Published on October 27, 2020
If you were unable to join our quarterly webinar, watch the replay to hear updates on the Osterweis Fund and Osterweis Strategic Investment Fund.
Shawn: Good morning, everyone. This webinar is being recorded. My name is Shawn Eubanks and I'm the Director of Business Development at Osterweis Capital Management. We'd like to welcome you to our third quarter webinar for the Osterweis Fund and the Osterweis Strategic Investment Fund. During the webinar, John Osterweis will review the funds and our economic outlook. After that, Greg Hermanski will review the top and bottom contributors, as well as some new and exited positions. And then Larry Cordisco will go into more detail about a couple of our holdings. We'll then have a question and answer session. Please feel free to submit your questions at any time during the webinar. I'll now turn it over to John Osterweis.
John: Well, good morning, everybody. As you know, the stock market has generally been very, very strong despite the fact that we have a weak economy. What is pretty obvious to most investors is that the market strength is a function of two things. One: Sustained low interest rates, which obviously leads to higher valuations. And the fact that certain sectors of the economy are in fact very strong. So, while the overall economy is weak due to Covid, there are sectors that are benefiting.
And what we have done in the funds is focused, intensely, really intensely on the growing sectors of the economy. And we've avoided those sectors such as leisure, travel, hospitality, et cetera, that have been hurt by the Covid epidemic. And so it's important, in looking at our portfolio, to understand that we have really focused the investments in companies that are enjoying significant tailwinds. And the most obvious of course, is e-commerce. In a period of Covid epidemic, people have avoided brick-and-mortar retail, and obviously a brick-and-mortar retail has become a bit of a graveyard.
On the other hand, companies that support e-commerce, and are able to do e-commerce, have benefited quite a bit. And those would include package delivery companies, warehouses that are essential to the movement of packages, as well as all the internet infrastructure that e-commerce depends upon. So this obviously means internet access, data centers, semiconductors, et cetera.
The second area that has become increasingly strong in our economy is renewable energy; namely wind and solar. As wind and solar become ever cheaper sources of energy, and we try to wean the economy off of carbon-intensive sources of energy, wind and solar have benefited quite a bit. And oil and gas has languished. And so we've avoided oil and gas for the most part. And we have several investments that are in the renewable energy area.
The third area is health care, which plays directly into a long-term trend, which is the aging of the population. Also, we've been very focused on the digital transformation throughout the economy, and focused on companies that either support the digital transformation or are using it to become increasingly competitive in their own industries. And so, as you know, we've talked a lot about this over the last several years. The economy has been gravitating increasingly towards what we call a "winner-take-all" or a "winner-take-most" kind of structure in industry after industry. And so we have, having identified that really again, oriented our investments to companies that are the dominant players in their respective industries.
There are a couple of other areas that we're looking at. One is electric cars, which we think will become increasingly dominant in the automobile industry, or transportation industry. And the other is artificial intelligence. And next quarter, we'll have more to say about those two sectors. So with that, let's move on.
As you can see, performance year-to-date has been very strong. The Osterweis Fund is up 8.6% versus about 5.6% for the S&P. And so this reflects our focus on the very dramatically growing parts of the economy and our avoidance of those parts of the economy that have languished. As you can see over a very long period of time, the fund has outperformed the S&P, and I hope that we will continue to do so. Next slide. Greg, I'll turn it over to you to talk about top and bottom performing contributors.
Greg: Thanks, John. And good morning, everyone. You can see on the slide, the top and bottom contributors for the third quarter and the last 12 months. As we discussed last quarter, when we analyzed the new stocks to put in the fund, characteristics that we looked for to include high-quality, dominant companies with growth drivers. While four of the five top contributors have changed for the quarter, these new stocks also possess these characteristics. Moreover, AMD, Danaher and FedEx are all gaining share and accelerating growth due to their strong market position.
I'd like to highlight one of the names, Air Products, which is not only a dominant high-quality company, but their opportunity set is accelerating given their leadership in hydrogen energy. Governments around the world are focusing on hydrogen as a new path to reduce global carbon emissions. And Air Products is well positioned to benefit from this.
Before turning it over to Larry, I'd like to briefly discuss one of our top performers, which was also a new position that we added during the quarter, FedEx. We've been following FedEx for a few years, and we've been intrigued by the investments that they've been making in automation. And that's helped them to increase their capacity while at the same time reducing the cost and the time to deliver parcels. FedEx has stated repeatedly that they believe that these investments are going to enable them to become the low-cost last-mile provider.
And we formed a thesis around the fact that as e-commerce becomes the fastest growing area in parcels, that having these efficiency characteristics are going to be critical to growing and to profitability. And so if FedEx can become the low-cost provider, then they're going to be able to thrive in the new environment. During Covid, e-commerce really accelerated. And for the first time, we're able to see these investments starting to pay off for FedEx through reduced costs and accelerating growth. That confirmed our thesis and, as a result, we bought the stock.
In addition to the e-commerce opportunity, FedEx also has a cyclical recovery play. And as we see they're high margin B2B, business-to-business returning, as well as the international express business starting to recover, we believe that's going to add fuel to the growth and drive earnings and profitability. So in conclusion, we believe FedEx is really well positioned for long-term profitability, driven both by e-commerce, as well as the recovery of their other businesses. So now, I'll turn the call over to Larry to discuss more on the fund positioning and some other new stocks that we've added during the quarter. Larry?
