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SPEA earns PSN’s Top Guns Manager of the Decade Awards for the second straight year!
Sterling Partners Equity Advisors
Top Guns Designations for 4Q 2021
–Manager of the Decade-
-Bull & Bear Masters-
by Informa Investment Solutions
(Chicago, Illinois—March 15, 2022) Sterling Partners Equity Advisors (“SPEA”) has been awarded Top Guns distinction by Informa Financial Intelligence’s PSN manager database, North America’s longest running database of investment managers.
Sterling Partners Equity Advisors was honored with awards in each of the following categories:
(*) Style Benchmark
**The PSN SmallCap Value universe is comprised of 169 firms and 218 products. The PSN universes were created using the information collected through the PSN investment manager questionnaire and use only gross of fee returns. Please refer to the Confidentiality and Disclaimer page for PSN Informa Top Guns criteria and full performance disclaimer information.
(*) Style Benchmark
**The PSN SmallCap Value universe is comprised of 169 firms and 218 products. The PSN universes were created using the information collected through the PSN investment manager questionnaire and use only gross of fee returns. Please refer to the Confidentiality and Disclaimer page for PSN Informa Top Guns criteria and full performance disclaimer information.
“We are honored to earn this coveted designation for the second time, especially during a period of unprecedented market turbulence. We are particularly happy with our risk metrics, which are noteworthy for their consistency while also beating our benchmark. These results have only been possible because of our excellent fundamental research effort, and so I applaud a decade of great work by our investment team, good job!” said Kevin E. Silverman, CFA, Portfolio Manager.
Top Gun firms are awarded a rating ranging from one to six stars, with the number of stars representing continued performance over time.
Manager of the Decade: These products had had an r-squared of 0.80 or greater relative to the style benchmark for the latest 10-year period. Moreover, the strategy’s returns were greater than the style benchmark for the latest 10-year period and also standard deviation less than the style benchmark for the latest ten-year period. At this point, the top ten performers for the latest 10-year period become the PSN Top Guns Manager of the Decade.
Bull & Bear Masters: These products had an r-squared of 0.80 or greater relative to the style benchmark for a three-year period. Moreover, products must have an upside market capture over 100 and a downside market capture less than 100 relative to the style benchmark. The top ten ratios of Upside Capture Ratio over Downside Capture Ratio become the PSN Bull & Bear Masters.
4-Star Category: These products had an r-squared of 0.80 or greater relative to the style benchmark for the recent five-year period. Moreover, returns must have exceeded the appropriate style benchmark for the three latest three-year rolling periods. The top ten returns for the latest three-year period then become the 4 Star Top Guns.
The PSN manager database is one of North America’s longer-running databases of investment managers. Through a combination of Informa Financial Intelligence’s proprietary performance screens, PSN Top Guns ranks products in six proprietary categories in over 50 universes and is a well-respected quarterly ranking widely used by institutional asset managers and investors. PSN Top Guns performance rankings are tabulated for thousands of strategies across 75 peer groups subdivided by increasingly rigorous screens and reported in ascending classes from 1-6 stars. Distinct rankings are created for Separate Accounts, Managed Accounts and Managed ETF products.
About Sterling Partners Equity Advisors
Sterling Partners Equity Advisors (“SPEA”) is a SEC registered investment advisor specializing in long-only small-capitalization equity investment strategies. SPEA’s Small Cap Value strategy has been named “Manager of the Decade and Bull & Bear Masters”, is ranked in the top 1% in the eVestment universe for five years and was ranked in the top ten out of all managers for the decades ending 4Q 2021 & 2020.
Our Objective is to offer our clients risk-adjusted returns in excess of the Russell 2000 Value Index. SPEA’s disciplined and repeatable investment process has been developed over decades of experience, resulting in our long-term track record in small-cap value. We offer an experienced investment management team coupled with an institutional financial services infrastructure.
SPEA offers small-cap value and large-cap value strategies to its clients. The Small-Cap Value Diversified strategy (“SCV Diversified”) is a diversified, low-turnover, small-cap, value strategy holding 50-70 stocks with a 14-year verified track record. The Sterling Quality Income & Value strategy (“QIV”) is a fully diversified large-cap portfolio of 65-90 high-quality, income-producing companies with a 12-year verified track record. The strategies have been managed by Kevin Silverman, CFA, SPEA’s CIO, since the strategy’s inception. SPEA claims compliance with Global Investment Performance Standards (GIPS®).
**Criteria:
Manager of the Decade: The PSN universes were created using the information collected through the PSN investment manager questionnaire and use only gross of fee returns. Mutual fund and commingled fund products are not included in the universe. PSN Top Guns investment managers must claim that they are GIPS compliant. Products must have an r-squared of 0.80 or greater relative to the style benchmark for the ten-year period ending DECEMBER 31, 2021. Moreover, products must have returns greater than the style benchmark for the ten-year period ending DECEMBER 31, 2021 and also standard deviation less than the style benchmark for the ten-year period ending DECEMBER 31, 2021. At this point, the top ten performers for the latest ten-year period ending DECEMBER 31, 2021 become the PSN Top Guns Manager of the Decade.
Bull & Bear Masters: The PSN universes were created using the information collected through the PSN investment manager questionnaire and use only gross of fee returns. Mutual fund and commingled fund products are not included in the universe. PSN Top Guns investment managers must claim that they are GIPS compliant. Products must have an r-squared of 0.80 or greater relative to the style benchmark for the three-year period ending DECEMBER 31, 2021. Moreover, products must have an upside market capture over 100 and a downside market capture less than 100 relative to the style benchmark. The top ten ratios of Upside Capture Ratio over Downside Capture Ratio become the PSN Bull & Bear Masters.
Upside Market Capture Ratio – The Up Market Capture Ratio measures the manager’s performance in up markets relative to the performance of the market (index) itself. An up market is defined as any period (quarter) where the market’s return is greater than or equal to zero. The higher the Up Market Capture Ratio, the better the manager grew capital during a market expansion. A value of 110 suggests that a manager’s gain was 110% of the market’s gain when the market was up.
