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Peterson Investment Fund Q2 2024 Letter: “Infinite Compounders”

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HFA Staff
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“Stocks are probably still the best of all the poor alternatives in an era of inflation - at least they are if you buy in at appropriate prices.”

Performance and Overview

During the second quarter of 2024, Peterson Investment Fund I (PIFI) continued its positive trajectory, posting a return of 1.03%, net of all fees and expenses. Meanwhile, the S&P 500 returned 4.3%, primarily fueled by the strong performance of a select few heavily weighted securities. Our strategy continues to focus on ownership of the world’s leading business models, run by extraordinary management teams, at a deep discount to each firm’s intrinsic value. This long-term value investing approach is superior to chasing the market's short-term favorites, and we remain disciplined in our execution.

Our 'infinite compounder' portfolio consists of seven core long-term holdings with exceptional business models and leadership teams that are well-positioned for promising returns in the quarters and years ahead. These assets are detailed at length in our past Annual Reports and are known for their relentless growth and compounding potential. Each individual company has asymmetric probabilities of future return expectations, suggesting that our compounders like Daily Journal Corp, Berkshire Hathaway, Alibaba, Naspers and others have very low possibility of any long-term price decline and the potential for substantial appreciation. This rare combination of low downside risk and high upside potential sits at the heart of our fund’s investment philosophy.

The US economy and market landscape have continued an upward trajectory, buoyed by a 'Goldilocks' scenario of declining inflation and a robust economy and labor market. Such favorable conditions foster an ideal environment for our long-term, value-driven approach. While the Federal Reserve may find that data justifies reducing interest rates by 25 to 50 basis points before year end, we remain fully invested and see many opportunities for new capital.

We continue to develop our Alpha One software tools utilized to identify highly niche and underexplored market opportunities. As discussed at length in our annual reports, our Structured Dividend Capture strategy allows us to precisely and confidently deploy cash for brief periods using a proprietary option strategy to pick up dividends with high expected returns. This highly liquid strategy is an enormous opportunity to maximize our cash returns, and all new capital entering the fund is immediately put to work in this accretive strategy.

As explained in the 2022 Annual Letter, a new United States bull market began in October 2022 and it remains important to be fully invested as equities climbed in the subsequent quarters and years. It is possible that the current bull market may extend for many more years. Although we anticipate market volatility and periodic market corrections, the US economy remains extremely strong and resilient.

Indeed, it will not be alarming for the US to experience a market correction of between 10-20% sometime over the next 4-6 quarters. This is normal and could present attractive buying opportunities if it occurs. Notably, our foreign holdings provide diversification from US market corrections, and firms like Daily Journal will not receive reductions in their government contracts while Berkshire Hathaway is highly countercyclical, with $200 billion in cash reserves to deploy during a major downturn.

Partners can be confident in the comprehensive security of our long-term portfolio. We continue to be fully invested as markets advance and any cash deployed within our SDC process captures weekly option premiums and dividends. Our disciplined execution of Structured Dividend Capture continues to improve with highly attractive results. We have determined that the current market depth provides no immediate constraints, and we can potentially run hundreds of millions of dollars in cash through this strategy each year.

This moment presents a unique opportunity as our core portfolio remains substantially underpriced with significant growth potential and our Structured Dividend Capture method is continually refined to maximize returns. Our concentrated portfolio strategy focused on owning the greatest businesses, managed by extraordinary teams, and purchased for opportunistic prices, positions us well for long-term price appreciation of our portfolio.

Performance Highlights:

  • Time since inception: 12.75 years
  • $1 million at inception is now worth $3.6 million net of all fees and expenses
  • PIFI returned 7.9% net of all fees and expenses during H1 of 2024
  • S&P 500 including dividends gained 15.3% over the same period
  • PIFI has achieved a 10.6% annualized net return since inception

Investment Philosophy

Our mission is to provide a world class capital appreciation vehicle that builds enormous wealth for our long term partners. PIFI follows a value investing philosophy. Our objectives include capital preservation, limitation of downside risk, and outperformance of the S&P 500, including dividends, over the long-term. PIFI is a concentrated, long-term, value-based fund. We focus on owning thriving businesses with high-quality management teams trading at discounts to their growing intrinsic value.

Portfolio Characteristics:

  • Seven positions across financial, industrials, insurance, and technology sectors
  • Companies headquartered in China, South Africa, Turkey, and the United States, serving customers globally

Core Tenets:

  • Perform bottom up, in-depth, fundamental analysis used to selectively purchase undervalued
  • companies with exceptional business models and management teams
  • Deploy capital with high portfolio concentration on our highest conviction ideas
  • Employ a low portfolio turnover strategy, holding most positions for years
  • Avoid excessive leverage with rare use of margin
  • Focus on minimizing taxes and expenses

Operations

Alignment of interests is a top consideration in every operational design decision.

On August 17, 2024, we will host our virtual Annual Meeting. Your invitations have been distributed electronically and we look forward to seeing you.

The 2023 Annual Meeting is available on our YouTube channel.

Click here for Full Analysis

Please click here to access the 2023 Annual Report.

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