We have a rather simplistic investment philosophy: we like to buy assets when the prices of those assets reflect a sizable discount to what we believe them to be worth. We like to sell those assets back to the market when the market is willing to give us what we believe is a full, fair price. The catch is often that in order to buy discounted assets, there usually needs to be some fear and uncertainty reflected in securities prices. As the old saying goes, you can have cheap prices or you can have good news, but you usually can’t have both. When it appears that all is well in the world and the market is driving asset prices higher, we tend to be net sellers. That has been especially true for us over the past year, in large part because there has not been a significant market sell‐off during that time that has lasted for more than a few days to allow us to make significant new investments. Our strategy greatly benefits from the occasional market break in order to re‐stock our portfolio with new investments that meet our Fund’s risk‐averse, income generating mandate. In a way, we need the occasional market volatility that accompanies fear and uncertainty in order to achieve our strategy’s full potential.
It is somewhat unusual for mutual funds to let un‐invested cash build up in their portfolios, because it is an invitation to under‐perform the markets if the market appreciates in the near term. We suspect that very few mutual funds would be willing to let more than 30% of the assets sit fallow, particularly given the historically low rates on money market funds, but in our view the willingness to do so can be a competitive advantage in the right circumstances. The reason for this is that markets tend to run in cycles driven by fear and hope; when the market is going up, it feels like it will never come back down. The reverse is also true. Our view is that the best way to exploit the occasional bouts of market fear is to have an inventory of ideas that one is ready to buy at the right price, and the cash available to carry out that buying. One without the other is useless. The willingness to radically flex our invested balance up and down with market conditions (buying heavily into fear and uncertainty, selling appropriately into happy, fully‐valued market conditions) based on the availability of cheap individual securities or the absence of the same is likely to increase the chances of a good experience over time, and theoretically should reduce risk. The unfortunate reality is that following such a course can lead to uncomfortably long periods of under‐performance which can test the patience of both the Fund’s manager and its investors. It is for this reason that we are satisfied with the Fund’s recent returns that essentially matched the market’s strong performance. We are willing to endure a performance drag in the short term in order to achieve our longer‐term objectives, but it’s nice when we don’t have to. Continue Reading »