Downside Market Capture Ratio – measures the manager’s performance in down markets relative to the performance of the market (index) itself. A down market is defined as any period (quarter) where the market’s return is less than zero. The lower the Downside Market Capture Ratio, the better the manager protected capital during a market decline. A value of 90 suggests that a manager’s losses were only 90% of the market’s loss when the market was down.
The content of PSN Top Guns is intended for use by qualified investment professionals. Please consult with an investment professional before making any investment decisions using content or implied content from PSN Top Guns. All Rights Reserved. PSN Top Guns is powered by PSN. PSN is an investment manager database and is a division of Informa Financial Intelligence. No part of PSN Top Guns may be reproduced in any form or by any means, electronic, mechanical, photocopying, or otherwise without the prior written permission of Informa Financial Intelligence. Because of the possibility of human or mechanical error by Informa Financial Intelligence (IFI) sources or others, IFI does not guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall IFI be liable for any indirect, special or consequential damages in connection with use of any information or derived using information based on PSN Top Guns results.
*Performance prior to May 2017 occurred while the Portfolio Manager was affiliated with prior firms and the Portfolio Manager was the only or primary individual responsible for selecting the securities to buy and sell. The PSN manager database is one of North America’s longer-running databases of investment managers. Manager must be a SEC Registered Investment Adviser to be listed on the database. There is no fee required by Informa Investment Solutions for inclusion in the PSN manager database.
Net of fees performance for the Small-Cap Value Diversified strategies reflects the deduction of a model annual management fee of 1.00% applied monthly through 12/31/2019 and 0.90% applied monthly for periods after 1/1/2020. The management fee schedule for the composite is 0.90%. Actual investment advisory fees incurred by clients may vary. The performance includes the reinvestment of dividends and other corporate earnings and is calculated in U.S. dollars
About Informa Financial Intelligence’s Zephyr
Financial Intelligence, part of the Informa Intelligence Division of Informa plc, is a leading provider of products and services helping financial institutions around the world cut through the noise and take decisive action. Informa Financial Intelligence’s solutions provide unparalleled insight into market opportunity, competitive performance and customer segment behavioral patterns and performance through specialized industry research, intelligence, and insight. IFI’s Zephyr portfolio supports asset allocation, investment analysis, portfolio construction, and client communications that combine to help advisors and portfolio managers retain and grow client relationships. For more information about IFI, visit https://financialintelligence.informa.com. For more information about Zephyr’s PSN Separately Managed Accounts data, visit https://financialintelligence.informa.com/products-and-services/data-analysis-and-tools/psn-sma.
Sterling Partners Equity Advisors Portfolio Commentary – Winter 2022
2022 and Beyond!
Sometimes patience is useful. Had I written this letter a month ago, my optimism for the future would appear so much more incorrect than is likely now, with most indices at least touching correction territory a few days ago. It appears that concern about inflation and what the Fed may do about it has caught up with actual inflation, an issue we explored in our Spring 2021 Letter, “All is Good Except This M2 Chart.” It’s worth remembering that January has always been a bit of an odd month for many reasons, hence the phrase “January effect.” We certainly saw a January effect this year, although maybe not the namesake.
Last year was a fascinating year as cross-currents of new supply/demand patterns, unprecedented levels of money printing and new non-fundamentals driven entrants into the stock market made for a crazy brew. It reminded me of a college football game where about ⅓ of the crowd is screaming wildly about stuff that has nothing to do with the game on the field yet may impact the players’ ability to hear the play called. Needless to say, it was an interesting year. Our strategies, like many, had a pretty good absolute year, and so in terms of our primary goal of delivering good returns to clients, we feel pretty good about that. There is detail about our performance and the best and worst contributors among our holdings later in this letter.
One thing to note, this Winter of 2022, the impact of the pandemic appears to have normalized. It may not be the winter of content, but at least it seems to no longer be the winter of discontent. The worldwide lurch to a more internet centric life has become mainstream. Grandma can deposit a check with her phone and get a medical checkup via Zoom. Her knowledge worker buddies can now work from an RV in the woods and maintain their weekly bridge game with her. As we’ve pointed out in past letters, the potential for a sustained period of rising productivity is apparent. The actual costs of supporting a commuter infrastructure are falling and that unproductive time and capital will be redeployed into more productive pursuits. We expect leisure to be one of them, but on the other hand, generally when new roads are built, people follow. Shifting long-term capital spending trends are something we pay attention to. So, while predicting the intermediate future well remains our core task, predicting the immediate future is not a core competency, and hence, a post-January letter is working better than an early-January letter, at least this year.
This time of year, market participants love to read prognostications about the year ahead. With January behind us, I feel we have a bit of an edge over our competitors in that our rosy view won’t be immediately rendered incorrect. Our view is only partially due to our colored glasses, the rest is due to the engine of productivity gains that has driven human activity for millennia. We like charts, so here is one that shows the long march of real GDP per capita, real disposable personal income per capita and real personal consumption expenditures. These are real numbers, and in the long run, this is a great source of conviction about the future, maybe not next year, but the next five years.
We do feel good about 2022, but it’s hard not to. Over most of the history of those rosy charts, interest rates were higher, sources of capital were limited, knowledge sat in silos and computing power was tiny. We believe a lurch in productivity is underway because of low rates, abundant capital, global collaboration in real time and game changing computing power. Will that happen in 2022? Really, we don’t know, but it’s likely one of two things.
If 2022 turns out to be a tough year in the market, our turnover is likely to be muted. When the market offers us prices below our estimates of intrinsic value, we pass. Manager research teams may say we had a bad year, and unfortunately the argument that we didn’t sell many holdings would fall on unsympathetic ears. Meanwhile, we would in fact be paring our best performing names to add more quality to the portfolio at what often in a bad market can be a steep discount.
If 2022 turns out to be a good year in the market, then our turnover is likely to be higher as more holdings reach our estimate of intrinsic value. We would re-deploy capital into our highest expected return names at that time. Researchers might say we had a good year, but we might be having trouble finding great expected returns.
