Todd Intrinsic Value Opportunity Review
January 17, 2014 | Jack White, CFA | Partner, Senior Portfolio Manager
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|4Q13||1 Year||3 Year*||5 Year*||7 Year*|
|Intrinsic Value Opportunity (Gross)||10.93%||44.52%||20.12%||25.69%||8.79%|
|Intrinsic Value Opportunity (Net)||10.74%||43.52%||19.27%||24.82%||8.06%|
|Russell 1000 Value||10.01%||32.53%||16.06%||16.67%||4.52%|
*Annualized Total Returns. Please refer to the Performance Disclosure at the bottom of this page for futher information.
The Intrinsic Value Opportunity Strategy had a banner year, beating the benchmark during the quarter and year by dramatic margins. For the quarter, the strategy gained 10.9%, capping off a year that offered gross returns above 44%, well ahead of the indexes. Longer term results have been excellent as well, and we are pleased to report the product is in the top docile of value managers according to eVestment, over all time frames since inception.
The fourth quarter will likely be remembered as "that time they shut the government and nobody cared." It may feel like ancient history, but early October was when the shutdown debate was raging. As the quarter wore on, we found that politicians can compromise, and worries about debt defaults were misguided. The shutdown ended with a Congressional compromise agreement on October 16. Congress also approved a budget framework in mid-December that should lead to less contentious relations between the opposing parties for the next two years.
The economy entered the quarter a little soggy, but showed continued progress as the quarter wore on. October non-farm payrolls (reported in early November) were much higher than expected, and followed by stronger results for November as well. We saw a disappointing number for December, but unemployment claims remain low and the unemployment rate is now well below 7%. In all, the economy feels like it is on track for a fairly durable recovery.
Bond rates rose as the Fed began to taper off their bond purchase program in December. This is a mixed blessing. We've found that the stock market has liked the bond purchase programs over the past couple of years, though it could successfully transition to no bond purchases if investors think we have a self-sustaining recovery. That is a key question to answer in 2014. Meanwhile, we see early signs that investors are warming up towards stock purchases as they begin selling off the bonds that were purchased over the past five years. We think this trend continues as bond rates move higher over 2014.
We believe the stock market still offers good opportunities for capital appreciation, though we acknowledge that a 32% gain last year probably recognizes some of the potential positives. We recently wrote a piece titled "The Case For S&P 2500" detailing our belief that we are now in a secular bull market that should last for some time to come. We see pent up demand, contained inflation and a general absence of economic excesses in most developed markets and an emerging market middle class driving demand growth. That leads us to expect a continued durable recovery, which translates into higher stock markets worldwide. When you see profit taking at some point this year, it is likely a buying opportunity and not the beginning of a 2000 or 2008 type pullback.
We present our customary charts on what factors have been helping and hurting performance for stocks below. These charts look very similar to what we have seen for most of the year. Investors are seeking low quality stocks with high betas and low valuations. Any emphasis on Quality, Larger Market Capitalization or Dividends has been severely penalized. Fortunately (for this strategy) the emphasis is on valuations, relative strength, share repurchase and gross profits. Most of those factors added to returns over the past year.
The Intrinsic Value Opportunity fund is unconstrained when looking at sectors, and we limit the portfolio to our highest conviction 30 stocks. We follow where our discipline tells us to invest in an unemotional, rules based manner.In the most recent quarter, our largest sector positions were found in Consumer Discretionary, Technology, Financials and Health Care. We were completely out of the Telecommunications and Utilities sectors with only very modest positions in Staples, Industrials and Materials.
The best five contributors to return during the quarter were Western Digital, First Solar, Seagate Technology, Ameriprise Financial and Lincoln National Corporation. All of these stocks gained more than 20% during the quarter. The primary detractors to the portfolio during the quarter were Family Dollar Stores, Abercrombie and Fitch, Western Union, Dollar Tree and O'Reilly Automotive.
This portfolio tends to focus on groups of stocks that are benefitting from similar themes. Our early January re-balance "thinned the herd" on some of the notable themes from last quarter. Specifically, we removed all of the discount auto parts stores and a couple of the off priced retailers. Additionally, all of the managed care stocks and many of the insurance companies/financial services stocks were removed as well. Lastly, we had three beneficiaries of higher consumer spending around the home last quarter, while this quarter, we have one. A new theme did come through as we introduced a pair of leading food retailers into the portfolio. Additionally, the discipline added to the technology sector, specifically into some older line recovery stories that we find attractive. In all, it is a more eclectic list this quarter, but there are still thematic pockets within the portfolio.
