Tom Russo’s 2Q16 Semper Vic Partners Investor Letter

Tom Russo’s 2Q16 Semper Vic Partners Investor Letter

Tom Russo’s letter to Semper Vic Partners investors for the second quarter ended June 30, 2016.


Results for Semper Vic Partners, L.P. for Second Quarter 2016, appear below, along with cumulative performance since L.P. conversion in July 1990. Partnership results are presented net of advisory fees and are compared to market indices whose returns include reinvested dividend income:

Seth Klarman On Margin Of Safety Investing

This is part nine of a ten-part series on some of the most important and educational literature for investors with a focus on value. Across this ten-part series, I’m taking a look at ten academic studies and research papers from some of the world’s most prominent value investors and fund managers. All of the material Read More

Semper Vic Partners

Investment Position and Outlook

While my “global value” equity investors have generally enjoyed positive results year-to-date, there is little about today’s global political forces and/or financial marketplaces that seem either normal or particularly reassuring. One need not cast too distant a glance to see evidence of this in all directions, including the surprise Brexit vote in the United Kingdom, an attempted coup in Turkey, impeachment of Brazil’s president, ISIS terrorist attacks throughout Europe, copycat massacres throughout both the developed and developing markets, and the discrediting of the political process in the United States (e.g., revelations of the Democratic Party’s efforts to distort truth regarding a final candidate and Republican Party’s inability to chaperone candidate conduct during countless debates).

  • DIS 15-Year Financial Data
  • The intrinsic value of DIS
  • Peter Lynch Chart of DIS


Indeed, the list above, as long a list as it is, probably does not nearly capture the full extent of the pressures which we seemingly confront as we commit capital. Fortunately, however, as Lord Rothschild once opined over a century ago, the best time to invest is when there is blood in the streets, when the very essence of capitalism is called into question and institutions, which were long relied upon to channel conduct, fall away. Though we are not remotely close to fully Rothschildean investment conditions, we are seeing opportunities open up as investors extrapolate some of today’s most violent disruptions out into the future beyond the likely time some of today’s disruptions will last.

My job as investor, however, is to recognize that investing is a long-term activity. As I have focused for my “global value” equity investors over several decades, my goal is to direct your capital to businesses imbued with the “capacity to reinvest” their cash flows from existing operations into new geographic markets and/or into adjacent categories in existing markets.

For our reinvestment, I hope to find unfair competitive advantages by focusing on companies who have privileged opportunities when approaching reinvestment. Such advantages can arise from the strength of the pre-existing appeal their brands possess in markets into which they wish to invest behind brand activation. Another such advantage may be the cash which they are free to deploy from cash flow arising from markets in which they already operate profitably and in which additional investing would not yield optimal returns. Clearly, family control of boards help underwrite management’s capacity to make long-term investments.

When making such investments on clients’ behalf, I am constantly challenged to weigh the prospects for the portfolio holdings which currently drive your returns with prospects for potentially new portfolio holdings that might seem brighter, brassier, and even more promising. However, through my own early experience and through countless observations from investors whom I respect who came before me, I have grown to greet such pitches with a critical examination. As I do so often when acting in the investment world, I take inspiration from Berkshire Hathaway when formulating my own response to seemingly alluring new pitches.

“And Then What?”

Pilgrims lucky enough to attend the Berkshire Hathaway annual meeting enjoy, in addition to Warren Buffett’s well-recognized pearls of investment wisdom, profound insights offered by his long-standing partner, Charles T. Munger. While Mr. Munger freely reserves the right to proclaim that “he has nothing to add,” when Mr. Munger chooses to add his comments, they are well worth the wait.

“And then what” are three words Mr. Munger shared with investors that he claims has regularly kept both he and his partner away from seemingly good-sounding investments that subsequently fail to reward. The simplest way in which to stay clear of ideas that promise short-term pleasure is to ask “and then what” to make sure that knowable, long-term pain is not destined to follow.

Mr. Munger’s partner, Warren Buffett, no slouch on his own for deep and pithy investment insights, provides some added thoughts to Mr. Munger’s “and then what” when he describes predictable, irrational behavior in the context of investing. Whenever asked at annual meetings to explain why one or another seemingly catastrophic investment occurred, Mr. Buffett generally responds that he finds it “amazing how easily people are willing to risk what they have and they need for what they don’t really need and very likely cannot have.”

