Seven Canyons Strategic Income Quarterly Commentary
To begin with, let me express my appreciation for your willingness to join me in launching our new firm Seven Canyons Advisors. My partners in this new venture include my two sons, Josh and Spence, my son-in-law Eric, as well as Wes Golby. As you know, Josh also came from Wasatch as the lead manager of what is now the Seven Canyons World Innovators fund. Spence came from Grandeur Peak where he was the portfolio manager of Grandeur’s Emerging Markets Opportunities fund. Wes was a portfolio manager for S Squared, a leading tech investor. Eric’s years of work in healthcare administration trained him well to run our back office.
I want to assure you that I will continue to manage our fund in the same manner which I have been managing it since its inception. I expect WASIX to be even better due to the insights my partners bring from their prior positions.
Over the past year WASIX returned 10.25%, which is above our high single digit return goal. This growth was supported by a year over year 10.50% increase in dividends. While we did fall short of our S&P 500 benchmark, which had a 17.95% return, we handily beat the -1.31% return of our bond benchmark, the Bloomberg Barclays US Aggregate Bond Index. Our results were spot-on our goal of returns in the range right between stock and bond returns.
Mastercard was the leading contributor for the past year, and Visa was not far behind. Both companies were also among leading contributors for the quarter. These companies are both benefiting from the replacement of cash with credit cards and digital payments. Herbalife and Arbor were the other two contributors adding more than 1% to WASIX returns over the past year. Herbalife is recovering from Bill Ackman’s short attack by demonstrating that there is a genuine market for its dietary-based product line. Arbor’s recent acquisition and internalization of its previously external manager have given the stock a boost.
For the quarter, WASIX’s 5.28% return fell short of our S&P 500 benchmark, which returned 7.71%. However, with bonds returning -.08%, WASIX’s return was on target between our stock and bond benchmarks. WASIX largest contributors for quarter were Mastercard, Visa, and Walgreens, each adding around 50 bps. Losers were chip-related companies Microchip and BE Semiconductor, which subtracted a total of 99 bps from WASIX’s returns.
This quarter, I plan to leverage the international experience of my Seven Canyons partners and invest in more companies around the globe. While WASIX has always had the ability to own non-US companies, to date we have only held a company or two. One of the primary benefits of adding more international names is that they tend to pay higher dividends than US companies do.
This beneficial experience of my Seven Canyons partners has already helped add several companies to the portfolio. Photo-Me, out of the UK, is primarily a chain of internet connected photo booths capable of producing government IDs which ease the process of obtaining passports, driver’s licenses and identity cards. PHTM.LN offers a 7% yield and has grown its dividend at more than a 5% annual rate over the past five years. Norway-based Ocean Yield offers a yield of more than 9%. OCY.NO is a specialty finance company focused on the shipping industry. Its seasoned management team employs conservative lending practices to provide capital to ship owners. Ocean Yield is benefiting from the bottom of the shipping cycle after many bigger banks pulled back from the sector during a protracted downturn. DOM Development is the preeminent housing developer in Warsaw offering a yield of over 11%.
I am pleased our fund did well during the more volatile market environment of recent months in spite of the reduction in our stabilizing cash anchor from 20% to around 10%. As a reminder, I increased our cash position to 20% as a precautionary measure in response to the market’s sharp decline from its January peak. As it has become apparent that the sell-off was not an immediate precursor of economic woes, I have used some of our cash anchor to add to our holdings of companies exhibiting both the ability and the willingness to pay a growing stream of dividends.
The companies we currently own have grown their dividends at a 9.5% rate over the past year. The rapid growth may suggest a bright future. As I mentioned last quarter, I look forward to our first holding where the dividend exceeds the purchase price of our stock.
President Trump’s trade war tweets continue to unsettle the market, but I believe that economic fundamentals are solid. The economy is growing and inflation is contained. I am always on the lookout for signs of potential issues.
Dividends are not guaranteed and companies that pay dividends can cease paying dividends without notice
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 does not indicate future results.
For a list of top ten holdings and performance charts, please click here.
Basis Points (bps) are a one hundredth of one percent
Bloomberg Barclays US Aggregate Bond Index is a broad base index, maintained by Bloomberg L.P and is often used to represent investment grade bonds being traded in United States.
S&P 500 is the abbreviation for the Standard & Poor’s 500, an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ
*The Fund was organized as a successor to the Wasatch Strategic Income Fund (the “Predecessor Fund”), a series of Wasatch Funds Trust. The Predecessor Fund was reorganized with and into the Fund on September 10, 2018.