Q2 2024 Memo

2024 Q2 INVESTOR UPDATE

EQUITIES

Performance: Equity+ accounts gained ~9.6% since the start of 2024. Importantly, from our 2016 inception date your portfolios appreciated by ~16.0% annually, well ahead of our internal “double digit” bogey. Reported results include the deduction of all expenses and fees.

During the recent quarter there was little activity of note. We sold our position in the Puerto Rico Sales Tax contingent value instrument (CVI) with a gain of ~56% over a ~1 year holding period. After the substantial rise in price and no material upside to our expected cash flows, the risk/reward proposition made the decision to sell an easy one.

Outlook and Opportunity: Many continue to question the wisdom of value investing. The cult of growth and momentum has left the typical value investor in the dust, leaving some investors to ask if they should just give in, follow the herd into the tech industry’s obvious winners, and ride the new wave.

We see more wisdom in following a proven rational process than chasing popular trends.

While value hunters are faced with difficult conditions, we’re increasingly excited about the opportunities that are developing. Huge sums of money are being siphoned from the type of investments that we love most—steady, cash flowing assets—and into highly priced momentum stocks. The longer this persists, the more likely we will have a large opportunity set to exploit, We believe this opportunity is already starting to materialize.

During the recent lull in portfolio activity, we’ve been preparing. A handful of companies on our watchlist have already declined in price, though not yet enough for us to pull the trigger.

Your portfolios nave dry powder that we plan to invest at attractive risk adjusted returns, but until we have opportunities in hand, we are holding cash—and we’re ok with that—it’s currently earning north of 5% with minimal risk.

-Joe Di Scala, CFA

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FIXED INCOME

“If you don’t find a way to make money work while you sleep, you will work until you die.”
-Warren Buffet

Joe recently posted this quote on LinkedIn, and I thought it was worth repeating here.

His comments on Equities are posted nearby, but when we think of fixed income performance in particular, these words hit home.

And while the cause of keeping your investments in perpetual motion to your benefit may sound obvious, current market conditions indicate that our view is now that of the minority; How else does one explain the market’s willingness to accept far lower rates on 10-year bonds than those with a 2-year maturity. Many investors are clearly putting more faith in their vision of future interest rates over the opportunities that are currently at hand.

While the rest of the world focuses on the Fed, we think you’re likely to find better insight through our current portfolio metrics below which represent the rates at which you’ll be earning when you go to bed tonight.

Income+ as of 6/30/24:
Current Yield: 5.7%
Avg. Duration: 2.3 years
Discount to Par: 6.7%

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US Treasury 10 Year Yield: 4.4%

Muni+ as of 6/30/24:
Current Yield: 4.6%
Avg. Duration: 4 years
Discount to Par: 4.4%

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Bloomberg AAA 5yr Muni Yield: 2.9%

-Arch Peregoff

Q1 2024 Memo

2024 Q1 INVESTOR UPDATE

While Q1 performance was exceptional across Seabird’s strategies (please see our attached composite performance tear sheet), there were no remarkable events in the quarter nor news to report. To the contrary, news painted in the press as critical to an investor’s decision-making process is mostly irrelevant when a portfolio is constructed to perform over a wide variety of economic scenarios instead of a singular, predicted one. Rather than focusing on the machinations of other market participants whose focus is all too often short-sighted, Seabird’s focus is solely on the investments we own (or intend to own) and producing our own desired outcome. In short – to borrow a sports euphemism – we “run our own race.”

Despite Q1 returns far exceeding our expectations and the performance of relevant benchmarks, we’re not surprised that we were able to post positive returns in our fixed income strategies during a period when the broader market saw negative returns. And while it may be typical across the investment spectrum to assume that unusual performance must come at the expense of higher risk and volatility, Seabird’s low volatility continues to belie that particular industry orthodoxy. There’s one simple reason for this accomplishment (despite our never focusing on volatility per se): our laser-like focus on predictable income and distributable cash flow. One might call it the proverbial “bird in hand”.

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FIXED INCOME

The primary purpose of these quarterly notes is to give you a sense of how we see future returns for those who have additional capital to allocate. While that exercise is difficult in equities, it is somewhat illuminating in fixed income. As a reminder, we believe investors can gain a general sense of how to view future returns by simply dividing the average discount to par by the duration and adding that number to the current yield. Those tables are provided below:

Income+
Current Yield: 5.82%
Avg. Duration: 2.11 years
Discount to Par: 9.2%

Muni+
Current Yield: 4.54%
Avg. Duration: 3.8 years
Discount to Par: 7.3%

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EQUITIES

We would note here that we enjoyed strong equity performance in Q1 even while entering the quarter with about 18% of equity assets in cash. While holding cash has become far more palatable with money market rates exceeding 5%, and we see cash as critical asset in achieving outstanding returns, our preference will always be to have our assets invested in opportunities with likely double- digit returns. To that end, we initiated a position in Rentokil, a company whose primary focus is in the pest control industry. Of course, our initial attraction is quantitative; based on our assessment of distributable cash flow. We would also note that the qualitative characteristics are attractive as well: the appeal of an industry which has endured for ages, and the opportunity for CEO Andy Ransom to source attractive “tack-on” opportunities to reinvest capital at unusually high returns.

-Arch Peregoff
-Joe Di Scala