WASIX Commentary (Q3 2019)
WASIX
Q3 2019
At the end of each quarter, most funds send a report detailing how they did during the quarter. We are no exception. However, 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 random. For this reason, I like to include results for the trailing three years in addition to quarterly and annual results. Three year periods may provide better information for assessing fund performance, as that period 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 9/30/19 | WASIX | MSCI ACWI Index | Bloomberg Barclays US Aggregate Bond Index |
|---|---|---|---|
| Quarter | -0.11% | -0.03% | 2.27% | Year | -2.01% | -1.38% | 10.30% | 3 Years | 6.71% | 9.71% | 2.92% |
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. Total Expense Ratio: Gross 1.94%; Net 1.75%. This agreement is in effect through September 10, 2020, and may only be terminated before then by the Board of Trustees, and is re-evaluated on an annual basis.
By and large, the results shown in the table do not present a pretty picture, especially for the abbreviated year and quarter-time periods. For those limited periods, we fell short of both our stock and bond benchmarks. For the three year period, we fell short of stocks but did better than bonds, though we were slightly below our high-single-digit-return goal.
For the quarter, only Grupo Galicia, Argentina’s leading bank, is worth calling out, as it drove most of the shortfall from our stock benchmark. Galicia’s stock price fell 63% due to the surprising results from Argentina’s runoff election. The presumptive favorite, incumbent President Mauricio Macri, fell 16 points short of Alberto Fernandez and his running mate, former President Christina Fernandez de Kirchner. Fears of the return of de Kirchner’s populist policies led to an overnight dramatic decline in the prices of Argentine stocks. No stock added as much as 50 basis points to our returns, which is my criterion for special mention.
For the year, Mastercard and Comcast are worth mentioning on the positive side. Comcast was the only stock that contributed 1.0% to our returns. Mastercard fell just short, at .9%. Both of these stocks are typical of the larger-cap stocks that drove benchmark returns over the past year. Further, their businesses continued to progress along the expected path. On the unfavorable side, FedEx had a poor year resulting in an almost 1% decline in our returns. They attributed their weak results to softness in global trade. In addition, their acquisition of TNT continues to be “the gift that keeps on NOT giving.” The one bright note for the year is that the underlying results of the companies we own were solid, producing a median dividend growth of 13%. Our companies did much better than our stocks.
For the trailing three-year period, the only stocks adding more than 1% per year to our gains were Mastercard and Visa. Their strong performance drove a significant portion of our returns. Those two stocks are emblematic of the stocks which have driven the performance of the benchmark over the past three years. In addition to strong earnings growth, Mastercard’s price to earnings ratio multiple has expanded by 50%. Visa offers a similar story. By and large, the companies in our portfolio did better than their stock prices, with the median dividend growing at a 16% rate.
The market environment has been similar over the past quarter, year, three years, and even longer. The search for yield in a low (and getting lower) interest rate world has been the dominant focus for most investors. Central banks around the globe have driven interest rates lower trying to prod their economies to more rapid growth. Often this low rate strategy has come at the urging of the executive or legislative branch of government. A recent example of this has been President Trump pressing Federal Reserve Chairman Powell to reduce interest rates.
The other main driver of the market has been demography. An aging population tends to be a saving population. One reason for this is that most of life’s major purchases have been completed by the time a person nears middle age. The other reason is that as retirement nears, saving becomes more important. An aging population means that ever more savings are seeking a safe home with reliable returns. But as more and more seek this goal, prices of high-yielding bonds are driven up. As bond prices rise, the yields they provide fall.
Falling bond returns lead some savers to relax their definition of safe to include large, blue-chip stocks as a potential savings vehicle. This drives stock prices higher. The dynamic of falling interest rates and higher prices for blue-chip growth stocks has been in play for the past five years. The reduced returns from savings mean that savers need to run faster and faster to stay in the same place. By adding to their savings, investors drive bond and stock returns ever lower and prices ever higher.
The way to win the performance derby in this environment has been to own increasingly expensive bonds and blue-chip growth stocks. About two years ago, we chose a different path. We started to buy international, smaller-cap stocks. They have not only added growth but also yield compared to what large-cap US stocks are able to offer. The market has yet to reward this move. Not only have international stocks fallen short of US stocks, but small-cap stocks have fallen short of large-cap stocks. That doesn't make the move wrong, but we believe it does make it early. Even so, we believe that it made sense to buy international stocks such as Polish homebuilder Dom Development, which has been growing at a double-digit rate and paying an 11% yield. We also added TAV Havalimanlari, an airport operator with airports in Turkey, Georgia, Tunisia, Macedonia, Saudi Arabia, and Latvia. TAV has also been growing at double-digits and pays an almost 9% yield.
To be sure, we can be criticized for not owning more large-cap US stocks -- market leaders that usually have an element of technology driving their business. Some of these stocks, such as Amazon, Google, and Facebook, pay no dividends, so they don’t fit the profile of the companies we seek. We look for companies that have both the ability and willingness to pay a growing stream of dividends. Other large-cap secular growers, such as Microsoft, represent a miss. Our wariness of the diminished role of the PC kept us from buying Microsoft. We did own Apple for a while but moved it to the sidelines when the growth rates for their iPhones started to decline. Without sizeable ownership of these tech blue-chips, it has been hard to keep pace with market averages.
During the quarter we moved on from several companies, including Colony Capital, MSC Industrial, Extended Stay Hotels, Ameriprise, Matahari Department Stores, and Skellerup. In each case, we sold due to a lack of clear growth prospects. While the dividends they were paying were ample, we were concerned about their ability to grow their dividends. We also added two companies during the quarter. We bought Integrated Diagnostics Holdings, which provides lab testing in the underserved Egyptian market. We also made an opportunistic buy of Burford when a short report cut its price in half. Burford provides financing to law firms. In return, it receives a portion of their fees. We continue to “peel the onion” on Burford to assure that it truly does possess long-term growth prospects.
As always, I appreciate your confidence in our strategy of owning companies that have both the ability and the willingness to pay a rising stream of dividends. While the returns from that strategy have fallen short of the market in recent years, they have been relatively safe and they approached our high-single-digit-return goal. I believe our strategy will serve us well in the coming years, especially if the market faces tougher times.
DEFINITIONS
Basis Points (bps) are a one hundredth of one percent
Bloomberg Barclays US Aggregate Bond Index is a broad- based benchmark that measures the investment grade,U.S. dollar-denominated, fixed-rate taxable bond market
MSCI ACWI Index is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI ACWIis maintained by Morgan Stanley Capital International (MSCI) and is comprised of stocks from 23 developed countries and 24 emerging markets
Price to earnings ratio multiple is the ratio for valuing a company that measures its current share price relative to its per-share earnings.
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.
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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