A great example of Mr. Buffett’s observation occurred during the late innings of the Web 1.0 bubble in 1999 and early 2000 when the Bass family was romanced into investing into a handful of high-tech darlings of the day. Indeed, with the vast bulk of Bass family wealth tied up in low tax cost basis shares of Disney (NYSE:DIS), the family needed to heavily margin those shares to generate funds to deploy into this small basket of then Internet darlings that had showed hyperbolic returns prior to luring in the Bass family.

Almost no sooner than the family, aided in the effort by their then favorite investment bank, had margined billions of dollars received by pledging their Disney shares into these new holdings did the music of Wall Street’s Web 1.0 waltz abruptly stop. Indeed, the stop was so abrupt that the Bass family brokers had the duty to sell off billions of dollars of Bass holdings in Disney shares to cover the margin call brought about due to the collapse of the share price of the former internet darlings that had entered into an equity market free fall.

The Bass family indeed had and needed a fortune in Disney shares that came about because of extraordinarily wise investments decades earlier. The Bass family clearly did not need to pledge their life savings securely placed in Disney shares to chase extraordinarily overvalued Internet company shares. They were aided in this effort by brokers who arranged vast margin loans to accomplish this unnecessary and risky transaction. Nobody within the family had the sense to ask Mr. Munger’s simple question, “and then what” when contemplating putting on such risky investments at such a late stage in the first internet market bubble.


In many ways the British people, I fear, have been treated to a similar hand by proponents of Brexit. Much like the brokers who convinced the Bass family that what they had and they needed was no longer enough, so too did pushy and promotional proponents of Britain’s exit from the European Union (EU) place the British people in a very real position of risking what they had and they needed regarding their trade relations with the EU for something they did not need and could not have.

The British did not need the exit from the EU. Clearly, however, a sufficient percentage of Britain felt sufficiently disaffected to seek change broadly as they did not perceive that what they had was all that they needed.

Indeed, the promoters of the concept of Brexit promised the British people that they would recoup in excess of 350 million pounds of savings each week by disentangling themselves from unnecessary EU pronouncements. However, even had the promised “savings” been accurate as forecasted, the promoters conveniently failed to remind the British that over 45 percent of their trade is with their EU counterparts, all of which was eligible to the EU at common terms available only to members of the EU. Unfortunately, they forgot to say that a large portion of which they needed, i.e., over 45 percent of their commerce, would indeed be at risk. Promoters also forgot to mention that over one million finance industry jobs could be at risk as British-based financial firms’ former freedom to transact financial transactions historically reflected the United Kingdom’s position as a member state.

Finally, the belief that Britain could somehow cast away those people from abroad who cleaned their hospitals, mowed their lawns, drove school buses, etc. is almost as unachievable as was the promise that Britain could stop taking in refugees from other parts of the world. Being promised something, in the case of Brexit, Britain could not have led the nation to disappointingly weigh the balance of what they could get and disregard the reality of what they might lose.

Fortunately, the full adverse impact that could have confronted the United Kingdom due to the Brexit vote seems likely to be muted for a couple of reasons. First and foremost, the British themselves, I believe recognize that they probably misjudged the benefits and savings to be gained from exiting the EU. This appears to be the case when one considers the conciliatory reference taken by the United Kingdom’s new Prime Minister, Theresa May.

Second, Germany and France seem to be less demanding that the United Kingdom file required papers for dissolution under Article 50 nearly as soon as they early on suggested they might. It appears that both nations may be willing to keep open minds regarding ways to pull back from the emotional ledge that they were forced near as a result of the vote. While the process is set into motion, it will have the benefit of being “slow motion,” hopefully slow enough to deflect the worse-feared disruptions.

Minor Portfolio Impact from Brexit

With nearly 70 percent of my investors’ assets invested in companies that are either headquartered abroad or, in the case of Philip Morris (NYSE:PM), conducts all of its business abroad, one might suspect that the surprise Brexit outcome might portend poorly for our portfolio holdings. Upon reflection, this does not seem to be the case for several reasons.

First and foremost, I have invested in no domestic-only United Kingdom-based companies. Even though I have continued to search for as rewarding a United Kingdom-centric investment as was the twenty percentage position I held in Weetabix for several decades, I have not found anything yet to replace that remarkable investment. However, since Weetabix’s takeover by Lyndon Capital in 2004, I have held a considerable number of shares whose United Kingdom businesses may be well-positioned to profit from consequences from Brexit.

