July 2021 Newsletter
Sandhill delivered a terrific first half of 2021 across our product platform.
Sandhill’s Concentrated Equity Alpha (CEA) composite returned +12.7% net of fees.
Sandhill’s Large Cap Yield (LCY) composite returned +12.2% net of fees.
Sandhill’s Corporate Bond composite returned +0.6% net of fees. The current yield on the composite is 4.5% and the yield to maturity is 2.3%.
Sandhill’s Private Real Estate Investment Trust (REIT) returned +4.6% net of fees. Since we introduced the REIT last August, it has returned +12.7% net of fees. Most of this return was tax deferred.
The stock market is being fueled by a dramatically increased money supply and zero short term interest rates. Investors who venture into the wrong areas of the stock market at the wrong time will pay the price. There are “mini bubbles” in certain sectors of the market that seem to rotate from industry to industry quarter to quarter. I like our returns and the steady and thoughtful way we are producing them.
Housing is in a raw bubble. Residential real estate prices are unsustainable. I will note that our real estate product is industrial real estate.
The bond market trade is done. Bonds are a terrible value. You are losing money in real terms. Keep what you own – but some of our bond portfolio will start to run off the books in 2022. This is one of the reasons we introduced the REIT. We are currently looking at highly rated perpetual preferred stock to add to the bond portfolios. The paper we are looking at currently yields approximately 3.6%. Importantly, the preferred stock we are researching floats so it will have increased yield if interest rates rise.
The labor market is in bad shape. Whether it’s the COVID hangover, the ongoing jobless benefits, or simply “I don’t want this lousy job anymore”, businesses are having a very difficult time hiring workers – especially on the low end of the wage scale. We can have all the apps, smart homes, and streaming services we want, but the world is still principally analog and we need to make (manufacture) products.
Inflation is FAR higher than you think. Resort towns can’t hire workers because they can’t afford to live in the resort towns. Been to the supermarket lately? Food has gotten very expensive. Tried to get a contractor? They are naming their price due to outsized demand. Frankly, I am rather shocked the Federal Reserve has called inflation “transitory”.
We are in a fast paced, highly dynamic, rapidly changing world. Sandhill’s job is to keep a steady hand on the tiller, make investments that are relevant to today’s world, and achieve attractive return that beats the market over the long haul for our clients. Our core belief that we are long term holders in well managed, durable, innovative, and cash generating businesses is more important than ever.
Since we started in 2004, Sandhill’s CEA composite has returned 518.5% net of fees. Clients who have been with us from the beginning have (pre tax) more than six times what they started with.
In running our business (or any money management business), we deal with a lot of “friction”. Sandhill carries a lot of client cash – some $93 million. This is only 4.2% of our asset base. The reality is there is always cash flowing out of Sandhill to meet our clients’ needs and we have to have cash on hand. Second, we do not immediately reinvest dividends and interest payments as the total return indices do.
So, after seventeen years, on a straight up basis, how have the stocks in our flagship CEA product (excluding cash) done vs. the Russell 3000 and the S&P 500? The stocks in Sandhill’s CEA composite returned +708% net of fees since inception (3/1/04) to the end of the second quarter this year (6/30/21). Over the same period, the total return (including dividend reinvestment) of the Russel 3000 is +451% and the total return of the S&P 500 Index is 434%.
As stock pickers, we have vastly outperformed the market over a long period of time. This data is very illustrative in that it tells the investor to be fully invested all the time to get maximum exposure to our stock picking.
Running a separate account business (as opposed to a mutual fund or ETF) has great advantages and flexibility for the client, but there are inherent performance inefficiencies that we would like to minimize.
New Partners and Promotions
Aaron VandeGuchte and Ryan Myers have been named partners at Sandhill. This brings the total number of partners to twelve. Sandhill is 100% owned by its partners (and will continue to be). Our interests are 100% aligned with our clients. Hiring, developing, training, and allowing new talent to prosper is the path to keeping Sandhill vital, current, and dynamic.
Aaron works on the investment team. He has walked up the learning curve with regard to corporate research and idea generation in an incredibly quick time period. On the investment team, four of the five committee members are now partners. The investment team is at the core of Sandhill – and we want the team to be direct stakeholders in our clients’ results.
Ryan Myers is our Chief Compliance Officer. Overseeing the regulatory framework of an investment manager that has over 3,000 accounts, nearly 1,000 relationships, and does business in 43 states is a large job. Ryan does it diligently, effectively, and with great attention to detail.
