MVP: 2Q 2019 Review and Commentary
“Successful investing involves the disciplined and patient execution of a long-term strategy, especially when it is emotionally difficult. That is usually the time the opportunities are the greatest.”, Bill Miller.
The second calendar quarter of 2019 was another positive one for the capital markets. After a very strong performance in the initial quarter of the year, the U.S equity markets advanced in a yo-yo fashion in the second quarter with strong gains in April and June but with May experiencing a swoon of approximately 6.5%. For the entire quarter, the S & P 500 Index showed a total return of 4.3%. During the quarter, growth outperformed value again while large cap stocks outperformed their small cap brethren. The best performing groups were financials, materials and information technology while energy was the only group with negative performance. For the first six months of the year, the S & P returned an impressive 18.5%, a performance that was better than many prior full-year returns. The fixed income markets also had a good quarter with the benchmark 10-year U.S. Treasury falling from a yield of 2.42% at the end of the first quarter to a yield of 2.00% at the end of June.
Metis Value Partners, LLC (MVP) had a solid quarter with the Value strategy producing a total return of 10.02% for the six months, somewhat less than the Russell 1000 Value Index with a return of 16.24%. The MVP International Value strategy had a total return of 8.76% for the six month period compared with the MSCI EAFE Index with a total return of 11.77%. Lastly, the MVP Dividend Income strategy had a six month total return of 13.48% compared to the DJ Global Select Dividend Index with a total return of 5.01%.
As you may recall, our research process at MVP is focused on a thorough analysis as rational business owners looking at a company’s balance sheet and income statement and developing our own estimate of a firm’s intrinsic value. Once established, we then seek to purchase a company’s stock at a significant discount to its intrinsic value. An example of this dynamic in action occurred during the recent quarter when Allergan was bought by ABBVIE, another one of our holdings. We first became attracted to both names due to their cash flow generations, attractive valuation and solid underlying business fundamentals. As the market became volatile early this year, we adhered to our process and increased our position in AGN with lower prices. AGN quickly went from a detractor to our performance to a contributor in one day with a 25% gain after the merger announcement, hence highlighting our convictions and research process. In addition, being fundamental value investors with a long term focus, we were pleased to see that Xerox was the best performing stock among all the stocks in the S & P 500 Index for the first six months of the year with appreciation of 87%. These two examples are further proof that our disciplined approach continues to identify attractive companies for purchase in our three strategies. Similarly, across all three strategies, we continue to own holdings that we believe are undervalued and in which our estimated intrinsic value for them hasn’t been recognized by “Mr. Market”.
From an historical perspective, the average annual return from the stock market over the last seventy years has been approximately 8.5%. With this in mind and with first half returns well in excess of that figure, it may be helpful to evaluate the conditions that have fostered these returns in order to make some judgments’ about what the future holds for the capital markets.MVP 2Q19 CIO Letter Final