We sent out our last letter only two weeks ago on February 27th, warning that although the market had fallen -12% in a week, valuations were still high, and signs of speculative excess and deteriorating fundamentals were legion.

That seems like a lifetime ago. As of the close yesterday, the S&P 500 had fallen another -16.6% for a total decline of -26.7% from its highs. Yesterday’s plummet of -9.5% was the fifth worst day in the history of the S&P 500, exceeded only by Black Monday in 1987 and three days during the collapse preceding the Great Depression in 1929. Crude oil has fallen over -40%. Treasuries have soared, sending long-term yields deep into uncharted territory. Yesterday, high-yield corporate and municipal bonds collapsed, more than doubling credit spreads. Everything fell in tandem: international equities crashed -11.1%, and even allegedly uncorrelated assets like gold (-3.6%) and bitcoin (-27.2%) declined.

Fundamental Value returned 8.3% for the fourth quarter, slightly trailing the market’s return of 9.0%. For the year, FV was up 29.7% vs the S&P 500’s 31.2% return. Since inception in 2016, FV has beaten the market by 4.4% annualized after fees, returning 19.2% annualized.¹

FV’s outperformance has come in spite of two material drags. First, FV tilts toward value stocks, which have had weak relative returns (as we have discussed in depth). FV has outperformed the S&P 500 Value Index by 6.7% annualized. Second, FV has carried net cash, averaging a net long position of only 89% and a monthly beta of only 0.83. Despite a much more concentrated portfolio, FV has had 20% lower downside volatility than the S&P 500.

Bireme Capital LLC is an SEC Registered Investment Advisor. Registration does not constitute an endorsement of the firm nor does it indicate that the advisor has attained a particular level of skill or ability. This piece is for informational purposes only. If not specified, quarter end values are used to calculate returns. While Bireme believes the sources of its information to be reliable, it makes no assurances to that effect. Bireme is also under no obligation to update this post should circumstances change. Nothing in this post should be construed as investment advice, and it is not an offer to sell or buy any security. Bireme clients may (and usually do) have positions in the securities mentioned.

The performance described above is the performance on a dollar weighted average of the securities in all Bireme accounts invested in the FV portfolio. Net performance is shown as net of a 1.75% advisory fee. Some clients may receive services at a lower advisory fee with a performance fee based on the gains in the account. Advisory fees and other important disclosures are described in Part 2 of Bireme’s Form ADV. Changes in investment strategies, contributions or withdrawals may cause the performance of your portfolio to differ materially from the performance displayed. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Past performance is not indicative of future results. SPY ETF performance includes expenses as well as reinvested dividends. For current performance information, please contact us at (813) 603-2615.

Fundamental Value slightly outperformed in Q3, returning 2.0% after fees vs 1.8% for the S&P 500. This brings the strategy’s annualized return to 17.9% vs 13.1% for the broader market.

FV’s outperformance has come in spite of two material drags. First, FV tilts toward value stocks, which have had weak relative returns. FV has outperformed the S&P 500 Value Index by 760 bps on an annualized basis. Second, FV has carried net cash, averaging a net long position of only 89% and a monthly beta of only 0.84. Despite a much more concentrated portfolio, FV has had 20% lower downside volatility than the S&P 500.

The second quarter of 2019 saw positive returns across nearly the entire Fundamental Value portfolio, with the strategy up 5.3% after fees relative to the S&P 500 at 4.2%.

Since inception, FV has gained 18.8% annually net of fees, beating the market by 5.2% per year. A hypothetical investment of $100,000 in FV at inception would have turned into $169,000 at the end of Q2, compared to $148,000 if invested in the SPY ETF.¹

One of our favorite current holdings, Bollore SA, is a conglomerate that we think trades at a large discount to fundamental value. Bollore has an underappreciated and rapidly growing asset in music label Universal Music Group though Bollore's stake in Vivendi. Bollore also offers a large discount at the corporate level driven by availability bias, a bias that causes shareholders to focus on the most available information – in this case, the reported share count.

The share count as disclosed in Bollore’s financial statements (2.9b) is actually more than twice the economic shares outstanding (1.4b by our calculation). The true economic share count is smaller than the reported figure because most Bollore shares are self-owned by subsidiaries in a complicated web of crossholdings. We suspect that many investors have overlooked this information due to its obscurity, or ignored it due to its complexity. This has caused them to undervalue Bollore by a factor of two. At Bireme, we've meticulously analyzed and transformed the crossholding data into a graphic that we think demonstrates our claim about the share count in a clear and intuitive way.

In the figure we’ve created below, each row represents an upstream holding company affiliated with Bollore. As many of the upstream companies which own pieces of Bollore are partially owned by Bollore itself, self-ownership accumulates as we travel down the graph towards the operating company.

The final row shows the true economic ownership of Bollore after accumulated self-ownership has been subtracted out. 52.1% of Bollore’s outstanding shares are indirectly self-owned. They should be treated as treasury shares and can be subtracted from the total share count. Thus, public shareholders actually own 74.5% of Bollore, rather than the reported 35.7%.

The first quarter of 2019 was one of Fundamental Value's largest gains since inception, returning 11.5% net versus a gain of 13.5% for the S&P 500. For the S&P, this was merely a reversal of losses created in the fourth quarter, when the market dropped -13.5%. Since FV only dropped -9.4% in Q4, we've come out 2.9% ahead during this 6 month period.

Since inception, FV has gained 18.4% annually net of fees, beating the market by 5.2% per year. A hypothetical investment of $100,000 in FV at inception would have turned into $168,000 at the end of Q1, compared to $132,000 if invested in the SPY ETF.¹

The Fundamental Value strategy returned -9.4% net of fees in Q4, a disappointing result on an absolute basis but an outperformance of 4.1% relative to SPY, the S&P 500 ETF. For the year, FV lost -1.1% after fees vs SPY’s decline of -4.6%. Since inception, the strategy has outperformed by 6.3% annually after fees, a result we work hard every day to sustain.¹