Either way, we own well-capitalized companies that earn good returns over cycles. They sell differentiated products and services that serve a niche, with a “moat” to quote Morningstar, and we buy them at what we believe are attractive prices. We will be looking for more of them in 2022.
Click here for our most recent performance and please keep reading to see our thoughts about our best and worst contributors to our performance in the quarter.
Thank you for your interest in Sterling Partners Equity Advisors.
See PDF below for a discussion of our top and bottom contributors to performance.
Kevin E. Silverman, CFA
Chief Investment Officer
P: 312-465-7096
C: 312-953-0992
ksilverman@sterlingpartnersequityadvisors.com
Contact:
John A. Schattenfield
Head of Distribution
jschattenfield@sterlingpartnersequityadvisors.com
P: 312-465-7037
C: 872-202-2340
Lara M. Compton
Director of Platform Marketing
lcompton@sterlingpartnersequityadvisors.com
P: 312-465-7093
C: 312-810-1036
Sterling Partners Equity Advisors Portfolio Commentary – Fall 2021
Productivity to the Rescue!
There’s still a lot of unusual events going on, at least from the myopic view of someone who did not personally live through the World Wars, the Great Depression, the Plague, the fall of the Roman Empire and numerous historic horrible calamities. Despite that lack of experience, we are managing our strategies much as we have for the past twenty years, which is based on our best predictions of the future. There is a discussion of our best and worst contributors last quarter and our recent performance later in this letter, so you can see how we’ve been doing. The future does feel harder to predict these days, but that view may just be hindsight.
Our main job continues to be to make our best predictions for the future and dial those into estimates of the underlying intrinsic value of our candidates for investment. The future is always uncertain, but at a time when almost all historic patterns of commerce are changing at once, the near term is more uncertain than usual. It’s unlikely many corporate finance types are just extending last year’s growth rates into next year’s forecast. While this approach was simple and not terrible in a lot of “steady as she goes” kind of years, now it’s just horrible.
It’s easy to blame the pandemic for the massive dislocation of resources that is disrupting world economies, but in fact, the benefit is that owners of capital have been alerted that moving billions of workers dozens of miles a day to work at maximum productivity may not be the highest and best use of time and resources. It has become apparent that maintaining offices of information workers in a central hub is not quite as necessary for productivity as we thought, which was the purpose of the central hub in the first place. The advent of digital banking and digital signatures leaves even fewer reasons to go downtown.
So, we are in a period of rapid adaptation in which all global suppliers and customers need everything shipped to a new address at the same time. They also need something slightly different than they needed at the old address or a different quantity. This shift naturally creates logistics excesses and shortages. Prior patterns of commerce have been disrupted and, like gravity, seek the most efficient new pathways.
The world is working hard to move to a more productive model. The evolution of the internet and its use is reminiscent of other big productivity enhancing technologies like the road system or air travel, or still the mother lode, electricity, where it took decades to fully realize the full productivity potential of the innovation. If the interstate can bring us the suburbs can the internet take away the cities? Many of the consumer and business needs that downtown hubs were built to serve, and in the process generate an ROI, can now be satisfied with a smart phone – no real estate or travel required. Because of the need to work and shop remotely, the pandemic has lurched big swaths of the world into a more productive approach to almost everything at once, and we are beginning to see this in the data.
We speculated about this a year ago when the effects of the pandemic were just becoming discernible. But now we are seeing some data. When the future is unknown, it’s good to know what people who think about ROA for a living are doing with their checkbooks. The best source for this is the Bureau of the Census, Manufacturers’ Shipments and New Orders. For our money, and this is free, this is some of the best lumination into the road ahead so it’s worth looking at.
Granted, a fair amount of the recently strong GDP numbers can be attributed to the pouring of trillions of dollars into business and consumer wallets, and clearly a good bit of that has found its way into the equity markets, but there are clues in the new order data about the future.
In August 2021, orders for all new manufactured goods were up 18.0% and new orders for durable goods were up 24.7% from a year earlier. These are the highest numbers reported in these series, aside from earlier this year when the comparisons were even easier, since 2010. New orders rose more than shipments, which posted up 12.9% for August 2021 for all manufacturing and up 14.1% for all durable goods.
More interesting than the top line numbers are those categories at the top of the list. New orders for industrial machinery were up 48.0% in August! New orders for transportation equipment were up 45.7%. Shipments were up 41.0% for industrial machinery, up 37.3% for Light Truck and Utility Vehicles, and up 32.9% for computer storage. In most cases these are the best numbers since 2010.
There is another useful big picture statistic we like, growth in real GDP per capita. At the core, until you get higher into Maslow’s Hierchy of Needs pyramid, real GDP per capita is a pretty good measure of a nation’s wellbeing, as it correlates with self-reported happiness, but more specifically, it measures total production per citizen, and roughly speaking the average goods and services available per person in the U.S.
Sustained growth in productivity per capita has delivered modern civilization as we know it so it’s interesting to note that the posted number for 2Q 2021 of 11.78% is the highest recorded since the late 1940’s, beating the second highest of 11.52% posted in 4Q 1950, as the nation began benefitting from the post WW2 reallocation of resources, and beating the third highest 7.63% spurred by the onset of Reagan realignment of tax incentives. Much of this current gain is of course a recovery from last year’s decline, but there is always a bit of that after steep declines. Despite an environment stoked by free money, the orders and shipments of capital goods will drive real productivity gains, as the nations’ businesses and consumers adapt, re-allocating resources to maximize productivity. If we manage to grow productivity fast enough, we can stay ahead of inflation, and the data suggests that may happening now.
It’s worth noting that the 11.78% growth was posted to reach a record U.S. annualized GDP per capita of $69,904. This was the fastest GDP recovery on record. In the chart below we show Real GDP per capita, which in 2012 dollars reached a new high of $58,478, beating the prior high posted in 4Q 2019 of $58,333.
