Garrison Fathom’s First Fund Marks Two Years of Success: Championing Long-Term Value for Investors
GF Fund I ends Q2 2024 with a +15.92% YTD net return and a 62.12% net return overall
Garrison Fathom Fund I (GF Fund I) performance
June 2024 marks the two-year anniversary of our Garrison portfolio, and our strategy of long-term focus and Sharpe optimization continues to be validated by the market. GFI ended the first half of 2024 continuing to outperform the indices in terms of net and risk-adjusted returns. Our annualized performance since inception, as of 28 June 2024, is shown in the table below:
Our long-term approach continues to be validated with our risk measures, including a Sharpe ratio of over 3 and a Sortino ratio of over 5; we also continue to outperform the indices in terms of max drawdown and recovery time. It should be noted that at this point in GFI’s life, our Garrison portfolio is outperforming some of the best and most well-known mutual funds and ETFs on a Sortino-ranked basis.
GFI is listed below as U9:
This should not be surprising, given that our strategy has always been focused on optimizing return per unit risk. The long-term performance of the Garrison portfolio remains validated as our holdings continue to pull away from the traditional indices, a trend which has progressed since approximately March of 2023, less than one year into the portfolio’s life.
Our raw monthly growth rate lagged the indices for the previous two months, as seen below; however, our compound monthly growth rate continues to exceed those of the indices, which has been the case since Garrison’s inception. This is in keeping with our long-term strategy: the variations in performance relative to the indices is of little consequence when compared to the long-term performance of the portfolio and the consistency of returns. Ultimately, Garrison is designed to perform consistently within a wide range of market conditions; thus, today’s slight underperformance of the S&P is tomorrow’s gross outperformance of it.
The distribution of returns further validates our strategy: Garrison consistently outperforms the indices within the -2% to 2% range. The performance difference is notably due to the lower frequency of returns in the 2–4% range for the S&P and NASDAQ. We consider these minor fluctuations insufficient to warrant a strategy change.
Garrison’s monthly Sharpe ratio continues to outperform the indices, as shown below. As of the end of Q2 2024, we are running a Sharpe ratio approximately twice that of the S&P’s long-term average.
The monthly returns of Garrison are shown below. The rebalancing of the portfolio (especially the reduction in weight of NVIDIA holdings) has created a noticeable and expected decline in monthly returns; however, this has also increased our risk-adjusted returns, and as such we consider the reduction in NVIDIA holdings (and increase in positions in companies such as Walmart and Costco) to be merited given the broader macroeconomic pressures concerning affordability; for instance, one of Walmart’s fastest-growing customer segments is those shoppers making over $100,000 annually, giving credence to the reality that affordability concerns are not easing regardless of more optimistic headlines of the health of the economy.
Our performance margin relative to the S&P has narrowed as a result of this, although we are still aligned with our historical outperformance of the index.
Despite the narrowing margin of outperformance, our portfolio rebalancing (detailed below) is justified given the concentration of the “Magnificent Seven” within the broader S&P 500. Much has been said about the dangers of such concentration, but despite the tech-driven euphoria that drove the Mag7 up 57% over the past year (as of June 27, 2024) — more than double the return of the entire S&P during the same period, with NVIDIA’s stock alone tripling — concerns over this concentration are not necessarily overblown. In fact, there’s precedent for such concentration: the top ten stocks made up approximately 30% of the US market in the 1930s and 1960s, and almost 40% in 1900. Equity markets were as concentrated (or more) during the late 1950s and early 1960s, with nary a market crash in sight. Most importantly, the big US companies have the profit margins and equity returns to back up their valuations, which is a marked difference from the dot-com bubble. This also merits consideration, since many of today’s tech companies — especially the ones in which we invest, such as Apple, Microsoft, Google, and NVIDIA — have become both cornerstones of the modern age and ever-expanding spiderwebs creating the framing of tomorrow’s innovations.
The real question is how much more gain can be had before a correction, whether such a correction is the result of broader market pressures, profit-taking on the part of investors, or notable selloffs of shares. Taking large positions in a few companies is the exact opposite of diversification, and also creates exposure risk from correlated corrections. There are few exogenous events that could adversely affect all Mag7 companies simultaneously (they’re in different parts of the tech marketplace, after all), and generally speaking the correlation between them is insufficiently high to cause much concern, especially the correlations between Tesla, $TSLA, and the other six:
Examining our current holdings of four of the Mag7, at first glance the correlations do not appear to be inherently concerning:
However, when these correlation coefficients are compared with those of the rest of the Garrison portfolio, it becomes apparent that there is a lower mean correlation between all of the portfolio stocks versus the four Mag7 companies within the portfolio.
In other words, the mean correlation coefficient between the four Mag7 companies in the Garrison portfolio is 0.6298, whereas the mean correlation coefficient of the entire Garrison portfolio is only 0.1544. By intentionally avoiding the concentration of Mag7 stocks — regardless of their concentration within the S&P 500 — we are reducing the risk of correlated downside. Yes, this reduces the risk of the Garrison portfolio symmetrically — protecting against downside risk while “protecting” against (i.e. avoiding) upside risk — but the potential for enormous upside is not the Garrison strategy: consistent, reliable returns that beat the market over the long term is. Rebalancing our positions away from the tech darlings and more toward stalwarts such as Costco and Walmart is justified, especially given concerns over housing affordability in the US and increasing cost of living effects being felt by even the largest companies within their industries.
