April 23, 2024

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The Sound Shore Fund Investor Class (MUTF:SSHFX) and Institutional Class (MUTF:SSHVX) superior 12.43% and 12.50%, respectively, within the fourth quarter of 2023, forward of the Russell 1000 Worth Index (Russell Worth) which superior 9.50%. As of December 31, 2023, the three yr annualized advances for SSHFX of 9.12% and for SSHVX of 9.34% have been additionally forward of the Russell Worth’s 8.86%. As long-term traders, we spotlight that Sound Shore’s 35 yr annualized returns of 10.14% and 10.43%, for SSHFX and SSHVX, respectively, as of December 31, 2023, have been forward of the Russell Worth at 9.94%. For the Fund’s most up-to-date standardized efficiency data, click on right here.

It was a superb yr for Sound Shore’s portfolio, gaining 17.42% for SSHFX and 17.67% for SSHVX in 2023, each properly forward of the Russell Worth’s return of 11.46%. We started the yr with a number of hand wringing on Wall Avenue as geopolitical tensions flared and the macro outlook was as unsure as ever. The Federal Reserve took traders on a curler coaster experience of recession fears that ebbed and flowed. All year long, inflationary stress on the economic system and markets remained entrance and heart and a few of us introduced this cartoon residence on the holidays. Adults across the desk all appeared to take pleasure in a superb snort out of it. The kids…not a lot.

Regardless of the market narrative typically dominated by fascination with the “Magnificent Seven” mega-cap progress shares that led the Commonplace & Poor’s 500 Index (SP500, SPX) returns, below the hood there was loads of alternative. Given larger rates of interest and the adjustment to COVID’s growth and bust impression on numerous industries, there was numerous dispersion within the fairness market. And so, forty years after the discharge of The Police’s closing studio album, Synchronicity, we discover ourselves in a interval of a-synchronicity. In different phrases, what we wish to check with as “mini-cycles” inside and between industries and geographies, at completely different closing dates. As correlations got here down and with a lot of shares buying and selling for very enticing valuation ranges, the chance set for our elementary worth technique improved, as evidenced by our robust return within the fourth quarter.

Attire maker PVH led all contributors for the quarter and was one among our greatest performers for 2023. As we mentioned in our letter on the finish of final yr, the inventory offered off within the second quarter of 2022 because it fell on client spending considerations and regardless of the corporate’s core enterprise persevering with to develop. We believed that with main manufacturers comparable to Tommy Hilfiger and Calvin Klein, together with a powerful stability sheet to face up to a gross sales slowdown, PVH was executing properly in a difficult setting. We added to our place on the time and our conviction has been rewarded. This yr, margins have improved as the corporate targeted on enhancing the standard and value construction of their finest promoting merchandise. This has allowed earnings to develop in opposition to a difficult retail backdrop. PVH’s administration staff has focused even larger margin enchancment which might result in earnings energy (‘EPS’) of greater than $18 per share, in comparison with the present EPS of $11.

Lengthy-term holding Capital One (COF) was additionally one among our higher performers this quarter. The corporate boasts a diversified deposits base with about 80% FDIC insured, properly above {industry} common. It’s the solely main financial institution 100% within the cloud, which permits higher underwriting and faster response to modifications within the setting. This know-how additionally helps cut back working and fraud price whereas releasing up money stream for reinvestment in advertising and marketing to develop merchandise (Enterprise X card) and construct its model. Intervals of stress, like we noticed within the banking sector throughout March, are a reminder of the underwriting acumen and prime quality deposits of Capital One. We added to our place after the fallout, figuring out that the corporate’s seasoned administration staff had steered capably by earlier cycles. At the moment, as bank card delinquencies have risen to extra regular ranges, Capital One is already reporting a slowing in delinquency progress. Conversely, some friends noticed prior underwriting missteps start to floor in 2023. At present buying and selling at 9 instances 2024 consensus earnings and round ebook worth, we stay enthusiastic in regards to the funding.

Worth investing typically requires persistence, and the passing of legendary worth investor and Berkshire Hathaway’s Vice Chairman, Charlie Munger, reminded us of one among his extra insightful quotes…“It’s ready that helps you as an investor and lots of people simply can’t stand to attend.” Healthcare holding Organon gives an identical state of affairs right now. The inventory lagged within the fourth quarter and for 2023 because of considerations about long-term income drivers. Non-operational elements (foreign money, rates of interest and separation prices) have masked progress that has exceeded expectations. A by-product from Merck (MRK), Organon (OGN) has a really regular pharmaceutical enterprise and is investing to develop its ladies’s well being franchise. Buying and selling for simply 4 instances earnings, the corporate is rising steadily, investing in its analysis & growth pipeline and producing ample money stream to repay its debt. Regardless of near-term weak point, we predict Organon is a lovely alternative for affected person, long-term traders like Sound Shore.

