Sound Shore Fund’s letter to investors for the first quarter ended March 31, 2015.
H/T Dataroma
Dear Investor:
The Sound Shore Fund’s Investor Class (ticker SSHFX) ended March 31, 2015 with a net asset value of $49.23 per share. The first quarter total return of 0.90% slightly lagged the Standard & Poor’s 500 Index (“S&P 500”) which rose 0.95% and outperformed the Dow Jones Industrial Average (“Dow Jones”) which rose 0.33%.
We are required by the SEC to say that: Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. The Fund’s Investor Class 1, 5, 10, and 15-year average annual total returns for the period ended March 31, 2015 were 8.88%, 13.96%, 7.95%, and 7.72%, respectively. As stated in the current prospectus, the Fund’s Investor Class total annual operating expense ratio (gross) is 0.93%. For the most recent month-end performance, please visit the Fund’s website at www.soundshorefund.com.
US stocks achieved modest gains in the first quarter of 2015 despite currency and commodity volatility that continued from 2014. Foreign exchange markets in particular created an uncertain outlook for corporate earnings and left investors to debate the ultimate impact. However, while the appreciation of the US dollar has been notable for its speed, the currency’s value has actually just returned to its historic averages versus many currencies.
Sound Shore’s focus on company fundamentals incorporates the impact of macro-economic factors, currency among them, on our analysis of earnings and cash flow. We invest in stocks that are out of favor and trading at a discount to their historic norms, but have strong underlying businesses and managements driving long-term improvement in a wide range of economic scenarios.
Sound Shore Fund: Hospira, Anthem and Flextronics
Our investment in generic drug maker Hospira is a good example of the “time arbitrage” benefits from our longer term horizon. Hospira, which readers may also recall as a strong 2014 performer, was the first quarter’s best contributor after it agreed to be acquired by Pfizer. When we first invested in Hospira during early 2013, our research concluded that the 24-36 month earning power of its leading injectable franchise could be at least double then-depressed consensus forecasts. In addition, the company’s biosimilar product pipeline had significant option value not reflected in its below norm valuation on sales. Pfizer’s view of Hospira’s potential matched ours and we exited the position after the February sale announcement with a gain of over 90% since our initiation of the position.
Other strong first quarter contributors included health insurer Anthem and electronics manufacturer Flextronics. Both stocks are sector winners generating strong free cash and repurchasing between 5% and 10% of their shares outstanding.
Sound Shore Fund: Bank of America, Procter & Gamble and Applied Materials
Meanwhile, financial holding Bank of America was the quarter’s largest detractor as it fell 14%. After a strong 2014, Bank of America was held back by sluggish capital markets trading and low interest rates. Short term pressures notwithstanding, Bank of America trades for less than 10 times normalized earnings and has excess capital which can either be returned to shareholders or invested for growth. During the quarter we saw progress with management continuing to take excess cost out of the franchise and the company receiving Federal Reserve approval for larger share repurchase and dividends.
Consumer products maker Procter & Gamble and semiconductor equipment supplier Applied Materials also declined in the period as slower growth in international markets and the stronger dollar were perceived to pressure margins. Both holdings are attractive risk reward opportunities based upon their significant free cash and structural improvements via P&G’s portfolio rationalization and Applied’s pending acquisition of Tokyo Electron.
The S&P 500 forward P/E is 17 times, slightly above its long term average, although within its historic range given the interest rate environment. Even so, our valuation based, bottom up research process continues to surface opportunities where consensus expectations are low and companies are hard at work building value.
Thank you for your investment alongside ours in Sound Shore.
Sincerely,
SOUND SHORE FUND
Harry Burn, III
John P. DeGulis
T. Gibbs Kane, Jr.
Co-Portfolio Managers
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