Striving to Consistently Outpace The S&P 500 Index
0% Management Fee, Performance Fee Only
7/1/2019 – 6/30/2020
Annual Letter to Limited Partners
Cavallini Capital LLP.
Greg Cavallini
1080 Brickell Ave. Miami, FL 33131
Results July 1, 2019 to June 30, 2020
Cavallini Capital including dividends reinvested, (hereinafter called CC) had an overall gain of 28.03% during the fiscal year. The S&P 500 Index including dividends reinvested (hereinafter called the S&P) had an overall gain of 7.52% during the fiscal year.
To view track record, please contact Greg Cavallini at greg@cavallinicapital.com
I am glad to report that CC had an exceptionally good year. To date, this has been the best year for CC. CC beat the S&P by 20.51 percentage points. The separation between CC and S&P is what I consider to be the key factor in determining which has been the best year thus far. However, we should not expect results like this in the future. More importantly is the separation between CC and S&P since the Fund’s inception. CC’s has nearly doubled the return of the S&P in its initial three years.
Cavallini Capital Investor Gains vs. The Competition
The results depicted above show that CC nearly doubled the return of the S&P during the course of its first 3 years since inception. Naturally, what is most important to investors is what the gains (Net of Fees) have been since the Fund’s inception. Below you will see 5 separate results.
An average of all U.S. stock mutual funds. These Funds are actively managed by individual(s) who are the smartest and brightest in selecting stocks.
Results from a typical mutual fund that is invested in a similar manner to CC. T. Rowe Price (PRDGX) has Assets Under Management (AUM) of about $14 Billion. PRDGX represents a prototypical fund for an ordinary investor seeking to put money in an investment vehicle focused on stocks. Results are represented net of fees.
The S&P which is passively managed.
Investor’s gain in CC net of fees.
Results of CC.
The results have been a success thus far in the life of not only the Fund but investors who have decided to come along for the ride. The Mutual Fund industry continues to struggle as it has for many decades. Going forward, I will update the results on the semiannual letter as well as the annual letter.
To view track record, please contact Greg Cavallini at greg@cavallinicapital.com
3-Year Track Record
CC has reached its three-year track record. This is significant for a few reasons. It is important to judge a money manager based on a minimum of a three-year track record. When looking at the track record, consistency is key. An outlier year can skew the averages, which could distort the reality. One should not judge a money manager based on how he/she performs in a one-year period or a 6-month period etc. It is simply not possible to say with confidence if the results (good or bad) below 3 years were attributed to skill or luck. Pension Funds, Mutual Funds, and Fund platforms seek managers with a live 3-year track record or more in order to consider investing with a manager. A live 3-year track record is seen as the barometer to a good or bad performance. By no means does a 3-year track record mean that it was attributed all to skill and non to luck. Luck will always play a role in any investment decision of any kind. The idea is to make investment decisions in which luck is minimized as much as possible. One should not focus on the result but instead on the process that led to the result.
Covid-19 And Its Impact on the CC / Market
Covid-19 has been devastating to individuals and their families. I hope anyone and everyone reading this letter is in good health as well as their loved ones. As a long-term investor, I like to focus on businesses that have low debt, plenty of cash on hand, and have a moat that makes it very difficult for new entrants to compete (just to name a few qualities I look for). Covid-19 also had devastating effects on businesses and the market in general. The airline and cruise ship industries were hit particularly hard. Many stocks, outside the industries just mentioned, suffered losses of between 50% to 80%. To some degree, the stocks that were hit hardest were the companies that had a lot of debt, little cash on hand to services both the current and long-term debt, and little or no net profits. However, all things considered, the Fund’s performance was exceptional during these tough times. As a long-term investor, I tend not to focus on quarterly or yearly results. What is most important is the cumulative gain since inception of the Fund vs its competitors and the S&P. From time to time, the market has extreme gains and extreme losses during short periods. In calendar year 2019, the S&P had a total return of 31.50%. To put that into perspective, since 1926 (1st year of the S&P) the average annual gain has been about 9.5%. On the other hand, the 1st quarter of calendar year 2020 saw one of the worst declines ever. During this period the S&P lost 19.60%, good enough for the worst 1st quarter ever and the worst quarter since 2008. During times of such volatility, it is helpful to see how investments performed. Below you will see two charts. One highlights how the Fund performed during extreme gains in the market vs its competitors. The second illustrates how the Fund performed during one of the worst quarters in financial market’s history vs its competitors.
