It truly has been a very exciting year 1 for the F.P.I.portfolio. We have outperformed the market quite substantially. Returning 82% while our comparative market index had total return of 20%. Since we are primarily invest in small and mid cap companies we believe our comparative index should be the average in performance of the S&P 500 and the Russell 2000, which is roughly 20%. We will continue to invest in these sorts of “non-spotlight” undervalued companies in the marketplace since our funds investment philosophy is to find deep value companies that are trading at a market discount.
During the past year our returns were abnormally large and we do not consider this to be the norm going forward. For future reference we believe in an average yearly return range of 17 to 30%. In fact F.P.I. also looks forward to market decline years in order to show our partners how our portfolio is hedged and balanced in order to make gains even in a time of index decline.
Over year 1 a majority of the earnings took place in Q4 of 2013. In that time-frame, 2 of our holdings were spotted as MnA targets and both were purchased at considerable market premiums. We are never dismayed about the notion of collecting a premium on investments however both of these positions were taken with the outlook of a 2-3 year holding period in order to capitalize on even greater future growth. Sizable returns were also seen in a couple of our positions thanks to “market-media-firms” such as Zack’s Research, Seeking Alpha, Barron’s, and other notables who did spotlights on our holdings which pumped public attention into the companies. This is a bittersweet affect for us as we do like the notion of the big firms backing up our philosophy. However it does create some disturbance in stock prices. Positive disturbance in that it pumps the price of the companies up and negative disturbance in that as our fund grows having too much public acceptance of our keynote holdings will make it more expensive to invest future partners equity into these holdings.
In year one the portfolio had on average between 8 to 10 holdings. Some of the major positions represented up to 15% of the total portfolio and smaller positions ranged between 3 to 6% of total portfolio weight. On average we maintained a cash balance of about 12 to 15%. At one point in time (Q1 of 2014) we had a cash position of 45%. This was a two-fold effect of our 2 large MnA position buyouts coupled with a feeling of uncertainty in the marketplace, which we acted on by beginning to take profits on our larger positions.
This particular notion leads me to discussing the F.P.I. trading strategy. Partners should note that our portfolio turnover ratio is in the area of 60% for year one. This should not be considered the norm going forward. This higher than normal turnover was due to the fast pace of the markets this year coupled with our feelings of a weak Q1 in 2014. Because of that we wanted to take profits when the opportunity was presented and utilize that return to make positions poised to see returns in year 2 and 3.
Positions are normally taken in a staged process that is indicative of “pyramid trading” principals. Meaning that we take a first position as entry into the investment and as time proceeds we add on to that position if the company is heading in the direction that we foresee. However if the company does not we dispense of that position and move forward. The same goes in the opposite manner when we are beginning to take profits from our high return position. More often than not a company can stay overvalued for awhile and become even greatly overvalued. For this reason we stage our selling in blocks so that we can realize our gains but also continue to be invested in the company in case of an overzealous market. In year 1 the average number of buying blocks into a company was on average 3. Our year 1 average selling blocks were around 2.5, meaning that we are a little bit quicker in exiting our positions but not drastically. Going forward as partnership funds continue to grow our buying and selling pyramid will also increase we look to make it an average of 5 “buying pyramid steps” and 4 “selling pyramid steps”.
F.P.I. can definitely say that this first year has been quite successful and we will continue to keep the same investment philosophy for the fund and its partners. We see no concerning future alarms that would make it necessary to change this philosophy or take profits and sit on the sideline. However that being said F.P.I. does want to note to its partners that we do not see the same type of market that was seen in the beginning of year 1. Great value opportunities are fewer and far between compared to last year. However our portfolio is well balanced and arranged to foresee the fruits of our labor going forward late in year 2 as well as the beginning of year 3.
We will continue to publish market musings on the website, some which are in our portfolio and others that would never be due to their irrational financials. Teaching our followers what to not invest in is arguable even more important than explaining what makes a great investment!
F.P.I. will always try to cover all points that are of interest to its followers and invites everybody to raise questions to us on any material that is of interest. We look forward to sharing another great year with you in 2014.