.
We are underweight the US as stocks here are generally more expensive and have fewer growth prospects, especially compared to companies in emerging markets.
Our largest sector underweight is technology. Given tech’s growth prospects, We would really like to have more weight. However, the prices of tech stocks often more-than-reflects their growth, making them too expensive to own.
A continuing theme in WASIX has been outsized holdings of financial stocks. We are overweight due to the fact that the development of banks is critical to the growth of emerging economies. Nearly 10% of WASIX is invested in emerging banks, including Bank of Georgia (BGEO.LN), Arman Financial (ARLF.IN) in India, and Kaspi Bank (KSPI.KZ) located in Kazakhstan.
We are overweight communications stocks such as Google, Facebook, Disney, and Comcast. But instead of owning these large domestic companies, we own smaller internationally-based communication companies like Future PLC (FUTR.LN), GTPL Hathway (GTPL.IN), and Gamma Communications (GAMA.LN).
In fact, the largest contributor to our performance during the quarter was the British media company, Future PLC. FUTR gave a positive update on expected earnings. They also announced the completion of their acquisition of Dennis, adding magazines such as Kiplingers and The Week. GTPL was our second-largest contributor. The stock rose due to strong subscriber additions and subscription revenue growth reported during the quarter. Both FUTR and GTPL are reflective of our communications theme.
On a quarterly basis, we usually call out any stock adding .5% to our returns. In addition to FUTR and GTPL, there were a half dozen other names that qualified. One example of these stocks is Burford (BUR.LN), reflective of our financials theme. BUR reported strong new case growth and record low losses.
We had several losers during the quarter. Flatex (FTK.GR) subtracted more than 1% from our returns, as investors were disappointed by the fact that reported earnings were below the prior quarter. Despite the rough quarter, we continue to own FTK because of its commitment to identify the right strategy for the long term. Their aim is to strengthen their position as the only pan-European broker. Perfect Medical (1830.HK) cost us nearly 1%. The reason for Perfect’s stock decline seems to be a combination of Covid lockdowns as well as China’s move to exert more control over companies listed in Hong Kong. Gamma Communications (GAMA.LN) cost us more than .5%. Investors didn’t like GAMA’s hint of more competitive markets.
During the quarter we added one new company to our portfolio: Antony Waste Handling (AWHCL.IN). Antony has the largest waste processing plant in Asia. Currently it processes 60% of Mumbai’s waste. Growth in waste will likely keep apace with the growth of India.
Looking forward, we expect the market will continue to be choppy, as it was this quarter. We believe the best way to navigate turbulent markets is by being highly selective in the companies we own. Good companies usually do well, regardless of market conditions.
For a list of current top ten holding and performance charts, please click here.
Dividends are not guaranteed and a company’s future abilities to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.
An investor should consider investment objectives, risks, charges, and expenses carefully before investing. To obtain a Prospectus, which contains this and other information, visit www.sevencanyonsadvisors.com or call us at +1 (833) 722-6966. Read the prospectus carefully before investing.
Seven Canyons Funds are distributed by ALPS Distributors, Inc.