ValueWalk obtained a copy of Corsair Caital‘s 2014 letter to investors – readers can find the full letter below.
Corsair Capital letter to shareholders for the fourth quarter ended December 31, 2014.
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Dear Limited Partner:
For the fourth quarter ended December 31, 2014, Corsair Capital was up an estimated 3.5%* net, after all fees and expenses, bringing our 2014 performance to 4.5%*. Corsair Select was up an estimated 5.4%* net, after all fees and expenses, bringing our 2014 performance to 5.4%*. Since inception in January 1991, Corsair Capital’s compounded net annual return is 13.8%*. Since inception in January 2004, Corsair Select’s compounded net annual return is 13.3%*.
Although it now seems like quite some time ago, when we sent out our last quarterly investment letter, the equity markets were in the middle of a nasty pullback led by the Russell 2000 Index, which was showing a nearly 9% loss for the then year-to-date period. Worries over possible higher interest rates due to the Federal Reserve ending its quantitative easing program and new concerns over the inability of western European nations – especially France and Italy – to meet their promised deficit spending reductions were weighing on investors. However, in hindsight, we can also now surmise it was likely the Ebola outbreak – and associated newspaper headlines – that really spooked the market and caused many investors to shift into a “risk-off” mode.
Corsair Capital: The Ebola scare
Fortunately, for those not residing in certain African countries, the Ebola scare ended up being just that: a scare. Nevertheless, the possibility of an epidemic certainly stirred investors’ worst imaginations as can be seen from the extreme interest in two very small companies that manufacture protective medical gear and clothing — Lake Industries (“Lake”) and Alpha Pro Tech (“Alpha”). During the summer, Lake was a micro-cap company (7,000,000 shares outstanding) trading a mere 10,000 shares a day at $6/share. By October 8th, Lake was trading nearly 100% higher ($11.62) on daily turnover of 10,000,000 shares. On October 9th alone, Lake traded up another 60% on an astounding 48,000,000 shares! Finally, Lake peaked at $29/share on October 13th, the exact day the Russell 2000 bottomed. Likewise, Alpha, at $2.50/share and just 18,000,000 shares outstanding, was trading 50,000 shares/day during the summer. Alpha similarly proceeded to triple in value by October 10th, when an amazing 39,000,000 of its shares traded hands and then it too peaked exactly on October 13th.
As the Ebola fear subsided, markets quickly began to rally. The markets gained further momentum when one of the Federal Reserve Banks’ presidents, James Bullard, suggested that quantitative easing could be extended if the economic data justified doing so. Additionally, the Fed released a policy statement that said it would maintain near-zero interest rates for a “considerable time” after winding up quantitative easing. On October 31st, Japan provided equity investors an extra “Halloween treat” when it announced a surprisingly large increase in its QE program (nearly equal to that of the United States despite its economy being just 1/3rd our size) and that both the Bank of Japan and the government’s pension plan would be buying significantly more equities and real estate.
Corsair Capital: The decline of oil prices
You may also recall that we discussed the 20% decline in the price of oil in last quarter’s letter. At that time, we and others thought this would be good for most equity markets. However, with oil subsequently plummeting to $50/barrel (down 55% from its peak in June), there is some question as to how much is too much of a good thing. With Saudi Arabia refusing to reduce its oil production in order to stem the price decline, various geo-political concerns could come into play. Already hurting from certain economic sanctions, Russia saw the ruble drop by more than 50%, primarily due to the lower price of oil. While it would seem positive to have both a weakened Russia and various Middle Eastern countries, the world might be a more dangerous place should their governments become [economically] truly desperate. In early December, U.S. equity markets quickly dropped approximately 5% on these concerns before rallying to new highs at year-end.
As we begin Corsair Capital’s 25th year, equity markets have again pulled back a bit due to the perceived slowing of global growth, new worries about Greece leaving the Euro, and the potential rise of global terrorism given the horrific attacks in Paris. Interestingly, the S&P 500 fell by 3.5% last January before rallying strongly on a somewhat similar set of worries. We continue to see central banks around the world trying to stimulate their economies through quantitative easing and lower interest rates, including negative rates for up to 2 years in Germany and Switzerland. Again, per last quarter’s letter, given the level of longer-term interest rates worldwide, stocks still seem at a minimum to be fairly valued. Furthermore, with 10-year yields now under 2% in the United States (down from 3% last year), and well-under 1% in Germany, France, and Switzerland, a good argument can be made that stocks are actually still inexpensive and mathematically would still be attractive even at 4% yields. Importantly for Corsair Capital, we continue to find value in misunderstood stocks amid a robust environment for companies undergoing strategic transformation.
See full PDF below.