Published on January 30, 2023

If you were unable to join our quarterly webinar, watch the replay to hear updates on the Osterweis Fund and Osterweis Growth & Income Fund.


Shawn Eubanks: Good morning everyone. 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 quarterly webinar for the Osterweis Fund and the Osterweis Growth & Income Fund. As a reminder, this webinar is being recorded.

Before we jump into things, I wanted to let you know that we'll be revamping our quarterly webinar program for 2023, so please look for updates on that. If you have any suggestions, please email them to and we would appreciate any thoughts you may have.

John, let's start off with your thoughts on the market and the outlook going forward.

John Osterweis: Good morning everybody. Before we talk about outlook and markets, I want to give you a brief update. At the end of last year, Larry Cordisco decided to pursue other opportunities and as a result resigned from Osterweis. To fill his shoes, we promoted Greg Hermanski and Nael Fakhry to co-CIOs along with me, so the three of us now will be the co-CIOs. Both Nael and Greg are highly disciplined analysts and investors and really investors in the Osterweis tradition. I don't think you'll see any major changes. This should be a seamless and very easy transition.

As far as the market outlook and the economic outlook, as all of you know, 2022 saw a sea change in inflation after 20 or 30 years of very low inflation, which was driven by the opening up of China and the tidal wave of cheap labor that that entailed, and also the impact of technology in inflation for 20 or 30 years was quite subdued, but last year it really changed and part of that, in our mind, is secular and part of it is more cyclical.

The secular change is that this vast pool of cheap Chinese labor is no longer there. China, as you know, is starting to see a decline in its overall population and certainly decline in its working age population. At the same time, the more developed economies like the U.S. and in particular Europe, are experiencing an aging labor force. We've gone from a vast surplus of cheap labor to something of a labor shortage, and as a result, workers were able to bargain for higher wages and we did see significant pickup in wages, significant pickup in union activity, et cetera. This cost push was, to some extent it could be offset by price, and to some extent it could not be. So certain companies experienced decreased margins as a result.

The Fed obviously tried to respond and to tighten monetary policy in order to get inflation back under control. I am highly skeptical that they will get it back to around 2%. I think it will trend higher over time, but certainly don't want it up at seven or 8%. As a result, interest rates went up and lo and behold, bond prices went down, and equity valuations went down. So last year was a particularly tough year. The S&P dropped about 18%. Depending which bond index you use, bonds dropped between somewhere between 13 and 15%, so there was essentially nowhere to hide.

Also, last year the economy had to contend with some short-term issues, one being bottlenecks due to the Covid reopening and the China shutdown, and we opened, they shut down, so it was hard to get things that we needed. The second thing, of course, was the war in Ukraine, which significantly disrupted the grain markets and the energy markets. You can say what you want, I think the war in Ukraine will last quite a while and probably be inflationary in it in its impact. I think as China reopens, partly that will have an inflationary impact as they start to demand more oil and other raw materials, but it'll also have a deflationary impact as they solve some of these Covid-related supply chain bottlenecks.

Given all this uncertainty, the key for investors in our mind is to position in companies that can grow throughout a period like this, and also companies that have a market position that enables them to exert some pricing power and maintain their margins. Rather than have me opine on that, I'm going to turn it over to Nael for a few minutes to talk about specifically the kinds of companies we are maniacally focused on at this point.

So Nael?

Nael Fakhry: Sure, thanks, John. We believe that as you to just touched on, quality growth businesses, that's what we call them, are well-suited for this environment. So, what do we mean by quality growth companies?

We define them as having three prongs. These are businesses that have attractive returns on capital and a significant reinvestment opportunity that enables revenue growth, and then third, good management. Why would a company have these characteristics? The only way you can really have these characteristics, particularly the high returns on capital, the only way you can do that is you have a durable competitive advantage, and we want to be able to identify that and we want it to be tangible. Examples would include scale advantage, some sort of low-cost position, regulatory barriers to entry, a differentiated operating model. There are a handful of others, but those are just a few.

