Performing Capital commentary for the month ended June 30, 2024.
Dear Investors, Colleagues & Friends
June represented the last month for Performing Capital. With few exceptions, funds of almost every type (mutual funds, private equity, hedge funds, etc.), opt to close when outside investors flee (seek redemptions) -- but this was not the case for our fund. I am extremely grateful for the support of all my partners, colleagues, and service providers over the 11-year life of Performing Capital. And, in speaking with all our partner investors, I am particularly touched by the on-going support -- each of you has been very gracious when notified of the closure (almost all were surprised I felt it was time).
I started the fund – at the time with my former partner Brian Warner (happily, Brian continues to do very well) – and, after three years, ran the fund solo for eight years. The fund achieved strong performance for the first ten years (on an absolute basis and against every relevant metric) and, over the life of the fund, provided a solid return (still above important benchmarks). This was done with rare leverage and net long “exposure” of ~50% -- in essence managed conservatively (probably too much so). But, during the past 18 months I felt as if I “lost the battle” as my stock picking was mixed and hedges against growth stocks and indices quite poor; we lost money at a time when the major indices achieved strong gains. In a concentrated long-biased fund, stock picks are particularly important.
As you know, I consider undiscovered, underfollowed, and/or misunderstood names to be my core wheelhouse –these opportunities are most often found in small cap, an area that has been a meaningful underperformer. Small cap, as measured by the Russell 2000, was up just 1-2% in the first half of 2024 (albeit following a strong 2023). Even looking to the S&P 500, when excluding the six mega-cap tech stocks that almost every investor hears about daily, the first half return was just 5%; yes, six stocks accounted for a staggering 10% (1000bps) of additional performance in the first half (and 2023’s S&P return was also historically concentrated).
However, the mandate of the fund was open-ended enabling us to opportunistically “go anywhere” in the public markets and I failed to capitalize on names that worked (including eliminating exposure to big-cap banks very prematurely). As I point up in almost every correspondence, I was the biggest investor in the fund throughout (Brian and I were the biggest investors during our three years) – and I demand better performance of myself and surely for outside investors.
I hope to maintain a dialogue (and friendship) with all of you. Partner funds will be wired out by mid-month.
Performing Capital, LP's June 2024 performance was a decline of -2.2%*, bringing the first half year-to-date to a decline of -4.7%*. Since inception eleven years ago, an investment in the fund provided a tax-efficient return of +145%* -- a compound annual rate of +8.8%*. (Return data for Performing Capital, LP is net of all fees and expenses*.)
As always, your input and questions are most welcome. I wish you and your family a very Happy 4th!
Best,
Howard Rosencrans, CFA
CIO & Principal
Performing Capital Advisors