We
are happy to report our first quarter numbers,
which were a nice continuation of our strong
results in 2009.
One
of the big themes for 2010, as suggested by
the great market seers frequenting CNBC, was
that this was to be the year of large cap
stocks and that smaller stocks would take
a breather after a strong 2009. We disagreed
with this premise based on three points:
1) If the US dollar continued to rally, the
profit growth of
large multinationals would be relatively hindered
vis-à-vis
the higher domestic
content of most small cap companies
2) The huge percentage gains
in small cap in 2009 must be
measured against
the equally huge declines in 2008, and
thus in our opinion
there still remained a fair amount of
room left in the
move to fair value
3) There remained a distinct
distaste and disbelief about
equity prices, as suggested not only by anecdote,
but by
the lack of
actual cash flowing into equity oriented
mutual funds.
What we saw in the first quarter was dollar
strength, a continued strong rebound in corporate
profits, and the first signs of money flowing
out of money markets and bond funds and back
into equities (with the impact of the latter
having a mathematically disproportionate effect
on smaller stocks.)
While
we are fond of quoting Woody Allen's great
and applicable line that “80% of life
is just showing up,” our current and
longer-term performance is the result of a
well researched and concentrated portfolio
of stocks which allows smart stock-picking
(and equally important - bad stock avoidance)
to have a material impact on performance as
opposed to being diversified away into index
oblivion.
Looking
at the portfolio, most stocks continued to
perform quite well during the first quarter.
Our two biggest contributors were a pair of
Liberty Media Corporation tracking stocks,
Liberty Interactive (LINTA) and Liberty Capital
(LCAPA). Liberty Capital rose substantially
during the quarter as its largest holding,
Sirius-XM Radio, increased markedly in value
as liquidity fears subsided and the domestic
auto market continued to stabilize. Liberty
Interactive benefited from very solid results
at QVC, as the consumer rebound took hold
and the management team did an excellent job
of improving margins and maintaining healthy
cash flow. Moreover, Liberty Interactive improved
its capital structure by taking advantage
of better credit markets to extend maturities,
paying down expensive debt with free cash
flow, and selling various nonstrategic equity
holdings. As for laggards, Central Garden
& Pet (CENTA) was a detractor over the
quarter as revenue growth remained sluggish.
However, this stock was one our big winners
in 2009 as the company continued to generate
solid free cash flow and enhanced its competitive
position during the economic downturn and
we continue to see meaningful upside in the
stock. Lastly, we have mixed emotions with
regards to the announced acquisition of one
of our holdings, Plato Learning (TUTR). Although
the acquisition price of $5.60 represented
a nice premium to its 12-month trading range,
our analysis suggested that the longer-term
value of the company was well above the offer
price and we believe the private equity buyers
are getting the company on the cheap.
Going
forward, there remains a balance between our
ability to pick among literally thousands
of smaller cap companies that comprise our
universe, and the basic fact that as prices
have
generally risen for many companies, the intrinsic
value for new investments has shrunk. Our
portfolio remains a mix of highly defensive
companies both in terms of balance sheet strength
and the ability to deploy large cash stockpiles,
and economically sensitive companies in the
first few innings of a potentially enormous
cyclical upturn. We expect most companies
to show improvement in profitability in 2010
after recovering from their lows in 2008 and
early 2009.
We
remain "flexible" with a decent
cash position as we have made several sales/trims
in the past couple of months and are being
patient about redeploying those proceeds given
the unusually large block of uncertainty that
exists in the market. As always, we continue
to take things one stock at a time and patiently
wait for opportunities to present themselves.
In firm news, we are pleased to announce the
addition of Mark Yancey to the firm. Mark
joins RCB as Senior Managing Director of Global
Distribution and brings with him 25 years
of
institutional marketing experience. Prior
to his association with RCB, Mark was a founding
member of Hillcrest Asset Management and a
partner and co-head of institutional marketing
and sales at Metropolitan West Capital management
from 1999-2007. Mark has also held positions
at Wells Capital and Mass Mutual and is a
graduate of the University of Oklahoma. We
welcome the contributions of his experience
and new ideas to the team.
As
of March 31, 2010, the Fund held the following
positions: Central Garden & Pet Class
A 2.3%, Liberty Media Capital 2.3%, Liberty
Media Interactive 4.1%, and PLATO Learning
2.0%.
The
S&P 500 Index consists of 500 stocks chosen
for market size, liquidity, and industry group
representation. It is a market-value
weighted index (stock price times the number
of shares outstanding), with each stock's
weight in the index proportionate to its market
value. Russell 2000 measures the performance
of the 2,000 smallest companies in the Russell
3000 Index, which represents approximately
8% of the total market capitalization of the
Russell 3000 Index. The MSCI EAFE®
Index is an unmanaged index consisting of
a market-value-weighted average of the performance
of international securities listed on exchanges
in Europe, Australasia and the Far East .
It is not possible to invest directly in an
index.
Note:
Past performance is not a guarantee or indicator
of future results. The
information provided herein represents the
opinion of the manager at a specific point
in time and is not intended to be a forecast
of future events, a guarantee of future results
nor investment advice. Further, there is no
assurance that certain securities will remain
in or out of the portfolio. Please consult
an investment professional for advice concerning
your particular circumstances. There are risks
involved with investing, including possible
loss of principal. In addition to the normal
risks associated with investing, investments
in smaller companies exhibit higher volatility.
MUTUAL
FUND SHARES ARE: NOT FDIC INSURED, NOT BANK
GUARANTEED AND MAY LOSE VALUE.
