The GoodHaven Fund (MUTF:GOODX) semi-annual report? for 2014.
GoodHaven Fund: Investment Objective
The GoodHaven Fund (MUTF:GOODX) (the “Fund”) seeks to achieve long-term growth of capital.
In his 2009 annual letter, Baupost Group's Seth Klarman laid out what he believed to be the 20 Investment Lessons of 2008. SORRY! This content is exclusively for paying members. SIGN UP HERE If you are subscribed and having an account error please clear cache and cookies if that does not work email [email protected] or Read More
See full GoodHaven Fund Summary Prospectus in PDF format here.
Dear Fellow Shareholders of the GoodHaven Fund (MUTF:GOODX) (the “Fund”):
In the six months ended May 31, 2014, the Fund gained approximately 3.32% but underperformed the S&P 500 Index, which gained about 7.62%. Since inception and through May 31, 2014, the Fund has gained approximately 48.62% compared to 55.04% for the S&P 500 (roughly 13.43% on an annualized basis compared to 14.96% for the index) – a period in which significant liquidity in the Fund moderated overall risk but also reduced returns. Given near-zero yields on “safe” securities such as short-term government notes, we consider these results to be attractive on an absolute basis and reasonable on a relative basis, particularly given the performance drag of sizeable cash inflows last year.
Notwithstanding positive results since inception, we have been out of sync with recent market conditions and have materially underperformed the S&P 500 Index over the last twelve months or so – although we did make money. During this period, rapidly rising stock prices coincided with a historic stretch of low volatility – making it more difficult to take advantage of mispriced securities. In addition, significant cash inflows from new shareholder subscriptions made keeping up with a steadily rising market tougher. We have made no unforced errors lately, but were, in the aggregate, unable to capitalize on enough opportunities to outpace general index gains, which were robust. Although never pleasant to see relative returns lag, we expect significant variance with indexes from time-to-time and believe we are well positioned given today’s valuations and conditions.
Certainly, we can be criticized over the past year for being slow to reinvest cash inflows, missing one or two chances to increase the size of existing investments, and not swinging at a couple of hittable pitches.1 Nevertheless, it seems more sensible to be positioned to be opportunistic after indexes have nearly tripled from crisis lows rather than attempt to chase performance by fully investing our portfolio in fairly valued or overpriced securities.
Moreover, there are indications of speculative behavior – about 80% of recent Initial Public Offerings (IPOs) are unprofitable companies – a level historically only exceeded by 1999 during the tech bubble. To paraphrase the mechanic in the FRAM oil filter ads of years past, we can look a little foolish now (by remaining disciplined), or a lot foolish later (by capitulating to the crowd).2 For us, that’s an easy choice.
As a brief digression, and with a nod of welcome to our new fellow shareholders, it’s worth a short review of what we are trying to accomplish. Both of us manage the Fund with an understanding that your money is important to you and that it may represent a significant part of your net worth – as it does ours. Accordingly we are constantly trying to: 1) keep what we have; and 2) earn a reasonable return on what we have kept, which we believe we have accomplished to-date.
Our strategy is not to bet on the long-shot at 30-1 odds, but to bet when the odds are heavily in our favor and the competition is hobbled. Sometimes that means carrying liquid reserves for an extended period of time – where criticism often rises proportionately to the bragging of one’s neighbors about recent investment prowess.
In the mutual fund world, leaning into the wind is not an easy strategy and we depend on rational shareholders who do not easily succumb to either panic or euphoria. In other words, we are glad to have you as our investment partners. In our view, it often pays to avoid crowd behavior and to question conventional wisdom, although in doing so we must be vigilant that our logic is neither flawed nor arrogant. We are attracted to stress and securities under pressure, usually accompanied by negative headlines and someone telling us we are stupid. Too much exuberance or too few securities under pressure means that patience should rule the day. When pessimism is rampant and business valuations offer high returns, we want to be greedy.
By a number of measures, equity indexes today appear to be somewhere between fairly valued and expensive. This does not mean that opportunities don’t
exist or that new ones won’t appear, just that investors should be acting more like a spry and experienced octogenarian who has been knocked around a few times rather than an exuberant teenager with lots of energy but limited knowledge and experience. For example, Warren Buffett has previously discussed comparing the overall value of publicly-traded equities to Gross Domestic Product (GDP) as a good but imperfect guide to value. In a Fortune magazine interview in 2001, Buffett said “…the market
value of all publicly traded securities as a percentage of the country’s business–that is, as a percentage of Gross National Product (GNP)… has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.”
Below is a chart comparing the Corporate Equity Valuations to GDP (essentially equivalent to Buffett’s GNP), one measure of the sort that Buffett was discussing:3