As an aside the U.S. is way ahead of the pack of large nations with this metric. In 2019, the IMF estimated U.S. $GDP per capita of $63,544. Next, 18.5% lower, was Germany at $45,724, the U.K. at $40,285, Japan at $40,113, France at $38,625. The U.S. has been an engine of productivity for a long time, the country is good at it, and it seems we may be in store for a few years of good gains as the world redeploys resources and capital.
Thinking about this is what makes our job to manage small equities fun. Please keep reading to see our thoughts about our best and worst contributors to our performance in the quarter. Thank you for your interest in Sterling Partners Equity Advisors and our small-cap value strategies.
See PDF below for a discussion of our top and bottom contributors to performance.
Kevin E. Silverman, CFA
Chief Investment Officer
P: 312-465-7096
C: 312-953-0992
ksilverman@sterlingpartnersequityadvisors.com
Contact:
John A. Schattenfield
Head of Distribution
jschattenfield@sterlingpartnersequityadvisors.com
P: 312-465-7037
C: 872-202-2340
Lara M. Compton
Director of Platform Marketing
lcompton@sterlingpartnersequityadvisors.com
P: 312-465-7093
C: 312-810-1036
SPEA’s Small Cap Value Strategies earn Top Gun distinction from PSN Informa for 11th Straight Quarter
(Chicago, Illinois—August 19, 2021) Sterling Partners Equity Advisors (“SPEA”) has been awarded Top Guns distinction by Informa Financial Intelligence’s PSN manager database, North America’s longest running database of investment managers.
SPEA offers small-cap value and large-cap value strategies to its clients. The Small-Cap Value Diversified strategy (“SCV Diversified”) is a diversified, low-turnover, small-cap, value strategy holding 50-70 stocks with a 13-year verified track record. The Small-Cap Value Focus strategy (“SCV Focus”) is a concentrated, small-cap, value strategy holding 25-30 stocks with a 19-year verified track record. The strategies have been managed by Kevin Silverman, CFA, SPEA’s CIO, since the strategy’s inception.* SPEA claims compliance with Global Investment Performance Standards (GIPS®).
Sterling Partners Equity Advisors was honored with awards in all the following categories:
“We are excited to again be recognized for our top-ranking long-term investment performance during such a turbulent environment. We are particularly proud of our outstanding risk capture metrics and applaud the good work of our investment team,” said Kevin E. Silverman, CFA, Portfolio Manager.
Click here for our results through June 2021
The PSN manager database is one of North America’s longer-running databases of investment managers. PSN Top Guns ranks products in six proprietary categories in over 50 universes and is a well-respected quarterly ranking widely used by institutional asset managers and investors. PSN Top Guns performance rankings are tabulated for thousands of strategies across 75 peer groups subdivided by increasingly rigorous screens and reported in ascending classes from 1-6 stars. Distinct rankings are created for Separate Accounts, Managed Accounts and Managed ETF products.
Top Gun firms are awarded a rating ranging from one to six stars, with the number of stars representing continued performance over time.
Bull & Bear Masters: These products had an r-squared of 0.80 or greater relative to the style benchmark for a three-year period. Moreover, products must have an upside market capture over 100 and a downside market capture less than 100 relative to the style benchmark. The top ten ratios of Upside Capture Ratio over Downside Capture Ratio become the PSN Bull & Bear Masters.
6-Star Category: These products had an r-squared of 0.80 or greater relative to the style benchmark for the recent five-year period. Moreover, products must have returns greater than the style benchmark for the three latest three-year rolling periods. Products are then selected which have a standard deviation for the five-year period equal or less than the median standard deviation for the peer group. The top ten information ratios for the latest five-year period then become the 6 Star Top Guns.
5-Star Category: These products had an r-squared of 0.80 or greater relative to the style benchmark for the recent five-year period. Moreover, products must have returns greater than the style benchmark for the three latest three-year rolling periods. Products are then selected which have a standard deviation for the five-year period equal or less than the median standard deviation for the peer group. The top ten returns for the latest three-year period then become the 5 Star Top Guns.
4-Star Category: These products had had an r-squared of 0.80 or greater relative to the style benchmark for the recent five-year period. Moreover, returns must have exceeded the appropriate style benchmark for the three latest three-year rolling periods. The top ten returns for the latest three-year period then become the 4 Star Top Guns.
Through a combination of Informa Financial Intelligence’s proprietary performance screens, PSN Top Guns ranks products in six proprietary categories in over 50 universes. This is a well-respected quarterly ranking and is widely used by institutional asset managers and investors. Informa Financial Intelligence is part of Informa plc, a leading provider of critical decision-making solutions and custom services to financial institutions.
About Informa Financial Intelligence’s Zephyr:
Financial Intelligence, part of the Informa Intelligence Division of Informa plc, is a leading provider of products and services helping financial institutions around the world cut through the noise and take decisive action. Informa Financial Intelligence’s solutions provide unparalleled insight into market opportunity, competitive performance and customer segment behavioral patterns and performance through specialized industry research, intelligence, and insight. IFI’s Zephyr portfolio supports asset allocation, investment analysis, portfolio construction, and client communications that combine to help advisors and portfolio managers retain and grow client relationships. For more information about IFI, visit https://financialintelligence.informa.com. For more information about Zephyr’s PSN Separately Managed Accounts data, visit https://financialintelligence.informa.com/products-and-services/data-analysis-and-tools/psn-sma.
*Performance prior to May 2017 occurred while the Portfolio Manager was affiliated with prior firms and the Portfolio Manager was the only or primary individual responsible for selecting the securities to buy and sell. The PSN manager database is one of North America’s longer-running databases of investment managers. Manager must be a SEC Registered Investment Adviser to be listed on the database. There is no fee required by Informa Investment Solutions for inclusion in the PSN manager database. PSN Top Guns performance rankings are tabulated for thousands of strategies across 58 peer groups subdivided by increasingly rigorous screens.
GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
A prospective client can obtain a GIPS® Composite Report and/or Sterling Partners Equity Advisors’ list of composite descriptions by sending an email request to: info@sterlingpartnersequityadvisors.com
Sterling Partners Equity Advisors Portfolio Commentary – Summer 2021
The Secret Sauce of Total Return
At all times, even weird ones like this, we worry mostly about earning a good risk adjusted total return. That has always been the goal of our strategies and the team that runs them. Aiming for a specific total return in the short-term is tricky because if your investments require more certainty about the timing, you are almost certainly giving up some piece of total return. With the supply of stock reasonably given in the short term, lower certainty brings lower demand for the shares, and lower prices. More certainty brings the opposite. We are often uncertain about total return in the short-term, a risk we bear that helps drive our total return in the long-term. This uncertainty around timing is different than the uncertainty around survivability, an octane-fueled potential return source that we avoid. It might be worth mentioning that the standard deviation of our monthly returns is below that of our benchmark.
The biggest impediments we believe to total return in the long-term are in simple terms, overpaying. This can come about from overly ambitious financial forecasts about the company and the industry out in the future or it can come about from excessive emotional enthusiasm in the present. Earnings x Price / Earnings = Price and both components have an equal impact. Because total return is created by a shift in the P/E, and a shift in E, we try to identify companies where the potential for an earnings recovery over the next few years is high, and when therefore the potential for the sentiment about the stock, and in turn, the Price / Earnings ratio, to recover is also high.
Inflation has been and can be a big impediment to earning a good real total return. Inflation affects earnings, and price/earnings so it’s double edged. We wrote about inflation risks last quarter and are watching the Fed print money along with everyone else. We try to stay on the right side of inflation by owning proprietary or low-cost competitors that can raise price faster than their costs are rising. Businesses that produce goods and services people need rather than just want, along with Maslow’s hierarchy of needs — we keep these in mind when investing. We also mitigate the potential for rising inflation and interest rates by owning companies that are advantaged in the battle for market share gains in their specific business, are largely cash flow generating and are in a healthy financial position.
Much of our ability to deliver alpha, a greater total return than our benchmark, in my opinion, is our ability to discern a short-term problem which harms sentiment from a long-term problem that harms market share and ultimately cash flow. The difference between the long-term reality and short-term market sentiment is often the difference between earning alpha relative to the averages and not earning alpha — the definition of adding value.
An important element to our effort to add value is that we do long term financial projections of our potential holdings. We know the forecasts aren’t perfect, with much educated guessing involved, but with objective well researched inputs, the forecast models give the team insight and conviction about the future of cash flow and therefore also a window into the potential for shifting sentiments and valuation multiples. This is particularly useful during confusing turning points in the midst of company workouts and turnarounds. Good forecasting also gives us a longer view into our holdings’ ability to weather or maybe benefit from difficult periods. With what we believe is a likelihood of outperforming analyst expectations comes the opportunity to enjoy rising sentiment and P/Es.
When we can predict earnings will rise faster than expectations and we can hold for the typically multiple-year period it takes for sentiment to follow — that is the secret sauce of our investment approach and I believe the source of our strategies’ excess total return. Thank you for your interest in Sterling Partners Equity Advisors.
Click here for our June 2021 performance.
See PDF below for a discussion of our top and bottom contributors to performance.
Kevin E. Silverman, CFA
Chief Investment Officer
P: 312-465-7096
C: 312-953-0992
ksilverman@sterlingpartnersequityadvisors.com
Contact:
John A. Schattenfield
Head of Distribution
jschattenfield@sterlingpartnersequityadvisors.com
P: 312-465-7037
C: 872-202-2340
Lara M. Compton
Director of Platform Marketing
lcompton@sterlingpartnersequityadvisors.com
P: 312-465-7093
C: 312-810-1036
Kevin Silverman Featured on The Drill Down Podcast with Cory Johnson
Sterling Partners Equity Advisors CIO Kevin Silverman joined The Drill Down Podcast with Cory Johnson recently. You can listen to the episode below. Kevin’s segment starts 16:22 into the episode.
STERLING PARTNERS EQUITY ADVISORS RECEIVES TOP GUN DISTINCTION FROM PSN INFORMA FOR THE 10TH STRAIGHT QUARTER.
(Chicago, Illinois—May 19, 2021) Sterling Partners Equity Advisors (“SPEA”) has been awarded Top Guns distinction by Informa Financial Intelligence’s PSN manager database, North America’s longest running database of investment managers.
SPEA offers small-cap value and large-cap value strategies to its clients. The Small-Cap Value Diversified strategy (“SCV Diversified”) is a diversified, low-turnover, small-cap, value strategy holding 50-70 stocks with a 13-year verified track record. The Small-Cap Value Focus strategy (“SCV Focus”) is a concentrated, small-cap, value strategy holding 25-30 stocks with a 19-year verified track record. The Sterling Quality Income & Value strategy (“QIV”), is a fully diversified large-cap portfolio of 65-90 high-quality, income-producing companies with an 11-year verified track record. The strategies have been managed by Kevin Silverman, CFA, SPEA’s CIO, since the strategy’s inception.* SPEA claims compliance with Global Investment Performance Standards (GIPS®).
Sterling Partners Equity Advisors was honored with awards in all of the following categories:
“It’s truly a career dream to rank so well against these iconic value shops with our 3-year and 5- year results. Hats off to my incredible colleagues Jason Ryder and Nathan Schmidt, CFA.” said Kevin E. Silverman, CFA, Portfolio Manager.
The PSN manager database is one of North America’s longer-running databases of investment managers. PSN Top Guns ranks products in six proprietary categories in over 50 universes and is a well-respected quarterly ranking widely used by institutional asset managers and investors. PSN Top Guns performance rankings are tabulated for thousands of strategies across 75 peer groups subdivided by increasingly rigorous screens and reported in ascending classes from 1-6 stars. Distinct rankings are created for Separate Accounts, Managed Accounts and Managed ETF products.
Top Gun firms are awarded a rating ranging from one to six stars, with the number of stars representing continued performance over time.
Bull & Bear Masters: These products had an r-squared of 0.80 or greater relative to the style benchmark for a three-year period. Moreover, products must have an upside market capture over 100 and a downside market capture less than 100 relative to the style benchmark. The top ten ratios of Upside Capture Ratio over Downside Capture Ratio become the PSN Bull & Bear Masters.
