Todd Intrinsic Value Opportunity Review
October 16, 2013 | Jack White, CFA | Partner, Senior Portfolio Manager
Please read our latest article, "The Case for the S&P 500 Doubling and a Global Bull Market"
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|3Q13||YTD||1 Year||3 Year*||5 Year*||7 Year*|
|Intrinsic Value Opportunity (Gross)||7.90%||30.28%||33.31%||19.60%||8.14%|
|Intrinsic Value Opportunity (Net)||7.72%||29.60%||32.38%||18.75%||13.95%||7.42%|
|Russell 1000 Value||3.94%||20.47%||22.30%||16.27%||8.86%||4.24%|
*Annualized Total Returns. Please refer to the Performance Disclosure at the bottom of this page for futher information.
The Intrinsic Value Opportunity fund performed well during the quarter, gaining 7.9% (gross) compared to the index gain of 3.9%. Performance over the year to date period is also strong, up 30.3% compared to the Russell 1000 Value Index gain of 20.5%. Longer term numbers are excellent as well, and we are pleased to report the product is in the top decile of value managers according to eVestment, over all time frames since inception.
Investors are likely to remember this quarter as the one where the Fed surprised everyone and did not taper the quantitative easing program. Maybe I'm old fashioned, but the really big surprises used to be when investors were not expecting action and the Fed surprised with a rate cut or increase. This is just more evidence of the new world we are in. Equities started the quarter acting stronger, with the S&P tacking on 6% between the end of June and early August. Then tapering fears started to impact the market along with some weaker economic releases and the market gave back about 80% of that gain. Following this sell off into early September, the market rallied to new highs in anticipation of the Fed Tapering. When no action was taken, stocks peaked one day later and have since been retreating on concerns over the Washington DC stalemate.
We see an economy that is offering mixed results at this point, but has overcome many problems it encountered this year. We still expect the tapering to occur, but it has probably been delayed due to the standoff in Washington. If a solution is found to this situation, markets probably rally. Tapering would only be on the table if the Fed thought we were in a self-sustaining recovery. Most investors will likely eventually see it that way. Auto production has only just reached the point where it used to bottom in prior recessions, and new home construction has improved only marginally. Our sense is there is much further to go in these recoveries as demand has built up over the past several years.
We present our customary charts on what factors have been helping and hurting performance for stocks on the following page. Market performance continues to be dominated by the low quality phenomenon we've spoken of in the past. Noting the charts below, the lower quality companies with more volatility and no dividends dominated performance both during the quarter and the past year. We've seen this occurring dramatically since the Federal Reserve instituted quantitative easing back in 2009, as presented in the chart below the factors on the following page. This quality chart compares the S&P low quality index to the high quality index, and shades periods of quantitative easing. When the line is declining, low quality outperforms. What we can see is that high quality starts to recover when quantitative easing ends.
Fortunately, performance for this product has not been impacted by the shift of trends between low quality and high quality over time.
The chart on the left shows the trailing twelve month performance while the chart on the right illustrates the most recent quarter. Price to Intrinsic Value is very important to this product, and it added substantially to returns over the past 12 months. We also found that our profitability and share repurchase factors added, though relative strength detracted. Combining the factors, the product is performing very well.
The Intrinsic Value Opportunity fund is unconstrained when looking at sectors, and we limit the portfolio to approximately 30 stocks. We follow our discipline where it tells us to go. In the most recent quarter, our largest sector positions were found in Consumer Discretionary, Technology, Financials and Health Care. We were completely out of the Telecommunications and Utilities sectors with only very modest positions in Staples, Industrials and Materials.
The best five contributors to return during the quarter were Celgene, Whirlpool, Robert Half, CF Industries and St. Jude Medical Group. All of these stocks gained strongly during the quarter. Topping the list of worst performers was Abercrombie and Fitch, which we sold from the portfolio. A close second was First Solar, another name we deleted from the portfolio during the quarter. Other laggards included Tesoro Corp, DIRECTV and Coach.
We are very pleased with the performance of the strategy this quarter, and it reinforces our belief that Price to Intrinsic Value is the best indicator of a stocks future value. Please feel free to contact any of us if you would like to see any additional information about this strategy.
