Dear Clients & Friends,
Now in our third year of operation, I remain pleased with both the results we have produced for our clients and the team we have built thus far. With 22 colleagues1 (10 of whom hold the CFA designation) guided by the extensive industry experience of both our executive and investment leadership, I feel strongly that we are well positioned for continued success in the future.
Financial markets are expecting the Federal Reserve to continue their efforts in tightening the money supply, with the yield curve discounting another 75-basis point (0.75%) increase in interest rates this week, and further rate increases at the December meeting2. Additional tightening in 2023 is likely, although much data between now and then will guide the extent of such.
Worldwide economic activity is slowing as central banks around the world fight inflation with interest rate increases. China continues rolling COVID lockdowns, limiting their economic growth, and the war in Ukraine creates various issues, especially for energy prices. As a result, most countries face economic recession over the next 12 months, pressuring corporate profits accordingly.
With these events in mind, I am reminded by our All Cap Concentrated (ACC) portfolio managers, Jason Downey, CFA and Bobby Murphy, CFA, of a salient quote from Warren Buffett: “Predicting rain doesn’t count. Building arks does.” Amidst current market volatility, we believe we have upgraded the quality of our portfolios by adding to existing positions in high conviction ideas, as well as adding new positions in companies we have long admired. We strive to invest in companies that are resilient and can take advantage of adverse environments through attributes such as balance sheet strength, competitive positioning, and opportunistic capital allocation. We are pleased with our present positioning and with the combination of business quality and favorable valuation (relative to our estimate of intrinsic value) across our portfolio companies, which we feel is integral to our goal of outperforming the broader U.S. market over the next five years and beyond.
The table below shows results for our separately managed ACC strategy composite versus the relevant benchmarks. Our goal is for client returns, net of fees, to be at least three percentage points (annualized) above the benchmarks over rolling periods of five years and longer. We feel this time period permits us to focus on the long-term prospects of each business we evaluate and allows us to take advantage of the stock price dislocations and volatility that frequently disrupt short term performance.
Total Returns (%), All Cap Concentrated Composite (as of 9/30/2022)
Thank you, as always, for your support and interest in VELA.
Sincerely,
Ric Dillon
Ric Dillon, CFA
CEO, CIO, & Co-Portfolio Manager
Ric Dillon is one of our firm’s founders and serves as Chief Executive Officer & Chief Investment Officer. Early in his career, Ric served as a Portfolio Manager for Loomis, Sayles & Company. During his tenure, the Detroit office became the top-ranking office in the company with the large cap and small cap value funds. The small cap fund that Ric started ranked number one in its Lipper category after its first twelve months of existence. While at Loomis, Ric created a new valuation model that Loomis adopted replacing the previous model of twenty-five years.
In the 1990s, Ric founded Dillon Capital Management, where he served as President and Chief Investment Officer until the company was acquired by Loomis, Sayles & Company, where he returned to work as a Portfolio Manager. In 2000 Ric founded Diamond Hill Investments, a public company (DHIL) based in Columbus, Ohio. During Ric’s tenure as CEO of the Company, Diamond Hill ranked in the top 1% of all public companies in the US in terms of shareholder total return, with an annualized total return of 27%.
Ric holds the Chartered Financial Analyst (CFA) designation. He received an MBA from the University of Dayton, as well as a M.A. in Finance and a B.S. in Business Administration from The Ohio State University.
Ric, his wife Marina and their daughter Luisa split time between homes in New Albany, Ohio and Orlando, Florida.
VELA Investment Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
Composite Description: The “All Cap Concentrated Composite” includes all pooled funds and all fee paying and non-fee paying, taxable and tax-exempt, segregated accounts that seek to provide long-term capital appreciation by investing in a concentrated portfolio of equity investments of companies of any size market capitalization that the portfolio manager(s) believe are undervalued. The Russell 3000 Index (total return) serves as the composite’s benchmark due to the composite’s broad market capitalization and domestic company focus. Securities in the strategy are identified using a valuation-oriented, fundamental analysis approach. Key material risks include equity market risk, small cap and mid cap company risk, concentration risk, and the general risk that the composite will underperform its benchmark. The composite inception date is July 1, 2020 and the composite creation date is January 8, 2021.
Performance Calculation: Returns presented are time-weighted returns (TWR). Valuations are computed and performance is reported in U.S. dollars. The composite results reflect the reinvestment of dividends, capital gains, and other earnings. Composite returns and benchmark returns are presented gross of withholding taxes on dividends, interest income and capital gains.
Fees: Gross returns are presented before management fees and custodial fees (if applicable) and reflect the deduction of actual transaction costs. Net of fees returns are calculated by deducting a model management fee of 0.0625%, 1/12th of the firm’s standard management fee for segregated accounts of 0.75%, from the monthly gross composite return. This timing methodology differs from the billing/fee policies for the composite’s constituent portfolio(s), additional details are available upon request. The standard management fee schedule for segregated accounts is as follows: 0.75% on all assets, billed quarterly in arrears. Composite and benchmark returns are presented gross of non-reclaimable withholding taxes.
The Russell 3000 TR Index is a market-capitalization-weighted equity index maintained by FTSE Russell that tracks the performance of the 3000 largest U.S. traded stocks across all market sectors, inclusive of dividends, capital gains, distributions, and interest. You cannot invest directly into an index.
The S&P 500 Index is a composite of 500 of the largest companies in the United States. The S&P 500 Index is unmanaged and does not represent the performance of any particular investment.
Performance includes reinvestment of dividends and other earnings.
1Includes 21 full-time employees and one outsourced CCO.
2Source: https://www.wsj.com/livecoverage/stock-market-news-today-2022-10-20/card/treasury-yields-surge-to-new-post-great-financial-crisis-highs-fed-expected-to-raise-rates-to-5–ky36jKwWZpdJfULDcn4a?mod=Searchresults_pos4&page=1