6-Star Category: These products had an r-squared of 0.80 or greater relative to the style benchmark for the recent five-year period. Moreover, products must have returns greater than the style benchmark for the three latest three-year rolling periods. Products are then selected which have a standard deviation for the five-year period equal or less than the median standard deviation for the peer group. The top ten information ratios for the latest five-year period then become the 6 Star Top Guns.
5-Star Category: These products had an r-squared of 0.80 or greater relative to the style benchmark for the recent five-year period. Moreover, products must have returns greater than the style benchmark for the three latest three-year rolling periods. Products are then selected which have a standard deviation for the five-year period equal or less than the median standard deviation for the peer group. The top ten returns for the latest three-year period then become the 5 Star Top Guns.
4-Star Category: These products had had an r-squared of 0.80 or greater relative to the style benchmark for the recent five-year period. Moreover, returns must have exceeded the appropriate style benchmark for the three latest three-year rolling periods. The top ten returns for the latest three-year period then become the 4 Star Top Guns.
3-Star Category: These products had one of the top ten returns for the three-year period in their respective universes.
Through a combination of Informa Financial Intelligence’s proprietary performance screens, PSN Top Guns ranks products in six proprietary categories in over 50 universes. This is a well-respected quarterly ranking and is widely used by institutional asset managers and investors. Informa Financial Intelligence is part of Informa plc, a leading provider of critical decision-making solutions and custom services to financial institutions.
About Informa Financial Intelligence’s Zephyr:
Financial Intelligence, part of the Informa Intelligence Division of Informa plc, is a leading provider of products and services helping financial institutions around the world cut through the noise and take decisive action. Informa Financial Intelligence’s solutions provide unparalleled insight into market opportunity, competitive performance and customer segment behavioral patterns and performance through specialized industry research, intelligence, and insight. IFI’s Zephyr portfolio supports asset allocation, investment analysis, portfolio construction, and client communications that combine to help advisors and portfolio managers retain and grow client relationships. For more information about IFI, visit https://financialintelligence.informa.com. For more information about Zephyr’s PSN Separately Managed Accounts data, visit https://financialintelligence.informa.com/products-and-services/data-analysis-and-tools/psn-sma.
*Performance prior to May 2017 occurred while the Portfolio Manager was affiliated with prior firms and the Portfolio Manager was the only or primary individual responsible for selecting the securities to buy and sell. The PSN manager database is one of North America’s longer-running databases of investment managers. Manager must be a SEC Registered Investment Adviser to be listed on the database. There is no fee required by Informa Investment Solutions for inclusion in the PSN manager database. PSN Top Guns performance rankings are tabulated for thousands of strategies across 58 peer groups subdivided by increasingly rigorous screens.
GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.
A prospective client can obtain a GIPS® Composite Report and/or Sterling Partners Equity Advisors’ list of composite descriptions by sending an email request to: info@sterlingpartnersequityadvisors.com
Sterling Partners Equity Advisors Portfolio Commentary – Spring 2021
All is Good Except For This M2 Chart
Another crazy quarter and another quarterly letter. What’s new is that the value space and particularly the small value space is finally getting its 15 minutes of fame with a 20%+ year-to-date gain in the Russell 2000 Value. While it is admittedly tough to predict the future, it is sometimes also hard to believe the past. Our strategies are performing well, and here’s a link to our recent performance. A discussion of our top and bottom contributors to performance follows this commentary.
With the market up so much, and GDP revisions moving higher, I am pleased to report that everything is great. The market itself is the best predictor of a strong economy ahead, and that’s what we see. It is a great awakening of productivity from the boundaries of daily commuting for billions of people, and the realization that all the knowledge of the world is connected in real time to fuel new ideas. New ideas drive productivity which lead to better lives. It’s a time when less incremental capital is needed to drive the capacity and distribution of goods and services that are increasingly digital and idea driven just at the time that value added ideas are evolving faster and spreading at a faster rate and at lower cost. Capital is increasingly abundant and therefore cheap, while great ideas remain scarce, raising the cashflow multiple on high conviction annuities. The U.S. 10-Year Treasury bond yield of 1.5% means a 66.7 multiple on the pretax coupon, for example.
So, everything is looking pretty good. Except for this money supply graph we dug out.
Isn’t that an interesting chart? Inflation that erodes the future purchasing power of investors is one of the few things that could creep into the landscape of our good times and cause some bad feelings among asset owners. It turns out that adding money to the money supply at a faster pace than the dollar growth in GDP is viewed by some as potentially inflationary.
A reason to mention it even though everything’s great according to the stock market, is that there is a pretty good inflation forecasting metric, namely the 10-year breakeven inflation rate* published by the Federal Reserve, that has been going straight up. A good economy and an uptick in inflation certainly do not have to be mutually exclusive, as 10-year inflation could tick up a bit, now estimated around 2.2%, and returns over that period could still overcome that hurdle, or maybe not. If the current trend continues, history suggests that could be a little headwind to equity markets due to pressure on real returns.
The 10-yr B/E metric turns out to be a pretty good predictor, at least up to the most recent 10-year prediction in 2011, with an r-squared of 27%. And therefore, unfortunately, it is also a pretty good predictor of real equity returns.
It’s been an interesting time to navigate equity markets, and inflation is the kind of thing we worry about. When we think about the themes that are apt to deliver good returns over the next decade, our attention is drawn to companies that sell products that, in addition to being proprietary, are also necessary. These tend to be the type of products that can raise prices faster than their factor input costs rise. Products that improve productivity will tend to gain share faster during inflationary periods, in our view, so we look for that. Sometimes small companies are quicker to benefit from one or two great products gaining share and are also easier to identify, since the gainers can more quickly become a reportable percentage of total revenue.
Our portfolio is always filled with companies that we believe hold proprietary niches, and we find there is typically a permanent margin advantage because of it. Owning companies that earn long term sustainable excess returns based on economic competitive advantages is a theme that has helped us earn good returns for clients over time, and which some data suggests may be even more important in the years just ahead. Thank you for your interest in Sterling Partners Equity Advisors.
