Fundamental Value had its best year ever in 2021, returning 48.5% net of fees vs 28.7% for the S&P 500. The strategy has now compounded at 25.9% net of fees since inception in June of 2016, beating the market by 800 bps annually over more than half a decade. While this level of absolute returns is unlikely to be sustainable, we are as confident as ever in our ability to significantly outperform a still richly-valued equity market.¹

Market commentary

It was only four months ago when we published Part III: Apex of a Bubble. We said that the US capital markets were mired in an “everything bubble,” presaging real returns that investors would find severely disappointing – and likely negative – for many years to come. And we predicted an imminent top and a proximate cause:

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...