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SPEA: 4Q 2022 Manager of the Decade – 3 Straight Years! Top Gun Distinction – 17 Consecutive Quarters!
STERLING PARTNERS EQUITY ADVISORS
NAMED MANAGER OF THE DECADE FOR THE THIRD STRAIGHT YEAR!
(Chicago, Illinois—February 28, 2023)
Sterling Partners Equity Advisors (“SPEA”) announced today that the Small-Cap Value Diversified strategy (“SCV Diversified”) has once again been named to the celebrated PSN Top Guns List of best-performing separate accounts, managed accounts, and ETF strategies for Q4 2022.
SCV Diversified was named Manager of the Decade(1) for the third consecutive year within the Small-Cap Value Universe(2). In addition, it continued its run of seventeen straight quarters for the Top Gun Distinction, named in the 6-STAR(1,2) category. SCV Diversified is a diversified, low-turnover, small-cap, value strategy holding 50-70 stocks with a 15-year verified track record. The firm applies a repeatable, disciplined process developed over decades of investment management experience with a focus on deep, bottom-up research to invest in companies at a significant discount to our estimate of their intrinsic value of “true worth.” Since its inception, the strategy has been managed by Kevin Silverman, CFA. SPEA claims compliance with Global Investment Performance Standards (GIPS®)(3).
The highly anticipated list, published by Zephyr, remains one of the most important references for investors and asset managers. Through a combination of PSN’s proprietary performance screens, the PSN Top Guns list ranks products in six proprietary star categories in over 75 universes based on continued performance over time.
“We are extremely proud to have our small-cap value strategy recognized by PSN for the 17th consecutive quarter. It is particularly a great honor to be recognized as “Manager of the Decade” for the third consecutive year. We applaud the outstanding work of our investment team in meeting the challenging risk/return criteria of the 6-STAR Top Guns recognition, especially through this period of unprecedented market volatility.”
– Kevin E. Silverman, CFA, Portfolio Manager
“With the growing interest in separately managed accounts, the PSN Top Guns List has attracted greater attention. SPEA has done remarkable work, and we are pleased to include them as a top performer.”
– Margaret Tobiasen, SVP of Data Distribution at PSN/Informa
We invite you to review our strategy results and read the insights and educational materials we’ve assembled in our collection:
1. 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 and Manager of the Decade. Manager of the Decade: These products must have an r-squared of 0.80 or greater relative to the style benchmark for the ten-year period ending December 31, 2022. Moreover, products must have returns greater than the style benchmark for the ten-year period ending December 31, 2022, and a standard deviation less than the style benchmark for the ten-year period ending December 31, 2022. At this point, the top ten performers for the latest ten-year period ending December 31, 2022, become the PSN Top Guns Manager of the Decade. 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 with a five-year period equal to or less than the median standard deviation for the peer group are then selected. The top ten information ratios for the latest five-year period then become the 6 Star Top Guns.
2. PSN’s Small-Cap Value Universe consists of 163 firms and 217 products. The complete list of PSN Top Guns and an overview of the methodologies can be accessed at https://psn.fi.informais.com/. Registration is required.
3. 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. 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.
About SPEA:
Sterling Partners Equity Advisors LLC (“SPEA”) is a limited liability company and SEC-registered investment advisor formed in January 2017. SPEA specializes in long-only small-capitalization equity investment strategies and offers an experienced investment management team coupled with an institutional financial services infrastructure. SPEA is an affiliate of Sterling Fund Management, LLC (“SFM”), a Chicago-based diversified investment management firm established in 1983. SFM is a multi-asset investment management platform investing across a variety of strategies. SFM invests capital in several institutional private-equity funds and internal and third-party capital on a deal-by-deal basis across various industries, growth stages, and structures.