Larry: Thanks, Greg. Thanks for walking us through that FedEx story. And I just want to expand on that just very briefly. As Greg mentioned, and you can see FedEx has a number of potential earnings drivers ahead of it. But what I really like about the position, and want to just take a second to focus on, was how it highlights some of the key aspects of our investment process. As Greg mentioned, the first thing is we studied this name for quite a while. We wanted to make sure we understood FedEx's competitive advantage, which, as Greg said, is scale and low-cost leadership. And we wanted to know whether that advantage would translate into success in e-commerce.
Second, our investment thesis is built around an important key metric for FedEx, which is the operating margin and FedEx's ground delivery segment. It was critical to us that FedEx proved it could make money in e-commerce. So when we saw the combination of e-commerce package growth and margin improvement, that to us provided the tangible evidence that we wanted in order to own the stock. So I hope that gives people just a little bit of a perspective on how we think and how we apply an investment process to a name like FedEx.
Moving on to some of the other new positions in the quarter. LiveRamp, we purchased. This is a software company that operates in the digital advertising ecosystem. We think the company is well positioned to capitalize on the accelerating trend of delivering more targeted ads to consumers. LiveRamp has a very strong competitive advantage around data ownership of consumers worldwide. The second company is Safran. It's a leading provider of aircraft engines. We think this company is undervalued based on our expectations for an eventual recovery in air travel. And it's basically leveraged on more airplane hours in the air is good for Safran. We don't have to over analyze the actual economics of airlines and profitability of airlines to guesstimate on orders. This is a utilization play on airplanes in the air.
For exited positions. We left FireEye and Pentair during the quarter. And in both cases we found there were better ideas to put in the portfolio. So at this point, I'll hand it back over to John to just give a few perspectives on the Strategic Investment Fund.
John: Okay. Can we have the next slide? The Strategic Investment Fund as you know is a dynamically balanced fund using our Core Equity Strategy primarily and our Core Fixed Income Strategy. It's been roughly 60/40. It's actually moved up a bit. The equities are now over 60%. We think it's a strategy that provides equity-like returns over the long haul. And so for where it fits in people's portfolios, we think it makes a lot of sense. So with that, I think we should throw it open to the Q&A.
Michelle: If you'd like to ask a question, you can enter a question into the Q&A box, or you can press the raise-your-hand button to ask a question with voice. We'll hold for questions now. John, it doesn't look like we have any questions this time around. Do you have any closing remarks?
John: No, I think we just appreciate everybody's involvement. And if you do have questions, as you know, we're always here, so feel free to give us a call or email us. And with that, why don't we close up and we'll see you all again in three months. So thank you again.
Opinions expressed are subject to change, are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.
The S&P 500 Index is an unmanaged index that is widely regarded as the standard for measuring large-cap U.S. stock market performance. The index does not incur expenses, is not available for investment, and includes the reinvestment of dividends.
The 60/40 blend is composed of 60% Standard & Poor’s 500 Index (S&P) and 40% Bloomberg Barclays U.S. Aggregate Bond Index (BC Agg) and assumes monthly rebalancing. The S&P is an unmanaged index that is widely regarded as the standard for measuring large-cap U.S. stock market performance. The BC Agg is an unmanaged index that is widely regarded as a standard for measuring U.S. investment grade bond market performance.
These indices do not incur expenses and are not available for investment. These indices include reinvestment of dividends and/or interest income.
Performance data quoted represent past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Osterweis Fund may be higher or lower than the performance quoted.
Holdings and sector allocations may change at any time due to ongoing portfolio management. References to specific investments should not be construed as a recommendation to buy or sell the securities by the Osterweis Fund or Osterweis Capital Management.
A basis point is a unit that is equal to 1/100th of 1%.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock.
Duration measures the sensitivity of a fixed income security’s price (or the aggregate market value of a portfolio of fixed income securities) to changes in interest rates. Fixed income securities with longer durations generally have more volatile prices than those of comparable quality with shorter durations.
One cannot invest directly in an index.
Earnings growth is not a measure of future performance.
Mutual fund investing involves risk. Principal loss is possible.
The Osterweis Fund may invest in medium and smaller sized companies, which involve additional risks such as limited liquidity and greater volatility. The Fund may invest in foreign and emerging market securities, which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks may increase for emerging markets. The Fund may invest in Master Limited Partnerships, which involve risk related to energy prices, demand and changes in tax code. The Fund may invest in debt securities that are un-rated or rated below investment grade. Lower-rated securities may present an increased possibility of default, price volatility or illiquidity compared to higher-rated securities. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities.
The Osterweis Strategic Investment Fund may invest in small- and mid-capitalization companies, which tend to have limited liquidity and greater price volatility than large-capitalization companies. The Fund may invest in foreign and emerging market securities, which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks may increase for emerging markets. The Fund may invest in Master Limited Partnerships, which involve risk related to energy prices, demand and changes in tax code. The Fund may invest in debt securities that are un-rated or rated below investment grade. Lower-rated securities may present an increased possibility of default, price volatility or illiquidity compared to higher-rated securities. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. From time to time, the Fund may have concentrated positions in one or more sectors subjecting the Fund to sector emphasis risk. The Fund may also make investments in derivatives that may involve certain costs and risks such as those related to liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Leverage may cause an increase or decrease in the value of the portfolio securities to be magnified and the Fund to be more volatile than if leverage was not used. Investments in preferred securities typically have an inverse relationship with changes in the prevailing interest rate. Investments in asset-backed and mortgage-backed securities include additional risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments.
Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC. [OSTE-20201027-0052]