Garrison Fathom Q1 2024 Performance & Outlook Report
Garrison Fathom’s Fund I grows nearly 10% YTD, over 52% growth since inception, and maintains strong track record of consistent performance
Garrison Fathom’s Fund I had a strong first quarter to kick off 2024, growing 9.5% YTD and outperforming the Dow and NASDAQ Composite while being nearly on par (within 0.7%) with the S&P. Meanwhile our risk measures, especially Sharpe and Sortino ratios, continue to exceed those of the benchmarks. Overall, GF Fund I’s portfolio remains strong and consistent, and continues to demonstrate the merit of our blended approach of fusing our investment fundamentals with data-driven analysis and long-term vision. GF Fund I has grown 52.46% since its inception.
Garrison Fathom Fund I (GF Fund I) performance
On an annualized basis, GF Fund I continues to outperform the indices with reduced volatility relative to the S&P. This was the first quarter where we consistently trailed the S&P, and this is likely due to our paring back our position in Nvidia ($NVDA) during the rebalance at the start of 2024. Furthermore, Rocket Lab ($RKLB) was our worst-performing position over the quarter (approximately -25%), and Apple ($AAPL) lost approximately 8% over the quarter. Given the size of our positions in these two equities (1.91% and 4%, respectively), most of the underperformance relative to the S&P can be attributed solely to these two positions. We will not change our positions with these two companies for the following reasons:
- Despite conventional metrics, Rocket Lab continues to show signs of repeatable and reliable success, launching its 45th Electron mission and its fifth national security mission for NRO. The company’s next mission (launch window opening April 24) is a joint KAIST-NASA launch that will deploy two satellites into two separate orbits, and will be one of its greatest technical and operational challenges to date. The company cannot be evaluated as a conventional blue-chip stock, but its mission history has repeatedly demonstrated that the company is more than capable of continuing to grow and evolve. Furthermore, the company continues to grow its space services business, providing a financial cushion against the notoriously feast-or-famine nature of commercial launches. While their P/E remains negative, the company’s long-term prospects remain bright and we continue to see a good long-term return. Given the very wide technological, operational, regulatory, and financial hurdles that must be overcome to compete, we remain confident in Rocket Lab’s ability to defend its economic moat from potential competitors.
- Apple’s underperformance is unsurprising given the slowdown in iPhone sales and efforts from the Department of Justice to castigate the company over alleged predatory and/or exclusionary practices. While the DOJ’s case appears lackluster, there’s no denying that the company stands to lose billions if it loses the case. Furthermore, Apple’s efforts to apply its aspirational pricing strategy in China and India have stonewalled as the company’s prices are significantly higher than what consumers in those countries can afford. The fact that Apple cut iPhone prices in China suggests Apple may be losing its ability to uphold high prices while enforcing high switching costs. The company is in need of a Next Big Idea, the last of which was the iPhone in 2007, and we remain confident that the Vision Pro mixed-reality headset will be the company’s next growth product. Initial reactions to the Vision Pro have been mixed at best — especially considering that some content providers, such as Netflix, have refused to support their apps on the headset — but it would behoove investors to recall that the original iPhone wasn’t much to talk about either, and yet became one of Apple’s best-selling products and reliably drew customers for fourteen consecutive generations without fail. A similar fate likely awaits the Vision Pro. Additionally, despite setbacks with artificial intelligence, we appreciate their patience and willingness to accept it and move forward with a plan of action to address it. We expect Apple to enhance their AI efforts in a meaningful way in the near future along with prospects of robotics as recently hinted. Lastly, we are not concerned with the current vicious regulatory environment as the recent antitrust lawsuit by the United State Department of Justice is lackluster in our view, but we will keep a close eye.
Our risk benchmarks remain positive, with a Sharpe ratio for the quarter of 4.13 and a Sortino ratio of 7.09. Yes, GF Fund I trailed the S&P for the quarter, but did so with almost 30% lower downside deviation, lower maximum drawdown, and 6% more positive periods. Looking at the distribution of returns, it’s easy to see that the S&P made up the difference in the bin of 2–4% returns; however, Garrison performed more favorably than the S&P in the bin of 0–2% returns as well as negative returns.
The value of each dollar invested in GF Fund I since its inception continues to outpace the indices, and it will be in 2024 — the second full year of GF Fund I — where we predict our strategy will begin to shine. The outperformance of the S&P for the quarter can easily be seen to have occurred entirely in the month of February, as it was the only month of the quarter where GF Fund I did not yield a return in excess of the benchmarks. GF Fund I’s compound monthly growth rate continues to hover around 2%, which is precisely as intended. It is the CMGR chart that is perhaps the most telling of our Fund I strategy, as GF Fund I continues to maintain steady performance despite macroeconomic uncertainties, such as Fed rate policy and geopolitical tensions driving broader market uncertainty.
Changes to portfolio allocations
There have been no changes to the Garrison portfolio during this reporting period.
Closing thoughts and future outlook
We remain focused on future rate action by the Fed and the apparent continued stickiness of inflation. Despite the headlines, companies continue to lay off thousands of workers across multiple industries, including telecommunications, consumer goods, technology, travel, finance, and logistics, just to name a few. Sticky inflation will continue to exacerbate problems of affordability: the longer inflation is allowed to ride, the more difficult it will be to regain control. Traditional fixes such as the Taylor rule may be off the table given that the Fed does not appear to have the political backing to take an aggressive stance on rates, and it is often overlooked that rate policy lives in the shadow of federal debt: it only works when there is responsible spending on the part of Congress, something which is currently lacking. This reinforces our investment thesis of defensive and value-driven decisions on equities: while some companies in the Garrison Fathom Fund I portfolio may take a hit, others — such as energy, waste management, food, and logistics — will likely insulate the portfolio from major losses. We are also keeping a close eye on the political climate domestically and overseas that will affect the macroeconomics further. Our eyes and ears are close to the ground and will make decisions accordingly.
We have begun monitoring Palantir ($PLTR) for a possible position within the Garrison portfolio. While the company is still young, it has demonstrated strong connections within the Department of Defense, including in the areas of data management, sensor fusion and tactical nodes, and in special operations applications. It must be apparent by now that AI is the bedrock of much of the future economy, and it is logical from our perspective to take positions in both the hardware and software sides of the equation: after all, even Nvidia’s ultra-powerful H100 AI GPU is meaningless without the software necessary to create actionable business and military intelligence. We feel that it will be this union of hardware and software that will bring the greatest benefit to investors interested in the AI sector, and will position ourselves accordingly.
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