Economic Overview
The year began with continued uncertainties regarding economic growth, interest rate policy, and market valuations. During the quarter the Fed raised rates twice for a total of 50 basis points (0.50%), setting the Fed Funds rate at 4.75-5.00% at quarter end. This is the highest overnight rates have been since 2007.
Predictably, the rate of US economic growth has continued to slow, as has the pace of inflation. Headline inflation is running at 5% year over year as reported by the BLS on April 12, and has continuously slowed since June 2022.
Source: US Bureau of Labor Statistics
Looking over the horizon, we see slower economic growth, slightly higher short-term interest rates, and continued slowing of inflation. Labor markets are softening, although wage levels remain elevated — a new and sustained forward condition in our view. Overall employment is strong, but like the economy, demand for labor has softened.
Energy remains one of the areas of inconsistency in the inflation outlook and macroeconomic slowdown trend. Although oil prices declined sharply over the past year, West Texas Intermediate crude (the US benchmark) retreated from just over $120/barrel in mid-2022 to a recent low of just about $66/barrel in late February 2023. In the past week, it jumped back above $80/barrel with OPEC’s announcement of a production cut along with a surprisingly robust increase in Chinese energy demand. We keep close tabs on energy, in part due to its outsized influence on inflation and in part as we look for opportunities to profit from the variability in pricing for all energy assets, including potential alternatives and renewables.
We think some caution is warranted looking ahead. Over the past six months, we’ve raised cash by selectively reducing our stock exposure. Simultaneously we’ve taken advantage of rising rates by adding bonds to portfolios. We believe as the economy continues to slow the Fed will respond with an about-face and begin cutting rates in rapid succession. Declining interest rates will be a big plus for bond holdings. We’ve added to bonds incrementally as rates have risen over the past year, in some cases, locking in yields of over 8% for more than seven years. We anticipate receiving abnormally high returns on our bond investments over the next few years.
Recent comments from a number of widely quoted Wall Street prognosticators are echoing one another, suggesting the Fed may begin cutting rates as soon as July. We believe rate cuts are forthcoming, but cannot predict the timing.
Our research team meets weekly to analyze economic data and draw conclusions that color our view of the world now and into the future. We continue to focus our efforts on making intelligent investments in the equity and debt of a small number of businesses in which we develop a high level of confidence and where we believe there is current mispricing by market participants.
A Word on Corporate Governance
Corporate governance is a topic that has arisen more frequently of late. Every public company in which we invest has a board of directors for whom the stockholders vote annually to appoint as their representatives. A board of directors has two principal responsibilities: to manage a company’s executives, and to hold those executives accountable to performance compared to the company’s strategic plan. Execution of the strategic plan is the sole responsibility of senior management, but oversight of senior management is the primary role of a board of directors.
When a company is having trouble, most investors appropriately look to blame management but overlook that directors are charged with oversight of management. While both parties have a role in a company’s success, only one bears ultimate responsibility for its failure. Poor corporate governance is reflected in poor share price performance, which is most often a result of poor business execution. In addition to their oversight responsibilities, directors have fiduciary obligations to a) carry out the business of the corporation with loyalty, and b) to exercise care in business judgment[1]. To do otherwise would be a breach of the obligation of the appointment and cause for termination. Much has been written on this subject, which is of utmost importance for a high-functioning corporation.
How We View Corporate Governance
Milwaukee Institutional Asset Management (MIAM) devotes considerable time and attention to understanding the people who manage businesses. Our investment research process includes interviewing management to understand corporate governance and the company’s culture. Although difficult to quantify, it is easy to discern when a company has obviously excelled in implementing a culture of self-accountability.
Travel
A group of our research analysts traveled to Oslo, Norway during the first week of March to meet with several Norwegian companies in which MIAM has invested. Meeting in person at a company’s headquarters is of immeasurable value in that we can observe what is apparent but unspoken. For example, how does the CEO interact with subordinates, and how lavish are the facilities (especially the chief executive’s own office space).
We met with management and directors of four businesses in which we are invested, and were impressed by the positive corporate cultures and clear strategic focus that we observed. It was a very productive trip during which we further enhanced our already deep knowledge of the companies we visited. While in Oslo, we also attended a conference focused on investment in shipping and offshore energy sectors that allowed us plenty of opportunity to meet with other executives and immerse ourselves in current and emerging trends in these industries.
From Our Library
We recently concluded Dead Companies Walking by Scott Fearon. Among the many insights the author offers throughout his book, he emphasizes how investors and money managers need to look at the world objectively in order to achieve a different, and better, outcome than the average. He states:
Effective money managers do not go with the flow.They are loners, by and large. They’re not joiners; they’re skeptics, cynics even. Whatever label you want to put on them, the trait they all share is that they don’t automatically trust that what the majority of people—especially the experts—are doing is necessarily correct or wise. If anything, they move in the opposite direction of the majority, or they at least seek out their own course.
