The calendar third quarter of 2023 was a messy one for financial markets at large, and we were not immune to its lack of charms. Nonetheless, it’s been a pretty good year for our small-cap strategy.
Oddly, the re-emergence of Middle East depravity has a weird connection to risk and investing: it is never “not there.” There are simply sudden changes in participant willingness to see it…and then risk appetite adjusts accordingly. And quickly. And sadly and painfully.
In our core institutional strategy, our top ten positions, which as always represent 40 to 50% of our portfolio, mostly held their own. We had two takeovers of longer-term holdings at “reasonable” prices and another in the making, which has created cash for reinvestment in what looks like an “interesting” close to the year. To paraphrase words written long before us, new money wants volatility and uncertainty, for that is where opportunities are created. Good news and cheap stocks rarely co-exist.
And to get the big satellite out of the room, yes we own a stock – our largest position at the time – that managed to successfully launch two of the world’s most advanced satellites…only to have them fail 22,000 miles away from earth. One was the first failure in 13 installations of a Northrup Grumman antenna, and the other the first complete failure in a 40-year history. Let’s just say we once again appreciate the concept of “off-spreadsheet” risk. Dealing with a “mess” is a learned experience in life and managing money, and the first step is severing prior disappointment and time from the current, “what is the risk reward from here, on an absolute and relative to other alternatives basis?” That caused us to sell half our Viasat (ticker: VSAT) in between failures as the inflection to free cashflow moved out two years, and math is simply math. Down another 30% to stupid-levels, we subsequently reloaded and have made it a “simply top ten position” vs. the missing link between our clients and a private jet. The bonds and the stock are both buys if you are asking.
We will get to the usual bugaboos of inflation, interest rates, credit and energy, but here we relate some tidbits from a recent in person canvassing of some of the usual suspects of global asset allocation. Spoiler – I don’t think it is unfair to qualitatively suggest that the asset classes of public, value and smallcap are at generational lows of representation in most family office, endowment and corporate pension plan assets.
Cry for us Argentina (and BTW – if you are whining about rising interest rates, their Central Bank just went to 133%) but one can either view that as a generational opportunity or a recipe for career suicide. Let’s go with the former for a moment. The bold headline in the WSJ recently was “Smallcaps are Almost a Buy,” which sums up the investment world neatly – very few want to be first, much less be early. You aren’t early with us – that was four years ago which we have been hard at work fixing.