3rd Quarter 2024 Investor Letter
The election is over. Depending on where you fall on the political spectrum, your mood may vary. Historically, the political party of the president has had had little impact on stock market returns. Factors such as starting valuation and economic cycles tend to have a much larger impact. Presidents can impact the economic cycle, but we tend to give them too much credit for success and too much blame for failure in that arena. I can’t tell you whether this time will be different. As of this writing, the market appears to be forecasting higher profits through tax cuts, but also higher inflation due to greater deficit spending. I would expect volatility as investors ascertain how policy will change and digest economic reports over the coming months. Whether this excites you or terrifies you, please know I attempt to design our portfolios to be agnostic to a political party. I want to invest in companies that can do well no matter who is sitting in the White House. First Solar is a great example. They manufacture solar panels to help utilities and technology companies reduce their carbon footprint. However, they are also the largest manufacturer of solar panels in the US with facilities in Ohio, Alabama, and Arizona. As such, they benefit from both green energy initiatives as well as policies designed to promote domestic manufacturing.
Stock markets have soared over the past 2 years. The performance has been uneven with a disproportionate gain in the very largest companies and those within the AI landscape. The US stock market, in aggregate, is very expensive any way you want to look at it. While our equity portfolios largely had a strong quarter and have produced solid returns over the past few years, we will not risk client money on investments we believe to be overpriced. To do so violates our core principles, particularly with margin of safety.
Warren Buffet seems to view the market similarly but faces a different set of options. Warren’s Berkshire Hathaway continues to sell off its massive stake in Apple and pile cash on their balance sheet. This is not a market-timing call; Warren is simply expressing a belief that T-bills are a better investment at these prices than the stocks of large companies that he could realistically purchase. Because we are not a behemoth like Berkshire, we are able to invest in the stocks of smaller companies that we believe are more attractively priced. This is a structural advantage we intend to leverage in our portfolios.
In the bond market, the yield curve has moved considerably this year with interest rates falling for short-term bonds and rising for longer-term bonds. Credit spreads remain incredibly tight meaning investors in lower quality bonds get paid little extra for the added risk of default. Our portfolios here have performed considerably better by preferring shorter term bonds and seeking alternative risks to add yield. Catastrophe bonds, which are linked to events like hurricanes (wind damage) have been particularly helpful in adding to our returns as insured damage was less than feared.
In short, the investment landscape is littered with landmines. However, some pockets for profitable investment still exist. Stocks of small companies, commodity producers, and foreign equity (ex-China) appear particularly attractive. China looks cheap on the surface, but I fear it to be a value trap owing to a deluge of systemic problems bereft of CCP-palatable solutions. During the quarter, we actively shaped portfolios to benefit from an eventual recovery in undervalued parts of the market.
Below is a summary of our portfolio returns and some risk metrics along with some portfolio-specific comments. Please note that portfolio Beta is relative to the quoted benchmark.
Capital Preservation Tax-Free
The municipal bond portfolio has more duration than our taxable due to the incentive provided by the muni yield curve. During the most recent quarter we sold our shortest-term bonds (JMST) to purchase (TAXX) which is slightly less short. TAXX has the flexibility to purchase bonds in the taxable space when the after-tax yield justifies the transaction.
Capital Preservation Taxable
Our taxable bond portfolio retains a defensive posture. Should longer-term yields continue their ascent we will explore adding duration to the portfolio. Currently, our largest source of duration comes from our position in SCHP which owns TIPS.
Concentrated Equity
While positive on the year, our portfolio has lagged the benchmark. In the past quarter, Mobileye was a large detractor along with our commodity-related holdings. We view this volatility as an opportunity and were active in the quarter. We sold Kroger and trimmed Exxon Mobil to purchase Air Lease, added to Mobileye twice and bought more Sibanye stock. The market was actually kind to a few of our holdings (up over 20%), especially Lovesac, Northrop Grumman and Philip Morris International.
Core Equity
Core Equity had a strong 3rd quarter. It is still lagging the benchmark considerably for the year due to factors previously discussed. Lovesac, Northrop, and Philip Morris all aided returns for the quarter while auto exposure (Mobileye, Gentex) and commodities detracted (Coterra, Farmland Partners, Sibanye Stillwater). We continued to adjust the portfolio in the quarter to take advantage of dislocations in the market. In addition to the AI names, “compounders” have had quite a run in the market. During the quarter, we sold two such stocks to take advantage of sky-high valuations. We sold Morningstar to purchase shares of Air Lease in August. And in September, we sold our shares of TJX Companies to add to our depressed positions in Diageo, Sibanye Stillwater and Mobileye.
Equity Income
Equity Income had a very strong quarter owing to strong returns from several holdings such as IBM, Best Buy, Gilead Sciences, Philip Morris International and Omega Healthcare. Sibanye Stillwater was the worst performer in the portfolio weighed down by PGM prices. In the quarter, we sold our shares of Texas Instruments to buy shares of Diageo. This transaction marginally improved the expected income from dividends for the portfolio.