About PSN:
For nearly four decades, PSN has been a top resource for investment professionals. Asset managers rely on Zephyr’s PSN to effectively reach institutional and retail investors. Over 2,800 firms, 285 universes, and more than 21,000 products comprise the PSN SMA database showing asset breakdowns, compliance, key personnel, ownership diversity, ESG, business objectives and strategy, style, fees, GIC sectors, fixed income ranges, and full holdings. Unique to PSN is its robust historical database of nearly 40 years of data, including net and gross-of-fee returns. PSN Top Guns performance rankings are tabulated for thousands of strategies across numerous peer groups subdivided by increasingly rigorous screens. There is no fee required by Informa Investment Solutions for inclusion in the PSN manager database.
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 this link. For more information about Zephyr’s PSN Separately Managed Accounts data, visit here.
Sterling Partners Equity Advisors Portfolio Commentary – Winter 2023
Kevin Silverman, CFA
Forecast 2023:
Long-Term Looks Good
Another year is behind us, and so traditionally a good time to make prognostications about the year ahead. This year we are more optimistic than past years — in part because we’ve waited to see how January turned out, but also because we recognize the power of mean reversion! Last year was a poor year for our SCV strategies, both in absolute terms and relative to our Russell 2000 Value benchmark. The damage was done in the first quarter as we shared the fate of many long-duration strategies when long bond yields jumped at the fastest pace in at least a generation, and the so-called efficient frontier was efficient in delivering worse-than-average historical results in almost every traditional asset class. We wrote last year that we believed the market performance suggested a recession was coming; that is closer to the consensus now, with two negative GDP quarters behind us. But, as often happens, it may be called over before it is officially declared to have begun. So it’s been a tricky period to navigate. Our Director of Research shares his thoughts on recent results about our best and worst performers later in this report.
We have been doing this job a pretty long time. Our SCV-Focus strategy has an inception date of June 2001, and our SCV-Diversified strategy began in December 2006. Before sharing our short-term views, which may be of less interest to long-term investors, it’s worth noting that our historical long-term results have been very good relative to the benchmark, as is our performance so far this year (links located at the end of this letter). One of these things we care about, one we care less about.
Unfortunately for the reader, we don’t know what will happen this year, which makes these annual prognostication letters a tad awkward. On the other hand, we are confident in long-term predictions of growth anchored around estimates of population growth and productivity growth per capita, some of the few trends that have been somewhat predictable in recent times.
According to British economist Angus Maddison, these trends accelerated around 1820 when a “range of gadgets” swept over England, dramatically increasing the speed and reducing the cost of transportation leading to larger trade areas and a means for best manufacturing practices to spread. The result was an historic shift in world economic growth, as a consistent increase in productivity per capita allowed a consistent growth in population that continues to this day. It seems we may now also be in a period when a “range of gadgets” sweeps over not just England but the entire world at the same time.
As we’ve said in past letters, the COVID period has likely introduced a lurch in per capita productivity, as government lockdowns forced even older folks, skeptical of new technology, to learn how to do a few important things faster and cheaper. Like 1820, it is a transportation revolution, but in reverse. Resources used for years to move workers to their most productive location will now be put to better use, as will the time used for that travel. This may not matter much or multiply by billions of people, but it may have started a period of productivity growth that will sometimes be difficult to measure.
One thing that becomes apparent over a long career is that institutional investors, on average, spend too much time worrying about the short term, that is, if maximizing total return is truly their objective. A short-term focus erodes long-term return by extracting a cost for certainty during uncertain times in the form of a lower than “fair” price, which for argument’s sake, we could say is defined as average valuation or average P/E. Investors with a long-term focus that buy during uncertain times have traditionally beaten the averages, and the uncertainty that those better returns will continue likely means that they will. Of course, risk-adjusted returns may be the same for buyer and seller if each defines risk differently. The risk of earning sub-par long-run returns and losing more money later today can be mitigated in the same transaction.
Figuring out which information is important in the long run and which isn’t is difficult. The amount of news and information that is truly strategically important is but a fraction of what we see. Learning to discern between signal and noise has been important for millennia, and it may be among the most important elements of generating good long-term investment results. The other is not to overpay.
