From today's market commentary by the
Palm Valley Capital Fund (PVCMX) co-manager Eric Cinnamond.
Complete blog post with graphs can be found here:
https://www.palmvalleycapital.com/post/the-b-team*****************************************************************************************************************************
[EXCERPT]
The B-Team
March 28, 2024
Believing in someone or something when circumstances promote doubt isn’t easy. The current investment environment has many valuation-based investors questioning their long-held beliefs and disciplines. The popularity of passive investing, trillions of quantitative easing, and an overly accommodative Federal Reserve have pushed prices significantly higher since the cycle began in 2009. Regardless of valuations, inflation, and the unsustainability of the drivers of the current cycle, equities appear determined to continue their rise. It’s tempting to set aside investment rules, change stripes, and participate in one of the most profitable and carefree cycles in the history of the stock market.
While there was tremendous value in the earlier stages of the cycle, and pockets of value throughout, we believe our opportunity set has rarely been more overvalued. Nevertheless, given the strength and persistence of the current cycle, many investors are giving up on valuation as their guiding light when allocating capital. Actively managed value-based strategies are being replaced with price-insensitive passive funds that are often concentrated in many of the best performing and most expensive stocks.
While it saddens us to see capital give up on time-tested valuation disciplines, we’re empathetic to those who feel pressured to keep up with sharply rising benchmarks. In effect, it’s not an investment decision but a business decision, and response to a market cycle that isn’t being allowed to fail and appears invincible. For many investors, this time really does look and feel different.
Although some things have changed this cycle, most things have not. Human nature remains the same. Greed, envy, and the powerful forces of groupthink are stronger than ever. Confidence in the Federal Reserve and its ability to protect investors from overpaying hasn’t changed. Easy monetary policies have again led to significant asset inflation and credit growth, artificially boosting spending and corporate profits. Fed policies have also enabled the government to significantly increase debt and fiscal deficits. Wealth inequality is soaring again. Risk assets are being priced as if the economy and markets are no longer cyclical. We even have another housing bubble this cycle with millions of Americans being priced out of the market. Lastly, examples of overheated speculation are numerous, with the return of day trading and a boom in short-term stock options. No, things are not different this time. It’s all very similar to past bubble cycles led by asymmetrical monetary policy, debt creation, and the extrapolation of the unsustainable.
Valuation-driven investment disciplines have been the B-Team of the current market cycle. In today’s market, carefully considering the value of a stock may feel more like a hinderance than an investment discipline. It’s tempting to throw in the towel and change teams. Although switching may be comforting and possibly rewarding in the near-term, we remain committed to our valuation-based discipline and assumption that one thing will never change—the cyclicality of human behavior. As such, we do not believe the current market and profit cycles are perpetual. Like past cycles, we expect many of the trends inflating profits and asset prices will revert and be proven unsustainable. In basketball terms, this game (cycle) isn’t over. We plan to keep shooting, finish the game, and are prepared for the final shot. Instead of giving up, we believe valuations matter more today than ever.
Eric Cinnamond
[email protected] 
Comments
The difference between the value funds in my accounts and PVCMX might be the commitment to the value stocks identified. I don't see how a value oriented stock fund can make much progress if it is unwilling to back its best stock picks past 17% of holdings.
I recently realized VSMIX was available in most of our accounts. We now have toeholds, or better. They commit.
In my experience (and I've invested in three Cinnamond funds), his funds tend to go through a long period of flat performance, followed by fairly rapid appreciation bursts, followed by another period of flat performance. All of this can be readily understood within the technicalities of his style. So, when one is unfortunate to invest towards the end of the run, losses - though rather modest losses - would follow should one sell out before the next run or if Cinnamond decides to liquidate the fund (as he - rather objectionably, imo - did with ARIVX).
To be fair, if you wait for and hold on through the run, the returns might be quite impressive. I've invested early in ARIVX and did make money on it. Similarly, ICMAX returned ~ 100% over Cinnamond's tenure there (roughly, 2006 - 2011) while SP500 barely broke even during that time.
I can respect the patience and discipline required to wait out the cycle. Its a gamble of sorts, with opportunity risk a potential issue. I will buy some and hope for 8% to 10% returns over time.
Another ingredient to toss into the melange. At least it is unique.