He further adds:
But there is one common trait that I believe all great investors share: intellectual curiosity. Good money managers are broad-minded and intellectually curious. They don’t, no, they can’t just accept conventional wisdom. They are vociferous readers. They crave new ideas and when they hear them, they’re willing to try them out. They’re not afraid of something just because it’s novel or disruptive. In fact, the more iconoclastic an idea is, the more curious they are about it. Unfortunately, this attitude is exceedingly rare on Wall Street.
We just began our next book, Financial Shenanigans, How to Detect Financial Gimmicks & Fraud in Financial Reports by Howard Schilit and Jeremy Perler. It is sure to be an intriguing read.
Firm update
As a firm we continue to manage capital for individuals, families, and institutional investors. We are currently eleven strong, including Rachel Cheng, an NYU student intern, who has been working with us since early March. She brings an interesting perspective to our discussions as a Chinese citizen studying in the United States.
Zephyr/PSN recognized MIAM in 2022 for outstanding performance across our three portfolios (all stock, all bonds, and balanced). We have a singularly focused strategy that drives our long-term success. Our rigorous research process allows us to identify and invest in undervalued and mispriced businesses, then actively engage with management over our holding period to ensure we achieve maximum return on investment. This goes for both our equity and debt investments. We think market pricing has inefficiencies that can be exploited which allows us to invest opportunistically over time. We welcome volatility or variability in pricing because it increases the opportunity for us to buy and sell at favorable prices in relation to value.
MIAM recently expanded its board of directors, adding James P. Geygan, our current chief operating officer, and Shawn G. Rice, a Milwaukee-based corporate attorney, as new directors. We take corporate governance seriously as a firm, applying the same standards to ourselves as we expect from public company boards. This standard of behavior has served us well over the years and creates a high level of confidence amongst the stockholders and stakeholders of Milwaukee Institutional Asset Management
Concluding Thoughts
When we penned our year-end letter, we stated that we still saw significant investment opportunities and encouraged clients to contact us regarding adding capital for investment management. Our equity account (stock) composite returned well above the market averages during the first quarter. We remain alert and opportunistic and still see select areas for investment.
If you’ve had changes in your investment objectives or financial situation that warrant adjustments to your portfolio, please let us know. We are happy to schedule a call to discuss ways in which we can update your objectives to better align with your current circumstances.
Annually we send a copy of the firm’s Privacy Policy, which is enclosed, and an offer our SEC Form ADV, which we can send upon request, or direct you to the SEC website to access a digital copy.
Thank you for your ongoing confidence.
Your Investment Research & Advisory Team
Milwaukee Institutional Asset Management
A Division of Global Value Investment Corp.
The opinions expressed herein are solely those of Global Value Investment Corp. (GVIC), its divisions and subsidiary business. The data is furnished for informational purposes only and should not be relied upon as the basis for an investment decision or recommendation. Although it is derived from sources believed to be accurate, GVIC cannot guarantee the accuracy of any statistical information.
[1] https://corporatefinanceinstitute.com/resources/management/board-of-directors/
This document is published by Milwaukee Institutional Asset Management (MIAM), a division of Global Value Investment Corp. (GVIC). MIAM is the institutional investment advisory division of Global Value Investment Corp., providing investment advisory services to institutional investors including Registered Investment Advisors and Broker-Dealers. All statements or opinions contained herein are solely the responsibility of Milwaukee Institutional Asset Management. The material, information and facts contained in this report were based on publicly available information about the featured company and were obtained from sources believed to be reliable but are in no way guaranteed to be complete or accurate. This report is for informational purposes only and should not be used as a complete analysis of any company, industry or security discussed within the report. This report does not constitute an offer or solicitation to buy or sell any security, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. An investment in any security referenced in this report may involve risks and uncertainties that could cause actual results to differ from the analysis provided herein, which may not be suitable for all investors. Past performance should not be taken as an indication or guarantee of future results. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. Employees of GVIC may have positions in securities referenced in this report. ‘Intrinsic’ or ‘Appraised’ value refers to MIAM’s quantitative and qualitative assessment of the value of an enterprise. Market capitalization is a measure of the total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current quoted share price. MIAM’s investment strategies generally invest in a smaller number of securities than some other strategies. The performance of these holdings may increase the variability of a strategy’s return. There is no assurance that dividend-paying stocks will reduce price variability. Value investments are subject to the risk that their intrinsic value may not be reflected in market prices. For purposes of distribution in the United States, this report is prepared for persons who can be defined as “Institutional Investors” under U.S. securities regulations. Any U.S. person receiving this report and wishing to affect a transaction in any security discussed herein must do so through a U.S. registered Broker-Dealer. Neither Global Value Investment Corp. nor Milwaukee Institutional Asset Management is a registered Broker-Dealer.
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