A Little Stitious

Why Invest in Efficient Growth:

• Top 1 percentile: Running Oak’s Efficient Growth separate account has performed in the top 1% of all Mid Cap Core funds in Morningstar's database over the last 10 years, net of fees.¹
• 5 Stars: Efficient Growth has a 5-Star Morningstar rating and received Morningstar's highest quantitative score of Gold.  
• Since inception, Efficient Growth has provided 27% more return than the S&P 500 Equal Weight Index, given the same level of downside risk, gross of fees. (Ulcer Performance Index)*

Differentiated Approach and Construction

• Mid Cap stocks are at their cheapest in 25 years relative to Large. Efficient Growth provides significant Mid Cap exposure.
• Efficient Growth is built upon 3 longstanding, common sense principles: maximize earnings growth, strictly avoid inflated valuations, protect to the downside.
• Running Oak utilizes a highly disciplined, rules-based process, resulting in a portfolio that is reliable, repeatable, and unemotional.

How to Invest

• Efficient Growth is currently available as an SMA and ETF. (ETF specifics and SMA historical performance can't be shared in the same email - sorry, it's annoying, I know. Please inquire for the ticker or more information.)
• The ETF Which Shall Not Be Named just hit its 1-year anniversary and has grown over 9000% since launch – from 2 to 183mm.

Performance update:

• Running Oak’s Efficient Growth portfolio was down -0.53% in June, gross of fees (-0.57%, net).*

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“I’m not superstitious… but I am a little stitious.” - Michael Scott, The Office

Now is looking like a very good time to be a little stitious and consider investing with discipline and thought. You know, like Running Oak does.

In the last two letters, I shared a few charts illustrating how historically stretched market internals were (some might say imprudent, rabid, crazed, frenzied, mindless, idiotic…). A tiny number of stocks were going up A LOT, while the majority weren’t. A quick summary:

• Record Momentum - A measure of investors buying because other investors bought, who bought because other investors bought, who bought because other investors bought, and so on – hit the 99.8%, one of the highest marks in history and the highest reading since the Tech Bubble. In other words, it was a sheep stampede!
• Record Concentration - A tiny number of hot stocks set a new record for the largest percentage of the S&P 500. Investors were dumping a historically large percentage in historically few stocks.
• Record Dispersion - Due to a tiny number of stocks going up and a large number not, the S&P 500 Equal Weight Index and S&P 500 Total Return Index diverged to a historic degree.

Per BTIG, the market hit a fever pitch with historically low breadth, historically high optimism, and historically low volatility (regard for risk). When the market is at all-time complacency, is it a great time to be complacent with client assets? If you're dubious, Efficient Growth is for you. 

Stitious-er and Stitious-er

More frequently than I can recall, advisors have recently shared that their clients are expressing more and more FOMO (fear of missing out). As a generally accepted rule of thumb, when clients start calling in droves, clamoring for something, it’s a good time to do the opposite. I’m feeling a little stitious.

Here’s a quick amalgamation of the conversations that have been shared:

Client:     Why don’t I have more Tesla? It’s up almost 100% in under 2 months.

Advisor:  You told me to sell it when it dropped 70% a few years ago.

Client:     Why don’t I have more Nvidia?

Advisor:  I mean, it’s your largest position.

Client:     Why am I only up 8% this year, while the S&P is up almost 18%?

Advisor:  Do you remember that financial planning conversation in which we discussed your hopes and dreams, risk, diversification, what you’d need to retire, and the importance of not getting smoked?

Client:     I see your lips moving but have no idea what you're talking about. I need more Nvidia.

To Stitious or Not to Stitious?

The last four trading days have been NUTS. Per Bespoke Investment Group, the Russell 2000 outperformed the Nasdaq by what appears to be the largest margin EVER, almost 6%, on Thursday, July 11^th. In just 4 days, the Russell 2000 (what investors have little to none of) has outperformed the S&P 500 (what investors have far too much of) by almost 10%. 

The question is: were the last 4 days a blip or a sign of things to come and the inevitable unraveling of the greatest performance/Momentum chase in history? 

Efficient Growth - Your Portfolio Rabbit’s Foot

First, why choose one or the other when you can have both?! Efficient Growth has performed roughly in line with the S&P over the last 10 years, despite minimal exposure to the tiny number of companies that have driven the S&P’s performance, AND it smoked the S&P over the last 4 days. If the last 4 days were a blip, Efficient Growth has performed well (top 1% well) in the recent environment, while providing diversification from the concentrated positions in clients’ portfolios: no Apple, Amazon, Meta, Tesla, Nvidia or Microsoft with a tad of Google. If the last 4 days are a harbinger of the great Momentum unwind, Efficient Growth performed even better. 

Efficient Growth’s philosophy is simple, easy to understand, and common sense:

• Above Average Earnings Growth – Because owning a company that is making more and more money is obviously a good thing.
• Attractive Valuations – Because paying a dumb price is, well, dumb.
• Lower Downside Risk – Because losing money stinks. Lower drawdowns mean smaller bounces are required to get back to new highs.

With just the slightest bit of critical thinking, one would theorize that Efficient Growth is likely to outperform due to higher earnings growth and investment in under to fairly valued companies and do so with less downside risk, due to the avoidance of overvalued, unprofitable, and insolvent companies. Efficient Growth would also never have almost 30% of the portfolio invested in just 6 highly correlated companies. (Because that would be irresponsible, putting clients at risk...)

Running Oak's goal is to maximize the growth of clients' portfolios, while subjecting them to far less risk of loss. In other words, we aim to help your clients realize their dreams and avoid nightmares. Efficient Growth is your portfolio rabbit's foot. However, unlike the origin of a true rabbit's foot, Efficient Growth did not begin as a pickled, severed hand of a common criminal; it's just a portfolio of great companies.

If you appreciate critical thinking, math, common sense, and occasional sarcasm, we would love to speak with you. Please feel free to set up a time here: Schedule a call.

Seth L. Cogswell
Founder and Managing Partner

P +1 919.656.3712
www.runningoak.com

For additional data and context regarding the claims made within this communication, please refer to the Disclosures and Additional Data document located here.

Investment Advisory Services are offered through Running Oak Capital, a registered investment adviser.

*Past performance is no guarantee of future results. Performance expectations are no guarantee of future results; they reflect educated guesses that may or may not come to fruition. All indices are unmanaged and may not be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments and strategies may be appropriate for you, consult with us at Running Oak Capital or another trusted investment adviser.

Stock prices and index returns provided by Standard & Poor’s.