The Eisenhower Matrix, popularized by Stephen Covey, is a nice tool for organizing decisions into a matrix of “urgent / not urgent” and “important / not important,” which may be useful when seeking good long-term equity returns. If we recognize that stock prices are determined by supply and demand, and we re-define “urgent” as being high investor interest and “not-urgent” as low investor interest, we can readily adapt Eisenhower’sand Covey’s Matrices to equity markets and call it the Value Investor’s, um, Matrix!
The adaptation is that important information when a stock is popular is likely to deliver returns offered by the efficient market, or fair risk-adjusted returns, while important information discovered when a stock is in low demand is more likely to deliver excess returns as demand recovers. Obviously, “not important” information should be avoided. But when every news outlet, pundit, client, co-worker, family member, friend, boss, or stranger holds a strong opinion, all of which are worth listening to under the mosaic theory, it is difficult to determine which information is truly important.
Over time, one of the most important compasses or guideposts in our effort to discern important from not important has been the Consumer Expenditures Survey (CES). When looking for important information, we have found this data is among the most important. Outside opinions are good to hear, but why not also let consumers tell you themselves what they are doing? We like to overweight industries that are growing relative to GDP by investing in the most undervalued companies in those industries. This approach has worked for a long time. Often, even a weak competitor in a good industry can deliver decent relative returns, mitigating the long-term risk of earning sub-par returns. The growth in leisure, gaming, software, internet advertising, e-commerce, healthcare – the list is longer – was trending nicely in the CES, while bargains would regularly appear after a short-term earnings miss or an officer resignation. For us, companies trading at below-average valuations in industries consistently gaining a share of GDP is a nice wind at the back.
As an example, we attach a table that we use as a guidepost in our search for new ideas. Not surprisingly, information services, scientific equipment, and data processing are near the top of the relative growth list since 2019, while construction, petroleum, food and beverage, chemicals, and government are toward the bottom. We organize the table into various economic periods, looking for changes and new trends that may be emerging. These long-term, sometimes well-entrenched trends, in our view, are always a good compass to above-average returns, and so we continue to mine this data for new ideas.
So, thank you for reading our annual Year-End/Forecast letter. One very comfortable prediction is that, especially during uncertain times, our long-term research and focus on long-term returns should help us continue delivering good returns to our clients. Thank you for your interest in our equity strategies.
Best Regards,
Kevin E. Silverman, CFA
Chief Investment Officer
ksilverman@sterlingpartnersequityadvisors.com
P: 312-465-7096
C: 312-953-0992
Click the following links for our most recent performance:
Please direct any inquiries to:
Timothy A. Knight
Director of Operations
tknight@sterlingpartnersequityadvisors.com
P: 312-465-7010
C: 773-909-5447
SPEA Earns SCV Top Gun Once Again! Award Winner for 16th Straight Quarter!
Sterling Partners Equity Advisors
Named To PSN Top Guns List of Best-Performing
SCV Strategies For The 16th Consecutive Quarter
(Chicago, Illinois—December 1st, 2022) – Sterling Partners Equity Advisors (“SPEA”) announced today that it has been named to the celebrated PSN Top Guns List of best-performing separate accounts, managed accounts, and ETF strategies for Q3 2022. The highly anticipated list, published by Zephyr, remains one of the most important references for investors and asset managers. Through a combination of PSN’s proprietary performance screens, the PSN Top Guns list ranks products in six proprietary star categories in over 75 universes based on continued performance over time.
SPEA’S SMALL-CAP VALUE DIVERSIFIED STRATEGY WAS AWARDED THE 6-STAR TOP GUN DISTINCTION IN THE SMALL-CAP UNIVERSE AS OF SEPTEMBER 30, 2022
“We are extremely proud to have our equity performance recognized by PSN for the 16th consecutive quarter! We again applaud the outstanding work of our investment team in meeting the challenging risk/return criteria of the 6-star Top Guns recognition, especially through this period of unprecedented market volatility.”
