Sandhill delivered a really good first half of 2023. We are pleased to deliver returns well in excess of the market. As importantly, our books look good and we remain well positioned with a stable of first-class growth companies in our portfolios for the next decade.

For the first six months of 2023 (1/1/23 – 6/30/23), Sandhill’s Concentrated Equity Alpha (CEA) composite had a return of +22.3% net of fees vs. the Russell 3000 Total Return Index of +16.2%.

For the first six months of 2023, Sandhill’s Corporate Bond composite had a return of +2.6% net of fees vs. the Bank of America Merrill Lynch 3-5 Year Corporate Bond Index return of +2.1%.

For the first six months of 2023, Sandhill’s Large Cap Yield (LCY) composite had a return of +5.0% net of fees vs. the Dow Jones Industrial Average’s return of +3.8%.

For the first six months of 2023, Sandhill’s Preferred product had a slight gain net of fees. I continue to really like the total return opportunity of this product going forward. To post a positive return in the first six months of 2023 is impressive given that interest rates have continued to increase and there was a “mini” banking crisis. Our strategy of being very selective on our preferred credits has worked well.

For the first six months of 2023, the Private REIT that we distribute and follow returned +2.7% net of fees and continues to provide tax-sheltered income to our clients.

The headline news for the quarter was the performance of our CEA product. A year ago, in the shadow of the bear market, we deployed the cash that we had built up over the first half of 2022 and deployed it aggressively. It was the first time in years that we had seen premier growth companies on sale. The mania for value stocks was short-lived and investors returned to growth stocks in the first half of 2023 in droves. The operative point is that through the bear market, Sandhill stuck with its discipline of being a quality growth manager. As I have said many times, growth far outperforms value over time. We were not swayed by short-term market dynamics.

I would also like to highlight the quality of work across Sandhill’s entire product offering. Corporate Bonds outperformed and so did our Large Cap Yield equity product. Our Preferred product is off to a good start and slightly ahead of break-even in a terrible environment for this product (but therein lies the opportunity). The Private REIT has held its share value and continues to pay its attractive dividend in an environment where REITs have performed badly. We continue to build our product offering so that we have the right solutions for the many and varied needs of our customers, regardless of the macro environment.

The million-dollar question is: where do we go from here? The answer is probably nowhere for the time being. The market has hit a valuation wall after a long run from the lows of the 2022 bear market. It would be healthy for the market to pause or correct slightly, as the last thing we want is an overheated market.

With regard to our bond, preferred, and Private REIT products, their return will very much depend on the cadence of the ongoing interest rate increases from the Federal Reserve. The common consensus right now—which I agree with—is that there will be two more interest rate increases over the next few months. The rate increases are still needed to cool the economy as unemployment remains too low (resulting in wage inflation) and price increases through all facets of our economy are ongoing. The danger of the ongoing rate increases is the Fed tips our economy into recession. This is a far better outcome than ongoing high inflation and the loss of your purchasing power.

The point here is that I like the outlook for our bond and preferred products. A lot. I believe we are nearing the top of the interest rate cycle which is always good news for the bond market. The outlook on the REIT requires a little more digging. We are meeting with their management team in August and will communicate our findings to our clients.

Assets under management and advisement were $2.01 billion as of 6/30/2023. Assets under management and advisement increased $180 million in the first six months of 2023.

Sandhill is pleased to announce that we have hired Jeff Lowrie to be our Director of National Sales. Jeff comes to us from Capital Group/American Funds and brings 15 years of experience in the distribution of asset management products to the Registered Investment Advisor sales channel.

Sandhill is also pleased to announce that we have hired Colin Helfer in the position of Data Coordinator. Colin joins our Operations team.

Sandhill has shown very good capital discipline over the last year. Our results reflect this. We have been very disciplined on the prices that we have paid for our portfolio companies. More importantly, the portfolio companies that we have purchased are indeed “Sandhill” companies—innovative, well-managed companies with balance sheet integrity that are leaders in their respective markets. The rigor in our capital discipline will remain front and center as we stay on message for our clients. Good asset management requires great patience, capital discipline, and the ability to identify ahead of time the assets that will flourish over the next decade.

Hope everyone is enjoying a terrific summer.

With warm regards,

Edwin M. “Tim” Johnston III
Founder, Partner

Annualized Performance Summary (Net of Fees) As of 6/30/2023

CEA (Master): 1 Year: 32.0% | 3 Year: 9.8% | 5 Year: 9.2% | 10 Year: 12.9%

Russell 3000 TR: 1 Year: 19.0% | 3 Year: 13.9% | 5 Year: 11.4% | 10 Year: 12.3%

Corp. Bond: 1 Year: 4.5% | 3 Year: -0.3% | 5 Year: 1.8% | 10 Year: 2.6%

B of A ML 3-5 Year: 1 Year: 1.6% | 3 Year: -1.3% | 5 Year: 2.1% | 10 Year: 2.3%

Large Cap Yield: 1 Year: 10.9% | 3 Year: 12.9% | 5 Year: 8.6% | 10 Year: 8.3%

DJIA: 1 Year: 11.8% | 3 Year: 10.1% | 5 Year: 7.2% | 10 Year: 8.7%

Preferred Equity (Cumulative): 1.1%* [since inception]

Invesco Variable Rate Preferred ETF (Cumulative): 2.8%* [since inception]

*Please note: Inception date of Preferred Equity product 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.