Know What You Own...
Friends & Clients,
Over the last few weeks, we have had several conversations with clients who have asked “What do these mutual funds own?” and “Are they capitalizing on any opportunities in the current environment?”. Below we answer the first question by highlighting a handful of the underlying positions you own through these mutual funds and how you are positioned today. To answer the second question, we revisited how the portfolio management teams we work with invest and provided detailed insight on two portfolio holdings.
First, some of the notable businesses we own in your portfolio include Microsoft (MSFT), Accenture (ACN), Alphabet (GOOG), Visa (V), Facebook (FB), Apple (APPL), Amgen (AMGN), Amazon (AMZN), Mastercard (MA), Berkshire Hathaway (BRK.B) and Adobe (ADBE). In our opinion, each of these are exceptional businesses which we believe have the ability to withstand challenging economic periods. We would expect that these companies will weather this storm admirably and emerge from the damage stronger than before. Your portfolios are positioned to benefit from their success whenever this storm passes.
Back in the Fall of 2019 we made a conscious decision to increase your portfolios exposure to higher quality businesses. Markets were rich at the time, the bull market was long in the tooth and excessive optimism left equities vulnerable. Today the companies we own in your portfolio are excellent businesses, which in our opinion, are recession resistant for the most part. They have secular tailwinds supporting growth in their industries and meaningful competitive advantages that should lend support in any challenging period, coronavirus pandemic included. Their strong financial position and flexible business models should provide the ability to steal market share or act as a natural acquirer if the economic situation worsens. These characteristics should allow them to emerge from this situation even stronger than they were going into it.
From a portfolio management perspective, we take solace in the fact that the portfolio management teams you are invested with are long-term oriented. They think and invest as if they are buying a business, not just the stock. They have been through several crises over their investing careers and have seen more than a few difficult periods. Through all of our recent conversations with our portfolio management teams we have heard one resounding message: “It’s go time”. In one case, a Portfolio Manager in your portfolio admitted that he was so optimistic about the opportunities he was seeing that he borrowed against his remaining 2020 salary to invest in his fund. “Go-time” indeed!
The largest challenge we have faced over the last few weeks has been the indiscriminate selling of stocks. For many of the exceptional companies highlighted above, the selling has created an opportunity for long-term investors. For example, in Polen Growth Fund (POLIX) one of the top positions is Alphabet (GOOG), Google’s parent company and arguably one of the best businesses in human history. Alphabet generates about 20% return on invested capital, has an annual free cash flow yield of 15-20% and has a long history of taking out their competition to increase the moat around their business (i.e. Youtube, Waze, Fitbit, Nest). After yesterday’s carnage the business is trading around a 16X Forward P/E. In a normal environment, some investors believe that business should trade near a 25X forward P/E(1). In layman’s terms there is currently a near 40% off sale on shares of a business that almost everyone you know uses every day, run by one of the most forward-thinking management teams in history. The team at Polen has undoubtedly taken notice of this risk/reward imbalance.
In Smead Value Fund (SVFFX) you own Berkshire Hathaway (BRK.B), the investment business run by two of the most well-respected value investors in history, Warren Buffet and Charlie Munger. As a quick refresher, the three criteria for buying a business at Berkshire are (2):
1) The business must have a positive return on capital
2) It must be run by able and honest management
3) It must be available at a reasonable price.
Berkshire has made an unbridled fortune since Warren & Charlie joined forces back in 1978, outperforming all relevant indices by several times since. Today, two of the best investors in history have $128B in cash on hand (as of the end of 2019) and prices for stocks are down by nearly 30% at the index level. It is safe to assume the Oracle of Omaha is preparing to deploy some capital and your portfolios will benefit.
If any questions come to light, or you would like to discuss our investment process or philosophy in more detail, please give us a call.
Sources:
1) Titan Research: “Recession Proof Playbook”
2) Forbes: “12 Warren Buffet – Inspired Stock Bargains Courtesy of the Coronavirus Crash”
Disclosure:
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
New World Advisors, LLC (“NWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where NWA and its representatives are properly licensed or exempt from licensure.
Past performance shown is not indicative of future results, which could differ substantially.