Alluvial is having a great year. See their Q1 letter to investors below
I am pleased to report strong results for Alluvial’s strategies this quarter. Alluvial has now completed three full years of formal operations, a milestone I was not sure would be reached when I began in 2014! Since its March 31, 2014 date of inception, Alluvial’s flagship Global Focused Value strategy has produced annualized returns, net of fees, of 17.6%. This compares quite favorably with the Russell 2000 Index at 7.1% and the Russell Microcap Index at 4.9%. I have been consistent in requesting clients assess Alluvial’s performance over time periods of multiple years. The small and often neglected or illiquid securities that are Alluvial’s focus often move (or don’t move) for no fundamental reason, and patience is required to see this investment approach to its fruition. In my view, a track record of minimum sufficient length to be meaningful has now been achieved, and I hope clients find Alluvial’s results acceptable. In general, I am satisfied with Alluvial’s investment decision-making processes and the results of those processes these three years. That does not mean I have not made errors. I certainly have and I have made efforts to discuss them candidly. But, I can say with confidence that I am better investor than I was three years ago. This is the result of constant effort to accumulate knowledge and understanding. An investor must never cease learning, because there is always more to know! More knowledge creates clearer sight, which allows better decisions and eventually, better results. I do not know if market conditions will be conducive to continued out-performance over the next few quarters or even years. I am exceptionally confident that Alluvial’s approach will continue to bear fruit over any reasonable timeframe.
Alluvial is growing, and with growth always comes change. Alluvial Fund, LP commenced operations on January 1 and has already welcomed several limited partners. With the launch of the partnership, Alluvial’s separately managed accounts are now closed to new clients. I believe the new partnership offers several advantages over the separately managed accounts. If you are an accredited investor and are invested in becoming a partner, please let me know.
Since Alluvial Fund, LP is now Alluvial’s only open investment vehicle, I will no longer be reporting performance for Alluvial’s legacy accounts. Doing so would only invite confusion and distract from efforts to attract new partners for Alluvial Fund. Because of rules surrounding general solicitation I am limited in my ability to provide information and commentary on Alluvial Fund’s holdings and results to non-accredited investors. Writing two different quarterly letters, one for separately managed account clients and one for limited partners in Alluvial Fund is untenable, so I am currently assessing strategies for continued communication with separately managed account clients. Future quarterly letters to non-accredited clients may be summary in nature. Regardless, Alluvial will continue to provide its services to both its separately managed accounts clients and to Alluvial Fund limited partners for the foreseeable future.
But that’s the future, and this is now. Let’s discuss a few of Alluvial’s holdings and their pertinent developments.
A new position as of last quarter, the thesis surrounding Contura Energy is fully intact. Metallurgical coal prices are down from the lofty heights reached earlier this year, but seem to have found their footing at levels substantially higher than the prevailing prices at the time of Contura’s exit from bankruptcy last July. Contura’s results for the fourth quarter were excellent, and the company has sold forward the lion’s share of its 2017 production at attractive rates. The company took advantage of its strong financials to refinance its debt, pushing out its maturity to 2022 and shaving over $10 million from annual interest expense. The company also increased its stake in the Dominion Terminal Associates export facility to 65%, purchasing bankrupt Peabody Energy’s interest in the facility. The company remains on track for an uplisting following the requisite financial filings.
Retail Holdings NV
Following some year-end share price fireworks, Retail Holdings NV reported great results at its operating subsidiaries and progress on its multi-year liquidation process. The company will pay a $2 distribution from recent asset sales and is set to distribute additional cash before year-end. Despite the run-up, the company still trades at a sizable discount to NAV.
I have long considered Meritage one of Alluvial’s most exciting “boring” holdings. While it may be difficult to get fired up over Wendy’s franchises, Meritage’s results and operating strategy are a different story. Having already engineered massive growth over the last decade, Meritage has a credible plan to become a much larger and much more profitable company. Management took a huge stride toward achieving that plan in the first quarter, announcing an agreement to acquire an additional 69 Wendy’s units. Assuming the deal is completed, Meritage’s restaurant base will increase by nearly 40%. There will be a lot of noise in the company’s financial statements as the additional restaurants are integrated, but I expect this acquisition to increase Meritage’s earnings power meaningfully on a per-share basis. Meritage’s medium-term plan is to reach 300 Wendy’s units. Alluvial owns a substantial portion of Meritage stock’s float and we expect to maintain this investment for as long as the company can continue doing highly profitable acquisitions and benefiting from operating leverage.
MMA Capital Management
For the first time in quite a while, MMA Capital Management reported some negative news, disclosing a material loan loss that reduced book value by about $1 per share. The news sent the stock lower but not for long as investors used the dip as a chance to pick up more shares. Word of MMA’s hidden assets and growing earnings stream seems to be spreading, as company shares are holding above GAAP book value for the first time in many years. Book value remains understated as the company has not yet recognized any income from its management of low income housing tax credit properties, though millions in fee revenue has accrued. The company’s huge buyback authorization remains in place, though the company seems to be taking a more cautious approach to buying back stock than it has in years past. I expect continued book value growth this year as the company continues to transition from a collection of disparate but valuable assets into a true operating company.
Ferronordic Machines AB Preferred
One of the more unusual ideas I have ever come across is preferred shares of Ferronordic Machines AB. (I suspect a few of you have looked at your portfolios only to see the ticker FNMA and wondered if I’ve lost my mind buying Fannie Mae. No, it’s Ferronordic.) A Swedish company, Ferronordic Machines is the authorized dealer of Volvo construction equipment and Terex trucks in the Russian Federation. The company deals in new and used vehicles and also supplies parts and support services. Ferronordic was founded in 2010 and expanded rapidly. The