The Value Fund Monthly Update – May 2022

Performance for May 2022

The Value fund was up 3.86% for May 2022 and is down 6.38% since the fund’s inception at the beginning of February 2022.

Market Performance

The market was manic this past month with the S&P dropping as much as 6% only to end the month flat while the Nasdaq composite was down almost 9% at one point finishing the month down 2.1%. We used this volatility in our favour and increased our exposure to a few of our highest conviction investments as opportunities presented themselves, though we did have to exit or reduce lower conviction positions to free up the cash.

The S&P and the Nasdaq are down 13.3% and 22.8% respectively year to date.

Comments

It was a busy month as May is earnings season. Over half of the companies we own reported results the majority of which were very pleasing and contributed to this month’s performance. Only two reported disappointing earnings one of which is our gas pipeline business where we realised a significant error in our analysis. This resulted in us immediately reducing our exposure to the company to a more appropriate level.

Our agility to act fast when we are wrong is a great advantage we must never be afraid of using. It is also an advantage when we believe the market is wrong as was the case when our apparel retailer traded down after one of its competitors reported disappointing results.

Performance was also helped by news out on a few of our investments most notably being the increased acquisition price of Entasis Therapeutics, which we exited after the acquirer increased their offer price for the third, and we believe, final time. And the news from a computer hardware company where an activist investor believes the stock to be worth almost double its current valuation and is willing to work with management to unlock that value.

Conclusion

Our actions in May have improved the overall quality of the portfolio while it remains attractively valued at a weighted valuation of 8.7x operating income vs 8.0x at the end of April 2022. (See April 2022 monthly update on how we value a company)

As we have said previously and will say time and time again, we are in this for the long-term, and although May was a solid month relative to the market, we are certainly not going to claim victory. We expect June to be quieter as earnings releases slow down but behind the scenes, the work will continue to ensure the fund remains optimised.