From a financial standpoint, these types of businesses often are operating in an industry with secular growth that's structural and exhibits some combination of financial characteristics like we touched on, high or improving returns on invested capital, particularly incremental returns on capital, strong operating margins, pricing power is a really important one, significant free cash flow generation, a track record of paying consistently growing cash dividends, prudent financial leverage. We believe that by buying these types of quality growth companies at attractive valuations when there's a temporary cloud that arises and then taking a long-term patient approach, we can generate attractive returns for clients over time.

Back to you, Shawn.

Shawn Eubanks: Thank you. Now let's go back to John to talk a little bit about the Osterweis Fund, if you can please, John.

John Osterweis: Okay. Well, during the fourth quarter, the Osterweis Fund was up 5.9%, slightly lagged the S&P, which was up about 7.6%. During the quarter, and actually throughout the year, we took a number of steps to buoy the Fund and keep it moving in the right direction. We have increased our exposure to businesses of the type that Nael just described, and we also, during the year, not during the fourth quarter, but during the year, had raised our cash level a bit. We started to reinvest that cash, as you might expect. Over time we've delivered value, although short term we lagged a bit.

Shawn, back to you.

Shawn Eubanks: Great, thank you, John.

Greg, can you now go over top and bottom contributors for the fourth quarter as well as 2022?

Greg Hermanski: Yeah, thanks Shawn, and good morning, everyone. You can see on the slide the top and bottom contributors for the fourth quarter and in the full year. Today I'd like to talk about them by putting them into two buckets. Nael had earlier talked about the characteristics that make for quality growth stocks, having strong motes, high returns on capital, reinvestment opportunities to drive value. Of our top contributors, you can bucket them. Air Products, Linde, Ametek, Boston Scientific, Progressive, Dollar General. All of these companies have these quality growth characteristics, and we view them as great long-term compounders of value over time, and so we're pleased to see that they're performing as we would expect. The second bucket in our top performers were Safran and Ross. These are more turnaround stories. They're also the quality growth companies, but we were able to buy them when they had some short-term issues, and we bought them at attractive valuations so as the performance has started to normalize, we've seen the stocks rebound. We love to look for these opportunistic opportunities to buy turnaround companies where there's a great high quality business, but we can get it at a discounted valuation.

The bottom contributors, many of these were tech companies, Amazon, Google, Microsoft, AMD. The companies benefited significantly during the pandemic, and now they're also being impacted by the slowdown, the consumers, and as well as technology spending. We continue to view them as attractive and well-positioned for growth, and we believe that they're going to be able to gain share going forward. We love these companies going forward, even though there's been a slight pull back.

Earlier, Nael discussed the importance in investing of high-quality growth companies as part of our investment strategy. We also believe that portfolio positioning and construction is really important. We construct a portfolio with a balance that includes defensive companies and what we call defensive compounders so that the Fund has a solid foundation in case the market gets choppy or the economic environment gets choppy. Holding these defensive compounders helps the performance in a downturn, but it also helps us by positioning us well so that we can opportunistically go on the offensive and buy great companies that are on sale.

As we look at new purchases and exits during the quarter, we used this downturn to further strengthen our foundation, so we took a couple additional steps. Given the uncertainty and the economic outlook, we reduced exposure to cyclicality and to interest rate and credit risk by selling PNC Bank as well as selling LECO, which is an industrial welding company. We increased our defensiveness by adding Brown & Brown, which is an insurance broker which has a recurring business model and strong top line growth opportunities as well is adding Becton Dickinson, a medical device company that fills consumable products like needles and syringes and we believe that it's well-positioned to improve its growth and margins in the years ahead. We also increased our defensiveness by adding to positions in some of our less cyclical stocks like L3 Harris, the defense company, and Sysco, a food distributor.

That put us in a solid position to opportunistically look for opportunities to add value. And so we added Avantor, Micron, and Oracle. We were able to buy all three stocks and what we view as attractive valuations and we believe they have significant upside as their businesses improved from here.

Also during the quarter, we were active in tax loss selling. This impacted IFF. This is a company we continue to believe is attractive as a turnaround candidate, but we took the tax loss in the fourth quarter and then also Crown Castle. I'll turn the call back over to Shawn.

Shawn Eubanks: Thank you, Greg. Let's transition to the Growth & Income Fund. John, can you talk a little bit about that Fund for ...

John Osterweis: Sure. Growth & Income, maybe want to bring this slide up. Growth and Income Fund is exactly what the name implies. Our goal is to construct a portfolio of really high-quality companies that pay sustainable growing dividends over time and to augment the income stream with some selected fixed income positions as well. We benchmark against the S&P 500, 60% S&P 500, 40% Bloomberg Agg, We ended the quarter with about 63% equity, 25% fixed income, and 12% cash. It's our very strong view that this is a fund for all seasons and will compound at attractive rates over time. With that, let's open for Q & A.

Shawn Eubanks: Thank you, John. While we're waiting for questions to come in, there's a lot of talk about whether the Fed will create a recession, and what do you think the possibilities are for recession and how do you think that will affect our funds?

John Osterweis: Well, there's a lot of concern that we're going to have either a recession or some kind of slowdown that looks like a recession that puts into question earnings and we think earnings risk is one of the major risks for 2023 and probably 2024 as well. You couple that with the Fed's stated goal of continuing to raise interest rates, so it sets up a lot of uncertainty. Again, as we've all three of us have said, we want to be focused on very high-quality companies that can plow through periods like this.

Shawn Eubanks: Thank you. Nael, I've heard you talking a lot about dividend growth. Can you expand a little bit more on that?

Nael Fakhry: . While dividend growth companies may seem stodgy and a bit out of touch, the returns have been anything but that. Keep in mind we're talking about companies with the ability to sustainably grow dividends for years. These are companies that tend to have dividend yields roughly in line with the S&P 500, sometimes below, but above average growth of cash flows and dividends.

Why do we find them attractive? To start, dividends are just an important source of returns. They've generated about a third of S&P 500 returns since 1926 and during low return periods, dividends can account for over 50% of total returns. More importantly, dividend growth stocks tend to outperform the S&P 500 with less volatility, according to a recent study by S&P Global. The reason for this ability to outperform with less volatility is intuitive. To sustainably pay a growing cash dividend, a company must generate growing cash flows, which often means having a long-term focus, running with prudent leverage, operating in an industry with growth tailwinds, and having some sort of durable competitive advantage. In other words, dividend growth companies have many of the characteristics of what we call quality growth companies. It's an area we've long had success in and will continue to focus on for the foreseeable future.

Shawn Eubanks: Thanks, Nael. I don't see any additional questions at this point, so do you have any final comments, John?

John Osterweis: I don't. I don't know if any, either Greg or Nael do.

Nael Fakhry: Nope.

Shawn Eubanks: Okay. Thank you all.

Greg Hermanski: Thank you.

Shawn Eubanks: And thanks for our audience for joining us today.

Greg Hermanski: Thanks.

John Osterweis: Thanks very much.


John Osterweis

Founder, Chairman & Co-Chief Investment Officer – Core Equity

John Osterweis

John Osterweis

Founder, Chairman & Co-Chief Investment Officer – Core Equity

After graduating from business school, John Osterweis served as a Senior Analyst concentrating on the forest products and paper industry for several regional brokerage firms and later for E.F. Hutton & Company, Inc. In addition to his activities as an analyst, Mr. Osterweis served as Director of Research for two firms and managed equity portfolios for over ten years.

In late 1982, Mr. Osterweis decided to devote himself full time to his portfolio management activities, and in April of 1983 launched Osterweis Capital Management. Mr. Osterweis has served as Director of the Lucas Museum of Narrative Art, Director on the Stanford Alumni Association Executive Board, Trustee of Bowdoin College, Director and Vice Chairman of Mt. Zion Hospital and Medical Center, and President of the Board of Directors for Summer Search Foundation. He currently serves as a Trustee of the San Francisco Ballet Association, Director of the San Francisco Free Clinic, and President Emeritus of the San Francisco Ballet Endowment Foundation, as well as Trustee Emeritus of Summer Search Foundation and of Bowdoin College.

He is a member of the firm’s Management Committee, a principal of the firm, and a co-lead Portfolio Manager for the core equity, growth & income, and flexible balanced strategies.

Mr. Osterweis graduated from Bowdoin College (B.A. in Philosophy, cum laude), and Stanford Graduate School of Business (M.B.A. with top honors in Finance).

Gregory Hermanski

Co-Chief Investment Officer – Core Equity

Gregory Hermanski

Co-Chief Investment Officer – Core Equity

Prior to joining Osterweis Capital Management in 2002, Greg Hermanski was a Vice President at Robertson Stephens and Co. where he was in charge of convertible bond research. Prior to that, Mr. Hermanski was a Research Analyst covering convertible, high yield, and distressed securities at Imperial Capital, LLC, and a Valuation Consultant for Price Waterhouse, LLC.

He is a principal of the firm and a co-lead Portfolio Manager for the core equity, growth & income, and flexible balanced strategies.

Mr. Hermanski graduated from the University of California, Los Angeles (B.A. in Business/Economics).

Nael Fakhry

Co-Chief Investment Officer – Core Equity

Nael Fakhry

Co-Chief Investment Officer – Core Equity

Prior to joining Osterweis Capital Management in 2011, Nael Fakhry worked as an Associate at American Securities, a private equity firm, and as an Analyst in the investment banking division of Morgan Stanley.

He is a principal of the firm and a co-lead Portfolio Manager for the core equity, growth & income, and flexible balanced strategies.

Mr. Fakhry graduated from Stanford University (B.A. in History, Phi Beta Kappa) and the University of California Berkeley, Walter A. Haas School of Business (M.B.A., C.J. White Scholar).

★★★★ Ratings Information
The Growth & Income Fund is rated 4 Stars Overall in the Allocation--50% to 70% Equity Category

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The Fund was rated 4 Stars against 703 funds Overall, 4 Stars against 703 funds over 3 Years, 4 Stars against 654 funds over 5 Years, 4 Stars against 492 funds over 10 Years in the Allocation--50% to 70% Equity category based on risk-adjusted returns as of 12/31/22.

The Morningstar Rating for funds, or “star rating,” is calculated for mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period has the greatest impact because it is included in all three rating periods.

© 2023 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance does not guarantee future results.

References to specific companies, market sectors, or investment themes herein do not constitute recommendations to buy or sell any particular securities.

There can be no assurance that any specific security, strategy, or product referenced directly or indirectly in this commentary will be profitable in the future or suitable for your financial circumstances. Due to various factors, including changes to market conditions and/or applicable laws, this content may no longer reflect our current advice or opinion. You should not assume any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from Osterweis Capital Management.

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 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 and Osterweis Growth & Income Fund may be higher or lower than the performance quoted.

Click here to view the Funds’ performance.

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.

The Osterweis Fund’s top 10 holdings may be viewed by clicking here.

The Osterweis Growth & Income Fund’s top 10 holdings may be viewed by clicking here.

Click here to read the prospectus.

Return of capital is return from an investment that is not considered income. This occurs when some or all of the money an investor has in an investment is paid back to him or her, thus decreasing the value of the investment.

Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain and expand the company’s asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value.

Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g., depreciation) and interest expense to pretax income.

A basis point is a unit that is equal to 1/100th of 1%.

One cannot invest directly in an index.

Earnings growth is the annual rate of growth of earnings from investments.

There is no guarantee that a company will pay or continue to increase dividends.

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 Growth & Income 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. 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-20230124-0769]