Sandhill completed one of the finest operating years in the history of our company in 2023. Performance was strong across the board, but many operational improvements were made that will bear fruit in the years to come. Sandhill completed the Schwab custodial transition with 100% reconciliation of client assets, hired Jedidiah Lemen to our investment team, retooled our client service delivery to clients and hired Mariah Hollingsworth to our client service team, launched Jeff Lowrie as our national sales manager as Sandhill seeks a broader audience, hired John Canty as an advisor to bolster our advisor team, launched our municipal bond product at an opportune time to take advantage of higher interest rates, tightened credit standards in our corporate bond portfolios, upgraded our website and marketing materials, named Rick Ryskalczyk co-managing partner, and watched Shant Goubrial complete his first full year as co-managing partner and start to truly understand the complexity, heavy work load, and leadership skills involved with running Sandhill. Numerous other team members moved into more senior roles and executed across the responsibilities that they were given. Sandhill operates with four distinct teams—research/investment, sales and marketing, client service, and operations. I am proud of the effort put forth and the results that the teams produced for our clients. Finally, the talent bench at Sandhill is deep with ten partners—all of whom have worked at Sandhill for at least five years.

Sandhill had a terrific year on the investment side.

For calendar year 2023, the Concentrated Equity Alpha (CEA) composite returned +29.9% net of fees vs. a return of 26.0% for the Russell 3000 Total Return Index.

For calendar year 2023, the Corporate Bond composite returned +7.1% net of fees vs. a return of +7.0% for the Bank of America/Merrill Lynch 3-5 Year Corporate Bond Index.

For calendar year 2023, the Large Cap Yield (LCY) composite returned +10.7% net of fees vs. the 13.7% for the Dow Jones Industrial Average.

For calendar year 2023, the Preferred Equity composite returned +7.5% net of fees vs. a return of +7.0% for the Bank of America/Merrill Lynch 3-5 Year Corporate Bond Index. This is a tax-advantaged product as all the income from the product is taxed at the federal long term capital gains rate.

For calendar year 2023, the Private REIT we distribute returned +5.6% net of fees. It is expected that approximately 75% of the return will be tax-deferred this year.

In managing the CEA portfolios, we have stayed ahead of the game. While bringing home a +29.9% net of fees return, we ended the year with 12.8% in cash in the CEA composite. The bottom line here is that we are set up in a defensive position for the start of the new year. We have “dry powder” for investment opportunities, and I expect those opportunities will materialize at some point in 2024. We will be patient.

I have limited return expectations for the stock and bond markets for the first half of 2024. We are managing your money in this context. We have taken defensive measures with a large cash position in our equity portfolios and credit upgrades in our bond portfolios.

When we get set up this way, it is very important to be patient, leave cash in place, and wait for good investment opportunities to present.

The American economy remains very healthy. That said, the economy has slowed considerably as dramatically higher interest rates have worked their way through the American and global economies. This was needed and healthy. Inflation has moderated considerably which will slow revenue growth and flat-line operating margin for corporate America. That will slow earnings growth and thus put a lid on U.S. equity prices. Add to this that the market is at 19 times (which is expensive) estimated 2024 earnings and the lid gets a little tighter.

Remember, this is only a short term outlook. Long term investment in quality growth assets remains one of the best ways to build significant wealth.

On the bond side, I mentioned in last quarter’s newsletter that I was bullish on bonds for 2024 and 2025. Some of that return got pulled into 2023 with the big bond rally in the fourth quarter of 2023. There were a lot of “fat pitches” in the bond market in the second half of 2023 and we took advantage of them. I am neutral on the bond market but reiterate there are still good yield to maturities to be had—a far different environment than a couple of years ago. The duration on our Corporate Bond product is only 3.1 years with a current yield of 4.2% and a yield to maturity of 5.3%. This is a great product for tax-deferred accounts.

