A Portfolio Parachute

Quick hitter:

• Running Oak’s Efficient Growth separate account has outperformed every Mid Cap Core fund in Morningstar's database over the last 10 years but two, net of fees.¹
• Efficient Growth is now available as an ETF and SMA. (Sorry, ETF specifics and SMA performance can't be shared in the same email - annoying, I know. Please inquire for the ticker or more information.)
• The ETF Which Shall Not Be Named – like Voldemort minus the murder of wizards and unicorns - will has grown 8000% in only eleven months – from 2 to 162mm.
• Efficient Growth has a 5-Star Morningstar rating and received Morningstar's highest quantitative score of Gold. *
• Running Oak outperformed all peers but one or two (one of which isn't a peer in any way) despite a historically poor environment for a strategy focused on risk, valuations, and debt and utilizing a disciplined process. It's tough to beat a top-performing strategy that has been out of favor for a decade.
• The average investor has little exposure to Mid Cap stocks at a time when Mid Cap is the cheapest it has been relative to Large in over 20 years. Efficient Growth offers timely, opportunistic exposure via a strategy that has a long history of providing value for clients.

Performance update:

• Running Oak’s Efficient Growth portfolio was down -4.42% in April, gross of fees (-4.46%, net), versus a decline of -4.87% for the S&P 500 Equal Weight Index.*
• 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)*

"You don’t need a parachute to go skydiving. You only need a parachute to go skydiving twice." - Someone Wise

You don’t need discipline or risk management to invest on behalf of clients. You only need discipline and risk management to invest on behalf of clients in the next bull market.

Spoiler alert: Investing almost a third of your portfolio in 6 highly correlated, arguably significantly overvalued stocks is likely to end poorly. That’s a fine parachute when sitting on a plane during an ascent. Hopefully, you never have to pull the cord.

Momentum has run hotter over the last decade than any time in history. The stocks that went up went up more, and then they went up more, and then they went up more, and so on… for a decade. Notice that at no point earnings, sales, products, profit margin, cash flow, return on equity, or valuations were mentioned in the prior sentence. Fundamentals had an indirect influence on momentum over that period, but the influence of passive investing, easy money, and complacency played a far greater role. The increasing popularity of passive investing, in particular, meant that as a stock went up, passive investors bought a higher percentage – because it was up, which pushed it up more, so investors bought a higher percentage – because it was up, which pushed it up more… While the dynamic makes sense, investing in that manner certainly doesn’t.

 I shared this chart last month. The market declined soon after but has since rocketed back up to highs, so I'm sharing it again. 99.8% seems meaningful (5th grade math refresher: it only goes to 100%.)

It appears to me, based upon history and logic (also, it’s blatantly obvious), that now is a good time for a portfolio parachute. Parachutes are like insurance, seat belts, and tetanus shots; you may not need them, but you’ll be pretty bummed if you do and didn’t plan ahead. And if clients are paying fees for forethought and the protection of their wealth, and there ends up being no parachute - like 6 highly correlated, arguably significantly overvalued stocks comprising almost a third of their portfolio, unpleasant conversations are likely to ensue.

Two-For-One

Efficient Growth has outperformed the S&P 500, gross of fees, since inception.* The Efficient Growth rules-based investment process is highly disciplined and focused on valuations, debt, risk, and diversification - it's a portfolio parachute. In other words, since inception, our clients have outperformed the S&P 500 AND had a parachute to boot. All of the upside with meaningful downside protection - it's the best of both worlds. Efficient Growth has also outperformed every Mid Cap Core fund in Morningstar's database but two over the last 10 years, net of fees.*

Invest with common sense. Why make things complicated?

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 the nightmares. 

If nothing else, Efficient Growth is an excellent complement to the Magnificent 7 big tech stocks. If those stocks continue to defy history and numbers, great. If they implode but a portion of a client's portfolio is invested with risk in mind, everyone lives to see another day. 

Best,

Seth L. Cogswell
Founder and Managing Partner

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