For the yr, we had a lot of shares up 50% or extra and the checklist features a various set of industries comparable to homebuilding, heavy truck manufacturing, and semiconductor capital tools. We want to spotlight one excellent contributor for the yr, electrical energy generator and marketer Vistra Corp. (VST), a low-cost supplier with a wholesome stability between technology and retail. Demand for electrical energy is rising and notably, load peaks are altering as properly. Because the nation brings on extra renewables and adjusts to better demand later within the day because of elevated use of electrical warmth pumps and electrical automotive charging, dependable clear energy is at a premium. Vistra is properly positioned with diversified gas sources together with photo voltaic, pure fuel, coal, nuclear and battery energy storage services, together with a advertising and marketing division to handle worth volatility. The corporate will quickly be closing its accretive acquisition of service provider energy generator, Vitality Harbor, and the deal will make Vistra the second largest carbon free, nuclear electrical energy supplier behind Constellation Vitality, one other portfolio holding. Vistra CEO Jim Burke, leads a veteran utility administration staff that’s dedicated to transitioning the corporate’s portfolio to a sustainable footprint by closing older fossil gas vegetation and rising the renewables portfolio. They’ve additionally been an vital voice to advocate for modifications that can speed up the worldwide transition to a clear, renewable power future, whereas sustaining sufficient near-term provide. Vistra has a powerful stability sheet that enables the corporate to put money into innovation and operational enhancements. Moreover, administration is utilizing extra money stream to purchase 40% of the excellent shares over a 5 yr interval and they’re greater than half method by that course of. At present valued at 9 instances earnings with a 17% free money stream yield and a 2.3% dividend, the inventory stays a full place. As you’ll be able to see from the chart under, Vistra’s efficiency was fairly completely different than many different electrical energy suppliers and gives additional proof of the disparate efficiency that may typically be discovered inside a sector.

VISTRA CORP. vs UTILITIES INDEX vs RUSSELL 1000 VALUE INDEX

VISTRA CORP. vs UTILITIES INDEX vs RUSSELL 1000 VALUE INDEX

Detractors for the yr included a few of our healthcare holdings, which underperformed together with the sector as the thrill for weight reduction medicine appeared to siphon a number of capital away from different elements of the healthcare {industry}. One instance is healthcare options supplier Centene; one other place we initiated earlier this yr when it was buying and selling at a under regular 9 instances earnings. Whereas the inventory is up from buy, it has underperformed the general market. Up to now, the corporate’s Medicaid enterprise is performing as anticipated. In the meantime, a brand new administration staff, led by Sarah London, previously of United Healthcare, is in its second yr of turning across the enterprise. We’ve been impressed with the preliminary success the corporate has proven streamlining its enterprise and enhancing working efficiency and the inventory stays a full place.

Over 45 years and quite a few market cycles and durations of uncertainty, we’ve discovered that conviction, judgement and inventory selecting are what ship outcomes. This yr once more offered affirmation that our technique doesn’t want a value-driven market to provide enticing returns. Sound Shore’s portfolio holdings responded properly to company-specific drivers of efficiency, signaling a extra balanced market with decrease correlations. In the meantime, we’re constantly researching shares which can be low cost versus their historic norms and the market, the place worth is constructing forward of expectations. Within the present setting, our emphasis on stock-specific sources of outperformance ought to show as related as ever, regardless of a protracted checklist of considerations in regards to the economic system and market volatility.

We word that as of December 31, 2023, Sound Shore’s portfolio had a ahead price-earnings a number of of 11.1 instances consensus estimates, a significant low cost to the S&P 500 Index at 19.5 instances and the Russell 1000 Worth Index at 14.7 instances. It’s our perception that the Sound Shore portfolio has super worth.

We’ve lately participated in interviews on standard, investment-focused digital platforms, together with a podcast discussing Vistra Corp., participation in a Worth Equities panel, and a short interview about what we see in right now’s market. Please click on right here for the interviews.

Thanks in your funding alongside ours in Sound Shore.


Necessary Info

An funding within the Fund is topic to threat, together with the doable lack of principal quantity invested. Mid Cap Threat: Securities of medium sized corporations could also be extra unstable and harder to liquidate throughout market downturns than securities of huge, extra extensively traded corporations. Overseas Securities Threat: The Fund might put money into international securities primarily within the type of American Depositary Receipts. Investing within the securities of international issuers additionally includes sure particular dangers, which aren’t usually related to investing in U.S. dollar-denominated securities or quoted securities of U.S. issuers together with elevated dangers of opposed issuer, political, regulatory, market or financial developments, modifications in foreign money charges and in trade management rules. The Fund can be topic to different dangers, together with, however not restricted to, dangers related to worth investing.

The Adviser analyzes threat on a company-by-company foundation. The Adviser considers governance in addition to environmental and social elements (ESG) as acceptable. Whereas valuation, governance, environmental and social elements are analyzed, the analysis of all key funding issues is industry- and company-specific. Consequently, nobody problem essentially disqualifies an organization from funding and no particular person attribute have to be current previous to funding.

Diversification doesn’t guarantee a revenue or shield in opposition to a loss in a declining market. The Dow Jones U.S. Utility Index, a member of the Dow Jones World Indices® household, is designed to measure the inventory efficiency of U.S. corporations within the utilities {industry}.

Efficiency information quoted represents previous efficiency and isn’t any assure of future outcomes. Present efficiency could also be decrease or larger than the efficiency information quoted. Funding return and principal worth will fluctuate in order that an investor’s shares, when redeemed, could also be value kind of than their unique price.

The views on this letter have been these of the Fund managers as of 12/31/23 and should not essentially replicate their views on the date this letter is first revealed or anytime thereafter.

This commentary might comprise discussions about sure investments each held and never held within the portfolio. Present and future portfolio holdings are topic to threat. For the Fund’s High 10 Holdings click on right here.

You need to contemplate the Fund’s funding goal, dangers, prices and bills fastidiously earlier than investing. The abstract prospectus and/or the prospectus comprise this and different details about the Fund and can be found out of your monetary middleman or www.soundshorefund.com. The abstract prospectus and/or prospectus must be learn fastidiously earlier than investing.

Distributed by Foreside Fund Companies, LLC.


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