*Chart Sources:
Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average, Percent Change from Year Ago of (Index 1982-1984=100), Monthly, Seasonally Adjusted
Federal Reserve Bank of St. Louis, 10-Year Breakeven Inflation Rate [T10YIE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10YIE, April 22, 2021
The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation-Indexed Constant Maturity Securities (TC_10YEAR). The latest value implies what market participants expect inflation to be in the next 10 years, on average.
See attached PDF for a discussion of our top and bottom contributors to performance.
Kevin E. Silverman, CFA
Chief Investment Officer
P: 312-465-7096
C: 312-953-0992
ksilverman@sterlingpartnersequityadvisors.com
Contact:
John A. Schattenfield
Head of Distribution
jschattenfield@sterlingpartnersequityadvisors.com
P: 312-465-7037
C: 872-202-2340
Sterling Partners Equity Advisors Portfolio Commentary – October 2019
Uncertainty is Our Friend… I Think.
The last few months in the market should be enough to shake anyone’s confidence that they can predict the future. This has been demonstrated in dramatic fashion by the rush toward certainty at any cost. Investors now want certainty so badly that portfolio managers around the world, according to Deutsche Bank, have invested $15 trillion at a quoted yield-to-maturity that is below zero as of September 2019. Not only do below zero interest rates cause a variety of quantitative valuation models literally to breakdown, but they also fail to pass the grandmother test, in that my grandmother does not understand how in the world she can pay back less money than she borrows. Of course, she’s smart enough to immediately ask to borrow a lot of money.
Certainty is expensive. When lenders are willing to pay you to safeguard their money, instead of demanding a return, it’s a hint that certainty has become perhaps a bit too expensive. My bond buddies tell me that it’s not the rates themselves, but the spread to longer maturities that are forcing short-term rates below zero. My grandmother is not convinced. On the other hand, the math says that if the coupons on a long bond are invested at positive rates, and not the negative yield to maturity that is quoted, that the actual compound return, or realized compound yield will still be positive. Grandma does not understand that.
Ultimately, the flip side of certainty that is too expensive should be poor long-term returns. But while current rates keep falling, the low coupon returns are kept at bay by rising asset values, and momentum buyers keep buying regardless of the quoted yield. Encouraging buyers is the fact that many valuation models start to go parabolic on the upside with quarter point rate drops from such a low base, as demonstrated by the strong long bond returns this year. So, while certainty should provide a lower return, the growing demand for assets with certain cashflows has pushed prices and returns up and yields down. Another contributor to negative rates is the excess supply of capital created by the biggest generation of capitalists in history. As they move toward retirement, they need more certainty, not necessarily more return. So, in effect, low rates may simply be an excess supply driven price decline. If so, the floor to negative rates is the point when building a safe and hiring security is less expensive than the loss on the loan. But this is so unusual that the Bank of England had not offered rates below 2% in over 300 years until just recently, a time which also enjoys the most excess capital in history.
It’s equally confusing in the stock market. Our strategies underperformed in the third quarter ended September 30, 2019, with our Small-Cap Value Diversified strategy losing 2.11% vs. the Russell 2000 Value loss of 0.57%. Our concentrated Small-Cap Value Focus lost 5.26% in the quarter. After a strong first half, our strategies in the third quarter were buffeted by growing fears of recession, a recurring theme at several points during the past few years as the length of the recovery goes into record territory. Initially, the market focused just on the length of the recovery as a predictor of recession, although now there are a few data points coming out of Europe and China that suggest an increasing probability of recession.
Still, the current fears are so strong that we now have many holdings trading at 20-30% cashflow yields, as measured by EBITDA divided by Enterprise Value, meaning if we bought the entire company, we would earn 20-30% on our cash investment, a cash-on-cash return. While this return is before cash interest and capital investments, these are extraordinary return levels and can only possibly reflect a few scenarios. One scenario is that EBITDA for these companies falls 70% or more and the yields move toward a more traditional 10% EBITDA yield, or 10x EBITDA, still beating most bonds by the way – an unlikely scenario in our view. Another scenario is that rates rise a lot, putting lots of pressure on future earnings multiples. The problem with that is that the excess supply of capital likely prevents rates on certain cashflow streams from getting too high. So, what we are left with in order to equate low or negative short-term government rates around the world to unusually high cashflow yields among small best-in-class companies is that the risk premium to own small equities is among the highest we’ve seen in 10 years. Here’s where the title comes in: the uncertainty in the market has pushed the expected return premium on our small-cap equity universe versus a risk-free government security to historically high levels and we are excited about that. We own quality companies that tend to grow asset values even during periods when the market doesn’t recognize it.
It’s worth pointing out that recessions are not that bad. Excluding 2008-09 as a mistake by accountants clinging to a mark-to-market rule for too long, most other recent recession have been reasonably mild and getting farther apart. While there are many theories about the causes behind fewer recessions, one view is that more timely information available through the internet is creating less uncertainty all along the supply chain, leaving fewer opportunities for inventory dislocations that cause recession, and therefore continuing the trends of more years between recession as a natural outgrowth of better information. As we discussed last quarter, the economy still looks pretty good. We see a full employment economy with low interest rates, good access to credit, U.S. energy self-sufficiency, and a well-educated growing population. These are usually good elements for continued economic growth.
With regards to a market outlook, the stock market, according to Ben Graham, is a voting machine in the short term and a weighing machine in the long run. We subscribe to that view. In the near term, headline risk of shifting interest rates, trade wars, hot wars, oil shocks, tweet streams, elections –all impact the stock market in ways that often look very much like random. In the long run, population growth times productivity growth equals GDP growth, and businesses and industries that manage to do things faster, better or cheaper than alternatives will gain share of the economy and prosper. In the long run, we believe that better education, better access to information, and easier access to collaboration will create an acceleration in innovation and productivity, even as academics find it difficult to measure. The benefits of the app Open Table, for example, struggle to find a way into GDP. The time we all save to work on other projects or read a book gets lost in translation. But these entrenched trends will, in our opinion, continue to drive the economy to new heights, in the long run.
