Our 2018 first quarter performance for the Institutional share class was +4.18% compared with S&P 500 Total Return at -0.76%. For the trailing twelve months ending March 31, 2018, performance for the Institutional share class was +28.54% compared with S&P 500 Total Return at +13.99%.
Our top-5 performers this quarter were Mastercard, Moody’s, Constellation Software, Roper, and Visa. These long-time holdings continued to produce excellent fundamental results. As you know, excellent fundamental results are sometimes (but not always) reflected in share price gains. This quarter we thought there was a good correspondence.
The notable performance detractor in the quarter was Dollar Tree (DLTR, Financial). On March 7th the Dollar Tree share price declined more than 14% as management communicated the decision to retain and reinvest about $100M of the expected $250M tax reform benefit in 2018. Most of the reinvestment will be in higher wages and better benefits for workers.
We dwell on this story for a moment because we believe it tells the bigger story of what we see going on in our economy. The best businesses with the least challenging competitive environments (e.g., our top-5 performers listed above) are great beneficiaries of the strong economy and tax reform, whereas businesses in more competitive environments (including retailers, such as Dollar Tree) are seeing these benefits substantially offset by rising wages and other costs.
Other market news in the quarter included a spike in volatility as measured by the commonly talked about “VIX” index and questions on whether the VIX is manipulated. This had very little bearing on our thought process. News media also focused on privacy issues at Facebook and the future of the so-called “FANG” large technology businesses. Together, Apple-Amazon-Facebook-Alphabet-and-Netflix comprised more than 11% of the S&P 500 Index in the quarter. We don’t own shares in any of these.
In our view, what mattered more than “FANG” headlines was the poor performance from a wide variety of large consumer, retail, energy, utility, bank, and industrial businesses. We count more than a third of the S&P 500 companies having a decline of greater than 5% in the quarter. A lot more is going on aside from Facebook! The fact we had relatively fewer of these situations helped us more than did our lack of “FANG”.
Chuck, Tom, & John