For instance, both United Kingdom-based British American Tobacco (BTI) and Diageo (NYSE:DEO) stand to see a vast bump up in the foreign earnings which they receive from their extraordinary businesses around the world when those profits are reported back into pounds sterling at a fifteen percentage point lower exchange rate. In other words, our longstanding exposure to British companies most exposed to international trading positions us to receive more pound sterling for the profits that return to the United Kingdom.

Demand for both companies’ products, cigarettes for British American Tobacco and premium international spirits (most notably locally distilled scotch whiskey) for Diageo, have been established over the decades in hundreds of markets worldwide. So long as their loyal consumers do not take offense from the inward-looking underlying message of the Brexit vote and remain loyal to their longstanding brand preferences for all things British, our portfolio should benefit from the increased inflow in foreign sourced profits. The same effect can be true for companies such as Pernod Ricard who have substantial businesses in the United Kingdom (e.g. Chivas Regal, Glenlivet, Ballantine’s, Royal Salute, etc.) even though headquartered elsewhere (in France in the case of Pernod Ricard). Nonetheless, Pernod Ricard (XPAR:RI) will, like Diageo and British American Tobacco, enjoy the ability to raise prices of their locally sourced United Kingdom spirits to reflect the benefits that they will receive as a result of the diminished value of the pound sterling.

Second, many of our portfolio companies not based in the United Kingdom have multiple associations with the United Kingdom that should allow them to offset the worse potential effects of Brexit. For example, Heineken may likely suffer as a result of reduced operating prospects of the local United Kingdom breweries acquired through their Scottish and Newcastle acquisition. However, as with many of our global enterprises, Heineken has a second layer of involvement with the United Kingdom. These companies have, in addition to some operating exposure in the United Kingdom, also directed a considerable amount of shared services operations to the United Kingdom. Many of our companies headquartered elsewhere have moved finance, human resources, research and development, etc., to the United Kingdom to tap into their open labor markets and into services provided by their excellent professionals. These structural costs and shared service costs will, going forward, be far less expensive than they were previously should the pound retain its post-Brexit weakness.

Third, some of our portfolio companies are using the post-Brexit period to take advantage of opportunistic moves. For instance, in the weeks following Brexit, Wells Fargo (NYSE:WFC) announced that they revised plans to rent space in a soon-to-open modern office building. They had envisioned renting in this building to house a growing cadre of employees located remotely throughout London in a cluster of random sites. The new location promised to bring under one roof all existing professionals and to allow for expansion of bank professionals overseeing their not-inconsiderable United Kingdom-based loan portfolio. Soon following news of Brexit, Wells Fargo revised their rental plans and purchased the building outright. Uncertainty offers opportunities of which well-positioned companies like Wells Fargo, supported by the strength of their home currency, were able to take advantage.

Even though I refer to many ways in which the surprise Brexit vote may not directly impact our portfolio holdings, there remains, nonetheless, a lingering overall feeling of disappointment for all of our portfolio holdings that arises as a result of the inward turning sentiment at the heart of Brexit.

It is troubling to see a nation of ostensibly well-educated citizens turn inward based on a false promise that they can protect themselves back to prior prosperity. Throwing up walls in England will protect quality jobs no better than throwing up walls would accomplish that along the Mexican border in the United States. Threatening to send back immigrants, on whose backs rest today an increasing amount of the load of manual labor and entry level jobs, will not create new work for United Kingdom citizens as they are jobs which have long gone begging to be filled by immigrants willing to take on such difficult work.

Finally, Brexit suggests a furthering of the return to home-country preferences that I fear over time may lead to a reversal of the march towards globalism that has accompanied the past three decades since the fall of closed societies around the world. Merely thirty years ago, few of our main portfolio companies (i.e. Nestlé, Philip Morris International, Heineken, Pernod Ricard, Richemont, Brown-Forman, Unilever, British American Tobacco, Swatch, etc.) were barely able to trade with citizens in the former Soviet Bloc, China, India, Brazil, and Vietnam.

Though the casting away of the former Soviet Union’s Eastern European walls was the most dramatic expression, most of the above countries have opened up their markets to global consumerism, a phenomenon which has helped underwrite the remarkable reinvestment opportunities which have underpinned the profitable expansion of so many of my portfolio companies. Clearly, political movements that return such markets to inward-focused, closed borders, etc., may stand in the path of continued ongoing expansion and investment.

Portfolio Performance During Second Quarter

During the second quarter, 2016, most of our positive portfolio performance arose from the performance of five of my portfolio’s top ten holdings. Position sizing is intended to add value when managing funds – directing more capital to those positions which I believe represent the deepest margin of safety that arises from the greatest likelihood that the favored positions will be able to expand their competitive moat and build competitive advantage able of delivering future returns.