– Kevin E. Silverman, CFA, Portfolio Manager
“With the growing interest in separately managed accounts, the PSN Top Guns List has attracted greater attention. SPEA has done remarkable work, and we are pleased to include them as a top performer.”
– Margaret Tobiason, SVP of Data Distribution at PSN/Informa
The Small-Cap Value Diversified strategy (“SCV Diversified”) is a diversified, low-turnover, small-cap, value strategy holding 50-70 stocks with a 15-year verified track record. The firm applies a repeatable, disciplined process developed over decades of investment management experience with a focus on deep, bottom-up research to invest in companies at a significant discount to our estimate of their intrinsic value of “true worth.” Since its inception, the strategy has been managed by Kevin Silverman, CFA, SPEA’s CIO. SPEA claims compliance with Global Investment Performance Standards (GIPS®).
Click here for SCV Diversified results through September 2022
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.
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 with a five-year period equal to or less than the median standard deviation for the peer group are then selected. The top ten information ratios for the latest five-year period then become the 6 Star Top Guns.
PSN’s Small-Cap Value Universe consists of 162 firms and 214 products. The complete list of PSN Top Guns and an overview of the methodologies can be accessed at https://psn.fi.informais.com/. Registration is required.
About SPEA:
Sterling Partners Equity Advisors LLC (“SPEA”) is a limited liability company and SEC-registered investment advisor formed in January 2017. SPEA specializes in long-only small-capitalization equity investment strategies and offers an experienced investment management team coupled with an institutional financial services infrastructure. SPEA is an affiliate of Sterling Fund Management, LLC (“SFM”), a Chicago-based diversified investment management firm established in 1983. SFM is a multi-asset investment management platform investing across a variety of strategies. SFM invests capital in several institutional private-equity funds and internal and third-party capital on a deal-by-deal basis across various industries, growth stages, and structures.
About PSN:
For nearly four decades, PSN has been a top resource for investment professionals. Asset managers rely on Zephyr’s PSN to effectively reach institutional and retail investors. Over 2,800 firms, 285 universes, and more than 21,000 products comprise the PSN SMA database showing asset breakdowns, compliance, key personnel, ownership diversity, ESG, business objectives and strategy, style, fees, GIC sectors, fixed income ranges, and full holdings. Unique to PSN is its robust historical database of nearly 40 years of data, including net and gross-of-fee returns. PSN Top Guns performance rankings are tabulated for thousands of strategies across numerous peer groups subdivided by increasingly rigorous screens. There is no fee required by Informa Investment Solutions for inclusion in the PSN manager database.
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 this link. For more information about Zephyr’s PSN Separately Managed Accounts data, visit here.
Sterling Partners Equity Advisors Portfolio Commentary – Fall 2022
Kevin Silverman, CFA
LESSONS
I had the pleasure of recently attending an investment conference hosted by the Hawk Center at UW-Madison, in conjunction with UW’s Applied Security Analysis Program (ASAP). ASAP is a pioneer in applied investment education and, not coincidentally, a program from which I am an alumnus. It was a pleasure reconnecting with Professor Hawk, former classmates and colleagues and hearing a few good investment ideas. But at least as interesting for me was the eagerness of the students to learn important lessons from seasoned veterans, so valuable in such a volatile and uncertain time.
Learn from seasoned veterans? What advice do we really have? I listened to one panel discuss how the advances in technology over our careers have helped investors but may have made things worse for professionals by making markets more efficient, fees lower, and has left the computers managing more money than the humans. I heard another panel discuss how the current period is unlike any in long careers, leaving the lessons of past cycles somewhat lacking to deal with this one. Clearly, these are challenging times. But for those just entering the business, if neither technology nor experience is helping, what are the lessons of experienced careers in the industry?
