Separately, GuruFocus uses his “All Cap Equity Composite” (one of the two Separately Managed Accounts) to represents his performance, because the strategy has the longest history. The composite goes back to 1992 and he had a good run with the strategy until 2006,when he started to underperform the benchmark. He underperformed for three years in a row until 2009 during which he returned 41.2% and S&P 500 returned 26.5%. The star of Richard Snow is shining again.
Performance of All Cap Equity Composite
|Year||Return (%)||S&P500 (%)||Excess Gain (%)|
Stay Fully Invested and Fine Tune Portfolio
Richard Snow actually discussed a bit more about his investment principles and process in the annual report of the mutual fund:
We believe that this year’s performance validates our investment process and our unwavering commitment to it. We strive to manage through irrational, short-term movements in the marketplace by focusing on companies with solid financial foundations but weak near- to intermediate-term fundamentals and depressed stock prices. We held fast to our conviction throughout the downturn, staying fully invested—even in the face of adversity. Most importantly, we did not change our process but instead were more resolute. Our process does not always work over abbreviated periods or in all periods of extreme volatility; however we firmly believe that our process works over time. Our patience and perseverance served us very well in 2009.
The past 24 months have provided an illustration of the perils of market timing and the need for an intermediate- to long-term investment horizon. We are not market timers; it is our charge to find undervalued assets in the market place, determine our estimate of fair value, and to be disciplined about entering and exiting positions. By averaging into and out of our investments either through options strategies or prudent buy and sell processes (i.e. dollar cost averaging), we can exploit the short-term volatility in stock movements, giving us more freedom to focus on long-term value. This basic element of our investment process helped augment our returns over the past 12 months as we were buyers when many investors were selling equities for the perceived safety of cash and U.S. Treasuries.
Confident with His Current Portfolio
At the time (February, 2010) when Snow wrote the annual report he acknowledge the market as a whole is fairly valued, but many of his holdings are still at depressed level:
We have seen a significant rebound since our last annual report in February 2009. Financial markets have recovered despite continued challenges in the economy. The credit crisis is largely over, as evidenced by the stabilization of the U.S. banking system and the narrowing of credit spreads. Equity markets remain well below pre-crisis levels but are once again responding to fundamental drivers. Most importantly, the economic recovery in the U.S. appears to be broadening from early cycle consumer and financial companies to later cyclical technology and industrial sectors.
Despite encouraging evidence of economic recovery, many investors have chosen not to participate in the stock market rally. A consensus of pessimism has driven individuals and corporations to hold very high levels of cash and U.S. Treasuries for fear that the worst is yet to come. If the present economic recovery continues and the expected double-dip does not materialize, we believe that some of the cash on the sidelines will inevitably be reinvested in stocks and other corporate capital investments, further fueling the market recovery and economic turnaround. While the broad market appears to be fairly valued at present, many stocks remain at depressed levels. We have been beneficiaries of a wide range of investment opportunities offering both earnings growth and price-to-earnings multiple expansion. We are optimistic about the intermediate-term prospects for our own concentrated portfolio and we believe the portfolio remains significantly undervalued.
Use of Stock Options
Quite uncommon, Richard Snow uses option to generate additional income and hedge downward movements. According to the annual report:
One of the cornerstones of our investment strategy for the Fund is using options to generate additional income and to partially hedge downward movements in the portfolio. The options strategies we employ along with our ability to incorporate investments beyond long equity securities (e.g. options, fixed income, hybrid securities, etc.) into the portfolio as we find compelling opportunities differentiates the Fund from other straight long only equity investment products.
Our options hedging strategy remains focused on maximizing the performance of long equity positions through the sale of puts and calls. During the course of the last year, we took advantage of spikes in volatility to sell options at generous premiums. More recently, lackluster market volatility has reduced the number of compelling opportunities to sell options. Thanks to lower premiums and based on our view that the market, not our portfolio, is near fair value, we have become more active buyers of puts on the S&P 500 Index.
As of the end of February, the portfolio was approximately 90% net long. We had covered calls written against approximately 3% of our risk-adjusted long equity portfolio. In addition to the aforementioned puts on the S&P 500 Index, the portfolio continues to hold some short exchange traded funds (ETFs) as an additional hedge to our long equity portfolio. We are holding more cash than we have in the past as a component of our options strategies (e.g. written puts, and long call options) and to take advantage of any opportunities the market volatility may provide.