Jack White, CFA Curt Scott, CFA Jack Holden, CFA
Todd Asset Management LLC
S&P 500 - 1698
Russell 1000 Value - 859
Refer to Performance Disclosure on the bottom of this page for more information on the performance numbers presented. These notes are an integral part of this letter and should not be reproduced or duplicated without these notes.
This publication contains the current opinions of the author but not necessarily those of Todd Asset Management, LLC. Such opinions are subject to change without notice. This publication has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Information contained herein has been obtained from sources believed to be reliable but not guaranteed. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission of Todd Asset Management LLC. © 2013.
TODD ASSET MANAGEMENT LLC
INTRINSIC VALUE OPPORTUNITY COMPOSITE DISCLOSURE
Past performance does not provide any guarantee of future performance, and one should not rely on the composite performance as an indication of future performance. Investment return and principal value of an investment will fluctuate so that the value of the account may be worth more or less than the original invested cost.
Specific stocks discussed in this presentation are included to help demonstrate the investment process or as a review of the Composite's quarterly results and are not and were not recommendations for purchase or sale by investors. All or some of the specific stocks mentioned may have been purchased or sold by accounts within the Composite during the period, or since the period, and may be purchased or sold in th e future. Investors should not construe the Composite's performance or any security as predictive of future results. A complete listing of the ho ldings as of the period end is available upon request.
Todd Asset Management LLC ("TAM") is a registered investment adviser. The performance presented represents a composite of tax-exempt fully discretionary intrinsic value accounts, invested primarily in large cap domestic equity securities with the objective t o seek capital appreciation. This goal is pursued by investing in a diversified portfolio of equity securities that TAM believes are trading at a discount to their intrinsic value.
Todd Asset Management LLC, formerly Todd-Veredus Asset Management LLC began operations on June 1, 1998 as Veredus Asset Management LLC (VAM). Effective May 1, 2009, VAM combined with Todd Investment Advisors, Inc. (TIA). TIA (and its predecessors) was founded in 1967 by Bosworth M. Todd. Upon the combination of VAM and TIA in 2009, Veredus Asset Management LLC changed its n ame to Todd-Veredus Asset Management LLC (TVAM). On February 28, 2013, TVAM redeemed ownership units held by individuals who supported the growth products founded under VAM, and changed its name to Todd Asset Management LLC. The firm continues to offer the sa me products and strategies managed by the same individuals and process founded under TIA
The Intrinsic Value Opportunity Composite contains fully discretionary, tax-exempt accounts that use either the S&P 500 Index or Russell 1000 Value Index as the benchmark. All fee-paying, fully discretionary portfolios under our management are included in a composite. Accounts are eligible for inclusion in the composite at the beginning of the first calendar quarter after the month of initial funding and upon being fully invested.
TAM claims compliance with the Global Investment Performance Standards (GIPS®). The Firm has been verified for the period January 1, 2008 through June 30, 2013 by Ashland Partners & Company LLP and for the period July 1, 1989 through December 31, 2007 by a previous verifier. TIA's compliance with the GIPS® standards has been verified for the period January 1, 1993 through April 30, 2009 by Ashland Partners & Company LLP. In addition, a performance examination was conducted on the Large Cap Intrinsic Value Composite for the period January 1, 2011 through June 30, 2013. To receive a complete list and description of TAM composites and/or a full disclosure presentation which complies with the GIPS® standards, please contact TAM at 1-888-544-8633, or write Todd Asset Management LLC, 101 South Fifth Street, Suite 3100, Louisville, Kentucky 40202, or contact us through our Web site at www.toddasset.com
The performance information is presented on a trade date basis, both gross and net of management fees and includes the reinvestment of all income. Net of fee performance was calculated using the highest all inclusive annual management fee of .60% applied monthly. Prior to September 2001, the highest management fee applied to the composite was .50%. The currency used to calculate and express per formance is U.S. dollars. All cash reserves and equivalents have been included in the performance.
The composite performance has been compared to the following benchmarks (all shown with dividends reinvested):
S&P 500 Index is a widely recognized index of market activity based on the aggregate performance of a selected unmanaged portfolio of publicly traded common stocks. The performance data includes reinvested dividends and was supplied by Standard & Poor's. It is included to indicate the effect of general market conditions.
Russell 1000 Value Index is a widely recognized index of market activity based on the aggregate performance of common stocks from the Russell 1000 Index, with lower price-to-book ratios and lower forecasted growth values. The performance data was supplied by Frank Russell Trust Company.