Fundamental Value was up 9.1% net of fees in the third quarter, handily eclipsing the S&P 500’s return of 0.6%. FV has had a spectacular first three quarters of the year, returning 38.6% net vs 15.9% for the S&P. FV has now generated a net return of 25.6% annualized since inception in 2016, outperforming the S&P by 9.2% annually.¹

Market commentary

In our last letter, Part III: Apex of a Bubble, we warned that an “everything bubble” had emerged in financial assets in response to decades of increasingly reckless fiscal and monetary policy. Valuations are at historical extremes in every corner of the US equity and fixed income markets. These extreme valuations presage real returns that investors will find severely disappointing -- and likely negative -- for many asset classes over years to come. Our warning remains as urgent as ever.

Despite the dismal return prospects for the bond and equity markets as a whole, we believe Bireme clients are well positioned to outperform.

Fundamental Value returned 27.0% net of fees for the first half of 2021, handily besting the S&P 500’s 15.2% gain. The strategy has now returned 24.9% annualized since inception, outperforming the S&P 500’s 17.2% return by 7.7% annually.¹


The first part of this series, Part I: Birth of a Bubble, marked the bottom in value stocks. The second part of this series, Part II: Anatomy of a Bubble, marked the top in the most speculative growth stocks. We believe this third part will mark the top in the market as a whole.

Since our last letter, a bubble restricted to the most speculative securities has morphed into a bubble in all financial assets. Today, valuations are at historical extremes in every corner of the US markets: value stocks, growth stocks, Treasuries, corporate bonds, real estate. These extreme valuations presage real returns that investors will find severely disappointing -- and likely negative -- for many asset classes over years to come.

After struggling during much of 2020, Fundamental Value enjoyed a phenomenal fourth quarter, soaring 47.1% net of fees compared to a gain of 18.3% for the S&P 500. FV finished the year with a gain of 29.8%, outpacing the S&P by 11.5%. Since inception, FV has returned 23.5% annualized vs 15.6% for the S&P 500.¹

In the first half of the year, Fundamental Value struggled, giving up years worth of outperformance in two quarters. In the third quarter, FV outperformed slightly, but not nearly enough to claw back its losses. FV is down -11.8% net of fees in 2020, compared to a gain of 5.5% for the S&P 500. Since inception, FV has returned 12.3% annualized vs 13.5% for the S&P 500.¹

Our performance this year has been very distressing. However, it has not been demoralizing, for there is a silver lining: we believe that the prospects have never been better for value investors than they are today. Read much more below.

In Q1, FV had its worst result ever, down -26.4% net of fees. It is of little solace that the broader market was down as well, with the S&P 500 falling -19.4%.

Since inception, FV has returned 8.7% annualized vs 7.5% for the S&P 500.¹



The catalyst for the drop in markets was of course COVID-19, which continues to wreak havoc on the world’s health and economy. Perhaps the most dramatic illustration of the pandemic’s impact in the US is the near 19 million Americans who filed a new unemployment claim in April -- an unprecedented figure five times higher than the worst month of the Great Recession. Some businesses have been hit harder than others, with restaurants, hotels, events, travel, and financial stocks among the most impacted.

Value investing came under particular assault, with the S&P 500 Value Index falling -25.4% and the Russell 2000 Value Index falling -35.8%. In recent quarters, we have written ad nauseum about the historic relative attractiveness of value names. Yet...

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.