Technology has brought faster computing speeds and a ubiquitous internet that has led to many new tools for investors that can measure and visualize the causes of portfolio volatility and performance in real-time. Obviously, this has led to a majority of assets under management being managed by computers applying various forms of modern portfolio theory, first developed in the 1950s. There is now no shortage of data or the computer power to manipulate that data and graph it in HD, a functionality transforming all industries. Since fiduciaries typically need to see whatever level of granularity is available, this leads to even long-term active managers having a deeper understanding of what’s going on day-to-day in the portfolio than ever before. But are these advances helping investment returns or competing them away?
Even for active managers who don’t manage to the real-time volatility and performance attribution information flow and instead continue to value businesses based on the present value of future cash flows, technology has entirely changed the time and access to the information flow that is at the heart of the research process. SEC filings, news releases, management communications, databases, and product demonstrations- the currency of investment research are now available in real-time. There was a time when SEC Filings were only available on the day of filing in SEC regional offices in six cities in the U.S., each with a copy machine that required exact change! Technology has also automated the process of idea discovery, screening, and financial modeling. It has allowed testing a broader range of assumptions to hone estimates of cash flow and, ultimately, business value. But while these are great new tools, they have also vastly expanded access to information and the power to analyze it for the market in general, making markets more efficient and potentially eroding the alpha available to dedicated institutional investors.
As far as experience, in our shop, we hand-make financial models that attempt to predict the future by making judgments about market share changes within product categories and by making judgments about the amount of capital necessary to run those businesses. Are the products winning in the marketplace? Are they faster, better, cheaper, or more convenient? We largely try to predict the future by talking with people smarter than we are about what they think. We make intrinsic value estimates of businesses and expected return estimates from that. This approach was invented a long time ago and was dramatically aided by the invention of the telephone. Our edge is to care less about the present that no manager can talk about — and care a lot about the periods out a few years from now that they can talk about. Arbitrage the time value of information. Invest for the long run. This is an equity practitioner’s lesson: Trust the raw data, make well reasoned valuation judgments, and hold managers accountable for outcomes.
We like companies with little analyst coverage and little institutional interest because it hopefully leads to a better understanding of the intrinsic value than the average participant may have and the potential for rising demand later on. These days, that effort is made easier by the large ownership percentage of many stocks by ETFs, which trade with no concern for the valuation of any individual name. With an average four-year holding period, we normally find ourselves waiting for the stock’s price to move toward our estimate of intrinsic value as market participants come to believe what we believe, and demand slowly moves the stock higher. That is another practitioner’s lesson, patience. Being first in line means you won’t miss the event, but you may be waiting around a while.
In our strategies currently, we are waiting around for the gap to close between market prices and our estimates of intrinsic value. Our expected return estimates on our holdings have rarely been higher over our 20-year history; in that sense, this period feels very much like 2008. Our short-term returns have been holding steady against the benchmark since March or so but remain farther behind than usual year-to-date, again like in 2008. We have detail on our performance and our recent best and worst performers later in this newsletter written by our Director of Research, Nathan Schmidt.
If you have managed to read this far, the best lesson we can offer after a long career managing equity strategies is to own good long-term profitable businesses that sell necessary goods and services and own them at reasonable prices. If we can continue to do that, we can continue to deliver good long-term returns to clients. I don’t think it is really any more complicated than that.
Click here for our most recent performance, and please open the .pdf below to see our Director of Research’s thoughts about our best and worst contributors to our performance in the quarter.
Thank you for your interest in Sterling Partners Equity Advisors.
Best Regards,
Kevin E. Silverman, CFA
Chief Investment Officer
ksilverman@sterlingpartnersequityadvisors.com
P: 312-465-7096
C: 312-953-0992
Please direct any inquiries to:
Timothy A. Knight
Director of Operations
tknight@sterlingpartnersequityadvisors.com
P: 312-465-7010
C: 773-909-5447
View/Download PDF of this Commentary
SPEA does it again! 15th consecutive quarter earning PSN’s Top Gun designation
Sterling Partners Equity Advisors
Top Guns Designations for 2Q 2022
– 6 STAR – Small Cap Value Universe –
by Informa Investment Solutions
(Chicago, Illinois—August 19th, 2022) Today, 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 14-year verified track record. Since its inception, the strategy has been managed by Kevin Silverman, CFA, SPEA’s CIO. *SPEA claims compliance with Global Investment Performance Standards (GIPS®).