International Equity
While international markets have lagged the US thus far in 2024, they had a strong quarter. Our position in Pzena Emerging Markets Value had a particularly strong quarter, up 11.01%. For the time being, we have settled on Pzena and Diamond Hill International as our preferred vehicles in this space. Both have done reasonably well and are well-positioned regarding our outlook for non-US equities.
Final Thoughts
At Aurora, we are constantly looking for attractive investment opportunities for our clients. We look for businesses with economic moats, quality balance sheets and attractive upside potential. This blog represents our thinking at the time of publication. If you are a DIY investor, use this only as a starting point for your research and be sure to do your own due diligence. For questions regarding our asset allocation and individual stock strategies, please reach out to us!
Invest Curiously,
Austin Crites, CFA
Concentrated Equity Factsheet Disclosure
Past performance is not indicative of future returns. Performance for periods of one year or less is not annualized. Additionally the performance results displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. The composite portfolio that generated the historic returns differs from the current portfolio, and the portfolio composition may also change in the future, at the discretion of BCGM. Results of the composites presented herein do not reflect the results of any one portfolio in the composite. For the Concentrated Equity composite, the minimum asset level is $25,000. Prior to January 1, 2023, the composite is inclusive of assets subscribed to the Concentrated Equity model that were below the stated minimum. For all timeframes, only assets subscribed to and managed in the Concentrated Equity model are eligible for composite inclusion. The Concentrated Equity composite is comprised of assets subscribed to and managed in the Concentrated Equity model. The Concentrated Equity model is a highly concentrated, all-cap strategy invested primarily in U.S. domiciled companies and stocks of foreign firms with ADRs. The composite inception date is 11/01/2020. New accounts and/or new sleeve assets are eligible for inclusion in their first full month of being funded and invested in the model. Closed accounts and/or closed sleeves are included through their last full month of being funded and invested in the model. Accounts and/or sleeves that have experienced a cash inflow or outflow of 10% or more of the accounts/sleeves starting or ending value during a month are excluded. Accounts/sleeves with performance that deviates the composite by +/- 2 standard deviations are excluded from the composite for the period(s) in which the deviation(s) occurred. All accounts with investment restrictions have been excluded from the composite. Gross performance is calculated by subtracting the actual transaction costs from the composite performance. Net performance is calculated using the maximum advisory fee for the Concentrated Equity model, which is 1.10%. The Concentrated Equity model generally does not automatically reinvest dividends. For reasons including changes in portfolio holdings, and the date on which an individual became an investor in one of the portfolios, the performance experienced by a specific investor may vary substantially from that indicated in the performance results.
Market index information, where included, is to show relative market performance for the periods indicated and not as standards of comparison, since these are unmanaged, broadly based indices that differ in numerous respects from the composition of BCGM’s portfolios. Market indices are not available for direct investment. The historical performance results of the presented indices do not reflect the deduction of transaction and custodial charges, or the deduction of an investment management fee, the incurrence of which would decrease indicated historical performance. The historical benchmark performance results are provided for comparison purposes only, to assist an investor in determining whether an investment program meets his/her investment objective(s).
Market index information was compiled from sources that BCGM believes to be reliable, however, BCGM makes no representations or guarantees hereby with respect to the accuracy or completeness of such data. The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. The Russell 3000 Index is a market-capitalization-weighted equity index maintained by FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks, which represent about 97% of all U.S.-incorporated equity securities.
Characteristic data points, including top ten holding weights, sector allocations and industry diversification for the Concentrated Equity Model, are hypothetical, based on a model portfolio and not a composite of accounts invested in the strategy. Actual individual client position weights will vary, sometimes materially, from the information provided here based on timing of inflows or outflows by the individual client. The varying weight in client accounts will create characteristics that do not precisely match the characteristics shown here. For an individual client to have the exact same characteristics shown here, they would have to have been invested in Concentrated Equity Model since the inception date and have no modifications to their portfolio through the quarter end displayed in this material.
Core Equity Factsheet Disclosure
Past performance is not indicative of future returns. Performance for periods of one year or less is not annualized. Additionally the performance results displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. The composite portfolio that generated the historic returns differs from the current portfolio, and the portfolio composition may also change in the future, at the discretion of BCGM. Results of the composites presented herein do not reflect the results of any one portfolio in the composite. For the Core Equity composite, the minimum asset level for inclusion is $50,000. Prior to January 1, 2023, the composite is inclusive of assets subscribed to the Core Equity model that were below the stated minimum. For all timeframes, only assets subscribed to and managed in the Core Equity model are eligible for composite inclusion. The Core Equity model is an all-cap strategy invested primarily in stocks of U.S. domiciled companies and stocks of foreign firms with ADRs. The composite inception date is 11/01/2020. New accounts and/or new sleeve assets are eligible for inclusion in their first full month of being funded and invested in the model. Closed accounts and/or closed sleeves are included through their last full month of being funded and invested in the model. Accounts and/or sleeves that have experienced a cash inflow or outflow of 10% or more of the accounts/sleeves starting or ending value during a month are excluded. Accounts/sleeves with performance that deviates the composite by +/- 2 standard deviations are excluded from the composite for the period(s) in which the deviation(s) occurred. All accounts with investment restrictions have been excluded from the composite. Gross performance is calculated by subtracting the actual transaction costs from the composite performance. Accounts/ sleeves with performance that deviates the composite by +/- 2 standard deviations are reviewed for potential exclusion for the period(s) in which the deviation(s) occurred. The Core Equity model generally does not automatically reinvest dividends. For reasons including changes in portfolio holdings, and the date on which an individual became an investor in one of the portfolios, the performance experienced by a specific investor may vary substantially from that indicated in the performance results.