Looking forward, Snow is very bullish towards the performance of US equity:
Looking into the coming year, most market pundits and professional managers expect a slow, jobless recovery unlike prior cycles, calling this period the “new normal” and declaring that “it will be different this time.” But history suggests that the most severe downturns are often followed by equally strong rebounds. The data that we monitor also reveals that the recovery is on track, showing the same positive leading economic indicators observed in past recessions. In 2010, the disbursement of the majority of government stimulus funds should accelerate, helping to create jobs and further stabilize the economy. In short, we would expect any economic surprises this year to be to the upside.
Although the market is up significantly from its lows, the investments in the Snow Capital Opportunity Fund remain at a discount to our estimates of normalized valuations. Significant pools of cash remain on the sidelines, and any meaningful downturn in the market could spark significant inflows. It is our belief that investors can benefit meaningfully from active management in these markets since we believe having a disciplined process is the best course for navigating through the volatility.
As of March 31, 2010, Snow is heavily invested in Financials (27.8%), Health Care (22.7%), Industrials (13.6%) and Oil & Gas (10.7%).
|Oil & Gas||14.5%||10.7%|
Here are his top holdings as of March 31, 2010:
J.P. Morgan Chase & Co. is a global financial services firm. Jpmorgan Chase & Co. has a market cap of $161.94 billion; its shares were traded at around $40.76 with a P/E ratio of 15.92 and P/S ratio of 1.61. The dividend yield of Jpmorgan Chase & Co. stocks is 0.49%.
Snow sold about 140,000 shares of JPM in 1Q10.
No. 2: Bank of America Corp. (BAC), Weightings: 3.79% - 5,681,179 Shares
Bank of America Corp. is one of the world's financial services companies. Bank Of America Corp. has a market cap of $140.11 billion; its shares were traded at around $16.18 with and P/S ratio of 0.93. The dividend yield of Bank Of America Corp. stocks is 0.25%.
Snow sold about 600,000 shares of BAC in 1Q09.
No. 3: Community Health Systems Inc. (CYH), Weightings: 3.71% - 2,687,799 Shares
Community Health Systems, Inc. is a provider of non-urban acute healthcare services. Community Health Systems Inc. has a market cap of $3.56 billion; its shares were traded at around $38.19 with a P/E ratio of 13.84 and P/S ratio of 0.29. Community Health Systems Inc. had an annual average earning growth of 21.9% over the past 10 years. GuruFocus rated Community Health Systems Inc. the business predictability rank of 3.5-star.
Snow sold about 230,000 shares of CYH in1Q10.
The Gap, Inc. is a global specialty retailer which operates stores selling casual apparel, personal care and other accessories for men, women and children under the Gap, Banana Republic and Old Navy brands. The Gap Inc. has a market cap of $14.86 billion; its shares were traded at around $22.27 with a P/E ratio of 14.01 and P/S ratio of 1.05. The dividend yield of The Gap Inc. stocks is 1.8%. The Gap Inc. had an annual average earning growth of 10.7% over the past 10 years. GuruFocus rated The Gap Inc. the business predictability rank of 2-star.
Snow sold 400,000 shares of GPS in 1Q10.
No. 5: Health Net Inc. (HNT), Weightings: 3.19% - 3,430,790 Shares
Health Net, Inc. is an integrated managed care organization which administers the delivery of managed health care services. Health Net Inc. has a market cap of $2.25 billion; its shares were traded at around $22.42 with a P/E ratio of 9.62 and P/S ratio of 0.14.
Snow sold 400,000 shares of HNT in 1Q10.
No. 6: General Electric Company (GE), Weightings: 3.15% - 4,626,553 Shares
General Electric is one of the largest and most diversified industrial corporations in the world. General Electric Company has a market cap of $180.11 billion; its shares were traded at around $16.88 with a P/E ratio of 15.35 and P/S ratio of 1.15. The dividend yield of General Electric Company stocks is 2.37%. General Electric Company had an annual average earning growth of 14.1% over the past 10 years. GuruFocus rated General Electric Company the business predictability rank of 4-star.
Snow sold 600,000 shares of GE in 1Q10.
Richard Snow tends to hold his stocks for a long term, and fine tune his portfolio based on the market conditions. At the end of 1Q10, He is heavy with Financials and Health Care.
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