Sandhill’s assets under management and advisement were $2.14 billion at the end of 2023. Assets under management and advisement increased $302 million in 2023.

I expect 2024 to be a year with a lot of twists and turns. The functioning of our public capital markets—far and away the best in the world—is dependent on political stability and the rule of law. In addition, the massive budget deficits the United States are running need to be brought under control. As always, we will look to be opportunistic if there is dislocation and remain disciplined in our capital allocation.

My best to everyone for a happy and healthy 2024!

With warm regards,

Edwin M. “Tim” Johnston III
Founder, Partner

Annualized Performance Summary (Net of Fees) As of 12/31/2023

CEA (Master): 1 Year: 29.9% | 3 Year: 6.3% | 5 Year: 12.7% | 10 Year: 11.3%

Russell 3000 TR: 1 Year: 26.0% | 3 Year: 8.5% | 5 Year: 15.2% | 10 Year: 11.5%

Corporate Bond: 1 Year: 7.1% | 3 Year: 0.2% | 5 Year: 2.7% | 10 Year: 2.6%

B of A ML 3-5 Year: 1 Year: 7.0% | 3 Year: -0.8% | 5 Year: 2.7% | 10 Year: 2.6%

Large Cap Yield: 1 Year: 12.4% | 3 Year: 8.2% | 5 Year: 6.0% | 10 Year: 7.4%

DJIA: 1 Year: 13.7% | 3 Year: 7.2% | 5 Year: 10.1% | 10 Year: 8.6%

Preferred Equity (Cumulative): 1 Year: 7.5% | Inception: 7.8%*

B of A ML 3-5 Year: 1 Year: 7.0% | Inception: 6.6%*

*Please note: Inception date is 11/30/2022

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 adviser 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 U.S. dollar is the currency used to express performance. 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. The Russell 3000 TR Index is a market cap-weighted index of 3000 of the largest US common stocks which represents 96% of the US equity market. The Large Cap Yield Composite consists of all discretionary non-wrap fee accounts invested in U.S. common stocks, American Depositary Receipts (A.D.R.’s), domestic ETF’s, sector ETF’s, and cash in solely large capitalization companies. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. 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 corporate debt publicly issued in the US domestic market. The Preferred Income product’s primary goal is to provide current income with secondary objectives of total return and tax efficiency. The Preferred Income product will primarily buy Preferred Equity but maintains the flexibility to hold other hybrid instruments such as Convertible or Baby Bonds. Holdings may be either investment grade or high yield. The Primary benchmark is the Invesco Variable Rate Preferred ETF (VRP).  VRP seeks to track the investment results of the ICE Variable Rate Preferred & Hybrid Securities Index. The fund will invest at least 90% of its total assets in the components of the index, as well as ADRs that represent securities in the index. The index provider compiles and calculates the index, a market capitalization weighted index designed to track the performance of floating and variable rate investment grade and below investment grade U.S. dollar denominated preferred stock, as well as certain types of hybrid securities. It is non-diversified. VRP performance is reported net of the 50bps expense ratio based on closing market prices. VRP is the only above referenced benchmark available for direct investment. For a full performance presentation and/or the Firm’s list of composite descriptions, please call 716-852-0279.

Private REIT Disclosure: Accredited investors only: Non-Traded Private REIT is only offered and sold to individual investors and certain entities which are “accredited investors” under the Securities Act and the rules of the SEC, and who provide us with information we require to verify their status as accredited investors. Individuals are accredited investors only if they meet certain minimum net worth or sustained annual income thresholds. Entities are accredited investors only if they hold sufficient assets or are completely owned by accredited investors. Limited Liquidity: Investors may need to hold their shares for an indefinite period. REIT’s dividend is comprised of ordinary income (taxable) and return of capital (tax deferred). For income tax reporting via form 1099, real estate investments benefit from certain non-cash tax deductible expenses (i.e. depreciation). You should obtain financial and tax advice and conduct diligent investigation of information material to you before making any investment decision.