GreensKeeper Value Fund annual letter for the year ended December 31, 2015.
2015 was the Value Fund’s fourth full calendar year of existence. As promised in last year’s Annual Report, in addition to enclosing the audited financial statements of the fund (courtesy of KPMG), we will continue to provide you with some commentary on the portfolio’s performance for the year and to delve deeper into a major investment topic. This year the topic is the Sources of Investment Returns. It may be too detailed for casual readers, but we would recommend it to those looking to further refine their own investment approach.
Our goal at GreensKeeper, and the reason for the firm’s existence, remains unchanged. Namely, to deliver attractive above?market returns to the firm’s investors over the long term while also assuming less risk. We acknowledge that our approach goes against the conventional “wisdom” of the investment management industry. However, as demonstrated by our investing heroes (Warren Buffett, Charlie Munger, Benjamin Graham, Philip Fisher), value investing done properly does just that. Long?term, steady compounding of capital may be less exciting than investing in a hot stock tip. But our conclusion is that it remains the true path to investment success.
You should know that our approach to investing at GreensKeeper is not merely academic. I have over 70% of my immediate family’s net worth and 100% of our investible assets invested alongside GreensKeeper’s clients. The reason for doing so is quite simple. I believe that GreensKeeper’s approach to investing is the proper way to invest and that it will lead to attractive long?term returns. I am more than happy to back up that statement with my family’s money. In addition to aligning interests, this approach provides the firm’s clients with the benefit of knowing that we are paying attention to what we are doing. Having all of my own eggs in one basket tends to focus the mind. In my opinion, many of the negative aspects of the investment management industry would suddenly disappear if asset managers simply invested a meaningful percentage of their own net worth in their own funds.
GreensKeeper Value Fund – The Year in Review
The GreensKeeper Value Fund was up +0.6% in 2015 (after all fees and expenses). The markets were largely bearish and more difficult to navigate this past year. However, we successfully used the volatility of the markets to our advantage. During periods when Mr. Market was happy and prices elevated, we elected to take profits on certain investments that we believed were selling at or above their intrinsic value. When fear and panic prevailed, we were able to accumulate shares in companies that we had been monitoring at attractive prices.
One example is our investment in Microsoft Corporation (Nasdaq:MSFT). We started buying Microsoft in November 2011 at an average cost of approximately $26.58 per share or what we calculated were 7.8x earnings after adjusting for the billions of net cash sitting on the company’s balance sheet. The stock had been dead money for nearly a decade but earnings continued to grow handsomely. Multiple compression was the culprit for the poor stock returns during that period. The stock had traded at over 75x earnings in 2000 during the tail end of the dot?com bubble but the market had clearly lost interest in the company while we were buying it.
Fast forward to May 2015. A new CEO was in place and he brought some fresh ideas to this sleepy but enormously profitable company. More importantly, the market was more upbeat on Microsoft’s future prospects and began to value each dollar in earnings much more favourably. We took advantage by selling our entire position in May 2015 when the stock was trading at $46.96. Factoring in the $3.77 in dividends received along the way and our investment in Microsoft worked out quite well for us. Given the quality of the business and the price that we paid, we also viewed our investment as being fairly low risk.
Another example of how we used the market to our advantage in 2015 is Home Capital Group (TSX:HCG). The stock was down (43.9%) for the year, however our own experience was entirely different. As we disclosed in last year’s report, we sold slightly more than one?half of our position at $52.43 in November 2014 as we believed the stock fairly valued. Calendar 2015 was a difficult year for the company as they discovered that certain mortgage brokers had submitted fraudulent loan applications to the company. Mortgage loans were then advanced by Home Capital based on those applications. Combine that company?specific issue with an overvalued Canadian housing market and the company once again attracted the attention of US short?sellers.
As a result of the foregoing, the stock sold off materially and traded in the mid?twenties at which point we started buying the stock aggressively. We believe that management now has a handle on the issue, the credit risk very low and the earnings impact short?lived. Earnings for Home Capital in 2016 should be at least $4.10 per share. In other words, we believed the shares to be materially mispriced at 6.6x earnings given the company’s track record. The adjusted cost base of our position is $27.31, the company pays a dividend which it regularly increases and its capital ratios very strong. In fact, they have too much capital and management seems to agree as they recently launched a $150 million share buyback that will likely close in April 2016. Management clearly believes their shares to be undervalued. That doesn’t make them right, but in this case our assessment agrees with theirs and we applaud the capital allocation decision.
Before moving on from Home Capital I would be remiss if I didn’t acknowledge the incredible track record of Home Capital’s 77 year?old co?founder and CEO Gerald Soloway who is retiring in May. Over the past 30 years, Mr. Soloway has built an extraordinary business. Equally as important, he has managed the company in a shareholder?friendly way. Ever?increasing dividends, prudent capital allocation, modest management compensation, etc. One specific example stands out in my mind. Way back in 2003, Mr. Soloway and a few others voluntarily converted their multi?voting founder shares into common shares without seeking or receiving any compensation for doing so. It was the right thing to do, but all too often senior executives put themselves first and not their shareholders. Mr. Soloway is that rare exception and we all owe him a debt of gratitude.
During the year AT&T (NYSE:T) successfully completed its acquisition of DirecTV. The purchase price, comprised of a combination of cash and shares of AT&T, was $93.24. The average cost of our former holding in DirecTV was $67.92 resulting in a decent capital gain. As a result of the transaction we now hold shares of AT&T with a cost basis of $34.22. The stock is up over 15% since we acquired them as a result of the transaction and they sport a 4.9% dividend yield. Until we find a more attractive investment opportunity, we are comfortable holding the shares for now.
As you might expect, we made our share of mistakes during the year. Our basket of supermajor oil companies (Exxon Mobil,