Globescan Capital was founded on the principle that investing in high quality companies at attractive prices is the best and most consistent strategy for achieving favorable long-run risk adjusted performance. This remains as true today as it has ever been. Regardless of political changes, market movements and other investment fads, we have maintained and will continue to maintain the same disciplined adherence to that principle.
September marked the ten-year anniversary of the Lehman Brothers collapse, making the current bull market the longest on record (with a ‘bull market’ defined as one without a drop of 20% or greater). Logically, this should make any equity investor somewhat wary and cause one to take a closer look at valuations. On that front, markets themselves do not appear stretched in valuation terms. Indeed, on a simplistic metric such as the Price Earnings ratio the S&P remains less than 1 standard deviation away from it’s long term average. Couple that with the continued unattractiveness of other asset classes, and equities remain somewhat absolutely and certainly relatively attractive.
However, we must bear in mind that whilst markets do not look excessively expensive against earnings, these earnings have been boosted by both tax cuts as well as extensive share buybacks in recent years. That being said, the irrational exuberance and excessive risk taking that typically coincide with market tops are yet to appear in equity markets and are far more visible today in other areas such as cryptocurrency (which we continue to believe is not a legitimate asset class) and certain pockets of the debt markets.
As always, the Globescan approach is more methodical and defensive than many market participants, and as such may lag an index such as the S&P 500 during periods of irrational exuberance or very rapidly rising markets. This is something that we are content with in the short run, since we remain confident that our capital protection strategy will payoff over a full cycle. We are more than happy to sacrifice some upside today to avoid excessive risk tomorrow. This risk focused approach provides the best long-term returns.
We continue to focus on those companies where we believe we have a high degree of confidence in their future earnings power, and where we are not required to pay excessively high prices to own them.
In the fixed income world, as interest rates have continued to rise, so have bond yields. This has of course caused bond prices to fall. For those of you invested in our Moderate or Conservative strategies, this will have affected the fixed income allocations within your portfolio, however this was a change that we were expecting, so since the beginning of this year we have been reducing the duration of your fixed income allocation. In simple terms, duration is a measure of how sensitive an individual bond is to rising interest rates. Lower duration = less sensitive to rising interest rates. As such, we have managed to protect a good portion of your fixed income allocation by reducing the negative impact of rising rates.
As you all know, a fundamental concept that is at the heart of everything we do here is that markets are not perfectly efficient and as a result do not price all securities correctly. There are many reasons for this (which we will likely revisit in future in a dedicated article), but the important thing is that this pricing inefficiency creates opportunities for us as equity analysts and portfolio managers.
It enables us to buy shares in excellent companies, for less than we think they are worth. That is easy to say as a statement, but to really bring it to life we want to occasionally highlight individual stocks so that you have a window into the sort of research and analysis that we do here. It is the individual company research and thought process that has defined Globescan historically and will continue to do so. As such, at the end of this letter is a short ‘one- pager’ outlining our key thesis for CarMax, a new position during the quarter. This is a short summary to give you an insight into what has been many, many hours of work behind the scenes. If any of you would like to discuss this, or any other stock in more detail, please get in touch.