The Torray Fund letter to shareholders for the month ended January 31, 2016.
Dear Fellow Shareholders,
In April, Li Lu and Bruce Greenwald took part in a discussion at the 13th Annual Columbia China Business Conference. The value investor and professor discussed multiple topics, including the value investing philosophy and the qualities Li looks for when evaluating potential investments. Q3 2021 hedge fund letters, conferences and more How Value Investing Has Read More
When we wrote to you last year at this time, we ventured that the market’s 17.5% compound annual return over the preceding six years was unlikely to repeat anytime soon. Judging by its poor showing in 2015 and weakness so far this year, it appears we may have guessed right. The Torray Fund lost 1.36% last year. While the S&P 500 was slightly positive, its gain was misleading. As a group, ninety-eight percent – 490 of the 500 stocks – produced a negative result. Outsized gains in the other 10 boosted the Index 3.3%, wiping out the losses and leaving a net return of 1.38%. A wide disparity in performance also marked the spread between growth and value stocks (our Fund falls into the latter category). The Russell 1000 Value Index lost 3.8%, but the 1000 Growth Index gained 5.7%.
Torray Fund – Cash holdings
Given the market’s sharp downturn this month, we are pleased to report that we have a 15% cash balance on hand. This has nothing to do with trying to time the market. The money gradually accumulated last year as we pared back on a number of long-term holdings that had appreciated to levels we were not comfortable with. In addition, corporate transactions beyond our control resulted in cash inflows as well. We have been waiting a long time for valuations to realign with underlying fundamentals and it now appears to be happening. On the other hand, the most popular momentum-driven shares that have dominated the market in recent years still have a long way to go. We’re not interested in any of them.
Despite the seemingly endless bad news, we remain positive about the future of our country, its economic prospects and the rewards that come from investing in high quality stocks for the long term. We realize this is hard to do in times like these. But, the good news is that it seems like a broad range of U.S. stocks has largely discounted the bulk of the risk. We are particularly confident about the valuations of companies held by our Fund, as well as many others we have under consideration. The forward estimated price/earnings (P/E) ratio on the S&P 500 was recently 15.1, about in line with its average dating back to 1926. The Torray Fund’s average P/E ratio was a conservative 12.3. Due to the market’s decline, both ratios are now even lower.
The Torray Fund – Market Challenges
Wall Street prognosticators don’t share our optimism. While the start of every new year brings fresh forecasts of what’s in store, countless academic studies have shown these guesses are almost always wrong. The latest analysis reveals that annual market predictions since 2000 have been way off-base. In each of the 15 years, forecasters called for the market to go up, with annual returns averaging 9.5%. The actual number came in under 4%, one of the lowest on record. In five of the years, stocks went down. In 2001, the consensus called for a gain of 20.7%, but the market fell 13%. In 2008, the start of one of the worst downturns in history, the projections called for an 11.1% advance. Stocks collapsed 38.5%.
As we’ve often said, no one knows what the market is going to do, and investors are wise to not even think about it. While the economic and political backdrop today is certainly scary, in our opinion it’s not worse than the wars, depressions, recessions and collapsing stock prices of the past. Recovery from some of these setbacks took many years, but in the end, important, well-financed businesses always rebounded to new highs and bigger dividend payouts, rewarding their long-term shareholders. We believe today’s challenges will eventually be resolved and the outcome will be the same. This is by far the most important thing for investors to keep in mind. Sadly, though, it is the one truth they invariably ignore. The financial industry, increasingly crowded with supposed experts battling it out for the public’s money, deserves much of the blame. The only way they can win is by beating each other and the market for short-term returns. This concentration on tomorrow and the next day ruins any long-term chance of preserving capital and compounding money over a lifetime.
Please believe us when we say this is not going to happen at our company. We, our partners and employees have a meaningful investment alongside yours, and every one of us is committed to the principles set forth in these letters. Independent ownership of the business ensures everlasting freedom from outside influence.
Sincere appreciation is extended, as always, for your loyalty and confidence in our advice and management.
Robert E. Torray
Fred M. Fialco