We are very pleased with the performance of the strategy this quarter, and it reinforces our belief that Price to Intrinsic Value is the best indicator of a stocks future value. Please feel free to contact any of us if you would like to see any additional information about this strategy.
Jack White, CFA Curt Scott, CFA Jack Holden, CFA
Todd Asset Management LLC
S&P 500 - 1838
Russell 1000 Value - 923
Refer to Performance Disclosure on the bottom of this page for more information on the performance numbers presented. These notes are an integral part of this letter and should not be reproduced or duplicated without these notes.
This publication contains the current opinions of the author but not necessarily those of Todd Asset Management, LLC. Such opinions are subject to change without notice. This publication has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable but not guaranteed. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission of Todd Asset Management LLC. © 2014.
TODD ASSET MANAGEMENT LLC
INTRINSIC VALUE OPPORTUNITY COMPOSITE DISCLOSURE
Past performance does not provide any guarantee of future performance, and one should not rely on the composite performance as an indication of future performance. Investment return and principal value of an investment will fluctuate so that the value of the account may be worth more or less than the original invested cost.
Specific stocks discussed in this presentation are included to help demonstrate the investment process or as a review of the Composite's quarterly results and are not and were not recommendations for purchase or sale by investors. All or some of the specific stocks mentioned may have been purchased or sold by accounts within the Composite during the period, or since the period, and may be purchased or sold in th e future. Investors should not construe the Composite's performance or any security as predictive of future results. A complete listing of the ho ldings as of the period end is available upon request.
Todd Asset Management LLC ("TAM") is a registered investment adviser. The performance presented represents a composite of tax-exempt fully discretionary intrinsic value accounts, invested primarily in large cap domestic equity securities with the objective t o seek capital appreciation. This goal is pursued by investing in a diversified portfolio of equity securities that TAM believes are trading at a discount to their intrinsic value.
Todd Asset Management LLC, formerly Todd-Veredus Asset Management LLC began operations on June 1, 1998 as Veredus Asset Management LLC (VAM). Effective May 1, 2009, VAM combined with Todd Investment Advisors, Inc. (TIA). TIA (and its predecessors) was founded in 1967 by Bosworth M. Todd. Upon the combination of VAM and TIA in 2009, Veredus Asset Management LLC changed its n ame to Todd-Veredus Asset Management LLC (TVAM). On February 28, 2013, TVAM redeemed ownership units held by individuals who supported the growth products founded under VAM, and changed its name to Todd Asset Management LLC. The firm continues to offer the sa me products and strategies managed by the same individuals and process founded under TIA
The Intrinsic Value Opportunity Composite contains fully discretionary, tax-exempt accounts that use either the S&P 500 Index or Russell 1000 Value Index as the benchmark. All fee-paying, fully discretionary portfolios under our management are included in a composite. Accounts are eligible for inclusion in the composite at the beginning of the first calendar quarter after the month of initial funding and upon being fully invested.
TAM claims compliance with the Global Investment Performance Standards (GIPS®). The Firm has been verified for the period January 1, 2008 through June 30, 2013 by Ashland Partners & Company LLP and for the period July 1, 1989 through December 31, 2007 by a previous verifier. TIA's compliance with the GIPS® standards has been verified for the period January 1, 1993 through April 30, 2009 by Ashland Partners & Company LLP. In addition, a performance examination was conducted on the Large Cap Intrinsic Value Composite for the period January 1, 2011 through June 30, 2013. To receive a complete list and description of TAM composites and/or a full disclosure presentation which complies with the GIPS® standards, please contact TAM at 1-888-544-8633, or write Todd Asset Management LLC, 101 South Fifth Street, Suite 3100, Louisville, Kentucky 40202, or contact us through our Web site at www.toddasset.com
The performance information is presented on a trade date basis, both gross and net of management fees and includes the reinvestment of all income. Net of fee performance was calculated using the highest all inclusive annual management fee of .60% applied monthly. Prior to September 2001, the highest management fee applied to the composite was .50%. The currency used to calculate and express per formance is U.S. dollars. All cash reserves and equivalents have been included in the performance.
The composite performance has been compared to the following benchmarks (all shown with dividends reinvested):
S&P 500 Index is a widely recognized index of market activity based on the aggregate performance of a selected unmanaged portfolio of publicly traded common stocks. The performance data includes reinvested dividends and was supplied by Standard & Poor's. It is included to indicate the effect of general market conditions.
Russell 1000 Value Index is a widely recognized index of market activity based on the aggregate performance of common stocks from the Russell 1000 Index, with lower price-to-book ratios and lower forecasted growth values. The performance data was supplied by Frank Russell Trust Company.
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