WASIX Commentary (Q4 2020)
December 2020
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, year, and three 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 largely noise. For this reason I like to include results for the trailing three years, as this longer period typically includes both rising and falling markets, providing better information for assessing fund performance.
| Periods ended 12/31/20 | WASIX | MSCI ACWI Index | Bloomberg Barclays US Aggregate Bond Index |
|---|---|---|---|
| Quarter | 15.28% | 14.77% | 0.73% | Year | 4.42% | 16.83% | 7.48% | 3 Years | 5.96% | 10.62% | 5.26% |
A fund’s performance for very short time periods may not be indicative of future performance. Data shows past performance. Past performance is not indicative of future performance and current performance may be lower or higher than the data quoted. The gross fee for the fund is 1.76%. 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.
WASIX performed well during the final quarter of 2020. Nevertheless, I am happy to have 2020 behind us, and look forward to a less traumatic 2021. As the above table shows, WASIX rose 15.28% during the quarter, beating both our stock and bond benchmarks. Our shift towards a more global, smaller-cap portfolio continues to produce favorable results. But these past few quarters are much too short of a period to judge our strategy shift. It will take several years to get a good gauge on our new strategy.
I am confident that expanding our search criteria to encompass smaller-cap companies across the globe that have both the ability and the willingness to pay a growing stream of dividends will be rewarding. In fact, several such companies newer to our portfolio were among the leading contributors to our strong fourth quarter results.
Arrow Global (ARW LN) is a UK-based company that purchases bad credit card debt from banks. Arrow’s skilled collectors are often able to get non-paying borrowers to resume making payments on their delinquent loans. By nature, the debt collection business is capital intensive as the bad debt must be purchased up front, while potential repayments come in slowly over time. Arrow is innovatively transforming its business model towards becoming less capital intensive. Instead of solely relying on its own capital to purchase debt, it also purchases debt with external funds. Arrow believes the economics of their new asset management business will prove superior to exclusively using their own capital. Arrow contributed more than 2.5% to our returns during the quarter. Arrow’s stock price rose strongly as they raised more external funds than expected. In addition, despite the pandemic, Arrow collected debts at a 41% better rate than even they anticipated.
Controladora Vuela Cia de Aviacion (VLRS) also contributed more than 2% to our returns. VLRS is a budget airline based in Mexico. Over the past few years, VLRS’ revenues grew strongly, as their competitively-priced flights gained favor over time-consuming bus travel. Covid caused a substantial decline in VLRS’ passenger traffic, and forced its two major competitors into bankruptcy. The rise in the stock price this quarter reflects a sharp recovery in VLRS’ passenger traffic, which has returned to near-normal.
iEnergizer (IBPO LN) is a business process outsourcer. Their two largest clients are Credit One and Roblox. Credit One is a credit card issuing bank, for which IBPO helps collect delinquent credit card payments. Roblox offers an online game creation system allowing users to program and play games created by other users. IBPO helps Roblox gamers have a positive experience by providing in-game 24/7 chat and email support. The strength of IBPO’s business and their commitment to rewarding share owners is reflected in their recent declaration of a 15% special dividend, which helped IBPO add nearly 2% to our returns during the quarter.
Burford (BUR LN) is a leading legal settlements company. It provides financing for legal cases in exchange for a share of the eventual outcome of the case. Burford’s team of lawyers vet cases and fund only those where Burford expects a beneficial result. During the quarter, the stock benefited from recent cases that were adjudicated or settled in Burford’s favor, adding 1% to WASIX’s quarterly returns.
A few of our stocks impacted our returns negatively. Fortunately, none of those companies hit our returns sufficiently to be called out.
During the quarter we sold several companies, including TCI Bio (8436 TT), an ingredients provider to the multi-level-marketing industry. TCI’s sales have been hurt by a Chinese ban on their products. We also chose to exit some stable companies which provided insufficient justification for holding a larger weight. One example is Riverstone (RSTON SP), a Malaysian rubber glove manufacturer. Their business has boomed during the pandemic as focus on sanitation has increased demand for gloves. However, their stock price has also boomed, so we decided to take our profits and step aside.
Among the new additions to the portfolio was Kaspi Bank (KSPI LI), the dominant digital bank in Kazakhstan. In recent years, Kaspi has built an ecosystem with its ‘Super App’, which encompasses everything from payment solutions to a retail marketplace. We also added Stor-Age (SSS SJ), a South African self-storage company. Self-storage is a nascent business in South Africa, and Stor-Age is the dominant national provider. The path for growth in this industry has been well marked in other countries, and the entrepreneurial founders are following it closely.
I expect markets to continue to be challenging as we pick our way through the aftermath of Covid. The key issue worldwide is getting employment to return to normal levels. Another key issue is coping with the massive borrowing we’ve undertaken to offset the impacts of Covid. These are difficult problems, but WASIX’s emphasis on finding and owning companies with both the ability and willingness to pay a growing stream of dividends will allow us to steer a true course despite these choppy waters. I continue to be one of the largest shareholders in our fund. I appreciate your willingness to travel alongside me.
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.