We talked about how the Best Ideas Newsletter portfolio has outdistanced a flat market since May 2015, the last time that the market was at present levels, but…it gets better.
“In the five year period ended August 31, 2016, only 9.5% of actively managed large-cap domestic equity funds beat the S&P 500. Meanwhile, the Best Ideas Newsletter portfolio has generated nearly 33 points of outperformance since its inception in May 2011.” — Kris Rosemann
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By Kris Rosemann
At Valuentum, we have highlighted the potential for investors to beat the market, often chiding index-funds that are content to take individuals’ capital and collect a fee on assets that they are adding little value to. However, it appears that active money managers have had little success compared to the broader market in recent years, which has caused $422 billion in redemptions from actively run funds over the past five years. Over the same time period, passive funds have attracted $480 billion as investors appear satisfied with riding the upward trajectory of stocks since the doldrums of the Financial Crisis.
Part of the lackluster performance of active managers can be explained by monetary policy distorting fundamentals, energy resource pricing, interest rate uncertainty, and global economic growth concerns, but the notion that only 1 in 10 active money managers can outperform the broader market is certainly an unsettling one, not only for investors, but also for the asset management industry. When considering the S&P’s return of nearly 80% over the five year period ending August 31, 2016, such performance becomes more understandable, though still concerning.
More short-term oriented relative returns have been less encouraging, as the recent volatility and “flatness” in the broader stock market should have provided ample opportunities for outperformance. In the twelve month period ended June 30, 2016, only 15% of large-cap equity funds (S&P 500), 12% of mid-cap funds (S&P Midcap 400), and 11% of small cap funds (S&P Smallcap 600) were able to match the stock indices they track. Some money managers may be taking solace in the past, as the last time active managers lagged the indexes to such a degree was during the dot-com bubble in the late 1990s and into 2000. After the bubble burst in 2000, outperformance grew again. Could a similar dynamic be at play now? “Pop the Bubbly? Everyone Is Getting Rich (August 2016).”
However, if generating outsize returns has been so difficult over the past five years, Valuentum must then be an anomaly. As of the September edition of the Best Ideas Newsletter, the newsletter’s portfolio has outperformed the S&P 500 Index by nearly 33 percentage points since its inception on May 17, 2011. We could break down the extensive hours of manpower that it took to build Valuentum and its investment philosophies as that is what ultimately drove such outperformance over a sustained period of time, but a keen focus on fundamental strength, the power of cash and free cash flow generation, and staying true to the Valuentum style of investing can all be attributed with the portfolio’s wild success over the past 5+ years.
While there has been a number of stock picks that have contributed to the outperformance of the Best Ideas Newsletter portfolio, a few core stocks have been stalwarts in the portfolio’s lineup. Apple (AAPL), Intel (INTC), and Visa (V), have all been in the portfolio since 2011, and are currently the three of the top performers in the portfolio. Let’s take a look at what has made each of these companies noteworthy over the past five years.
Apple’s success has been no secret. As of September 14, 2016, shares have generated a return of nearly 135% since the initiation of the position, which currently makes up just under 6% of the Best Ideas Newsletter portfolio. The company best-known for the iPhone has cultivated unparalleled brand strength and incredible consumer loyalty, and it has an ecosystem of apps within the App Store that has found its way into the everyday lives of consumers. Apple has effectively made its products a “necessity” to the quality of life of many consumers enjoy across the developed world. The iPhone is a status symbol and an impressive display of technological prowess all at once. Of course, we cannot fail to mention that Apple is one of the strongest free cash flow generators on the market and has a cash hoard larger than the market caps of many firms included in the S&P 500. Despite the impressive performance, shares remain undervalued.
Intel is another example of a company that has more than doubled since its addition to the Best Ideas Newsletter portfolio in 2011. Though the firm’s balance sheet health has taken a hit due to the acquisition of Altera, it is still a top-notch free cash flow generator, and management expects to improve its cash balance in coming quarters. Positive news continues to roll in for the company, as it now has a share in the production of the iPhone 7 and 7 Plus, “Apple’s Brand as Strong as Ever (September 2016),” and management recently upped its guidance for the third quarter of 2016 thanks to signs of improvement in PC demand. 2016 has been a strong year for shares of Intel, just as we expected, “Intel May Have a Breakout Year in 2016 (October 2015).” Shares have surged to the upper $30s range after spending the first six months of the year languishing in the high $20s to low $30s range. Our fair value estimate currently sits at $42 per share, but we would not be surprised to see upside to the upper bound of our fair value range of $50.
While Apple and Intel have given us next to nothing to complain about in terms of returns, Visa has been even better. As of the close on September 14, our position in Visa in the Best Ideas Newsletter portfolio has more than tripled. The company continues to ride the secular trend of electronic transactions taking the place of cash and check transactions, and as it does so, it is benefiting from the network effect. As a growing number of consumers adopt the use of credit and debit cards around the world, more and more merchants will be forced to accept them, which creates a virtuous cycle and a demand dynamic seen in few other businesses. Visa has significantly reduced its balance sheet health due to the acquisition of Visa Europe, but like many of the Best Ideas Newsletter portfolio constituents, it is a tremendous free cash flow generator. We fully expect the company to rebuild its net cash position in coming years as a result of such a quality. Visa is currently the largest holding in the portfolio at more than 7% of the total value, due in part to its impressive returns. Shares are currently changing hands near our fair value estimate of $82 per share, but we see no reason why shares cannot run up to the upper bound of our fair value range of $98.
While we are proud of our strong track record, we remain humbled and grateful for the opportunity to provide our members with what we believe to be the highest-quality investment research we can produce. It has not been easy to generate outperformance at the rate the Best Ideas Newsletter portfolio has, as the mere 9.5% of money managers that were also able to outperform can attest. However, complacency is not a quality you will find in our team at Valuentum, and we hope you continue to expect nothing less than the best from us. With the utmost sincerity, thank you to each and every one of our members, and here’s to another five years of outperformance!