Sterling Partners Equity Advisors was honored with awards in all the following categories as of June 2022:
SCV Diversified 6 Stars Small-Cap Value Universe
We are honored to have our equity performance recognized by PSN for the 15th consecutive quarter. I applaud the fine work of our investment team in meeting the rigorous criteria required to achieve 6-star Top Guns recognition,” said Kevin E. Silverman, CFA, Portfolio Manager.
Click here for our results through June 2022
Through a combination PSN’s proprietary performance screens, the PSN Top Guns list ranks products in six proprietary categories in over 50 universes based on continued performance over time.
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.
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.
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 an 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 numerous peer groups subdivided by increasingly rigorous screens.
Sterling Partners Equity Advisors Portfolio Commentary – Summer 2022
Is It or Isn’t It?
That’s the question on everyone’s mind these days. It’s understandable because there are so many conflicting data points. We have pointed out in the past that a good thing to do to achieve certainty in stock market returns in the short-run is to avoid owning any stocks — or sell the ones you have; although we don’t recommend that, the market returns in the long-run have historically been pretty good. One thing we know for sure is our 2Q 2022 performance was worse than we like relative to our Russell 2000 value benchmark, and we will discuss the details of those results following this letter.
It certainly makes sense why markets are down this year. With negative GDP, rising inflation and interest rates, a war, collapsing consumer sentiment, and big economy-jolting energy price increases, it feels a lot like 1974, 1979, 2000, or 2008. There’s half a chance we are already in a recession that will be labeled after the fact, something that has happened frequently in the past. Market momentum is negative, retail sales are weak, housing is slowing, auto builds are down, the yield curve is inverted, disposable personal income has been slipping, even video streaming is down, and PE multiples are falling. In other words, good hunting grounds for a value investor.
At the same time, it’s also hard to make sense of record real wage rates, near peak personal consumption expenditures, near record low unemployment, and the Michigan consumer sentiment index at a 70-year low. A combination of the gut punch of post-Covid inflation, war, interest rate hikes, and then both a bear stock and bond market have obviously hit sentiment hard, but not yet employment.
In one post-Covid graph that looks pretty interesting (see chart), historically low unemployment rates seem entirely caused by a growing percentage of the working-age population moving into retirement. While some of this is undoubtedly a post-Covid appreciation for leisure, the demographics say that baby boomers are finally retiring and taking many of their non-college taught skills with them. In what could be a long trend, there seems to be an excess of lawyers and bankers and a shortage of truck drivers and construction workers. Hard to say if that’s bad for the economy.
But again is it or isn’t it?
There is a lot of negative data, but it’s quite possible we are in a slowdown created by the economy working through more than the normal number of global supply and demand shifts at the same time. We try to keep in mind that most of the numbers that are making people nervous are rough estimates. With GDP and the CPI releases, it seems that a good dose of skepticism regarding the accuracy of these estimates is warranted, particularly as real GDP growth hovers near zero. Is GDP capturing all the productivity that has been created by the recent mass adoption of new technology? Is the CPI estimate capturing the difference between pricing and productivity gains in fast-paced new products and services cycles? Does the CPI basket change frequently enough when web-based product discovery and substitution are now weaved into consumer behavior?
The stock market itself has historically been the best predictor of recessions. This decline did cross the threshold of the definition of a bear market and, therefore, is likely an official market prediction. But in another somewhat unusual case this time, the average market decline so far can be almost entirely accounted for by the mathematical impact of higher interest rates dialed into the denominator of the present value calculation. Does that make the market decline less predictive? Or is it in fact more predictive because earnings declines have yet to be dialed into market estimates?
