Written by Summary
Alphyn Capital Management, LLC is a registered investment advisor focussed on a) great public companies that have the power to endure, with long runways to grow through reinvesting cash flows at high rates of return, run by talented and aligned operators and b) the occasional special situation.
Following three years of running ACML, we are now almost fully invested.
While it sometimes takes the market a while to fully credit our companies, we can use “time as an ally” to allow prices to catch up with their intrinsic value.
Torsten Asmus/iStock via Getty Images Letter to investors, Q4 2021
Performance
The Master Account, in which I am personally invested alongside SMA clients, returned 3.9% net in Q4 2021, as reported by our fund administrator. As of December 31, 2021, the top ten positions comprised approximately 69% of the portfolio, and the portfolio held under 3% in cash. Following three years of running ACML, we are now almost fully invested. Approximately 12% of the portfolio is invested in what I consider smaller/more speculative names, with the vast majority in what I believe are robust, profitable businesses with long runways to compound in value. I expect to have approximately 5% of the portfolio in cash once I redeem some SPAC investments. Once that is deployed, I would have to sell existing positions to finance any new investments and be convinced these new ideas present more compelling opportunities for our capital.
ACML performance is net of fees and standard costs.
The constant barrage of financial and other news reminds me of Billy Joel’s song “We didn’t start the fire.” He rapidly mentions 118 significant political, scientific, and cultural events spanning the first 40 years of his life. (Apologies if you are not familiar, see link here . The song refers to Chinese politics, Edsels (a failed futuristic car brand), civil liberties, foreign debt, the Suez Canal, Sputnik, polio vaccines, and Afghanistan. Likewise, in three short years, we have been inundated with news of China/US relations, highly valued Electric Vehicle companies, civil rights, Quantitative Easing/rates, supply chains and the Panama Canal, the billionaire space race, Covid vaccines, and Afghanistan.
The markets have flip-flopped between fear and optimism several times in reaction to news of shutdowns, reopening, new Covid waves, potential inflation, stimulus checks, and “growth vs value rotations.” For example, just one quarter ago, fast-growing and mostly unprofitable software companies commanded some of the highest valuations in history until talk of interest rate hikes quickly knocked their legs from under them, with many of these companies drawn down 50-80% from their highs.
The S&P500 has continued to track higher, driven by the FAANMG companies, which now make up 21% of the index (and Tesla). Since 2013, the FAANMGs have appreciated 4.5 times the rest of the S&P500, masking a wide dispersion of results amongst individual companies . While the index ended the year within 1% of its all-time high, one fifth of its companies ended over 20% down from their individual highs.
Of course, none of this is new; markets (over)react to news as fear and greed dominate sentiment. As Mr. Joel said, “We didn’t start the fire, but when we are gone, it will still burn on, and on, and on ” I have always believed that a long-term approach grounded in some basic principles allows one to profit from any temporary dislocations, making it easier to tolerate market gyrations. I, therefore, spend my time trying to understand high-quality companies run by capable operators who are focused on creating value for shareholders.
I recently enjoyed reading “The mission the men and me” by Pete Blaber, about lessons he learned as a former commander of the elite Delta Force. I wasn’t sure what to expect and was curious about the decision-making process of someone faced with, in a very literal sense, hostile life and death situations. I was please to find a sensible and thoughtful approach that is broadly applicable to everyday life and business.
A key point of the book is “when in doubt, develop the situation” by which he means take the time to build context. Mr. Blaber advocates taking time to recognize life’s patterns, saturating one’s mind with facts about the real-world situation, then allowing time for ideas to incubate before executing decisions with creativity and courage. “Instead of indecision, going off half-cocked, or doing nothing, we understand that time is an ally that allows us to actively build context and uncover the options hidden from those who create ‘traditional plans’ […]
source Alphyn Capital Management Letter To Investors Q4 2021
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