Sandhill delivered a strong year for our clients.
For calendar year 2019, Sandhill’s Concentrated Equity Alpha (CEA) composite was up 31.0% net of fees vs. a return of 31.5% for the S&P 500 Total Return Index.
For calendar year 2019, Sandhill’s Corporate Bond composite was up 8.7% net of fees vs. a return of 9.1% for the Bank of America Merrill Lynch 3-5 Year Corporate Bond Index. I would note that the average duration (maturity) of our Corporate Bond Composite is only 2.8 years which makes our performance all the better.
For both of our products, a spectacular year.
The last four years
The return Sandhill has generated with our CEA product over the last four years is impressive. We have achieved these returns with patience and consistency, and they are worth highlighting:
Sandhill CEA Composite S&P 500 Index Total Return
2016 +17.5% +12.0%
2017 +33.0% +21.8%
2018 – 4.1% – 4.4%
2019 +31.0% + 31.5%
Total Return +96.3% +71.5%
We are pleased to add real value for our clients. Our first job is to be responsible and prudent with your capital; our second job is to generate return that exceeds our market benchmarks over time. Over the last four years, for every $1 million invested in the CEA composite, the client would have an additional $248,000 (pre tax) in capital.
The bond market
We are coming off a terrific year in the bond market – the best year on record for our Corporate Bond product (the product was established in 2009). That said, the bond market is a lousy deal right now. Yields are low. Spreads are tight. Very little value anywhere. Mistakes will be made chasing yield.
The current metrics of Sandhill’s Corporate Bond composite are as follows: The yield to maturity of the composite is 3.06%. The average duration of the composite is 2.77 years. The three-year US Treasury note currently yields 1.54%. Therefore, the yield on our Corporate Bond composite is 1.52% over the Treasury – or nearly double the yield of the three-year note. As has been the case for some time, we have no credit problems.
Our bond portfolios carry four great attributes. First, they are short term and liquid. Second, they are very well diversified. Third, they have very high price stability (standard deviation of around 2%). Fourth, they are in pristine credit shape.
One might ask why have an investment firm manage my fixed income assets in such a low rate environment? Fair point, but not the whole point. On the fixed income side, a big part of our job is to keep the portfolios liquid and flexible so we are ready to jump when there is opportunity. Credit markets will experience some nasty dislocations and illiquidity from time to time (better known as a “credit event”). It is important that we are not tempted to reach for yield and make credit mistakes when rates are low. Hard to maintain discipline but it is important.
One of the really neat things about Sandhill is that we generate our CEA return with a 97.2% “active share”. This means that 97.2% of the CEA composite holdings are differentiated from the S&P 500 Index. On the contrary, if you owned a S&P 500 Index exchange traded fund, your active share would be less than 1%.
In this day and age, trillions of investment dollars have flowed into index funds and ETFs that simply replicate the market. This means that a lot of investors – both individual and institutional – own the same stocks. When a bear market comes, what will happen when everyone tries to sell the same stocks? No one really knows the answer to this – but I would much rather be an investor with high active share in command of the assets that I own rather than being subject to everyone in a room trying to get out of the room at the same time. The door is only so big.
The basics (three things)
As Sandhill has evolved and gotten larger, there are three things that remain at the core of our mission. First, this business is and remains all about the success of our customers. Second, we must work and aspire to a standard of excellence that is second to none – that is our best effort given the skills that we have. Finally, we must deliver real value – to create returns with client capital that make a meaningful difference to their lives over time.
I have taken steps to build a culture and institutional memory in Sandhill that lays those three tenets at our foundation.
Instrumental in this is the growth in the number of partners at Sandhill. There are now ten partners and there will be more. Being a business that is 100% employee owned, it is clear and obvious that our interests are aligned with our customers. With the number of partners now meaningful, these attitudes are prevalent through the whole of Sandhill.
The election year
We have recently put to bed a spectacular decade in the domestic stock market. I remember how dark it was in 2008 and 2009. A real lesson there.
The U.S. capital markets remain far and away the best place to invest in the world – bar none. We are all lucky to live here. I am just finishing a book on Lincoln (Doris Kearns Goodwin’s “A Team of Rivals”). It shows how tenuous our Union has been at times and how fragile a nation can be.
Taking no political side, we clearly live in a very divisive time. As I mentioned in my last newsletter, I normally ascribe 0% long term influence to the political climate and actions in Washington on the stock market’s behavior. For 2020, I believe that the election outcome could have a major influence on the stock market’s behavior. With regard to the investment community, it would prefer that the three seats of our government (President, House, and Senate) are not controlled by one party.
Assets under management
Assets under management at year end 2019 were $1.62 billion. Assets under management increased $400 million in 2019. Our increased client asset base was a healthy mix of new client business and performance.
Sandhill will be entering new markets in 2020. This new business will be to market and sell our products to institutional clients. This is a new and different business that functions differently than our private client business.
The good news is that we will be selling the same products to potential institutional clients that we sell to our private clients. Therefore, and this is important, everyone’s interests will remain aligned. Our CEA product is a best in class product nationally and deserves to be presented to a wider audience.
To this end, I am pleased to announce that Traci Dority-Shanklin joined Sandhill in December. She will be joining our institutional sales group as a Director in the Taft-Hartley pension market. Traci has a distinguished resume – most recently raising over $1.2 billion in assets at a well established global asset manager. Traci will be working from Dallas, Texas.
We have also hired Bryan Burdick as a Senior Portfolio Strategist to work on developing the profile, data sets, product descriptions, and marketing materials to present our products to the institutional markets. This will require some intensive in depth work as Bryan prepares the information that both investment consultants and larger foundations/endowments require in the due diligence process.
It is clear that as Sandhill grows, we will need to offer more products to our clients. Two things come out of this. First, we are only interested in offering superior products that add real value over time. I am only interested in having the best products, not the most.
That said, as we grow, we find more needs from our growing clientele. We must thoughtfully react to that and innovate to satisfy customer needs where we can.
My best to everyone for a healthy and happy New Year.
Edwin M. 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 strategies have 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 by the following. 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 these Composites are not immediately reinvested. The Concentrated Equity Alpha Composite includes all discretionary non-wrap fee paying accounts 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. Accounts with securities that are not part of the all-cap core strategy are not included in the composite. The S&P 500 TR Index is a float-adjusted market cap-weighted index of 500 of the largest US common stocks. The S&P 500 TR Index performance includes the reinvestment of dividends, interest and capital gains; but not the deduction of management fees. The Corporate Bond Composite consists of all discretionary non-wrap fee paying accounts invested solely in individual Corporate Bonds and cash equivalents. The Corporate Bonds will generally be 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 publicly issued in the US domestic market. Referenced benchmarks are not available for direct investment. Prior to May 1st, 2018 these composites held both wrap and non-wrap clients. This is reflected in the historical performance. For a full performance presentation and/or the Firm’s list of composite descriptions, please call 716-852-0279.