Clipper fund was up 15.27% in 2006. New manager Chris Davis is writing to shareholders.
"Today’s environment of homogenous valuations is almost the mirror image of the late 1990s when the largest and best-regarded companies traded at big premiums to the market. In that “nifty-fifty” world, there was almost no price too high to pay for the biggest and best-regarded companies. For example, in 1999 the largest 50 companies in the S&P 500 traded at a 168% premium to the next 450 companies. At the beginning of last year, the top 50 companies traded at a 5% discount to the next 450. Because investors tend to buy what has already gone up and sell what has not done well, it is not surprising that investors have been fleeing from funds that invest in such large-cap, growing companies and buying funds (including hedge funds) that focus on the small and mid-sized companies that have soared in the last five years. While such a trend can continue for a long time, it is only a question of when, not if, it will reverse. With this idea in mind, Clipper has built positions in companies like American Express, Wal-Mart, Harley-Davidson, Microsoft and News Corp. without paying premium prices."
"While some investors may be startled to see such growth companies in what is often labeled a value fund, they are making a mistake in thinking of growth and value as two different approaches to investing. Growth is simply a component of value. Companies that grow profitably are more valuable than companies that don’t. As a result, to the extent that investors are overweighting one component of the equation, there are often opportunities. In the late 1990s, the market overweighted the growth side and underweighted the value side. In recent years, the market seems to be doing the opposite. "
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"Today’s environment of homogenous valuations is almost the mirror image of the late 1990s when the largest and best-regarded companies traded at big premiums to the market. In that “nifty-fifty” world, there was almost no price too high to pay for the biggest and best-regarded companies. For example, in 1999 the largest 50 companies in the S&P 500 traded at a 168% premium to the next 450 companies. At the beginning of last year, the top 50 companies traded at a 5% discount to the next 450. Because investors tend to buy what has already gone up and sell what has not done well, it is not surprising that investors have been fleeing from funds that invest in such large-cap, growing companies and buying funds (including hedge funds) that focus on the small and mid-sized companies that have soared in the last five years. While such a trend can continue for a long time, it is only a question of when, not if, it will reverse. With this idea in mind, Clipper has built positions in companies like American Express, Wal-Mart, Harley-Davidson, Microsoft and News Corp. without paying premium prices."
"While some investors may be startled to see such growth companies in what is often labeled a value fund, they are making a mistake in thinking of growth and value as two different approaches to investing. Growth is simply a component of value. Companies that grow profitably are more valuable than companies that don’t. As a result, to the extent that investors are overweighting one component of the equation, there are often opportunities. In the late 1990s, the market overweighted the growth side and underweighted the value side. In recent years, the market seems to be doing the opposite. "
Read the complete letter
Also check out:
