Sound Shore Fund 2Q15 Letter To InvestorsVW Staff
Sound Shore Fund letter to investors for the second quarter ended June 30, 2015.
The Sound Shore Fund Investor Class (ticker SSHFX) ended June 30, 2015 with a net asset value of $48.83 per share, after an income distribution of $0.248570 on June 18th. The second quarter total return was -0.32% versus the Standard & Poor’s 500 Index (“S&P 500”) and Dow Jones Industrial Average (“Dow Jones”), which returned 0.28% and -0.29%, respectively. Year to date, the Fund has gained 0.58% versus 1.23% for the S&P 500 and 0.03% for the Dow Jones.
We are required by the SEC to say that: Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. The Fund’s Investor Class 1, 5, 10, and 15-year average annual total returns for the period ended June 30, 2015 were 3.35%, 17.00%, 7.73%, and 8.12%, respectively. As stated in the current prospectus, the Fund’s Investor Class total annual operating expense ratio (gross) is 0.92%. For the most recent month-end performance, please visit the Fund’s website at www.soundshorefund.com.
The broad equity indices were little changed in the second quarter of 2015, as investors balanced sturdy corporate earnings reports with global economic concerns related to Greece, China, and Brazil. The apparent calm at the markets’ surface, however, belied a reasonable amount of movement underneath. For example, interest rates rose more than forecast during the period which contributed to strong performing financial stocks and lagging “bond proxies” in utilities and staples. Similarly, global GDP worries drove investors further into health care stocks and away from energy names, extending longer term trends for both.
Sound Shore Fund: General Electric
Sound Shore’s value driven investment process seeks out-of-favor stocks where managements are positioned to add value in a full range of macro scenarios. Our investment in global industrial leader General Electric, a strong second quarter contributor that also bucked the declining trend in its sector, provides a useful example. We invested in GE when its shares were valued below norm at 13 times forward earnings due to concerns about its finance segment and the integration of recent acquisitions. Through our research, we concluded that GE’s sum of the parts valuation was higher than its stock price implied at the time, and also that management had a long-term plan for unlocking that value. During the second quarter, this process continued with GE’s announcement to sell the bulk of its finance segment, which will allow the company greater focus on its profitable and growing core industrial and health care businesses.
Sound Shore Fund: Citizens Financial
Likewise, our holding in regional bank Citizens Financial outperformed both the market and its financial peers in the quarter, substantially driven by internal improvements. We initiated our Citizen’s position last summer when the company was being spun out of Royal Bank of Scotland with a below market P/E ratio and for less than book value. We viewed new management’s targets for asset growth, expense control, and higher returns on equity as achievable and not reflected in the company’s 40% discount to peer regional bank valuations at the time. Leveraging its market leading positions in New England and the Midwest, Citizens has steadily executed and narrowed the valuation gap, though it remains valued below norm at 0.8 times book.
Sound Shore Fund: Texas Instruments
Meanwhile, global economic concerns held back semiconductor maker Texas Instruments, a long term Sound Shore holding. Among analog chip firms, Texas has successfully established itself as a “new industrial,” with its products designed into long duration manufacturing platforms such as autos and aerospace. As well, Texas’ management is focused on return on capital and free cash, and the company has repurchased 28% of its shares outstanding in the last 5 years. We believe Texas’ 7% free cash yield and below norm 9 times enterprise value to EBITDA multiple make for a compelling risk/reward profile.
Sound Shore Fund: International Paper
Industrial packaging leader International Paper also declined in the quarter due to news that its containerboard mills would not qualify for MLP treatment under revised IRS guidelines. We view the decision as a transitory factor and consider IP attractively valued at 12 times forward earnings with a 9% free cash yield.
Our contrarian investment process is turning up a normal flow of company-specific opportunities, despite plenty of market skepticism. While the debate about above average corporate profit margins continues, we believe that well below norm capital spending versus history suggests many corporate management teams remain level-headed about balancing growth and shareholder yield opportunities. This backdrop combined with the S&P 500’s fairly typical 16.2 times forward P/E multiple should continue to prove a productive environment for Sound Shore’s research.
Thank you for your investment alongside ours in Sound Shore.
SOUND SHORE FUND
Harry Burn, III
John P. DeGulis
T. Gibbs Kane, Jr.