Changes to portfolio allocations
Closed positions on Robert Half, $RHI; Marsh McClennan, $MMC; and Essential Utilities, $WTRG
We have exited our positions in $RHI, $MMC, and $WTRG due to two of these companies’ underperformance over the past 18 months ($RHI: -26.28% YTD; $WTRG: -1.38% YTD). While $MMC is up approximately 10% YTD, we closed our position to allocate our assets towards companies better-positioned to benefit from macroeconomic and global events. For example, we have reduced our exposure to insurance companies overall, due to the likelihood of La Niña conditions developing in the second half of this year, which can lead to droughts in the southern US and a potentially more severe hurricane season (at the time of this writing, Hurricane Beryl, the first of 2024, has reached Category 5 in record time and is moving toward the gulf states). These events may result in an increased likelihood of policy payouts and thus reduced financial performance. However, we are studying several insurance companies with less exposure to these specific threats.
GTC limit order on Palantir, $PLTR
Despite reducing our position in NVIDIA, we remain bullish on AI applications in general, especially from a software perspective. Palantir remains a company with high potential despite its elevated P/E ratio, and the recent awarding of two US Air Force contracts (totalling approximately $30 million) for data ingestion and data-as-a-service work serves as further validation that the company’s long-term potential is growing. We currently feel the stock is slightly overvalued, however, and have an open limit order for an $18 share price.
Added positions: $NEE, $GEV, $GEHC, $VLO
We have increased our position in NextEra Energy, $NEE, as well as opened positions in GE Vernova, $GEV, GE Healthcare, $GEHC, and Valero Energy, $VLO.
NextEra and Vernova are well positioned to capitalize on the increasing demand for data centers and the energy needed to power them. These two companies have also made statements regarding the increasing power requirements for data centers — estimated to be 8% of the nation’s power consumption by 2030 — for several years now; in the case of GE Vernova, prior to the split of GE’s energy division from the rest of the company the predictions of data centers’ endless thirst for power can be traced to 2015. This is precisely the type of forward-thinking, long-term mindset that we value in our portfolio companies. The advanced capabilities of GE Vernova’s aeroderivative turbines — fuel flexibility (including up to 100% hydrogen), short installation lead time, fast startup times, and various output options — make them well-suited to supply the nation’s ever-growing demand for energy.
GE Healthcare caught our attention due to its position as a leading provider of medical technology, especially medical imaging technology, which will likely experience increasing demand over the next 10–15 years as we continue to experience the “silver tsunami” of aging Americans requiring an increasing level of healthcare. GE Healthcare has also experienced strong increase in international sales and touts a focus on innovation and new product development that will help it capture market share. The company also has a strong economic moat given the high switching costs healthcare providers would face, giving them some welcomed pricing power and a stronger economic moat.
We are interested in increasing our position in TSMC, $TSM, based on the advances in 3nm technology. These advancements make TSMC not only the world’s premier chip supplier, but also a global leader in chip manufacturing as the industry approaches its quantum limit. To date, however, we have not yet actively increased our position in TSMC, primarily due to geopolitical concerns.
Closing thoughts and future outlook
We have openly stated on several occasions that we do not view the US economy with the same rose-colored glasses as others, and we are positioning our portfolio with this in mind. We are well aware that the Fed’s tepid rate policy since inflation began in earnest in mid-2021 has done little for Americans in terms of affordability. We share the sentiments of several others that the market is overvalued, and much of this has been driven by irrationality and the delusional belief that the fight against inflation has somehow been won and rate cuts are due any day now; left conveniently unspoken is the reality that even if the fight against inflation were “won” tomorrow, it would do nothing to address affordability — that can only be achieved via deflation (recession) or an increase in pay rates, the latter of which would likely touch off another round of inflation. Recent headlines have touted inflationary cooling as a victory, but this is misleading: we are experiencing a period of disinflation, not deflation.
Broader increases in pay are unlikely. Companies continue layoffs — over 56k tech employees in 2024 so far, with more to come, and almost 260k overall during Q1 2024 alone — and several others have announced layoffs, including UPS and FedEx, citing economic slowdown. The layoff of high-earning workers will also likely have knock-on effects on support industries such as food away from home, personal and business services, etc. that may yet drag down the rest of the economy to some degree.
Unemployment generally is increasing, by both U3 and U6 metrics:
Affordability concerns not only drive Americans toward credit cards in an attempt to make ends meet — a dangerous enough proposition given the current rate environment — but also increases the rate of past due balances and thus the risk of default. Unsurprisingly, past due balances have increased steadily since inflation began in earnest in mid-2021.
These indicators do not reflect a strong or robust economy, but rather one where inflation remains high and economic conditions deteriorate for millions. We see this as a shift in consumer demand toward more cost-effective goods and services. Accordingly, we have rebalanced the Garrison portfolio to include a higher percentage of holdings in companies like Costco and Walmart. Additionally, we have increased our exposure to companies such as Republic Services ($RSG), which provide essential services regardless of economic conditions.
We remain confident in our strategy and holdings, particularly in the technology sector. Technology not only leads recoveries from downturns but is increasingly becoming a safe-harbor sector as the world grows more reliant on it. Despite broader market uncertainty, we are steadfast in our approach of investing in companies that are fundamental to society. This strategy has been the cornerstone of Garrison’s success since our inception and will continue to guide us in delivering value for years to come.