A lingering question that is key to where we go in the near term is what happens to inflation? Are general price increases a mathematical reaction to wartime-like levels of growth in the money supply? Undoubtedly yes. Are some price increases simply the natural market reaction to a post-Covid period when everyone wants to do everything at once, creating scarcity and higher prices for those who want to be first in line? Again, almost certainly yes. Are some price increases the natural market reaction to shortages caused by a major generational shift in world trade patterns and, therefore, a short-term incentive to build more capacity or invent a new approach? Again, we think yes. And while it’s easy to understand how higher rates can shock buyers and postpone big-ticket lifecycle purchases, a recent history that includes periods of higher housing starts and higher auto builds at a time of higher rates suggests that long-run demand goes beyond interest rates.
For the stock pickers among us, the flip side of a rising inflation and interest rate environment is that it creates opportunities for companies with proprietary products and good balance sheets to raise price and expand margin and earnings faster than competitors. The flip side of historically low sentiment is the opportunity for multiples to improve. Those two paths to good returns, expanding earnings and/or multiplies, say absolutely nothing about the timing, by the way. But in the long run, economic growth equals population growth times productivity growth, and whether properly measured or not, we remain pretty optimistic about that.
Click here for our most recent performance, and please open the .pdf below to see our Director of Research’s thoughts about our best and worst contributors to our performance in the quarter.
Thank you for your interest in Sterling Partners Equity Advisors.
Best Regards,
Kevin E. Silverman, CFA
Chief Investment Officer
ksilverman@sterlingpartnersequityadvisors.com
P: 312-465-7096
C: 312-953-0992
Please direct any inquiries to:
John A. Schattenfield
Head of Distribution
jschattenfield@sterlingpartnersequityadvisors.com
P: 312-465-7037
C: 872-202-2340
Kevin Silverman Featured on Market On Close with Oliver Renick
Sterling Partners Equity Advisors CIO Kevin Silverman joined TD Ameritrade Network’s -Market On Close- with Oliver Renick. You can view the segment below.
SPEA earns PSN’s Top Guns Award for 14th straight quarter!
Sterling Partners Equity Advisors
Top Guns Designations for 1Q 2022
– 6 STAR / 5 STAR – Small Cap Value Universe –
– 6 STAR – Large Value Universe –
by Informa Investment Solutions
(Chicago, Illinois—May 20, 2022) Today, 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 14-year verified track record. The Quality Income & Value Strategy (“QIV”) combines a capital preservation strategy with broad equity participation for a steady, growing dividend stream. QIV has a 12-year verified track record. Since their inception, the strategies have been managed by Kevin Silverman, CFA, SPEA’s CIO.* SPEA claims compliance with Global Investment Performance Standards (GIPS®).
Sterling Partners Equity Advisors was honored with awards in all the following categories as of March 2022:
SCV Diversified 6 Stars Small-Cap Value Universe
SCV Diversified 5 Stars Small-Cap Value Universe
QIV 6 Stars Large Value Universe
“We are happy to be again recognized for our top-ranking long-term investment performance and are especially proud of our top-tier risk/reward performance over the recent 5-year period. We applaud the outstanding work of our investment team,” said Kevin E. Silverman, CFA, Portfolio Manager.
Click here for our results through March 2022
Through a combination PSN’s proprietary performance screens, the PSN Top Guns list ranks products in six proprietary categories in over 50 universes based on continued performance over time.
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.
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.
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 an 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 numerous 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
SPEA named April 2022 “Boutique of the Month” by CityWire.com
Sterling Partners Equity Advisor’s was recently named April 2022 “Boutique of the Month” on CityWire.com.
Sterling Partners Equity Advisors Portfolio Commentary – Spring 2022
Stormy Weather
The Fed, the War, inflation, the yield curve inversion, spiking commodity prices, among other events, have all helped put the future on sale and near-term certainty at a premium. The long bond and mortgage rate, both of which affect our portfolio in a myriad of ways, jumped at the fastest relative pace in 40 years! (view chart). As we’ve written about before, it is usually the case that at times when the market price for certainty is rising, a portfolio such as ours, designed for long-term returns, is under near-term performance pressure. Our experience navigating market cycles leads us to believe that during these periods of high uncertainty, the potential returns are often the highest.