As an investor, I borrow from famed investor, George Soros, when I suggest that what matters in investing is “how much money you make when you’re right and how much money you lose when you’re wrong.” The George Soros message is indeed correct. Portfolio weighting matters. However, over the long term, I prefer to follow Warren Buffett especially over the long term when my goal is to abide by his pronouncement that the “first rule of investing is never lose money, and the second rule is never forget first rule. . . .” Near-term performance is affected by the swings in share price and the concentration of portfolio holdings. Over the long term, our returns will depend on our ability to find attractive businesses at attractive prices whose managers can reinvest our business cash flows attractively to drive increases in intrinsic value on a per share basis.

During the second quarter and first six months of 2016, my portfolio holdings followed Mr. Soros’ observation – my better performers represented greater percentages of assets and worse performers represented smaller percentages of capital. (See attached tables which show the actual weighted average portfolio performance contributions to Semper Vic Partners for the most recent quarter and for the year to date.)

The main contributor to positive returns for Semper Vic Partners came from Philip Morris International, Berkshire Hathaway Class A shares (NYSE:BRK.A), and Nestlé. Berkshire Hathaway continues to show a strong “capacity to reinvest” during the first half of 2016, closing on the purchase of Precision Castparts Corporation. Nestlé announced significant revenue and profit turnarounds in some categories (frozen food) and geographies (North America) which had remained stubbornly troubled, but which yielded to successful efforts of one of Nestlé’s leading younger division heads.

Philip Morris International has enjoyed enthusiasm over growing prospects for reduced-risk cigarettes which recently underwent trials around the world.

The main contributor to first-half declines for Semper Vic Partners came from Compagnie Financièr Richemont, SA (XSWX:CFR). Richemont suffers from adverse investor sentiment over negative trends in Swiss watch sales. Pressure comes on such sales from crackdowns from Chinese officials to police recently abundant corrupt practices relating to gifts given for influence. Pressure comes as well from perceived threat from connected watches (cf., Apple Watch) which threatens to capture attention of millennials, formerly targeted by Swiss watch makers. I believe such fears are exaggerated and watch sales will recover to a successful level (albeit likely less than the frothy recent past levels of activity). I believe year-to-date declines in share prices of both Richemont and Swatch fail to adequately value their enormous respective collection of leading luxury jewelry maisons, Cartier and Van Cleef & Arpels for Richemont and Harry Winston for Swatch. I also believe that the share prices similarly discount their balance sheet strengths.

Shares of two financial services companies, MasterCard and Wells Fargo, provided the next two declines in share price during the first half of 2016.

Wells Fargo continues to languish under negative investor sentiment towards large banks in general, despite being immune from some of the problems confronting its industry peers. Wells Fargo remains focused on consumer banking and retail banking, relying upon a large number of account relationships to build stickiness and create banking customer captivity. Wells Fargo shares trade for barely over eleven times net income and provide over three percent dividend yield. I believe that Wells Fargo will continue to enjoy funding benefits from low cost or deposit compared to its competitor bank which suffer higher borrowing costs to fund their own lending operations.

MasterCard (NYSE:MA) shares have suffered during the first half of 2016 in part as a reaction against all the global disruption ongoing in financial markets and global political corridors. Terrorist bombings throughout Europe slow travel and slow cross-border transactions, the growth of which had over the past decades fueled growth in interconnect revenues. Decline in consumer confidence also pressures revenues and growth in gross dollar volumes billed.

Finally, MasterCard and other domestic payment networks suffer from concern over the overturning of an agreed settlement with retailers over alleged anticompetitive pricing activities. The repeal of the settlement in the United States coupled with a judicial loss in the United Kingdom in a law suit alleging anticompetitive pricing has triggered concerns over regulatory and legal environment, now weighing on MasterCard’s share price.

I believe that current turbulence impacting MasterCard’s share price will abate as travel patterns return, consumer confidence restores, and payment networks reach reasonable ways in which to be paid for the benefits that payment systems offer merchants. The growth of mobile platforms will only further drive the migration globally from cash payment (cash payments represent currently over 80 percent of commerce throughout the world beyond the United States) to digital payment. MasterCard has massive capacity to reinvest mature industry cash flows to exploit new marketing opportunities for using credit, for increased consumer spending, for assisting government distribution of social benefits in secure manner, etc.

