Q3 2024 Memo

2024 Q3 INVESTOR UPDATE

At our 8-year anniversary we thought we’d note a milestone or two of interest. Over the past year we entered into two new sub-advisory agreements with fast growing wealth managers – one in Florida and one right here in San Diego. We’re excited to be partnering with like­ minded investors who appreciate our unique approach, and the investment results it continues to produce. As each year passes, we bring better closure to the question of whether our returns have merely been an anomaly, or the direct result of a mindset that grows increasingly unusual despite its rational simplicity. We’ve spent the past 8 years focused solely on delivering reliable income and compounding at historically attractive rates, yet continue to radically outperform across all three of our core investment strategies: Municipal Bond, Taxable Fixed Income, and Value Equity.

EQUITIES

Equity+ accounts gained ~16.2% since the start of 2024. As always, we encourage you to ignore our short-term performance, no matter how good (or bad). To distinguish between true talent and mere coincidence, a good rule of the thumb is the longer the time frame, the more meaningful the data. From our inception eight years ago, your portfolios have appreciated almost 3.5x, or ~16.3% annually, net of fees. I’m proud to say our results have far surpassed our expectations since starting the firm.

During the quarter, there were a few transactions in your portfolio:

1. We sold our long-term holding in McKesson. This was a very successful investment – a 4 bagger – that generated an annualized gain of ~25% over our holding period. We sold as the market price far surpassed the economic reality of the business and we saw a better risk/reward proposition in cash.
2. We also bought shares in two very high-quality businesses: McGrath Rent and Willscot MobileMini. Both manufacture portable storage containers and mobile workspace solutions. These companies are recurring cash flow machines, have pricing power, and a profitable growth runway tied to infrastructure projects and reshoring supply chains in the U.S. We pounced on them when the markets were volatile in early August and expect to earn long­ term returns in the double digits.

Other thoughts: I try to avoid commenting on market trends, so I will confine my observations to this: The world feels risky. Asset prices are high. For now, most people don’t seem to be paying attention, but this won’t last forever. At some point, the complacency will wear off and investor’s focus will return to the compelling risk/reward imbalance associated with owning classic underpriced cash flows. We will do quite well when this plays out, and if history is a guide, someone will slip and sell us something at an attractive price along the way. It happens more often than you’d think.

-Joe DI Scala, CFA

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FIXED INCOME

After operating through one of the most difficult interest rate environments in close to 100 years, it’s a pleasure to be operating in one in which current rates offer an attractive if not spectacular return. Apropos of Joe’s comments above, money market rates in the vicinity of 5% provide plenty of latitude for us to wait patiently for attractive opportunities, as well as the ability to act quickly when they do arise.

Income+ as of 9/30/24:
Cash Yield:  5.6% 
Avg. maturity/float:  2.1 years
% Discount to par:   6.4%

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US Treasury 10-Year Yield: 3.8%

Muni+ as of 9/30/24:
Cash Yield: 4.7% 
Avg. maturity/float: 2.8 years 
Discount to par: 4.0%

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Bloomberg AAA Syr Muni Yield: 2.5%

-Arch Peregoff

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