ACM Commentary 1Q 2011

by Mar 31, 2011

Dear Friends and Investors,

We are pleased to report our All Cap Equity Strategy outperformed the S&P 500 index return by 1.9% in the first quarter (7.9 vs. 6.0 net of fees). All Cap has achieved cumulative performance of 34.6% since inception (January 1, 2010), over 1,200 basis points (12%) greater than the S&P 500 net of fees.

It is our goal to provide an attractive risk adjusted return to our clients over an entire market cycle – typically judged by a 3 to 5 year time period. If we have learned anything in our years in this business it is that it’s important to remain humble and to always strive to improve.

Our Market Review letter is intended as a means to communicate with clients our results and how recent events may have impacted our performance and expectations going forward. This includes sharing both our successes and our mistakes.

Towards that end, much of the performance of our past and positioning for our future can be attributed to the following:

  • Individual Security Selection
  • Private Equity interest
  • A macro-economic insurance hedge

We are stock pickers at heart, but often times companies we own will share similar underlying themes. At Alamar we like big demographic, technological, and/or economic shifts that help make forecasting future revenue and earnings growth more predictable. For example, the aging population, cloud computing, global GDP growth, and the increasing disparity of wealth have all emerged as themes in the portfolio.

Recent private equity activity helps to assure us that we are not alone in this view. Towards the close of the quarter, Berkshire Hathaway made an offer to purchase Lubrizol (LZ) for $9 Billion in cash, a 28% premium to the trading price. This marks the 4th time in 5 quarters that an offer has been made on one of our investments. We do not believe this is a coincidence. Virtually all of these businesses are well run, have solid fundamentals and many are beneficiaries of some of the demographic trends mentioned above. We anticipate this phenomenon will continue given the large pool of capital raised by private equity, and the cash building up on the balance sheets of public companies.

Lastly, we have attempted to insure the portfolio against recent monetary policy and the likely inflationary pressures that may ensue. We do this at the security level, through the ownership of businesses with sufficient demand for their products and services to pass on cost increases. Further, many companies we own are U.S. based, but generate considerable revenue abroad. This works to give us exposure to international and even emerging markets, without the sovereign risk associated with direct investment. As we have discussed in the past, we continue to own small ETF (Exchange Traded Fund) positions in Gold (GLD) and Silver (SLV) which we believe helps to counteract current monetary policy. Both of these positions have performed well, approaching new all-time highs. If currency debasement continues, it is quite likely they will continue to increase in value in the future.

We hope this brief summary has given you some insight with respect to our new journey at Alamar thus far. Additionally, we hope the positioning of the portfolio illustrates some of the optimism we share for the future.

Best regards,

John Murphy

George Tharakan