Sound Shore Portfolio Commentary
June 30, 2019
Sound Shore’s second quarter 2019 results were ahead of solid gains for both the Russell 1000 Value Index and Standard & Poor’s 500 Index. Equities proved resilient despite concerns over moderating global growth and trade disputes. With major central banks indicating a bias toward greater accommodation, the aggregate level of negative yielding debt worldwide reached a record $13 trillion during June, up from zero just 5 years ago. While the more cyclical financial and material sectors led the S&P for the quarter, the low rate backdrop drove the bond-proxy utility and real estate investment (REIT) stocks to perform best over the past 12 months.
Sound Shore’s long-term investment horizon provides our process with a critical time-arbitrage advantage versus the markets’ ever-shortening attention span. In addition to focusing on valuation, our fundamental research includes meetings with customers, suppliers, competitors, and of course, senior management of the company itself. This thorough process enhances our reasoning and increases our probabilities of investing in stocks where sustainable improvement is underway. In our experience, the combination of a long-term view, informed judgement and business sustainability is often rewarded by the market. Armed with this framework, we can use periods when stocks may be out of sync as investment opportunities.
Throughout this year, we have been encouraged to see company-specific factors increasingly driving stock performance, a significant contrast to 2018. As a result, the patience inherent in Sound Shore’s long-term investment purview has allowed several of last year’s laggards, including AIG, Citigroup, and Allergan, to become strong contributors in 2019. At insurer AIG, for example, shares have responded well to management’s multi-year restructuring, which is bearing fruit through a lower combined ratio, market share stability, and an improved return on equity. As well, global bank Citigroup advanced after regulators approved its 2019 capital return plan, which includes dividends and share buybacks equivalent to 14% of the company’s market capitalization. We initiated our investments in AIG and Citi at less than 11 times earnings, and though each has advanced substantially year to date, they remain attractive portfolio holdings. Lastly, specialty drug maker Allergan rose after it agreed to be acquired by a rival, surfacing value sooner than we had anticipated.
Meanwhile, electrical component maker nVent Electric was among our detractors as it returned a portion of its prior gains due to global industrial slowdown concerns. A 2018 spinoff from prior portfolio holding, Pentair, nVent’s new and determined management team is improving sales growth and margins and has committed to return significant free cash to shareholders. We continue to hold the stock given its reasonable valuation at 13 times forward earnings.
After a strong start to 2019, many market pundits are calling for stocks to have a tougher time in the second half of the year. Due to continued low rates, the dispersion in valuation is at extreme levels as investors continue to crowd into low-volatility, bond-like vehicles. Never ones to predict, we at Sound Shore are resolved to take advantage of the current distortions by remaining focused on our bottom up process, which continues to find compelling investment opportunities valued below the S&P 500. Indeed, at June 30, 2019, Sound Shore’s portfolio had a forward price-earnings multiple of 11.8 times, meaningful discounts to the S&P 500 Index at 16.8 times and the Russell 1000 Value Index at 13.9 times. Exact timing is elusive, as always, but we believe the current environment is well suited to our investment approach.
The views in this letter were those of Sound Shore Management, Inc. as of 6/30/19 and may not necessarily reflect their views on the date this letter is first published or anytime thereafter. These views (i) are intended to assist investors in understanding the firm’s present investment methodology and (ii) do not constitute investment advice.
The Standard & Poor’s 500 Index is an unmanaged index representing the average performance of 500 widely held, publicly traded, large capitalization stocks. The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. It is not possible to invest directly in an index.
An investment in the Fund is subject to risk, including the possible loss of principal amount invested. Mid Cap Risk: Securities of medium sized companies may be more volatile and more difficult to liquidate during market downturns than securities of large, more widely traded companies. Foreign Securities Risk: The Fund may invest in foreign securities primarily in the form of American Depositary Receipts. Investing in the securities of foreign issuers also involves certain special risks, which are not typically associated with investing in U.S. dollar-denominated securities or quoted securities of U.S. issuers including increased risks of adverse issuer, political, regulatory, market or economic developments, changes in currency rates and in exchange control regulations. The Fund is also subject to other risks, including, but not limited to, risks associated with value investing.
The views in this letter were those of the Fund managers as of the date first published and may not necessarily reflect their views on the date this letter is first published or anytime thereafter.
You should consider the Fund’s investment objective, risks, charges and expenses carefully before investing. The summary prospectus and/or the prospectus contain this and other information about the Fund and are available from your financial intermediary or www.soundshorefund.com. The summary prospectus and/or prospectus should be read carefully before investing.