Happy New Year!
2015 was a challenging year from a performance perspective, though there were some bright spots. Our international funds, First Eagle Overseas and IVA International, had slightly positive returns despite the MSCI EAFE index being in negative territory. BlackRock Global Allocation also outperformed the MSCI All-Country World Index. As far as acts of omission, our hesitancy to utilize commodity-related funds has thus far proven beneficial.
The Fairholme, Royce Special Equity and Ivy Asset Strategy funds all suffered double-digit, or close to double-digit losses. These losses, though unpleasant at the moment, are not in our opinion indicative of a departure from their stated objective, which is to deliver solid long-term returns. Fairholme, for instance, has beaten the S&P 500 in about 86% of the 10-year rolling periods in which it has been in existence. Royce Special Equity topped the Russell 2000 in roughly 85% of its rolling 10-year periods, and Ivy Asset Strategy’s success rate versus the MSCI All-Country World Index was 98%.
The attentive observer will note that these numbers are not 100% - that is, there are some 10-year time periods when the funds have (and will) underperform. Through our ongoing research, we have become convinced that the solution to this problem is not to switch to funds that we think will always beat their benchmarks, as we have yet to find many of these (and those that have just haven’t been around long enough). Even Warren Buffett’s Berkshire Hathaway has not been exempt: the stock has trailed the S&P 500 by almost 1% per year for the last thirteen years.
Short-term losses are a reflection of the fact that even highly-skilled, bargain-hunters struggle to buy at absolute lows. A prime historical example can be found in a fund we have recently begun using: Hennessy Focus. Toward the end of 2000, the fund (then called FBR Small Cap Value) reported a sizable position in American Tower stock. American Tower had been falling since its peak in March of that year, but was nowhere close to its bottom. From the beginning of 2001 to end of October 2002, the price had plummeted another 96%! Instead of selling, management at that time took advantage of lower and lower prices by increasing their share count throughout 2002. American Tower, still a top holding in Hennessy Focus, has averaged about 30% a year since the beginning of 2003.
We think a recent quote from Bruce Berkowitz of Fairholme accurately summarizes not only his fund, but also our approach in general: “Our strategy requires remarkable patience during volatile periods when we look wrong, but has shown that perseverance will be well rewarded.”
Wishing you a rewarding 2016,
Aaron Pettersen, CFA, CFP®