May 1, 2019
Similar to life, our career paths do not always go according to plan. When I recommended returning capital in 2016, I intended to return to the asset management industry after the current market cycle ended and small cap valuations improved. That all changed on September 10, 2018, when I was presented with the opportunity to launch an asset management firm with two like-minded absolute return portfolio managers.
The proposed venture was particularly appealing given our shared beliefs and passion for absolute return investing. It was our chance to build an asset management firm independent from the industry’s pressure to conform and participate in groupthink. Career risk and the obsession with relative returns would play no part in our investment decision making process – absolute return utopia. Not knowing when or if we’d ever be presented with such an opportunity again, we decided to act, and Palm Valley Capital Management was formed.
In addition to forming an asset management firm, we decided to launch a mutual fund. We debated the most opportune time to launch. Specifically, should we launch the fund before or after the market cycle ended? It was a difficult decision. Complicating matters further was the fact that it usually takes 6 to 9 months to launch a mutual fund. Would it be better to launch before the market cycle ends or 6 to 9 months after the cycle ends? And if we launched after, would we miss out on periods or days of panic (opportunities) like on March 9, 2009? Furthermore, the time and distraction associated with launching a ‘40 Act fund would likely reduce our ability to find values during a market decline. Based on these and other considerations, we decided to launch the fund before the market cycle ended, with an aim to “Stick the Landing”.
Our decision was beginning to look fortuitous late last year as small cap stocks fell sharply and our opportunity set began to improve (the Russell 2000 declined -20% in Q4 2018). Unfortunately, small caps rebounded in Q1 2019 as the Federal Reserve once again came to investors’ rescue (see “Curry’s Fork Creek”). Partially due to this rebound, and mostly due to ten years of extraordinary asset inflation, we continue to believe most small cap equities are overvalued and risks remain elevated.
Given our views on valuation and risk, we are currently placing considerable emphasis on liquidity, quality, and minimizing mistakes. T-bills, in our opinion, are particularly attractive relative to many of the small cap stocks we’ve analyzed and valued. In addition to protecting capital, T-bills are liquid, provide a competitive yield, and allow investors to act decisively when future opportunities return.
In addition to T-bills, we are attracted to a handful of small cap equities with strong balance sheets. Our goal is to focus on businesses we believe will survive and gain market share during the next economic downturn. In summary, at this stage of the cycle, we want liquidity in the portfolio and liquidity in the balance sheets of the businesses we own.
With our firm and portfolio overview complete, we’d like to announce the launch of the Palm Valley Capital Fund. The fund was officially priced on April 30, 2019. We look forward to managing the fund through the end of the current market cycle and for many cycles to come!
If you have any questions related to the fund please email Jayme (jayme@palmvalleycapital.com) or me (eric@palmvalleycapital.com). We can also be reached at (904) 747-2345. For advisers interested in buying the fund through their platforms, please contact us.
Thank you for your interest in Palm Valley Capital and absolute return investing!
Index performance is not indicative of a fund’s performance. Past performance does not guarantee future results. Current performance of the fund, once available, can be obtained by calling 904-747-2345.
There is no guarantee that a particular investment strategy will be successful. Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.
Definitions:
Russell 2000: The Russell 2000 Index is an American small-cap stock market index based on the market capitalizations of the bottom 2,000 companies in the Russell 3000 Index.
It is not possible to invest directly in an index.