Muhlenkamp All-Cap Value SMA February 2015 Conference Transcript
We seek to maximize total return through capital appreciation, and income from dividends and interest, consistent with reasonable risk.
We invest in undervalued assets wherever they may be found. Typically, this results in holding a portfolio of companies we believe are materially undervalued by the market. Bonds may be included in the portfolio if they are a good investment.
We start with a bottom-up scan of domestic companies, typically looking at most U.S. companies at least four times per year. We add to that an understanding of the sector dynamics in which companies are operating, an assessment of the business cycle, and a review of macroeconomic conditions.
Our primary screening metric is return on shareholder equity (ROE). We are looking for companies with stable returns that can be purchased cheaply, or for companies with improving returns that have not yet been recognized by the market.
We don’t believe that a holding period of “forever” is appropriate in all cases, but are comfortable holding companies as long as they continue to meet expectations.
We define investment risk as the probability of losing purchasing power over long periods of time, which is quite different from Wall Street’s definition of price volatility in very short periods of time. Taxes, inflation, and spending will ALL impact the purchasing power of your assets.
Muhlenkamp All-Cap Value SMA February 19, 2015 Amended Transcript
February 19, 2015
Tony Muhlenkamp, President
Ron Muhlenkamp, Founder and Portfolio Manager
Jeff Muhlenkamp, Investment Analyst and Co-Manager
Good afternoon, everyone. Thank you for joining us today as we’re going to talk about some of the things we are seeing in the markets and economy, and discuss how we’re investing your money. With me, of course, I have Ron and Jeff. Ron is portfolio manager, Jeff is co-manager, and I’ll be asking them questions and walking them through sharing some ideas with us.
Before we start, there are a couple of housekeeping items that I want to address. Everyone should have received a copy of Muhlenkamp Memorandum #113 by now; if not, you can go to our website and download a copy. The website is new, brand new as of the first of January, so we’re interested in any feedback you have, ideas on what we can do with it further, what you like, what you’d like to see changed. We’re looking for feedback, so I’d appreciate any time you’d spend on that.
Finally, we ask you to mark your calendar for our next seminar. It’s scheduled for May 5. We’re hoping if you’re nearby, you can join us at the live event; otherwise, there will be a webcast that you can attend and view over the Internet. We’ll keep you posted on the details as we get closer. But if you’re anything like me, you need to get it on the calendar early in order to make it. As usual, if you have any questions on any of these things, please give us a call or send us an email. We’re happy to talk with you.
With that taken care of, Ron, I wanted to start with the question that I’ve been receiving from clients: performance of 2014. Some of our portfolios were flat for the year and some did well; on average, we underperformed, which we found disappointing. What happened?
2014 was a mixed bag. Large U.S. stocks, including the S&P 500 Index1 did well, up about 13% or so. Small U.S. stocks did rather poorly. International stocks did poorly. Bonds recovered what they lost in 2013.
If you’ve been coming to our seminars the last couple years, reading our publications, and paying attention to what we talk about, you know we’ve been talking about energy and biotech. In 2014, biotech worked well for us; I’ll say more about that in a moment. Energy did poorly. We had been impressed with the spread in the price of energy between liquid energy, that is crude oil, and gaseous energy, that is natural gas. We hosted a seminar In November 2013 [Natural Gas: An Energy Game Changer] and wrote various essays on it. We believed that the price spread (between crude oil and natural gas on an energy equivalent basis) had to close and that it would close gradually over a period of several years. And, in fact, we were saying that we were in the process of cutting the price of energy in half in the U.S. in the current decade.
What we thought would take a few years in terms of bringing the price of crude oil down, primarily through substitution of natural gas which was cheaper, occurred in the last six months of 2014. We believe it was helped by Saudi Arabia changing its mindset as to what level it would try to support the price of crude. They basically took the stops off. The price of crude oil got cut in half.
We were not invested in oil stocks. We were invested in energy stocks that we thought would benefit from a shift from crude oil to natural gas. Some of them were industrial stocks, some of them were natural gas stocks themselves, and we got hit harder than we ever thought we would, given that that was going on. So, we got hurt by that, and that was probably about two-thirds of our disappointing performance relative to the S&P 500 Index in 2014.
At current prices, frankly, energy stocks are starting to look interesting again, but they hurt us badly in the second half of 2014.
The lower price of crude oil did help our airlines. We own a number of airline stocks, and the cost of fuel is a major cost center for airlines. It did help those stocks, but it was not enough to offset what we had in energy stocks. Biotech for the year did well. People regularly ask us, “What are the drivers behind biotech?” Everybody’s familiar with the demographics. That is, baby boomers like me are getting older and there are a lot of us, but there’s also amazing things going on within the industry in terms of new drugs and new protocols.
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