Cue up The Last DJ
If we take a more extensive view, things at VSCAX/VSMIX start looking downright dismal: max DD of -45%/-48% and alpha of -0.16/-4.74 at 5/10 y respectively. So, investing in VSCAX/VSMIX one hopes to make money now and not need them when another < -40% DD hits. I am more comfortable taking 5-10 y results and being reasonably sure that I'll have no less than 80% of max whenever I need the funds. To each his own...
One can still mail them a check which they promise to accept if postmarked 03/29 or an advisor might be able to place a direct order, if they are open then.
Here is the link:
https://www.invesco.com/us-rest/contentdetail?contentId=9add3438-7a6b-4945-b2f5-7aa23303e3db&dnsName=us&title=invesco-small-cap-value-fund-to-close-to-new-investors
The guy also jumps from one fund to another = not a great idea.
The main problems:
1) Is he going to be another Arnott in the next 5 years?
2) How much patience is someone supposed to have?
3) What % of your portfolio are you investing with him? The less you invest, the more it's insignificant. For me this is major.
4) How do you know when in the start, middle, or end of the cycle? Remember, markets can be irrational for a lot longer than you think. Prof Shiller claimed in 2012, based on valuation, that SPY would make only 4% after inflation in the next 10 years, it made 11%
(link)
5) Cinnamond plays timing hugely, owning less than 20% in stocks is difficult to grasp.
But, I'm a flexible investor who looks beyond categories and is interested in total portfolio risk-reward performance.
Someone's style and goals matter a lot when selecting funds.
How many funds do you own, what trading are you doing,
What % did you make less than SPY or PRWCX?
The only way I would compare VSMIX and PVCMX is to say that both invest some money in small caps.
When I look at five and ten year returns, I compare VSMIX to its peers in SCV. It doesn't make sense to me to include a fund that has never surpassed an 18% stake in equities, just because the manager says there is nothing worth buying, but he would buy, if only something; darn the luck, or curse the times.
Over ten years, as tracked by MFO Premium, VSMIX is in first place for APR in SCV. The standard deviation is not for the faint of heart at 25.5. And the alpha is -.1. OTOH, it's fourth in Sortino and Martin, so the pain doesn't last as long as it might with other SCV funds.
BTW. VCSAX is third in APR behind XSVM. In fact, Portfolio Visualizer tells me a person would take about a 2000$ haircut from VCSAX on an original 10000$ investment made ten years ago when the Invesco team took over. Zowie.
Over ten years VOO's APR beat VSMIX's 12.7 to 10.4
Over five years VSMIX (and two of its siblings) is once again tops for APR among SCV, and running ahead of VOO 16.8 to 14.7. Its alpha is at 6.1 to 0 for VOO.
I don't know if VSMIX is still beating its SCV peers, but it is still beating VOO if M* can be believed.
A five year run at MFO runs from March through February at this point. I am curious where you got the negative alpha for VSMIX? Portfolio Visualizer also shows a positive number starting from January 2019.
What about risk? What about if I need money right now? Well, that's why I own funds like GLIFX, FSUTX, IYK, VRIG, and USFR. Four out five had positive returns in 2022, and GLIFX was only off -1.30.
I have only owned VSMIX for a few weeks. But might the total return of a dog's breakfast portfolio like mine end up beating a fund like PVCMX over some period of time? Would it fall behind, what with volatility, drawdowns, and all that stuff? I have no idea.
Is my approach "simpler" than leaving the allocations to a few managers like Cinnamond? I suppose most would say not. OTOH, I'm reasonably certain that the funds I own are actually investing in what they advertise, rather than waiting for Godot. And none of my funds charge me a buck 38 for the pleasure of their company.
I am an existing shareholder; just have to make sure I keep a few shares if I sell.
To current holders of VSMIX,
There is a theory that funds underperform after they close and outperform after they reopen. Pl comment/ share your experience. (PRWCX has been a known exception.)
I own a whole bunch of funds but most with only a toe-hold position: either closed or ones I'd like to make myself keep track of more closely.
Sadly, I am often time-constrained and cannot properly focus on investing for extended periods. When I have time, I sometimes do a bit of equity trading, but that's about it. Unfortunately, MStar no longer provides the record for ARIVX and I could not find another place to chart it w div. I'd invested very early on, perhaps, in the first couple of months - since I followed Cinnamond from ICMAX - w a decent entry point. I remember I was net positive in the end but would not venture on the %. If you can find where to chart it, I would be curious of the PRWCX comparison, since I also own that fund.