WASIX Commentary (Q4 2021)
December 2021
As you may already know, this is the first letter not coming from our renowned partner and friend, Sam Stewart. There was no communication of greater importance to him than the words he shared on this platform. He knew the value and importance of communicating with investors. He also understood the value of dissecting and documenting performance. The absence of his voice will be felt. Though the voice is new, the process and philosophy remain steadfast.
The continuation of our process and philosophy may be the most important message we convey today. The style in which Sam worked and collaborated set us up for a nearly seamless transition. Your portfolio is the product of the team. As we reallocated responsibility for positions, the increased burden was small given that 80% of the portfolio was already managed by the analysts. Over the past four years we have curated WASIX with the best of our best ideas from around the globe, and we will continue to manage it in a manner true to the course Sam charted.
Another notable change, though one of a purely administrative nature, is that we are aligning the fund’s name to better reflect the composition of this portfolio. Beginning January 28, 2022, the Seven Canyons Strategic Income Fund (WASIX) will officially be called the Seven Canyons Strategic Global Fund (retaining the WASIX ticker). The benchmark of the fund is also changing to MSCI ACWI Small Cap Index. The vision behind the fund is not changing — the composition of the portfolio as well as underlying stock selection process will stay the same. The name change is a lagging reflection of historical changes in what this fund strives to achieve: assembling a portfolio of the worlds’ best small-cap growth companies. As a reminder, we look for high quality companies with a long runway of opportunity to grow earnings in a stable, sustainable manner, while maintaining strong balance sheets and cash flow generation. Dividend considerations are secondary to long-term sustainable earnings growth. While this evolution in portfolio focus has been communicated extensively over time, adjusting the fund name and benchmark is the last and final step in this evolution. The name is changing, but the composition and process are not.
Below is the performance of Seven Canyons Strategic Global 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 | 2.12% | 6.68% | 0.01% | 2.12% | Year | 34.34% | 18.54% | -1.54% | 16.1% | 3 Years | 19.71% | 20.38% | 4.79% | 18.64% | 5 Years | 12.82% | 14.40% | 3.57% | 12.26% | 10 Years | 11.35% | 11.85% | 2.90% | 11.77% |
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 past quarter offered a quiet ending to a tumultuous year. Looking over the last 12 months, what has become apparent is that profits do, after all, matter. The massive valuation boost that supported “grow at all costs” stocks saw a reversal in ’21 on the back of rising inflation, stretched valuations, and some normalization in how people live, shop, and consume. During 2021 there was a renewed focus on earnings and valuations rather than just sales growth. WASIX weathered this environment quite well, with the fund being up 34.34% in the year, roughly double the benchmark return. Our focus on core, profit-generating growth companies at reasonable valuations no doubt served us well as our companies continued to compound earnings despite the challenging stop-and-start environment. We have no idea what 2022 will bring — whether entrenched inflation will lead to interest rate hikes and continuing “taper tantrums,” or whether inflation will cool towards the end of 2022 and growth stocks will fly again. What we do know is that we will continue to invest in high-quality, well-managed companies with long runways of opportunity. Our aim is a reasonably priced portfolio with earnings growth ahead.
Looking at Q4 specifically, our significant US underweight has been a big headwind for WASIX, as US outperformed the rest of the world. We are looking at deploying more capital in the US, but we are mindful of the stretched valuations for US stocks, especially as compared to those we like outside of the US. We continue to be significantly overweight India as believers in the long-term growth potential of companies we own there. And our performance in India was quite strong, appreciating by nearly 14% in Q4. Interestingly, the strong performance in India offset our underweight in the US, delivering an aggregate in-line portfolio performance for the quarter.
The biggest contributor in the quarter was Radico Khaitan (RDCK IN), one of the leading liquor brands in the budding premium liquor market in India. Radico is one of our larger long-term holdings on the basis of its strong historical revenue growth and profitability, a management team that excels in brand building, and the large untapped market. For a world-class branded consumer staple, we found the stock trading at a low PE multiple and at a sizable discount relative to their main competitor in India. In 2020, on the back of continued strong results posted by Radico, the market finally recognized the mispricing. Radico returned above 40% over the quarter and contributed more than 1% to our overall performance.
Another strong Q4 contributor was M3 Technologies (6799 TT), a fabless semiconductor design house. M3 is focused on providing innovative designs in power management chips for growing end markets at bargain prices. We have done numerous calls with management and are continually impressed by their ability to execute. When we picked up the stock, it was priced at a significant discount to larger semiconductor design peers despite offering a much better growth trajectory. In Q4 our bet on this small and undiscovered company paid off, with M3 returning 52%.
The biggest detractor in Q4 was Burford Capital (BUR LN), with a 4% loss and a 55 basis point hit to overall performance. Burford is a volatile stock that often fluctuates significantly in any given quarter, and the Q4 performance was the result of non-event driven downward movement. There has been no negative news flow impacting our long term thesis. The magnitude of Q4 dip was not atypical and it’s worth mentioning that despite such fluctuations, the stock finished up 10% for the year. Given the volatility of this name, we pay closer attention to longer-term performance rather than quarterly.
Another significant detractor in the quarter was Koukandekirukun (7695 JP). This company offers in-home replacement of kitchen and bathroom appliances in Japan, with customers able to set up the service and receive a price quote via the internet, saving customers both time and money. The global supply chain crunch limited the availability of appliances, negatively impacting Koukandekirukun’s returns, a temporary issue that we believe will be resolved shortly.
Despite the generally strong market performance of 2021, and world benchmarks delivering mid-teen returns, we are seeing potential pricing dislocations in the underlying securities within the benchmarks. Many stocks that benefited from Covid have been sold down aggressively, further, in our opinion, than warranted by fundamentals. We are looking closely at the opportunities that this presents, including a number of growth companies in Japan that are becoming reasonably valued after a significant sell-off in 2021, and high quality growth stocks emerging in China (a tough market where we won’t wade deeply just yet). During the quarter we added Oisix ra Daichi (3182 JP), Va-Q-Tec (VQT GR), and Victorian Plumbing (VIC LN) — all high quality long-term growth companies that were Covid beneficiaries in 2020 but have struggled in 2021 due to tough year-on-year growth comparisons. We think these business models have been strengthened by Covid and that these companies are more relevant to their customers today than two years ago. These are classic examples of how the market’s short-term focus presents opportunities to buy promising companies at reasonable valuations and capture long-term growth.
We are grateful to you, our investors. Producing results that merit your confidence brings us enormous satisfaction.
Sincerely,
The WASIX Fund Management Team
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