CCM 2Q 2017 Performance and Investment Update
Dear partners, friends, and fellow investment professionals –
In the second quarter of 2017, Clarendon Capital Management (CCM) returned 1.9% after brokerage expenses and the stated management fee. Returns were again positive, a primary objective, but they fell short of our benchmark’s return (iShares large cap value ETF, Ticker: IVV) of 3.1%.
Summary Return Statistics for CCM Composite

This long-term underperformance is due to maintaining sizeable cash balances, a late reaction to the trouble in the energy and mining sectors in 2015 and mistakes I have since learned from — principally trusting company management when I disagree with the strategy they pursue.
Per our allocation targets described last quarter, CCM remains out of balance in the current weighting of special situation investments and the slow accumulation of short positions. Given the asymmetrical returns of going long and short-selling, there will be greater diversification in the short portfolio, with position sizing being in the range of 0.5% — 2.0% instead of the typical long size of 2% — 35%.
Quarter over Quarter Summary Statistics Comparison

Commentary on Portfolio Changes and Select Investments
The increase in cash mostly came from short selling proceeds.
In a recent blog posted on Medium (also shared on Twitter) I wrote about the gratification I find in investing. In it, I wrote about working to help others, being constructive, and getting to work with people I enjoy. I am grateful for two colleagues (who I also consider friends) who offered their time and expertise to share their insight on an investments business, its strategy, and industry dynamics. These short investments are in the discount retailing and the automotive dealership sectors.
The short side of the portfolio is slowly building.
> The discount retailer is struggling to grow. It experienced declining revenue since 2012. The retailer’s “innovations” are currently an infinitesimal part of sales. These business improvements are poorly executed. It may buy management some time, but I believe management must be bolder to generate meaningful revenue and profit growth. The best course of action to accelerate these critical developments is through M&A, but the company had bad experiences on that front and appears reticent to make large acquisitions. The valuation looks cheap at a forward PE multiple of 13x. 2017 EPS estimates are 25% below 2016 and 2018 is essentially flat over 2017. A healthy dividend yield and share repurchases will keep some investors interested. But it remains a poorly executing business in a sector that is hyper-competitive. Until the strategy and execution for growth are fixed, I think it is a value trap.
I discussed two investments in the small cap space in my “Gratification in Investing” blog. These two businesses are led by value investing professionals who I view as exemplary capital allocators. However, these two positions are still a very small portion of the portfolio. I want and expect to buy more shares of these companies. The limited trading volume, as well as a lack of understanding and coverage, has made it difficult to accumulate shares.
The portfolio experienced volatility with five positions increasing by 10% or more and five positions declining by 10% or more. The largest decline dollar wise was in Seagate Technologies (STX). Seagate is a long-time holding, and I encourage you to read my blog titled “Seagate Technology and Basis Math.” Despite fears about advancements in data storage, it is a consolidated market, and people will continue to produce data exponentially. Whether it is stored in the cloud or on a computer — Seagate is part of the solution. The current dividend yield is 6%, but CCM’s yield on basis is 18%.
Two contributors to the quarter’s gains were in the insurance sector and the industrials sector. Both offer returns on equity above 10%. The insurer is at a premium to book value, but it has an additional revenue stream selling information services that are not constrained by equity capital. The industrial firm is undertaking initiatives to lift operating profit margin dramatically with improvements to its fleet. However, there are significant risks that these operating improvements can be achieved within the target timeline. The recent appreciation in the industrial firm has eliminated the previous discount to the market PE ratio and a reasonable value.
Carlos P. Sava, CPA, CFA
Founder and Portfolio Manager
www.Twitter.com/ClarendonCapMgt
www.Medium.com/@ClarendonCapMgt
Disclosures and Disclaimers:
This message is not a solicitation or offer of any security. Investments are inherently risky and appropriate caution and diligence should be taken. Please conduct appropriate due diligence and consult a financial professional, attorney, CPA, and/or similar professional before making any investment decisions. Investment decisions should be made after careful review of your financial situation, risk tolerance, investment objectives, and time horizon.
Past performance is no guarantee of future results. Individual account performance may differ. Investment advisory services are described and provided upon completion of an investment advisory contract. Please refer to Clarendon Capital Management’s Form ADV 2 for additional information.
Information contained herein is from sources believed to be reliable, but we cannot guarantee its accuracy. CCM return results are the time-weighted return for the applicable period. Performance is shown after management fees and expenses. CCM performance and return results contained herein are unaudited.