What Happened?
Our long-duration assets have had the largest negative impact on our performance this past quarter. More specifically, cotton price surges, recession fears affecting the lending business, potential trade issues in China, and short-term supply issues resulting from COVID, among others, have negatively affected our strategy’s short-term performance. We offer detail later in this report. Ultimately, we believe it is often life-cycle choices that drive consumer behavior in the long run, and they can be predicted, but the cost of these predictions is recognizing that patience is required in the short run.
What are we Doing?
We are always opportunistic in the quest for risk-adjusted returns, our proudest accomplishment for long-term clients, which sometimes means reducing risk. For example, we reduced a bit of exposure to European business directly because of the War. We also began to adjust near-term earnings estimates as general recession risks rose, but mostly we watched the average long-term expected return of the names in our strategies rise as their stock prices fell. As a result, while the portfolio remains under near-term performance pressure, we see well-above-average expected return estimates for our existing holdings.
We don’t overtly attempt to predict the timing of recessions, although it does seem more likely in the near term than usual, primarily because rising prices can slow demand. But we do understand that for companies to have a chance to realize our future forecasts, they must first successfully navigate the present. So, we take to heart Ben Graham’s “margin of safety” and are pleased to say the strategies have delivered good risk/return results over the long run. We achieve that by owning companies that offer strategically differentiated products and/or distribution that maintain the good cost and capital structures necessary to win against higher-cost competitors during difficult times. We own almost entirely U.S.-based companies with good balance sheets and products and services that we expect to be winning in the marketplace over the long term.
Among other businesses, we are attracted to niches and eddies of the economy that are gaining share with products that are faster, better, or cheaper than alternatives – companies that we think of as having the wind at their back. We try to buy them when they are misunderstood by the marketplace in the short run, during periods that often feel like right now.
Over the years, this has led us to try to understand the cycles of demographics and the life cycles of consumer and household buying habits to build conviction around longer trends and milestones during short-term periods of uncertainty. While we are value investors first, this approach has led to successful long-term investment themes like healthcare, leisure, internet, software, cloud, content, and, more recently, housing; where we periodically can take advantage of flights away from perceived long-term uncertainty, and buy what we believe is good long-term value for our investors.
What’s Ahead?
We are never immune to falling market prices that give up the uncertain long-term potential for the immediate security of receiving a cash-on-sale. Still, we have complete confidence in the underlying long-term value of the good businesses we own, most of which generate free cash and real cash-on-cash yields. As is often a good check on stock market rationality, we estimate that all our holdings would deliver higher than historical real cash-on-cash equity return spreads to private owners, as the bond market currently offers near-zero, inflation-adjusted returns along all maturities on the yield curve.
Our holdings sell at meaningful discounts to our estimate of “true value” or “intrinsic value.” When the market overvalues near-term certainty, we patiently wait for a better price to sell while our companies continue to earn their return on equity, increasing their value while we wait. We continue to look for great new ideas, and when there is a compelling value for a business, we tend to buy a little bit. With an average holding period of four to five years by design, our strategies don’t invest for short-term liquidity but rather for long-term returns, which we have delivered and believe will continue to deliver. It is periods like this, periods of most uncertainly, when the potential returns are the highest, at least in my humble opinion.
Click here for our most recent performance, and please open the .pdf below to see our Director of Research’s thoughts about our best and worst contributors to our performance in the quarter.
Thank you for your interest in Sterling Partners Equity Advisors.
Best Regards,
Kevin E. Silverman, CFA
Chief Investment Officer
ksilverman@sterlingpartnersequityadvisors.com
P: 312-465-7096
C: 312-953-0992
Please direct any inquiries to:
John A. Schattenfield
Head of Distribution
jschattenfield@sterlingpartnersequityadvisors.com
P: 312-465-7037
C: 872-202-2340
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