2018 Review and Commentary: Metis Value Partners

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“In the midst of chaos, there is also opportunity”, SUN TZU
2018 Review and Commentary

The final quarter of 2018 was similar to the first quarter when the markets made new highs followed by a sharp 10% correction. The recent quarter followed new market highs in September that quickly turned into a rout as declines cascaded into a free-fall. While there was a brief respite during the last few trading days of the year, the quarter saw the S & P 500 Index decline by 13.5%. For the entire year, the S & P 500 Index declined 4.38% while the Russell 1000 Value Index fell 8.69%. The MVP domestic value portfolio retreated 15.8% as indiscriminate selling pummeled the portfolio. Significantly, 2018 witnessed the first full year market declines since 2008. For the entire year, the best performing sectors were health care, utilities and information technology while the worst performing sectors were energy, materials and financials. In fact, according to Empirical Research Partners, there were significant ETF inflows in December in traditional defensive sectors such as healthcare, utilities and consumer staples. Once again, growth stocks outperformed their value stock brethren.

The carnage was not limited to U.S. equities as the MSCI EAFE index lost 13.32% for the year while the MVP International Value portfolio lost 21.96%. The sole relative bright spot was the MVP Dividend Income account that declined 7.91% for 2018 while the benchmark DJ Global Select Dividend Index fell 12.71%.

Despite the disappointing returns primarily due to the sell-off in December, MVP adhered to its process and took advantage of the chaotic events by adding to existing holdings and purchasing new names with greater discounts for the three strategies. Additionally, our process allowed us to lock in gains on holdings that reached our intrinsic value such as Sprit Airlines, American Express, and Citigroup while allowing us to trim existing positions such as Nokia, Fossil, and others in order to redeploy capital into deeper discounted names. Unfortunately, it is the annual dreaded year-end report card that did not reflect what we did throughout the year to add value to clients’ capital. Simply put, short term performance can make value managers look less than intelligent; however portfolio decisions made during chaotic periods can only prove to be right or wrong by Mr. Market over a 3 to 5 year holding period, if not longer. Also remember that our decisions are often contrary to the general market because as contrarians, we focus on valuation work and business fundamentals rather than daily stock prices.

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MVP 2018 CIO Letter FINAL

Stephen K. Kent, Jr., CFA
Founding Partner and CIO
Metis Value Partners, LLC

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