Tina Hassler has been promoted from Director of Client Service to an Investment Advisor. Tina has worked with Larry Stolzenburg for years (and will continue to do so) and has attained a wealth of knowledge in attracting and retaining clients, patiently listening and understanding clients long term goals, running asset allocation strategies for clients, and, as always, delivering great care and service to the client. This is a well deserved promotion and speaks to the ability for employees to build meaningful careers at Sandhill.
Trisha Allsop has been promoted to Director of Client Service. This promotion is also well deserved. We are really proud of Trisha who started working for Sandhill part time while attending college. She has come to master our back office operations, thoroughly understand our synergistic and important relationships with our custodians, and deliver highly efficient service and solutions to our many client requests.
Finally, we would like to welcome Megan Jurek to the Sandhill team. Megan joins us from M&T and will be working with the client service team.
Assets Under Management
Sandhill’s assets under management as of 6/30/21 were $2.19 billion. Assets under management increased $196 million in the first six months of 2021. Asset growth was a combination of new business and investment performance.
I hope you get a sense from reading this letter of the pace of change at Sandhill and how engaged an environment we all work in. We have one goal – to deliver for our clients. Over 40% of our employees are now partners. There have been many recent promotions. As Sandhill continues to grow, we will continue to hire top flight talent and introduce new products that are helpful to our clients reaching their financial goals.
Managing Money In This Environment
There are plenty of clouds on the horizon, but as we have witnessed, the market often shakes them off. The great thing about the appreciation in our clients’ equity portfolios over the last three years is that our clients are accreting wealth in real terms, that is, faster than inflation. Very important and necessary to one’s financial well being.
The “clouds” are the domestic money supply is up 30% over the last year, inflation, huge federal budget deficits, the potential return of COVID this winter, labor shortages, a still simmering social and political divide in the United States, the wealth gap, and ineffective leaders on both sides of the aisle.
The positives are the massive profitability of corporate America, the American capital markets are still the best game in town (even though our international image is tarnished), the ability of our institutions to uphold the rule of law, the dynamic innovation in the American technology and clean energy sectors, and the vast and deep talent pool in our country.
We have chosen investments that we think will enjoy structural competitive advantage over long periods of time, will prosper in good times, and have the durability to compete and sustain in difficult times.
The thing that has really come to surprise me is the pace of change. We have a rapidly evolving world that at times almost seems to be spinning out of control. Some of that perception is fueled by the media, but not all. When we think of investment ideas and horizons, it is important to step back, go slowly, and make the right choices.
My best to everyone for a great remainder of the summer.
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 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 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 Russell 3000 TR Index is a market cap-weighted index of 3000 of the largest US common stocks which represents 98% of the US equity market. The S&P 500 TR Index is a float-adjusted market cap-weighted index of 500 of the largest US common stocks. The Russell 3000 & S&P 500 Index performance includes the reinvestment of dividends, interest and capital gains. 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 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. Referenced benchmarks are not 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 of time. Royal Oak’s share redemption program is limited in amount, may be terminated or suspended from time to time, and is only available after shares have been held for a required period of time, except upon death. In addition, Royal Oak’s ability to redeem its shares may be limited. Determined Share Value set by Royal Oak’s Independent Directors Committee: The Determined Share Value (DSV) is the price at which Royal Oak sells its common stock and is set by the members of the Independent Directors Committee of Royal Oak’s Board of Directors In setting the determined share value, the Independent Directors Committee considers, among other factors, annual valuations by an independent valuation firm, real estate appraisals and the purchase prices of recently acquired properties and tenant compliance with leases. There may be variations from time to time in how Royal Oak’s independent directors apply or weigh the criteria in setting the “determined share value” or stock price. Royal Oak is not required by law to follow any particular methodology in setting the stock price. Timing or amount of distributions not guaranteed: Distributions with respect to Royal Oak’s common stock are only made if and when declared by the Board of Directors, and are subject to state law limitations on sources of funds and Royal Oak’s ability to pay distributions and certain contractual commitments, including financial covenants. Royal Oak’s past practice of distributions does not guaranty the timing or amount of future distributions. Royal Oak’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). Not investment, financial, legal, or tax advice: Information presented in connection with this offering of common stock is not investment, financial, legal, or tax advice. You should obtain financial and tax advice and conduct diligent investigation of information material to you before making any investment decision. Information about performance or any of the properties is historical, and past performance does not guarantee future performance.
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