On August 26, I added Palm Valley Capital Fund (PVCMX) to my non-retirement portfolio.
Why does this make sense?
My portfolio has a simple, static asset allocation: 50% stocks, 50% not. Within stocks, the default is 50% here, 50% there plus 50% larger, 50% smaller. When we calculated the likely downside of my portfolio in a 2008-like event, the loss was in the range of 25%. That’s not catastrophic.
Currently, my portfolio is overweight in international stocks, 50% rather than my targeted 25%, and underweight in US stocks, at 15%. That’s driven by two forces: (1) managers who have the freedom to invest in the US or elsewhere have, with some frequency, been choosing “elsewhere.” (2) The funds in my automatic investing plan (T Rowe Price Spectrum Income, Seafarer Overseas, Grandeur Peak Global Microcap) offer more fixed income and international equity exposure than US equity.
Palm Valley Capital, a fund that’s value-oriented, largely domestic and largely small cap, begins to redress that imbalance.
On August 26, Palm Valley announced that the fund was now available through TD Ameritrade. I assume that it will be added to the Schwab list soon, given the acquisition of TD by Schwab. The advisor is still working on Fidelity.
The fund has already attracted $12.6 million, with modest but steady inflows. It appears, for example, that the fund drew an additional $1 million in the last week of August. The managers have invested between $100-500,000 in, each, in addition to their stake in the adviser.
What do they do?
Palm Valley Capital (PVCMX) is an absolute-value small cap equity fund managed by Eric Cinnamond and Jayme Wiggins. Very few equity managers hew to an absolute value orientation. At base, it recognizes that stocks are worth owning but they’re not always worth owning. They are risky and owning them requires some margin of safety built into the price to compensate you for that risk. The absolute value mantra is: “if it’s not cheap enough, I’m not buying.”
In general, that means that most absolute value managers are … well, unemployed. There’s an endless, painful cycle that such managers face: the market crashes, they deploy the often substantial cash reserves when everyone else is selling in a panic, the fund soars, investors (belatedly) rush in, and then the market returns to normal. “Normal” generally means a period of rational exuberance (in which absolute value managers make a bunch of money) then a period of irrational exuberance (in which they sell off holdings which have become overvalued and have lost their margin of safety, and often find few replacements). Cash builds as markets soar, investors grow restless then charge off in search of more exciting options … often right around the time the market crashes.
Mr. Cinnamond has been navigating these waters since 1996, first at Evergreen Small Cap (1996-98), then Intrepid Endurance (1998-2010), and finally Aston/River Road Independent Value (2010-2016). Mr. Wiggins started at Intrepid in 2002 and succeeded Mr. Cinnamond as manager of Intrepid Endurance in 2010 when he was also Intrepid’s chief investment officer.
In 2019, the duo launched Palm Valley Capital Fund which has performed brilliantly. It is a small-cap value fund with significant exposure to microcap stocks; Morningstar classifies it as a small-core fund. Here is Morningstar’s report for the top three small value and blend funds for 2020.
|YTD return||Morningstar category|
|Aperture Discovery||30.7%||Small core|
|North Star Microcap||17.65||Small-value|
|Small core average||-8.9%|
|Small value average||-15.5|
Depending on whether you consider it small value or small core, it’s beating its peers by 25 – 30% YTD.
Small core is led by Aperture Discovery Equity (ADISX), a fund with a record of less than a year which is advised by the US branch of a fairly large UK adviser. It’s a long/short small-cap fund that reportedly it booked a 60% gain in Q2. Lipper considers it a long/short equity fund. Either assignment makes sense since the fund describes itself as “primarily” a long-based small-cap fund that “opportunistically …may also take short positions.” No idea of how much of 2020’s gains are attributable to long versus short positions. The fund sports a painfully high expense ratio (2.45%) with a very low investment minimum. The manager is from the private investment world; most recently, Diker Investments LLC, a small- and micro-cap specialist.
Small value is led by NorthStar Micro Cap (NSMVX), a hedge fund that converted about 10 years ago. We profiled their dividend fund last year. Neither Aperture nor North Star holds much cash.
Palm Valley falls in second place, regardless of which category you assign it to. Palm Valley is distinguished from its two competitors by having:
- managers with far longer track records
- substantially lower expense ratios
- an absolute-value orientation.
That last point provides striking context for the fund’s 2020 performance: the portfolio generated 15% returns while averaging about 70% in cash. (The actual stake has ranged from 52% – 92% as opportunities for buying arose or holdings became overvalued and had to be trimmed, but the managers agree that 70% is “a good average to use.) The math requires that the average stock in the portfolio has returned about 50% YTD, which is a yawning chasm from the 15% average loss for small-value funds as a group.
We noted in our May 2020 Elevator Talk with Messrs. Cinnamond and Wiggins that the fund has excelled because of the presence of two very good stock pickers and a rigid investment discipline. There are few better stewards in the small-cap space. I had previously invested in both Intrepid Endurance and Aston / RiverRoad Independent Value. That is not a “buy” recommendation because we don’t make buy recommendations. It is a recommendation that investors who are leery of the increasingly toppy behavior of the large-cap growth stocks that have dominated the past decade, might want to move, sooner rather than later, to expand their due-diligence list to include Palm Valley and the handful of remaining absolute-value funds that we’ve profiled before.