Market index information, where included, is to show relative market performance for the periods indicated and not as standards of comparison, since these are unmanaged, broadly based indices that differ in numerous respects from the composition of BCGM’s portfolios. Market indices are not available for direct investment. The historical performance results of the presented indices do not reflect the deduction of transaction and custodial charges, or the deduction of an investment management fee, the incurrence of which would decrease indicated historical performance. The historical benchmark performance results are provided for comparison purposes only, to assist an investor in determining whether an investment program meets his/her investment objective(s). Market index information was compiled from sources that BCGM believes to be reliable, however, BCGM makes no representations or guarantees hereby with respect to the accuracy or completeness of such data. The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. The Russell 3000 Index is a market-capitalization-weighted equity index maintained by FTSE Russell that provides exposure to the entire U.S. stock market. The index tracks the performance of the 3,000 largest U.S.-traded stocks, which represent about 97% of all U.S.-incorporated equity securities.
Characteristic data points, including top ten holding weights, sector allocations and industry diversification for the Core Equity Model, are hypothetical, based on a model portfolio and not a composite of accounts invested in the strategy. Actual individual client position weights will vary, sometimes materially, from the information provided here based on timing of inflows or outflows by the individual. The varying weight in client accounts will create characteristics that do not precisely match the characteristics shown here. For an individual client to have the exact same characteristics shown here, they would have to have been invested in Concentrated Equity Model since the inception date and have no modifications to their portfolio through the quarter end displayed in this material.
Equity Income Factsheet Disclosure
Past performance is not indicative of future returns. Performance for periods of one year or less is not annualized. Additionally the performance results displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. The composite portfolio that generated the historic returns differs from the current portfolio, and the portfolio composition may also change in the future, at the discretion of BCGM. Results of the composites presented herein do not reflect the results of any one portfolio in the composite. For the Equity Income composite, the minimum asset level for inclusion is $50,000. Prior to January 1, 2023, the composite is inclusive of assets subscribed to the Equity Income model that were below the stated minimum. For all timeframes, only assets subscribed to and managed in the Core Equity model are eligible for composite inclusion. The Equity Income composite is comprised of assets subscribed to and managed in the Equity Income model. The Equity Income model is an all-cap strategy invested primarily in dividend-paying stocks of U.S. domiciled companies and stocks of foreign firms with ADRs. The composite inception date is 05/01/2021. New accounts and/or new sleeve assets are eligible for inclusion in their first full month of being funded and invested in the model. Closed accounts and/or closed sleeves are included through their last full month of being funded and invested in the model. Accounts and/or sleeves that have experienced a cash inflow or outflow of 10% or more of the accounts/sleeves starting or ending value during a month are excluded. Accounts/sleeves with performance that deviates the composite by +/- 2 standard deviations are excluded from the composite for the period(s) in which the deviation(s) occurred. All accounts with investment restrictions have been excluded from the composite. Gross performance is calculated by subtracting the actual transaction costs from the composite performance. Net performance is calculated using the maximum advisory fee for the Equity Income model, which is 1.10%. The Equity Income model generally does not automatically reinvest dividends. For reasons including changes in portfolio holdings, and the date on which an individual became an investor in one of the portfolios, the performance experienced by a specific investor may vary substantially from that indicated in the performance results.
Market index information, where included, is to show relative market performance for the periods indicated and not as standards of comparison, since these are unmanaged, broadly based indices that differ in numerous respects from the composition of BCGM’s portfolios. Market indices are not available for direct investment. The historical performance results of the presented indices do not reflect the deduction of transaction and custodial charges, or the deduction of an investment management fee, the incurrence of which would decrease indicated historical performance. The historical benchmark performance results are provided for comparison purposes only, to assist an investor in determining whether an investment program meets his/her investment objective(s). Market index information was compiled from sources that BCGM believes to be reliable, however, BCGM makes no representations or guarantees hereby with respect to the accuracy or completeness of such data. The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. The Dow Jones U.S. Select Dividend Index aims to represent the U.S.'s leading stocks by dividend yield.
Characteristic data points, including top ten holding weights, sector allocations and industry diversification for the Equity Income Fund Model, are hypothetical, based on a model portfolio and not a composite of accounts invested in the strategy. Actual individual client position weights will vary, sometimes materially, from the information provided here based on timing of inflows or outflows by the individual client. The varying weight in client accounts will create characteristics that do not precisely match the characteristics shown here. For an individual client to have the exact same characteristics shown here, they would have to have been invested in Equity Income Fund Model since the inception date and have no modifications to their portfolio through the quarter end displayed in this material.