As you can clearly see from the graphs, CC gained significantly more than the market during good times and lost less than the market during bad times.
For reference sake, I have also included the performance of the above assets during the months of April, May, and June (Q2). I want to emphasize that the track record on a quarterly basis is not important but instead the cumulative long-term track record.
Many people jumped into stocks that perhaps were / are good plays for this current state and / or time, but as a long-term investor that is not my focus. My focus is on businesses that will hopefully be around for the next 50 years or more. I believe this is what contributed to CC’s higher gains and lower declines than the competitors and averages.
An important note to mention: The fund deployed large amounts of capital in the heart of the market panic in the first day of April (once again in the 1st day of May). This is now the second time the Fund has deployed large amounts of capital in the middle of a market panic; the first being in early January of 2019. The Fund did not sell any positions in the great outstanding businesses it owns because of the market decline. In fact, the fund did the very opposite. CC plowed money into the great businesses it already owns, which were offered at very steep discounts. As an added bonus, the Fund was able to get into a new position that had been on the radar for over a year but was too expensive to buy. As I mentioned in my
Essay of March 31st, when a rare discount is offered, take it. This does not mean that they could not have gone lower, it simply means that CC bought good companies at a cheap price. In time (no one knows when) the stocks will rise again.
Registered Investment Advisor
In March of 2020, CC applied to be a Registered Investment Advisor in the state of Florida. Subsequently, that means that I personally have also applied. The decision can take up to 6 months. I will keep everyone posted as to the latest news regarding this matter.
Note
At the risk of boring readers with repeated information from previous letters, I am restating what I believe to be the right measuring criteria of a successful Fund. I would rather bore previous readers than have confusion with new ones.
The Yardstick
In the world of professional money management, it seems it is a bit unclear as to what constitutes a good or a bad performance. To me, it is important to make this distinction and what I hope to achieve for myself and my partners. The first priority is the preservation of capital and the second priority is a reasonable return to investors in the long term. The question becomes what is a reasonable return on a long-term basis? Below are my conclusions:
a) 5 to 8 percentage points over the S&P. Since we know the S&P historically has given investors about a 9.5% return, I am aiming for a range of 15% to 18% return.
b) Long term basis denotes a minimum of 3 years (preferably 5 years). This assumes no prolonged bear market.
I, in no way, can guarantee these results, but I thought it fair that my partners know what my goals and targets are. I will not abandon my conservative investment style (or so what my analysis tells me are undervalued or fairly valued stocks) simply to reach the range of return I believe to be adequate. If it cannot be accomplished, I will say so immediately. In a year when CC has a negative return (which will happen from time to time), it would not necessarily make it a bad year from my perspective. For example, if the S&P has a negative 15% return for the year but the partnership has a negative 7% return, I would consider that a successful year. The idea is to gain an edge over the market / averages. I would much prefer to have a year where the market declines by 10% but the partnership only by 5% then to have a year when the market gains 20% and the partnership 21%.
The Fund Is Growing
I am happy to share that our family of investors is growing. As of this writing there are a total of 5 investors in the Fund. Furthermore, one of the original investors has been more than pleased with the results and has added additional capital to the Fund (hopefully the 2nd go around is even better than the 1st). As a result, Assets Under Management (AUM) grew by more than 90% during the fiscal year.
Ana and I have the majority of our investable wealth in CC and so long as CC is in operation, this will always be the case.
I can’t promise results, but I can guarantee that our wealth will be in lockstep with yours.
Sincerely Yours, Greg Cavallini
Track Record
To view track record, please contact Greg at greg@cavallinicapital.com.
0% Management Fee, Performance Fee Only
Notes:
The record above displays Cavallini Capital’s track record since inception on July 1, 2017.