Lockstep’s Monthly Update – October 2022

Our Funds’ Performance for October 2022

Premium Fund

The Premium Fund was up +12.2% for October 2022 and is down -6.9% since launching in February 2022.


 The Value Fund

The Value Fund was up +10.3% for October 2022 and is down -16.5% since launching in February 2022.


Performance vs the Market

Both the S&P 500 and the Nasdaq Composite had a decent month, increasing +7.9% and +3.9% respectively, driven by stronger-than-expected third quarter (Q3) earnings and by commentary from some Federal Reserve officials that interest rate hikes might slow sooner than expected. Both the S&P 500 and the Nasdaq Composite are down -18.8% and -29.8% year-to-date.

The question from investors now is, “is the worst behind us?” As always, we believe the future is unknowable and therefore have no real opinion on the matter. Although technology stocks declined in value this month after a few of the largest companies in the industry reported disappointing Q3 results, there remain many listed businesses significantly overvalued. Until these valuations correct, we struggle to see how it is blue skies ahead for the market as a whole.


Drivers of Performance

The Premium Fund

Much to our delight, all our positions contributed positively to the performance this month, but don’t count on this being a common occurrence.

The largest contributors to performance were Seritage Growth Properties (SRG) which appreciated after shareholders voted in favor of the liquidation of the company, our apparel retailer that continues to improve on last year’s record sales volumes, and our fintech business whose share price appreciated as its peers’ reported results.

Even after the strong month, we believe there is significant value in the companies we hold in the Premium Fund. Our goal in this fund is to find ultra-high-quality businesses that are flying below the radar of the market or are misunderstood. Of the 11 companies we are currently invested in, 10 of them we would be happy if our children inherit, while the 11th is being liquidated (SRG, which we have written about extensively).


The Value Fund

The Value Fund’s top contributors were also SRG and our apparel retailer, plus our medical device company which continues to report record revenue and profit.

Unfortunately, the funds’ performance was hurt by our investments in 3 tech companies. All 3 companies are undervalued relative to our fair value estimates but are facing headwinds. These 3 companies combined account for 5% of the fund’s net asset value (NAV). This has been done intentionally because of the headwinds however we must acknowledge that the sizing is also due to declining share prices.

The Value Fund is currently invested in 19 high-quality businesses offering a more diversified portfolio than Premium Fund. Over time we want to increase the number of positions in the fund to reduce volatility and to offer a more diversified portfolio of 25-30 positions. For now, though we do have a few concentrated positions due to the opportunity they present in the short to medium term.


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