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Shadowridge Value LLC is a long-only, value-oriented registered investment advisor (RIA) located in San Diego, California.
The challenge of deploying capital in a timely matter was exacerbated by an environment in which I thought a lot of pockets of the market showed signs of wildly optimistic sentiment and consequently, high valuations.
At certain times, the financial markets will provide stock quotations at values I simply don’t agree with.
Avalon_Studio/E+ via Getty Images Dear Investors,
Returns for the managed client accounts ranged from -2.7% to 0.5%, net of fees, from the various inception dates through year-end 2021 (please check your individual statements for your respective figure). For clients who are eligible and have opted for the performance fee option, this payout was not triggered since returns were below the minimum 5% absolute threshold. This hopefully serves as a small consolation knowing that in years when my performance is not satisfactory, you pay less in fees.
Clearly though, this is not the dream start one envisions when offering an investment management service, or a result clients will be enthusiastic about for that matter. However, there is one critical reminder I’d like to reemphasize. These are measurements over a short period of time…less than eight months for all managed accounts and in some cases only a month or two for recently onboarded clients. Had portfolio performance been exceptionally strong over the second half of 2021, I would still be advocating for the same caveat.
A year is just simply not enough time to evaluate the results of an investing approach as there is nothing inherently special about a calendar year turning over in relation to the operations of businesses we own. In fact, a more telling evaluation should likely include multi-year timeframes, with a minimum of 3-5 years preferred. Still, in a year when the market – as measured by the S&P 500 index – performed remarkably well, we find ourselves behind the curve. However, it also shouldn’t come as a surprise that our performance differs significantly from the index because we do not own any companies included in the S&P 500 index.
So, where could I have improved?
For starters, I should’ve had a better sense of the 8-10 companies I wanted to allocate day-one client funds to. Having left my prior firm at the end of January 2021, my initial focus was to get the new firm up and running as quickly as possible. Much of this work and preparation had been started well before departing my former company, and by April, Shadowridge Value was open for business. Unfortunately, the focus in those interim months had been largely on administrative and compliance tasks, as opposed to research and investment activities. Upon reflection, it would’ve been a better to slow things down and hold off on accepting client accounts until mid-summer when I had time to refocus on investment research. This way I could have had a ready list of where to deploy a decent portion of client funds as opposed to taking on cash and then searching for ideas beyond the few names I held at the time. In my 1H21 letter, I noted the high cash levels across investor accounts that I was working to deploy as quickly and prudently as possible.
The challenge of deploying capital in a timely matter was exacerbated by an environment in which I thought a lot of pockets of the market showed signs of wildly optimistic sentiment and consequently, high valuations. All else equal, higher business valuations at the initiation of an investment will lead to lower forward returns. Consequently, I was relatively cautious deploying capital over the course of 2021 despite looking far and wide. In the end, I resorted to a few niche investment spaces, as I’ll detail momentarily.
On that front, there is some good news as the excess cash has been getting invested, especially as the market has retreated from the peak levels of 2021. I have used the recent market volatility to our advantage and placed a larger number of bets. These companies may continue to be temporarily pushed lower by market movements in the interim. And while that may not be optimal from an emotional standpoint (especially if I have already allocated fully to the position), it will be acceptable. I deem it acceptable because enduring volatility is the price of admission one must pay for solid long-term performance. It will happen many times in the future I can assure you. Moreover, our companies should be able to endure a period […]
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