Shark Bait

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 30% 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 available as an ETF and SMA. (Sorry, ETF specifics and SMA historical performance can't be shared in the same letter - 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 8000% since launch – from 2 to 165mm.

Performance update:

• Running Oak’s Efficient Growth portfolio was up 3.58% in May, gross of fees (3.54%, net), versus 2.82% for the S&P 500 Equal Weight Index.*

“If you swim with a friend, your chances of getting eaten by a shark drop by 50%.” – A very wise (and disconcertingly ruthless) individual

Making History 

Dispersion between the S&P 500 and S&P 500 Equal-Weight is now the highest EVER, per BTIG (data begins in 1990). In other words, a tiny number of stocks are going up… a lot, while a large number are not. Only two other occasions were anywhere near today’s extreme, July ’98 and July ’21. Who knows what ensues, but anytime history is made, it’s worth noting.

Due to this dynamic, the 10 largest holdings in the S&P 500 now comprise a larger percentage of the index than any time in history. People have mentioned growing concentration for years, but it’s now, officially, historic. The six largest companies, all big Tech, make up around 30% of the S&P. In other words, 6 highly correlated companies currently account for roughly a third of many investors’ portfolios. If one goes down, they likely all go down. If they all go down, 30% of client portfolios get hit in concert, and – according to our numbers – several of those companies are over 100% overvalued. I’m sure it’s nothing.

Trigger warning: Diversification

If you ever want to see an advisor flinch, just mention that word. Diversification is my number one Halloween costume idea, just ahead of a guy riding a giant inflatable chicken. What was formerly an allocator mantra is now a source of trauma and dependable revenue stream for therapists. Advisors have shared that over the last year many clients have complained about lagging the S&P 500. 30% invested in 6 highly correlated companies ain’t diversification, so most advisors prudently diversified client portfolios with complementary strategies. Unfortunately, when a tiny number of companies massively outperform the majority, diversification is a drag on performance. The last decade has been lose/lose, relatively, for those who allocated responsibly.

Many have – wittingly or unwittingly – given up on diversification and invest a majority of their clients’ assets in the S&P 500, effectively going all-in on Large Cap Growth and Momentum. That has worked out over the last several years and maybe it continues to do so. But… what if it doesn’t? Asking ourselves “what if?” is our fiduciary responsibility. Notice the only period comparable to today in the above chart is the Tech Bubble. Today is different in many ways but clearly similar, as well. Maybe this time is different, but what if it isn't?

The sharks are circling; grab a friend, ideally one that looks especially appetizing.

The point of that data ISN’T that we would have outperformed an index, if we conveniently removed its best performing holding; that would be a dumb argument. The point is Nvidia is an outlier, having risen more than 1000% in a little over a year and a half. Basing decisions on an outlier is poor decision making. The rest of the Magnificent 7 - as illustrated earlier - are outliers, too. Most clients have A TON of Nvidia and the Magnificent 7. They don’t need more and arguably need far less.

The point of the data above is that utilizing Efficient Growth as a diversifier can be Win/Win; it doesn’t have to hurt if current conditions persist. You don't have to stifle a sob when you hear the word "diversification". While Efficient Growth hasn’t outperformed the S&P 500, ytd, it has performed remarkably well in a historically crazy environment through which very little has performed well. You don't have to resign yourself to "S&P 500 sans Magnificent 7" underperformance in order to achieve adequate diversification. Instead, Efficient Growth provided "S&P 500 sans Magnificent 7" diversification AND performance. It's akin to free insurance. If the market keeps going up, great. Nvidia goes up; the Magnificent 7 goes up, and Efficient Growth has performed particularly well.

But… what if? Efficient Growth only has 1.8% exposure to the Magnificent 7, Alphabet. Efficient Growth has over 55% exposure to Mid Cap companies, which are at their cheapest in 25 years, relative to Large Cap. The Efficient Growth investment process is highly disciplined, ensuring that companies are sold when they become overvalued and companies living on the razor’s edge of unsustainable debt are avoided. Efficient Growth is equally-weighted, reducing risk to individual companies and putting mean reversion in clients' favor. It’s pretty much everything the S&P 500 isn’t (thoughtful, risk-focused, truly diversified), which is precisely what makes it such an excellent complement to Nvidia and the Magnificent 7.

We're happy to be your shark bait. 

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.

Best,

Seth L. Cogswell
Founder and Managing Partner

4519 W 56^th St | Edina, MN 55424
P +1 919.656.3712
www.runningoak.com

For Institutional Use only, not for Public Distribution. For additional data and context regarding the claims made within this email, 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.