During these uncertain times, we strive to earn excess returns for our clients by continuing to do what we have been doing for nearly 20 years. We use a consistent process that fundamental investors have used for a long time. Between Ben Graham’s “margin of safety” and John Burr Williams’ discovery of the discounted cashflow model, we use tools that have been honed by time. Although markets have become more efficient, our universe includes some of the last eddies of opportunity to uncover information that has not yet been absorbed into market prices and we use fundamental research to find those opportunities for excess return. By identifying undervalued companies with good balance sheets that target growing industries and offer products or services that are better, cheaper, or faster than the competition, we have a universe of superior businesses that we believe on average will prosper in the future. By exercising discipline around our valuation approach and narrowing the bell curve around our estimates of intrinsic value, we rely on our expected return estimates to allow us to continue to buy stocks that we believe will deliver excess return over time. Uncertainty has driven the expected inflation adjusted return on our universe to levels that have rarely been higher. Does that make uncertainty our friend? For small-cap investors the answer is almost certainly, yes. Thank you for your interest in Sterling Partners Equity Advisors.
Kevin E. Silverman, CFA
Chief Investment Officer
P: 312-465-7096
C: 312-953-0992
ksilverman@sterlingpartnersequityadvisors.com
Contact:
John A. Schattenfield
Head of Distribution
jschattenfield@sterlingpartnersequityadvisors.com
P: 312-465-7037
C: 872-202-2340
Sterling Partners Equity Advisors Portfolio Commentary – July 2019
The stock market is making new highs, unemployment is at record low levels, and GDP has never been better. Corporate revenue and earnings are near records. Borrowing rates are low and inflation is low. It’s difficult to find any data that suggests a recession is on the way. Yet everywhere we turn, pundits are bearish. Why do we hear so many economists talking about a big chance of a recession sometime in the next few years? Earnings comparisons are tougher, tariffs are terrible, they say, a weak Europe is the start of a global recession, all the benefits of the tax cuts are over, negative interest rates are bad for asset values, among other things. When pressed, though, the most common reason is that the economy has been good for too long and that can’t last much longer.
This seems new. Perfectly capable economists are predicting recession simply on the basis of a recession being “due.” The longevity of the current recovery is simply too long for some people to stomach, believing that the “natural cycle” of recoveries is just 3.2 years, the average of the 1854-2007 time period. So, we are “overdue by 4.5 years,” according to an October 2018 Forbes article. The recent market corrections in the fall of 2018 and in May 2019 both unfolded with a healthy dose of concern about near-term earnings, GDP growth, China tariffs, and the policy of the Fed, all of which together formed a mosaic of imminent recession, pundits say by late 2019, or certainly by 2020 at the latest.
Two economic metrics that are key to this discussion are real GDP and inflation. In part, it is low real GDP growth compared to past recoveries that creates concerns about the longevity of the current expansion. Inflation estimates are used to make real output estimates from nominal sales reports, which then are used to estimate real GDP. Real GDP growth estimates obviously help drive analysts’ revenue and earnings growth assumptions and help to inform the Fed’s policy decisions. The problem with this is that these estimates are wrong and economists know it.
The CPI is the inflation measure used in these estimates. It is created using baskets of goods in dozens of locations around the U.S. The current survey methodology ignores certain substitution behaviors, doesn’t account for discounts at outlet stores, doesn’t account for new products, and quite often ignores quality differences between discontinued products and those that replace them in the baskets. The CPI is known to overstate inflation by as much as 0.4% per year. The PCE is a better, lower, inflation estimate but it is not as timely and goes unused. That leads to an understating of real GDP growth, which is of course the remainder after adjusting nominal GDP by the inflation estimate. While that’s a modest error in the short run it’s a giant error in the long run. Not only is real GDP growth understated, but with inflation overstated, real wage gains are understated. With real GDP growth and real wage gains understated, the current economy seems more tenuous and it makes near-term recessions easier for economists to predict.
Another element to the mismeasurement thesis is the mismeasurement of GDP itself. In addition to the problem of measuring general inflation discussed above, there is also the problem of determining whether a price increase is a feature enhancement or inflation. It’s likely that many feature enhancements are being misdiagnosed as inflation. There’s the problem of not measuring the convenience of using OpenTable and the time it saves to do other things. This isn’t captured. In fact, it’s likely that a whole host of new conveniences along with productivity and lifestyle enhancers from Waze to Live Nation to Amazon Fresh are not being captured in GDP growth because the benefits are hard to measure in terms of time saved, not to mention what beneficial activity is created during that extra time.
Finally, traditional causes of recession, the mismatched timing and bad forecasting of inventory and end demand, are increasingly tamed by transparency in the supply chain. In general, the vast benefits of the instantaneous flow of information to everyone or anyone are still working their way through the economy, quite possibly in ways that are difficult to measure with tools originally designed to count units and weigh output. With long-term real GDP growth and living standard gains mismeasured and the full economic benefits of the internet still not fully understood, we believe there is a reasonable case that the economy is not only better than generally believed but also that real wages have risen more than believed for 30 years. If only we were using the PCE instead of the CPI.
Not surprising then that we remain positive on the economy and that we believe our portfolios are well positioned for good results ahead. By identifying companies with good balance sheets that offer products or services that are better, cheaper, or faster than the competition, our portfolio companies stand to thrive no matter how the predictions of economists turn out. Our strategies performed well in 2Q 2019, with our Small-Cap Value Focus concentrated strategy earning a 5.9% return net of fees and our Small-Cap Value Diversified strategy earning a 4.02% return net of fees versus the 1.37% return of our Russell 2000 Value Index benchmark. Details on our results are discussed later in this commentary (see attached PDF).
Thank you for your interest in Sterling Partners Equity Advisors.
Kevin E. Silverman, CFA
Chief Investment Officer
P: 312-465-7096
C: 312-953-0992
ksilverman@sterlingpartnersequityadvisors.com
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