Hinde Group commentary for the fourth quarter ended December 31, 2024.
To My Partners:
The performance of our portfolio for the fourth quarter of 2024 and since inception is summarized below.
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The U.S. presidential election drove financial markets during the fourth quarter. Markets increasingly anticipated a Trump victory as the election approached and extended those moves after the result was in the books. The yield on the 10-year U.S. treasury rose from 3.81% at the beginning of the quarter to 4.58% at the end, including a nearly 20 basis point jump immediately following the election. The outlook for higher interest rates in the U.S. drove the nominal broad U.S. dollar index up 6.5% for the quarter. Although U.S. equities rose and credit spreads tightened immediately following the election, those moves mostly reversed by the end of the quarter. In general, financial markets seem to expect greater inflationary pressures, wider deficits, and relatively tighter monetary policy in the wake of Trump’s win.
Trump inherits a U.S. economy on solid footing. According to the U.S. Bureau of Economic Analysis’s advance estimate, the U.S. economy grew at a 2.3% annualized rate in the fourth quarter. The underlying trend was even stronger adjusted for the impact of changes in inventory levels. The headline unemployment rate ended 2024 at 4.1%, a figure in the 18th percentile of monthly unemployment data going back to 1948. The U.S. economy added 166,000 jobs per month on average in 2024 – notably above most measures of breakeven employment growth – including a barn-burning 307,000 in the year’s final month. Inflation is trending only slightly higher than the Fed’s target. The inflation rate for personal consumption expenditures grew at a 2.2% annualized rate for the final six months of 2024, just two-tenths of a percent higher than the Fed’s target.
Our portfolio significantly outperformed the S&P 500 on a mark-to-market basis for the quarter. Our positions in Interactive Brokers Group, Inc. class A common stock (NASDAQ:IBKR), Netflix, Inc. common stock (NASDAQ:NFLX), Northeast Bank voting common stock (NASDAQ:NBN), Alphabet Inc. class C capital stock (NASDAQ:GOOG), and Amazon.com, Inc. common stock (NASDAQ:AMZN) each made noteworthy contributions to our portfolio’s mark-to-market return. Those stocks delivered gains ranging from 26.8% to 13.9% for the quarter. Our position in Uber Technologies, Inc. common stock (NYSE:UBER) was the sole detractor from our mark-to-market performance. UBER fell 19.7% during the quarter.
Performance Attribution
Positions that had a material impact on the portfolio’s mark-to-market performance for the quarter and year-to-date are outlined below.
Portfolio Composition
The composition of the portfolio at the end of the quarter is depicted below.
There were no changes to the portfolio during the quarter. At the end of the quarter, our portfolio included seven long equity positions and cash.
Select Portfolio Updates
The portfolio update for this quarter covers our investment in Interactive Brokers Group, Inc. class A common stock. We have been shareholders of Interactive Brokers since the inception of Hinde Group’s portfolio with a few additions and reductions to our position along the way. At the end of the fourth quarter of 2024, the annualized return on our position in IBKR over our more than nine-year holding period sat at 24.3%.
Interactive Brokers Group, Inc. (NASDAQ:IBKR)
Interactive Brokers is a highly automated global securities firm that specializes in routing orders and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 150 electronic exchanges and market centers around the world. Interactive Brokers custodies and services accounts for hedge and mutual funds, registered investment advisors, proprietary trading groups, introducing brokers and individual investors. More than two-thirds of IB’s customers are based in Europe and Asia and an even greater share of its new customers come from those regions.
Interactive Brokers delivered another year of strong operating results in 2024. Customer accounts grew 30.3%, an acceleration from 24.7% growth in 2023. Total customer equity grew 33%, slightly faster than customer accounts. Despite relatively subdued equity market volatility in the U.S. — the VIX averaged 15.58 in 2024, below its long-term average of 19.46 — commission revenue grew 25% year-over-year. Lower than “normal” customer credit balances restrained growth in average interest-earning assets to 14.8% — notably below the growth in total customer equity — but higher-yielding margin loan balances grew 45% for the year. Net interest margin was relatively stable versus 2023 at 2.35%, with the strength in margin loan growth offsetting the headwind from a handful of cuts to the federal funds rate beginning in late September. The combination of 14.8% growth in average interest-earning assets and a relatively stable net interest margin resulted in 12.7% growth in net interest income for 2024. Interactive Broker’s adjusted pre-tax profit margin expanded by 65 basis points to 71.7%. Adjusted pre-tax income grew 21.5% to $3.8 billion.
In the last update on IBKR from the 4Q23 partner letter, I highlighted two factors that were weighing on the market price of IBKR:
Although Interactive Brokers has delivered strong operating results over the past several years — including in 2023 in particular — IBKR has only slightly outperformed the S&P 500 since the end of 2019. The increase in the market price of IBKR since the end of 2019 has not even kept up with the increase in the company’s intrinsic value. You could make the argument that IBKR is a better investment now than it was on the eve of the pandemic.
Two main factors have weighed on market sentiment toward Interactive Brokers and held back its stock price. First, the unusual fluctuations in financial market conditions over the past few years have undermined confidence in IB’s normalized earning power and growth trajectory. Second, many market participants face fear, uncertainty and doubt about how the looming normalization of U.S. monetary policy will affect Interactive Brokers and whether IBKR “will work” while the Fed is cutting rates.
The good news is that both of these concerns should fade over the next few years as the economy, financial markets and monetary policy settle into a new, post-pandemic normal. As those clouds dissipate, the light of Interactive Brokers rapidly growing intrinsic value should increasingly shine through to its stock price.
Concerns related to both of those factors faded over the course of 2024. For example, year-over-year commission revenue growth, which had been trending in the single digits — well below the rate of customer account growth — since 2Q22 due to a variety of pandemic-related factors accelerated to 26.1% in 2Q24, 30.6% in 3Q24 and 37% in 4Q24 as the year-over-year comparisons became less distorted by pandemic-driven fluctuations in financial market conditions.
At the same time, expectations for the pace and duration of the Fed’s march toward more neutral monetary policy moderated over the year. The fear, uncertainty and doubt about how the normalization of U.S. monetary policy would affect Interactive Brokers and whether IBKR would “work” while the Fed is cutting rates largely dissipated as a result.
The fading of those two concerns combined with IB’s continued, strong underlying operating results largely explains IBKR’s 113.1% gain for 2024.
Notwithstanding IBKR’s strong performance in 2024, the stock still offers attractive prospective returns. Although the normalization of monetary policy in the U.S. and elsewhere will be a modest headwind to earnings growth in the immediate future, Interactive Brokers should be able to grow its pre-tax income at a high-teens annualized rate over time. Interactive Brokers also pays a modest annual dividend that may periodically ratchet up over time. While IBKR’s capitalization rate has improved from where it was at the beginning of 2024, the change in IBKR’s capitalization rate over time should still add to the total return the stock delivers over the coming years.
The U.S. equity market is richly valued by almost any measure. That makes finding investments that meet Hinde Group’s criteria relatively harder, but far from impossible. There are always securities that become mispriced due to idiosyncratic factors, regardless of the broader market environment. I am confident my efforts to identify new investments for the portfolio will bear fruit over the coming quarters and create a solid foundation for our portfolio’s returns in the future.
Thank you for your continued confidence and support.
Regards,
Marc Werres
Managing Partner
