Seven Canyons Strategic Income Quarterly Commentary

Q1 2019

WASIX’ performance for the first quarter of 2019 was on target with a 9.6% return which met our high single digit (HSD) return goal. It also fell between our new ACWI stock benchmark return of 12.3% and the 2.9% return of our bond benchmark. I don’t usually like to spend much time talking about quarterly performance as a single quarter is just too short a time period to offer much insight into how good a job your portfolio manager is doing. I will say that the first quarter snap-back rally is a welcome relief from the market plunge during the 4th quarter of 2018. Mastercard, Visa, Comcast, Canadian National Railroad, Cognizant and Suncor were all strong contributors during the quarter. There were only few losers and none had a large enough impact on returns to call out.

The results for the past year were not as sanguine as WASIX returned 3.9% falling short of our HSD return goal. We did beat the 3.2% performance of our ACWI stock benchmark but fell short of the 4.6% return of our bond benchmark. I believe that a year is still a rather short period over which to assess the performance of a portfolio manager. A better assessment period is the traditional 3 to 5 year market cycle. With that in mind, I will spend some time discussing WASIX’ performance over the past year and more time discussing WASIX’ performance over the past 3 years.

Over the past year the three strongest contributors to our performance were Mastercard (MA), Visa (V) and Tractor Supply (TSCO), all of which we have held for some time and expect to hold for a long time into the future. Mastercard and Visa are the predominant “rails” over which electronic payments ride. The entire world is moving from cash transactions to electronic transactions. But we are still far from exclusively digital transactions. Even in the U.S. most transactions are not yet digital. Some fear that MA’s and V’s traditional rails will be supplanted by newer forms of payment such as those based on QR (Quick Response) codes. But, so far, most of the newer payment technologies have found it most efficient to rely on MA’s and V’s ability to connect seamlessly all parties to a transaction. While like all brick and mortar retailers, Tractor Supply (TSCO) is threatened by the rise of online commerce, TSCO’s unique rural store format has allowed it to continue to thrive.

The 3% contribution to our performance from our holdings in a group of diversified financial companies is also worth calling out. Arbor (ABR) led these firms with a near 1% return for the year. We’ve been strategically overweight this group and underweight banks. This strategy was particularly effective over the past year as banks as a group lost money.

WASIX’ major loser over the past year was BE Semiconductor (BESI.NA) as it was hurt by Apple’s failure to grow their phone sales. BESI.NA supplies semiconductor assembly equipment used in fabricating the chips which go into a phone. When Apple realized phone sales weren’t going to grow, it had no need of additional assembly equipment so it canceled a large order with BESI.NA. This led investors to sour on the stock. I have cut our position in half but I continue to believe that BESI.NA is an excellent company and worth a place in our portfolio. Our other semiconductor holdings including Microchip (MCHP) and TSMC (TSM) were down across the board.

Several other companies are worth mentioning even though their smaller weights precluded them from making a significant contribution to WASIX returns. All of these firms are representative of WASIX’ more global focus stemming from our move to the Seven Canyons platform. The first three are all emerging Asian retailers. Informal retail (small roadside shops) is still a dominating force in these growing economies. However as an economy emerges, formal retail takes over. Mitra Adiperkasa TBK (MAPI.IJ) and Matahari Department Stores (LPPF.IJ) are both Indonesian formal retailers that we own. In addition Metro Retail Stores (MRSGI.PM) is a Philippines retailer that reflects our increasing retail formalization theme. Both MAPI and MRSGI were strong performers over the year. In contrast LPPF was one of our weakest performers. Another smaller holding Grupo Galicia was also weak. Argentina’s rampant inflation has made it difficult for Argentine banks to navigate a successful path.

You’ve often heard me say that I’m looking for companies who have the ability and the willingness to pay a growing stream of dividends. Over the past year, the median dividend growth rate for the stocks we hold in our portfolio was 12%. While this far exceeded the growth rate of WASIX, it reflects the fact that the companies we own did better over the past 12 months than their stock market performance suggests.

Over the past 3 years WASIX grew at a 7.6% compound annual growth rate (CAGR) meeting our HSD return goal. We fell far short of the 11.3% return of our ACWI benchmark. But we did exceed the 2.0% return of our bond benchmark. Interestingly the dividends of the companies we own grew at more than a 12% CAGR suggesting that there is room for stock prices to catch up with dividends.

Mastercard (MA) and Visa (V) each contributed about 1% to our total return. Diversified financial companies as a group led by Arbor (ABR) added almost 3%. The three year story for both MA and V is the same as the one year story. These companies are primary beneficiaries of the shift away from cash to digital payments. ABR’s price rise was primarily driven by its decision to internalize its manager thus ensuring alignment of objectives. It can be tempting for the external manager of a real estate investment trust (REIT) to grow at all costs as their fees are based on the REIT’s assets. An internal manager will be more focused on profitable growth.

WASIX suffered its most significant loss in the strong health care sector. The drug store stocks we own (Walgreens (WBA) and CVS (CVS)) along with the drug distributor McKesson (MCK) cost us about a 3% loss. I was attracted to my perception of the value of these stocks. Not only do they provide essential services which aren’t going to vanish any time soon but they were trading at about half the multiple at which they used to. I thought we were getting a bargain when we bought them. I missed a couple of events that have continuing impact on their value. The most important has been the continuing pressure on drug prices. This pressure notably ramped up when Martin Shkreli first made the headlines for his company’s outrageous markups in the price of old but critical drugs. Drug pricing became a front and center issue in the 2016 election campaign. President Trump has continued this pressure. More pressure on the stock prices has come from Amazon’s moves towards creating an online pharmacy.


As I commented in our recent economic overview, the economy appears to be “steady as she goes.” Employment is strong as rising wages are attracting more and more workers back into the labor force. But, for now, inflation remains under control. This gave the Fed room to pause from their increase in interest rate hikes. As I have often said, the market takes its cues from the economy. So long as the economy remains healthy, I expect the market to follow along.

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 Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost.

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ACWI index (All Country World Investable Markets Index) is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world

CAGR (Compound Annual Growth Rate) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance assuming the profits were reinvested at the end of each year of the investment’s lifespan.




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.

An investor should consider investment objectives, risks, charges and expenses carefully before investing. Click this link to obtain a Prospectus, which contains this and other information, or call us at +1 (833) 722-6966. Read the prospectus carefully before investing.

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