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Worried about a possible recession in 2023? They are many investors. But not the managers of the $370 million Marshfield Concentrated Opportunities Fund (MRFOX). “We like companies that do well in the business cycle,” says Chris Nimczewski, who runs Concentrated Opportunity with Elise Hoffman and Chad Goldberg.
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In addition, some of the fund’s holdings are designed to perform better than many other investors would expect in an economic slowdown or outright recession.
Also, managers of the Marshfield Concentrated Opportunity Fund should take note. Their funds are bigger than ever this year.
Recession in 2023? Leadership in 2022
The fund has returned 3.93% this year through Tuesday. In contrast, the broader market in the form of the S&P 500 is shedding 18.62%.
Morningstar classifies the fund as a large-cap growth portfolio, based on the recent performance of certain holdings. That peer group is down 29.85 percent so far this year. The fund considers itself a global value strategy. Morningstar’s large-cap hybrid group — 54% of the fund’s assets work in large-cap stocks, by Morningstar’s count — has lost 17.16% this year, according to Morningstar Direct.
Finding resilience
Concentrated opportunity fund managers say one of the keys to their success is their willingness to zig when most other investors zag. “In order to consistently outperform over time, an investor should be as divergent as possible from (a benchmark like the S&P 500),” Hoffman said. “Otherwise, you’re just closet pointers.”
They look for stocks that are poised to boom in markets and stocks that thrive in downturns. Hoffman said, “When the economy is at risk, we want to put together a resilient and balanced portfolio because we have at least a portion of our portfolio in companies that can make hay during those times. “
Another key to the fund’s success is its portfolio focus. The fund tends to hold only 16 to 24 holdings. As of September 30, it held 17 shares. “We like great ideas more than second-rate ideas,” Hoffman said. “And focusing allows us to understand each capture in more detail and depth.”
20% in cash
The fund had 20% of its shareholders’ money in cash. Hoffmann, Niemczewski and Goldberg believe that they should dry their powder until there is an opportunity for the level of the best ideas. “That makes us very selective,” Nimczewski said.
So far so good. The relatively young fund – which opened on December 28, 2015 – has outperformed its rivals with 99% of the largest growth in the last five years. In the process, the fund has had a comfortable ride for shareholders. During that period, the fund has outperformed the S&P 500 by 91 percent in every market benchmark. Meanwhile, the fund has surrendered more than 68 percent of its benchmark in each bailout recovery.
That personal touch
Fund managers expect at least some of their holdings to hold even in the face of a recession. Take it Washington Expeditors International (EXPD) The company provides supply chain logistics support to transportation companies by land, air and sea. Instead of owning or operating planes, ships, and vehicles, freight forwarders help move customers’ planes, ships, and vehicles.
Expeditors are easy on transportation assets, but heavy on human workers. “Customer relationships are important in their business,” Hoffman said. “Many of the closest startup competitors are online-only.”
“Trade wars, drug trafficking and border security make it more complicated, difficult and time-consuming to move cargo through customs,” Niemczewski said. .
In the year If a recession occurs in 2023, producers will ship less goods to market. But carriers reduce capacity in decompression. That “allows expeditors to leverage their knowledge and relationships to the benefit of their clients,” Hoffman said. “Whenever there is a mismatch between supply and demand, they anticipate this before other market participants and position themselves accordingly.”
Made for A Recession
Home builder NVR ( NVR ) is another holding that, like Expeditors, may look to some investors as a bad bet in the face of a possible economic downturn. After all, interest rates have increased. And higher prices discourage home buying.
But concentrated opportunity fund managers say NVR is more volatile than its rivals. And this flexibility tends to help the company sell homes better than its competitors, even in recessions or recessions.
The key to NVR is not locking money in the ground like many competitors do. “Most home builders are also land developers,” Hoffman said. “They buy land, go through the permitting process, then build a house and sell it.”
This process takes time and a lot of money, she says. In contrast, NVR buys options that give it the right to buy land. They only use an option when there is clear demand for a house on that parcel. “This is a powerful program that no one else has received,” Hoffman said. “It allows NVR to make money every cycle.”
That approach allows the NVR to target the ground, but it’s based on demand. The company is willing to build homes at the price point buyers want, Hoffman said. By slowing down, NVR can eliminate options on land where only an expensive house can be built. Rivals don’t have that relief. You are forced to build a house in the neighborhood where you bought land, which is governed by price points.
opposite managers
Still, Hoffman and Nimczewski do not predict a 2023 recession or continued economic growth. “We tend to be agnostic,” Nimczewski said. “Other fish that swim together make us swim separately. It gives us the chance to find opportunities that others miss.”
Whether or not there’s a recession next year, they’re going to love the auto parts supplier O’Reilly Automotive (ORLY) According to Niemczewski, the Marshfield Concentrated Opportunity Fund likes companies that do well with business cycles. And that’s what O’Reilly says, because customers need practical vehicles no matter how the broader economy performs.
Also, O’Reilly’s same-day delivery of classes protects it from competition. Amazon.com (AMZN), generally delivers next day. Repair shops and do-it-yourselfers are typically willing to pay extra for same-day delivery.
“When we enter a place, we expect to hold it in the economic cycle,” Hoffman said.
Sources: S&P Global Market Intelligence, IBD
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