Sandhill delivered superb results for the first half of 2019.
For the first six months of 2019 (1/1/19-6/30/19), the Concentrated Equity Alpha (CEA) composite was up 26.8% net of fees vs. 18.5% for the S&P 500 Total Return Index. These results are a substantial win for our clients. We are now in the fourth consecutive year of outperforming the S&P 500 Total Return Index and are really pleased to be able to add so much real value to the management of our clients’ assets.
For the first six months of 2019 (1/1/19-6/30/19), the Corporate Bond composite was up 6.2% net of fees vs. 6.3% for the Bank of America Merrill Lynch 3-5 Corporate Bond Index – essentially in line. Bonds rallied hard on the fears of a slowing economy and rate cuts becoming a real possibility in the second half of this year.
When we step back and look at what Sandhill has done with our equity portfolios since the beginning of 2016, the results are impressive:
|CEA Composite (net of fees)||S&P 500 Total Return Index|
|Year 2016||+ 17.5 %||+ 12.0 %|
|Year 2017||+ 33.0 %||+ 21.8 %|
|Year 2018||– 4.3 %||– 4.4 %|
|2019 (6 mos)||+ 26.8 %||+ 18.5 %|
|+ 89.8 %||+ 54.6 %|
|Average Annual Return||+ 20.1 %||+ 13.3 %|
To put this in perspective, over the last three and a half years, for every million dollars our clients have invested in our CEA product they have $352,000 more per million than if the million dollars had simply been invested in a S&P Total Return Index fund.
Sandhill was featured in the print edition of Barron’s on April 26, 2019. This was a dream come true and an honor. Sandhill now has customers in forty-one states as we begin the process of establishing a true national presence. Third party validation from respected publications such as Barron’s is a great help.
Nowhere to go
There is really nowhere to go right now – nothing to do. With stocks at a high (but not ridiculous) valuation level and the plunge in interest rates, there are really very few good deals to be had in the stock or bond market.
One of the most important things that I have learned as a money manager over the years is – when there is nothing to do, no opportunity being presented, don’t do anything. That does not mean sell everything and go home – rather it means stay quiet and get yourself set up for when opportunity does present. This is precisely what we have done.
Our first step was to remove some valuation risk (really expensive stocks) from our equity portfolios. We did that by outright sales and trimming positions.
Our second step was to clean any potential credit risk (not that we had much) from our bond portfolios.
We are left in a terrific position into what I expect to be a bumpy second half of the year. Solid, proven, and growing companies in our stock portfolios; bond portfolios with a short three-year duration and clean as a whistle credit wise; and a good amount of cash to put to work when opportunity presents.
Our bond portfolios
The bond market is a bad deal. Rates are low. Real (after inflation) returns are even lower. Spreads are tight. No value at all.
The good news is that the bond portfolios that we have built over the past few years have much higher return than currently available. Even better, most of the bonds that we have bought for the portfolios are non-callable. We will hold them to maturity.
As of 6/30/19, our Corporate Bond composite had a duration (effective maturity) of 3.1 years and a yield to maturity 3.63%. The three-year Treasury yields 1.81% (as of 7/8/19) – so our bond portfolios are yielding 1.82% more than the three-year treasury bond. Our bond portfolios remain very well diversified with a strong credit position.
I believe that interest rates will remain steady or even head lower over the second half of 2019. There is not much yield to be captured in the fixed income markets. Again, the key here is to exercise patience in putting fixed income money to work. The opportunity will come when there is a stock market correction and the spread over Treasuries widens for corporate bonds during the correction.
Assets under management
Assets under management were $1.5 billion as of 6/30/19. Assets increased $280 million in the first half of the year on a strong mix of new asset flows and performance.
The fascinating part of our work is that we spend our days trying to figure out where the world is going. We look at technologies, medicines, population shifts, purchasing behaviors, and disruptive business models to try and determine how the world will do business in the future. This is a dynamic – not static – landscape that we examine – and that is why there will always be room for good and talented money managers who have the ability to be ahead of the curve. By figuring out where the world is going before most, they can produce returns substantially better than the stock market and make a meaningful difference in people’s lives and the way they live.
Sandhill had no new hires or departures in the last five months.
Our three operating teams – investment research, sales, and operations/customer service are all executing at a very high level and flourishing under the leadership of each unit. Rather remarkable, two of these leaders are in their 30s which augurs well for the future of this firm and its clients.
I hope everyone had a terrific Fourth in celebrating our country’s founding and the freedoms that we enjoy.
With warm regards,
Edwin M. “Tim” Johnston III
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.