Dear fellow investors,
James 1:27. Religion that is pure and undefiled before God the Father is this: to visit orphans and widows in their affliction, and to keep oneself unstained from the world.
Most professionals who employ our strategy are wide-asset allocators. We fill a sleeve in the U.S. stock ownership category and for most, that is in the large-cap space. We compete with other value funds and ETFs, which represent themselves as value strategies. Using the James 1:27 test, how do we stack up at the beginning of 2022 with other value strategies and large-cap managers that are portrayed as value managers?
For those who seek a value strategy, the first test would be price-to-earnings ratios (P/E) of the portfolios. Morningstar gives a 2022 estimate of the P/E of our whole portfolio at 11.56 and measures us against a value index with a 15.35 P/E and a category average of 14.66. The irony is that we just had the best year in the history of our strategy and our portfolio is trading the cheapest versus our category, index, and the S&P 500 Index it ever has!
We made some very difficult decisions to reduce our holdings of big long-term winners like Disney (DIS), Accenture (ACN) and Starbucks (SBUX). First, we don’t believe there are many companies whose stock price can overcome a 40-times P/E ratio over a ten-year time frame. Especially not mature companies which should have lower growth rates in the future than they have had in the past. We invest on behalf of people who we think are asking us to focus on 5-10-year performance. We take that so far as to say that if you are not going to stay with us for five years, don’t come into our strategy at all!
Check our competitors to see how much of their portfolio is dominated by holdings among the most popular stocks in the S&P 500 Index. Are they defiling themselves or will they look as smart in three years as they look if they moved in three years ago? Warren Buffett and Berkshire Hathaway own a huge slug of Apple (AAPL). It trades for a 32 times consensus estimates and is no spring chicken. However, he offsets this risk with a massive cash position as large as his holding of Apple. Amazon (AMZN) and Netflix (NFLX) trade for 87 times and 52 times the 2022 estimates, respectively. Will they break the historical mold for another five to ten years?