Sandhill had a solid first quarter.

For the first quarter of 2018, the Concentrated Equity Alpha (CEA) product returned +1.8% net of fees vs. -1.2% for the S&P 500 Index.

We are pleased Sandhill continues to outperform the market.

Fixed income

For the first quarter of 2018, the Corporate Bond product returned -1.1% net of fees vs. -1.2% for the Bank of America 3-5 Year Corporate Bond Index.

Short term interest rates have risen dramatically over the last six months and we have built short term bond portfolios for our clients that will be able to withstand the rapid rise in interest rates.

It is important to remember that we hold all of the bonds in our portfolios until they are called or to maturity. So, if interest rates continue to rise, we will be able to reinvest the capital at higher rates as these shorter term bonds mature.

The average duration (effective maturity) of our Corporate Bond product is 3.8 years. With such a short duration, the Corporate Bond portfolios have very little interest rate risk and high price stability.

The current yield to maturity (as of 3/31/18) of our Corporate Bond product is 4.4%. This compares very favorably with the 2.5% yield on the four year U.S. Treasury bond (as of 3/31/18). We currently have no credit problems.

Barron’s

On March 7, 2018, Sandhill was featured as one of the lead articles on Barrons.com. I was interviewed by senior editor Leslie Norton the week prior (one hour and twelve minutes of tape) and the content of the article went through a week of fact checking. Intensive and interesting process. As a thirty year reader of Barron’s, it was a thrill to be a part of their publication. You can find a link to the full article on the homepage.

Morningstar

Sandhill’s Concentrated Equity Alpha (CEA) product was recently awarded the coveted five star rating from Morningstar. This is the highest rating awarded by Morningstar.

Recent volatility

The stock market was very volatile in the first quarter. At the end of the day (or more precisely the quarter), the market had not changed much in value. Volatility has a way of concerning investors as the wide swings in the market (and one’s net worth) cause discomfort.

At Sandhill, we are not bothered by the volatility. We are not looking through to the next quarter or next year. We are looking years down the road to the eventual value of our portfolio companies regardless of what the market does. To go a step further, good managers will take advantage of volatility (both up and down) as the market misprices assets in the short term.

Our move

We will finally be moving to our new home at the end of May. We will be in the south tower in Fountain Plaza on the top floor. We face west with spectacular views of downtown and the Niagara River and look forward to getting to work there. The project has taken over a year to complete and I am glad it is winding to conclusion.

Going forward

We are in the ninth year of the economic cycle (of expansion). The average cycle over the last century has been seven years. Without making predictions (waste of time), at some point sooner rather than later we will have a down cycle and a declining stock market. Could be in months, could be in years.

It is important to continue to understand that real wealth is built through time while ignoring cycles and investing in assets that will be worth far more over the next five to ten years (and longer). In that sense, equity capital should be “permanent”, and for those looking to control risk, this is why we offer our Corporate Bond product which has great price stability and liquidity.

 

My best to everyone.

With regards,

Edwin M. “Tim” Johnston III

Founder, Managing Partner

 

This report has been prepared for informational purposes only and is neither a solicitation to buy or sell securities.  Third-party information in this report has been obtained from sources believed to be accurate; however, Sandhill makes no guarantee as to the accuracy or completeness of the information. Sandhill Investment Management (“Sandhill”) is a registered investment advisor with the Securities and Exchange Commission that is not affiliated with any parent company.  Individual results may vary.  Investments may not be suitable for all investors.  Performance may be materially affected by market and economic conditions.   Investment strategy has the potential for profit or loss. The performance statistics disclosed above are calculated on the rates of return from accounts managed by Sandhill, as defined below.  The U.S. dollar is the currency used to express performance. Composites includes discretionary accounts under management from the first full month at which the account’s capital is fully invested by Sandhill. Closed accounts are included in the composites through the completion of the last full month under management and are not removed from the historical rates of return. Performance presented net-of-fees is reduced by investment management fees, trading expenses, and administrative fees.  Interest, dividends and capital gains in Sandhill Composites are not immediately reinvested.  CEA includes all portfolios in the all-cap core strategy which may hold large, mid, and small capitalization U.S. common stocks, American Depositary Receipts (A.D.R.’s), domestic ETF’s, sector ETF’s, and cash.  The S&P 500 Index is a float-adjusted market cap-weighted index of 500 of the largest US common stocks. The Corporate Bond composite will generally invest in securities rated single B to single A and will have maturities of three to nine years.  The Bank of America Merrill Lynch 3-5 year Corporate Bond Index is a subset of the Bank of America Merrill Lynch US Corporate Master Index tracking the performance of US dollar denominated investment grade rated corporate debt publically issued in the US domestic market.  Referenced benchmarks are not available for direct investment.   Sandhill claims compliance with the Global Investment Performance Standards (GIPS®). For a full GIPS ® compliant presentation and/or the Firm’s list of composite descriptions, please call 716-852-0279.

Market volatility can lead to short term mispricing of good businesses.

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