Torray Fund letter to shareholders for the month ended July 31, 2015.
Dear Fellow Shareholders,
During the first half of this year U.S. stocks were relatively flat, a little unusual considering the market’s volatility. The Standard & Poor’s 500 Index gained 1.2%, and The Torray Fund lost 0.6%. Our portfolio is comprised of 34 holdings representing businesses in a variety of industries and sectors. Few of them ever account for more than 4% of the Fund’s value. Despite this, a few of these positions occasionally disproportionately affect our overall performance. This was the case during the first six months of 2015. Three of our stocks, for different reasons, suffered price declines which, taken together, had a negative 2.4% impact on our result. In each case we believe the declines are temporary and do not accurately reflect the underlying long-term fundamentals of the businesses. In addition, the Fund’s 12% cash reserve earned virtually nothing due to current 0% short-term interest rates. While this may appear to be a disadvantage, especially in a rising market, our view is that in the absence of compelling investment opportunities – the case we see today – it provides funding for new investments when they surface.
Torray Fund: Just six stocks responsible for more than all of the market’s current capitalization gain
The S&P’s performance this year has been propped up by a handful of institutional favorites, most of them we consider highly overvalued. Many make no money at all. As we write, just six stocks are responsible for more than all of the market’s current capitalization gain reflected by the Index. Similarly, six in the NASDAQ Composite Index account for more than half of its gain so far this year. Such concentrated returns in a small list of companies is reminiscent of past periods that did not turn out well for investors relying on a market being driven by them. The most recent occurred in the late 1990s. In both cases this year – the S&P 500 and NASDAQ – had it not been for the Indexes’ results being supported by such a small sample of stocks, each would have lost money. Regardless of what anyone was saying about these situations as the year progressed – and plenty was said – we would not have touched one of them.
Without belaboring a point we’ve made before, our markets in recent years have been dominated by math and computer wizards chasing gains, literally by minutes, seconds and milliseconds. None of these players are investors, and their speculative churning has accounted for a high percentage of the market’s volume and volatility. Much of it has been sparked by breaking world news on situations like Greece’s economic collapse, the Iran nuclear talks, falling energy prices, the timing of Federal Reserve interest rate hikes and last week’s collapse of the Chinese stock market. While these subjects are hard to ignore, they have never had a long-term bearing on the collective economic performance of successful businesses.
The stocks of solid companies have returned an average of 10% per year for over 100 years, a period spanning every conceivable disaster imaginable. Some make today’s headlines seem tame. Almost one-third of our holdings have records covering more than 100 years. Most are familiar household names: DuPont (1802), Stanley Black & Decker (1843), American Express (1850), Western Union (1851), Wells Fargo (1852), Johnson & Johnson (1886), Chicago Bridge and Iron (1889), GE (1892), Dow (1897), BP (1908) and IBM (1911). The long history of these and other sound businesses that have overcome adversity to produce rewarding results for their owners is the basis of our faith in the approach we’ve used since our company’s founding in 1972. We promise you our position is not going to change.
In closing, we want to express our continuing confidence in the Fund’s portfolio. Despite the ever-present risk of stock market setbacks, these companies, as a group, are well-positioned for the future. If you have any questions or would like to discuss our Fund with us, please feel free to call. Thank you for your trust and patience.
Robert E. Torray
Fred M. Fialco