I also attach a copy of the Semper Vic Partners After Tax Rate of Return Table intended to show the benefits of investing for the long term. Low portfolio turnover results in low recognition of embedded capital gains. Unrecognized capital gains fortunately remains non-taxed until realized. Over the years, Semper Vic Partners taxes paid mainly represent tax on dividend income and almost none on capital gains realized. The attached table shows how avoiding capital gains taxes can substantially reduce the performance loss due to taxes paid.

In Memoria

Before closing, I wish to remember Gene Gardner, my partner of nearly thirty years, who succumbed this month to his struggle against cancer. I met Gene at The Sequoia Fund in New York City, where I worked after studying law and business at Stanford University. At that time, the Sequoia Fund was one of the largest shareholders of Berkshire Hathaway. It was while I was studying at Stanford, that I first heard Warren Buffett, CEO of Berkshire Hathaway, speak in the early 1980’s to Professor Jack McDonald’s value investing seminar.

Gene and his wife, Anne, frequented Sequoia Fund’s offices when in New York City, as Gene had worked at an earlier firm as an investor with Bill Ruane, the founder of Sequoia Fund and the man under whom I trained. By 1989, Gene’s business based in his hometown, Lancaster,

Pennsylvania, had evolved to the point where he sought extra hands to lift the load of investing. By then, my own global value investment partnership, Semper Vic Partners, had proved its worth during tumult like the collapse of 1987 and was poised to grow.

Blessed with a shared investment style which we both learned through Bill Ruane and the Sequoia Fund, willing to continue to drive my investment business into international value investments, and blessed with the extraordinary drive and commitment of our truly remarkable colleagues at Gardner Russo & Gardner LLC (now numbering over 40), our business has enjoyed the chance to vastly increase the reach of our investment activities on behalf of investors whose needs we service.

Though Gene has not been actively working with clients for the past several years, he came to the office most every day, keeping up with portfolio company news, progress of portfolios which Gene had co-managed with his son, Eugene, our building project, and the lives of our employees. To say Gene will be missed falls far short of the mark of esteem and personal affection in which he was held by all at our firm and by the clients he ably served a span of over 45 years. Gene leaves behind a legacy of gentle humor, keen intellect, and unwavering respect for his work colleagues that are the cornerstone of our firm’s culture and our professional practices.


Semper Vic Partners may recall having received a note from our third party administrator, Stone Coast Fund Services, requesting information and signatures related to a “repapering” process required of administrators and regulators. Most partners completed the documents requested at that time. However, some have not yet completed the requested documents.

The documentation which partners who have not yet finished filling out their “repapering” requests focuses on two areas of change that must be updated for administrative and legal compliance purposes. The first area involves updating your subscription agreement to Semper Vic Partners to cover terms in conditions that have changed in a way that leave earlier answers incomplete and new questions unanswered. The second area requests disclosures intended to meet today’s tightened Anti-Money Laundering (“AML”) requirements. The AML requested materials must be completed to allow our administrator to receive and disperse each partner’s funds from the partnership, in light of changed requirements of federal law.

For investors who have not yet “repapered”, Stone Coast Fund Services plans to forward an abbreviated “Investor Questionnaire” in lieu the original request which accompanied your Subscription Agreement. To assist those partners, Gardner Russo & Gardner has received from Stone Coast Fund Services, in conjunction with Semper Vic’s counsel, Seward and Kissel, updated forms intended to generate the same materials as requested earlier but in an easier form to fill out.

A copy of this updated “Investor Questionnaire” will be resent to you this fall by Stone Coast Fund Services. You may also receive a phone call from either Stone Coast Fund Services or from one of my colleagues at Gardner Russo Gardner LLC to assist you to fill out forms you will receive from Stone Coast Fund Services.

Partners should know that Semper Vic Partners’ Administrative Officer, Holly Breneman, and her colleagues, Kathy Rathman, and Jennifer Zielinski, are prepared to assist with any questions about these required housekeeping steps and to help in any way possible.


Please keep in mind our need to be updated on changes of contact information, including email addresses and any other facts and circumstances of your personal and professional lives that would be helpful and important to you for us to have. For any additional administrative questions or concerns, please contact Holly or Kathy either by phone (717-299-1385) or by e-mail at. You will find their responses timely and accurate, and their manner friendly.

In closing, please rest assured that I continue to search globally for attractive new investments capable of balancing risk and return in ways similar to existing portfolio companies.



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