Barac Value Fund 2Q15 Letter – Twitter Thesis

Barac Value Fund 2Q15 Letter – Twitter Thesis

Dear All,

This is Barac Value Fund’s tenth regular quarterly report to provide updates on the Partnership’s performance. The Partnership’s fund administrator, Fund Associates, LLC, is also generating monthly investment reports for each Partner, by directly and independently accessing the Fund’s electronic brokerage data.

For the three-months ending June 30, 2015, The Barac Value Fund L.P. (the “Fund” or “Partnership”) delivered net returns of negative 0.32% (after deducting fees and expenses) versus a return of negative 0.51% for the benchmark1, resulting in relative outperformance of 19 basis points.

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Since the Partnership’s inception (on July 14, 2011), the Fund has delivered net returns of 57.02% (after deducting fees and expenses) versus a return of 45.32% for the benchmark, resulting in relative outperformance of approximately 1,170 basis points.

The Partnership’s returns amount to gross and net annualized returns since inception of 13.76% and 12.05%, versus 9.88% for the benchmark.

Barac Value Fund – Performance Overview

For the most recent quarter ending June 30, 2015, returns for the Fund outperformed the benchmark by 56 basis points on a gross basis and 19 basis points on a net basis after fees. The fund benefitted from being slightly overweight stocks and substantially underweight bonds, as equities outperformed fixed-income for the quarter.

Top individual stock performers included Entravision (+30% for the quarter), Stanley Black & Decker (+10%), and Charles Schwab (+7%). The worst individual stock performers included Twitter (-28%), Xerox (-17%), and Union Pacific (-12%).

Year to-date, the Fund has delivered gross and net returns of 2.24% and 1.47%, respectively, versus a 0.79% return for the Fund’s benchmark. The Funds year-to-date performance has also outperformed both the benchmark’s equity (up 1.23% year-to-date)2 and fixed-income (down 0.10%)3 subcomponents.

Gross and net returns for Barac Value Fund since inception amounted to 67% and 57%, respectively, versus a return of 45% for the benchmark. To put that in perspective, a $1,000 investment at inception (in July of 2011) delivered net returns of $570 versus $453 for the benchmark (26% more in net returns over less than 4 years).

As always, it is also important to restate that the Fund’s returns were generated without leverage (either direct or effective leverage through options), without taking highly concentrated positions, and with the headwinds of holding substantial cash balances. I also continue to “put my money where my mouth is” and most of my net worth also remains invested in the Fund along with the other Partners.

Barac Value Fund – Quarterly Commentary

It was looking like a solid quarter for domestic stocks until the last week of the quarter when the S&P 500 index fell by almost 3.0% as a result of fears surrounding the Greek debt crisis. I often view the substantial fluctuations resulting from headline news surrounding the Greek situation as overreactions and (on the sell-offs) potential buying opportunities. Bear in mind that the economy of Greece accounts for only about 2% of the Eurozone economy (about the size of economy of Louisiana). While there are clearly contagion risks beyond Greece, I still believe that the degree to which news flow on the Greek crisis impacts the U.S. and other global equity markets is often overdone.

Since Barac Value Fund doesn’t trade in and out of stocks with great frequency (for many reasons, including tax efficiency), perceived market over-reactions must be viewed as substantial before it prompts investment action. This was seldom the case during the most recent quarter. I would have loved to have put more of the Fund’s cash position to work but, alas, the Greek-driven sell-offs generally weren’t of sufficient size. It may seem strange to be welcoming a sell-off, but this can definitely be the case (especially when holding a substantial cash balance) in instances when the sell-off is viewed as both temporary and unjustified.

Twitter was one of the worst performers for the quarter (after being one of the best performers last quarter). Though Twitter is a small position for the Fund, the holding warrants some explanation as it is not the type of stock (i.e. speculative with substantial growth priced in) typically targeted by the Partnership.

Barac Value Fund bought shares of Twitter in May of 2014 after the shares had declined by over 50%. At that point, the company’s valuation had fallen such that I viewed a small position as an attractively priced option on the company’s ability to monetize their user base and/or realize takeover upside. In less than a year after the purchase, the stock price increased over 50% and I became less comfortable with the risk/reward dynamics of the shares (thus, selling a third of the shares at a considerable profit in April of 2015).

Tax considerations temporarily prevented me from selling more (i.e. the position was still a short-term unrealized capital gain) and this proved unfortunate (at least, in the short-term). Less than a month after selling the partial position, the stock fell by around 30% following a disappointing earnings report. I viewed this particular earnings-related sell-off as an overreaction and (again) believed that risk/reward was attractive and I increased the holding commensurately (to the level that the Fund owns today).

The purpose of detailing the Twitter investment (perhaps in too much chronological detail!) is also to demonstrate the following:

1.) While Barac Value Fund’s general investment strategy is focused on long-term buy-and-hold (and trading is limited), the Partnership’s positions are actively followed and managed in a dynamic manner (depending on news flow, valuation changes, downside risks, and tax considerations).

2.) Even a more speculative stock can be considered a good investment at the right valuation and under the right circumstances. At the end of the day, it’s about finding superior risk/reward opportunities with positive expected value.

3.) Speculative investments will be sized appropriately small relative to their risks. Twitter has been a profitably investment for the Fund and I currently view the beaten down shares as attractively priced. Nonetheless, the shares are speculative and, therefore, accounted for less than 2.0% of assets under management (A.U.M.) at quarter-end.

Barac Value Fund – Outlook

Since last quarter-end, not much had changed over the period with respect to domestic equity and bond valuations (nor for my outlook for these asset classes). I remain positive on domestic equities relative to bonds and I continue to believe that long-term bonds are substantially overvalued and don’t adequately compensate investors for interest rate and inflation risks.

While I don’t deny the possibility that interest rates and credit spreads could remain depressed for a further extended period of time (although that is not my expectation), I don’t feel that fixed-income investors are adequately compensated for the potential or likelihood that they don’t. Furthermore, at current bond yields, the opportunity cost of sitting on the sidelines with cash remains very limited.

Barac Value Fund’s international exposure fared less positively than the domestic positions. For example, the Spanish and German indexes (both markets in which the Fund has exposure) were down 7% and 9%, respectively, over the course of the quarter. I view these international positions as attractive long-term holdings and international stocks amounted to 14% of the Fund’s equity exposure at quarter-end.

The Partnership remained substantially underweight fixed-income at quarter-end (12% of A.U.M. versus 40% for the benchmark) and slightly overweight equities (64% of A.U.M. versus 60% for the benchmark). Given my bearish long-term view for bonds and the continued risk of a material pull-back in equities, I continue to believe that a substantial cash position is prudent. As such, cash held by the Fund amounted to 23% of A.U.M. at quarter-end.

Thank you to everyone for your interest and support and please let me know if there are any questions you may have that I have not answered. The next quarterly report will be for the quarter ending September 30, 2015 and the next subscription period for Barac Value Fund will be July 31, 2015.


Ted Barac

Managing Member of Barac Capital Management, LLC

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