Our Funds’ Performance for December 2022
The Premium Fund was down -0.6% for December 2022 and -6.5% since launching in February 2022.
The Value Fund
The Value Fund was down -1.7% for December 2022 and -12.3% since launching in February 2022.
Performance vs the Market
Both our funds significantly outperformed the S&P 500 and the Nasdaq Composite in December. The S&P 500 was down -5.9% for the month, while the Nasdaq Composite declined -8.7%. The weak market was driven by the Federal Reserve (US Central Bank) continuing to increase interest rates, albeit at a slower pace, while communicating that rate hikes are likely to continue well into 2023. The market interpreted this as an increased probability of a US recession resulting in a significant sell-off. Poor earnings from some market sectors also contributed to the weak month, while supply constraints hurt other sectors.
It has been a tough year as the S&P and Nasdaq finished the year down over 19% and 33%. Given how difficult it has been, we are proud of our performance, especially the Premium Fund. Our outperformance vs the market suggests we offer something different and are well-positioned for when the economy does improve.
Drivers of Performance
The Premium Fund
The negative performance resulted from weak earnings from one of our semiconductor companies. Even though it was evident that their product demand was going to decline, we underestimated just how significant the correction would be and how long it would continue. We always viewed this correction as short-term, while our investment thesis focused on the industry’s long-term demand dynamics. However, as soon as management communicated that their long-term expectations had reduced, it hurt our investment thesis, and we reduced our exposure in response.
Performance was also negatively impacted by one of our media investments which traded down even though it continues to deliver as promised. The stock is very illiquid. Therefore, we ignore any short-term movements in the share price and focus more on the company’s long-term fundamentals. This philosophy goes for all our investments, including our medical device company which also traded down even though it continues to post record results.
The negative performance was somewhat offset by our manufactured housing investment which we expect to post solid fourth-quarter earnings. Additionally, performance was boosted by our retail apparel business announcing a special dividend during the month and our other media business, which exceeded its annual digitisation goals.
The Value Fund
As with the Premium Fund, the value fund’s performance declined, driven by weakness in our semiconductor holdings. Again our semiconductor investment thesis is based on the long-term demand within the industry. When the management of our one semiconductor business adjusted its long-term demand expectations, we changed our exposure to the sector, closing out one of our holdings and reducing exposure to another. The industry should do very well in the long term, but we can’t ignore the risk of a prolonged cyclical downturn.
The share price appreciation in our manufactured housing investment and our retail apparel business offset the fund’s negative performance. While our Chinese game-streaming investment appreciated after the US accounting regulator announced it had received access to audit US-listed Chinese firms, substantially reducing the risk of these companies having to delist from US stock exchanges.
Our goal at Lockstep is to find value in lesser-known, high-quality businesses overlooked by the market (often due to their size). The Premium Fund consists entirely of such companies, while the Value Fund does have some exposure to well-known businesses we believe the market is mispricing. We remain optimistic about both funds’ long-term potential and look forward to the year ahead.