2Q17 Quarterly Commentary

Our style was not in favor in the quarter as cheap valuation characteristics were a headwind. Bond surrogates outperformed as long term interest rates fell despite solid economic growth. This underweighted cohort sells at an 800 basis point price per earnings premium to non bond surrogate stocks despite lower earnings growth rates.

1Q16 Quarterly Commentary

The dollar weakened slightly as expectations of future Fed hikes were reduced in the wake of weak International economic growth and turmoil in capital markets thus reversing a long period of dollar strengthening. Oil prices soared in March, but ended the period roughly the same. U.S economic growth remained decent at a low level, benefiting from solid consumer balance sheets. Net worth has rebounded to 2008 highs. High Yield spreads ended the period flat after January widening. U.S.  Treasury yields followed other developed markets downward. U.S. yields are now very wide versus Germany. Defensive stocks, particularly utilities, which our style rarely finds attractive, led the way. High quality (B+ or better) led low quality (B or worse) stocks.  Momentum, low volatility and defensive stocks continue to be very expensive. These factors led to macro headwinds to our deep value philosophy.

4Q16 Quarterly Commentary

US treasury yields ripped higher in the quarter after the election, finally moving to positive real yields. The dollar rallied to multiyear highs in response to the widest bond yield differentials versus German and Japanese yields in 30 years. Thus the reflationary sector rotation that began in the 3rd quarter accelerated in the fourth quarter, reversing years of low volatility, bond proxy leadership. This created a long lost tailwind for our deep value style. Low volatility and bond proxy stocks are still expensive, however, given the massive overvaluation that existed at midyear.

4Q15 Quarterly Commentary

Equity indexes rose in the fourth quarter off of a low 3Q ending level, but concerns over slow Emerging Market economic growth and high yield bonds intensified. Growth stocks continued their 5 year record setting string of outperformance versus value stocks as performance continued to narrow into a handful of mega cap momentum technology stocks. Valuation spreads between value and its opposites of momentum, low volatility, and quality are at historic extremes according to JP Morgan research. This is similar to 1999/2000, with Amazon, Facebook, Netflix and Google replacing Cisco, Microsoft and Nortel.

3Q15 Quarterly Commentary

U.S. equities posted poor returns during the quarter driven by concerns about a slowing global economy.  Domestic and emerging market credit spreads, lead by Brazil, widened sharply in the quarter.  Oil fully retraced its strong 2Q increase of $12 per barrel on news of the Iranian deal.  These three factors created a large headwind to our deep value style.  Defensive stocks lead the broader markets as is typical in these environments.  Energy was the primary reason for our underperformance in the quarter.  Certain stock selection in the Financial Services sector offset poor selection in Energy.

2Q15 Quarterly Commentary

The second quarter of 2015 was marked by a combination of uncertainty and complacency as interest rates and oil prices jumped, domestic equities returns were flat to slightly negative and the U.S. dollar was basically unchanged versus most major currencies.

For the quarter, the Russell 3000 Index posted a 0.14% return, as the domestic equities market traded within a fairly narrow band.  Interest rates experienced a dramatic reversal as the yield on 10-year U.S. Treasury rose from 1.90% at the start of the quarter to end at 2.40%.  Oil staged a strong rally as domestic prices surged nearly $12 per barrel to end the quarter above $59, while the price of gold was flat.

1Q15 Quarterly Commentary

The first quarter of 2015 was marked by volatility with wild gyrations in oil prices, domestic equities and currencies. U.S. equity markets were generally positive, but there was a distinct size effect as small stocks led the way, followed by midcap stocks then large stocks. Even more pronounced was the performance of the growth style, which bested the value style by a material amount across the capitalization spectrum.

For the quarter, the Russell 3000 Index posted a 1.80% return, while the 10-year U.S. Treasury recorded its fifth consecutive quarter of positive returns. Oil, which had plunged nearly 50% in 2014, was down about 10% in the quarter, but some stability may be forming in the energy markets. While volatile, the price of gold ended the quarter basically unchanged while the U.S. dollar continued to strengthen against all major currencies.