The 4th quarter of 2022 was a challenging, but positive quarter for the US Equity markets as significant volatility continued to persist.  The S&P 500 was up 7.56% for the quarter but down 18.11% for the year.  The US Small Cap Growth Index (USSGI) was up 4.13% and down 26.36% for the year. 

Volatility can make for some trying days.  During the 4th quarter, we saw ten extreme up days (absolute return of +2%) and seven extreme down days (absolute returns of -2%).  How do we respond to this type of environment?  It is extremely challenging, but we stick to our process and remain focused on the company specific characteristics important to Shaker that help drive performance over the longer term. 

The Shaker Small Cap Growth Strategy (SCG) increased 4.30% (gross of fees) in the fourth quarter, outperforming the USSGI which increased 4.13%. Net of maximum fees, the SCG strategy slightly underperformed.  Over the last 12 months, the SCG strategy was down 21.57% on absolute terms compared to a loss of 26.36% for the USSGI.  Our focus continues to be outperforming the index over the long-term.

The following is a summary of returns for the Shaker Small Cap Growth Strategy and selected indexes:

4Q Portfolio Update

The bear market of 2022 was tough.  Both value and growth-oriented equities declined for the year but rose during the fourth quarter.  Early in the quarter, equity markets showed strength as several central banks raised rates by less than what was expected.  Later in the quarter, the Federal Reserve said it needed more time before changing course.  Stocks subsequently went down.

We monitor many economic and geopolitical factors but are focused on what we can control and that is finding attractive growth stocks at great prices.  Stock selection, particularly in health care, contributed to performance. Consumer Staples and Financials, our two largest overweighted sectors, also contributed to performance due to stock selection.

Returns: Contributors and Detractors

Below are the ten stocks that most impacted the Portfolio’s gross return in the fourth quarter, whether positive or negative, along with their contribution to the Portfolio’s gross return for the full year.

As of December 31, 2022, the SCG had 50 positions. The ten largest positions were 32.8% of the portfolio, which is a lower concentration than the portfolio typically holds for the top ten holdings. We expect the size of the positions of the largest holdings to increase during 2023.

Throughout the year, we held a higher than typical cash position in the SCG strategy. Our research team has been working diligently to identify new stocks based on long-term characteristics important to Shaker, that also could excel in this economic environment and are priced appropriately.  We patiently waited, watching valuations and the economic climate shift, and added names that we feel upgrade the portfolio.

In the fourth quarter we initiated new positions in:

• Alamo Group (ALG), a manufacturer of heavy equipment and machinery,
• Casey’s General Stores (CASY), an operator of convenience stores across the Midwest,
• Kirby Corp (KEX), which operates tank barges in the US serving primarily the energy industry,
• Lancaster Colony (LANC), a producer of food products, which we subsequently sold during the quarter after a 30%+ move higher in the stock price, and
• The Boston Beer Company (SAM), a beverage producer with brands including Samuel Adams beer, Twisted Tea, and Truly Hard Seltzer.

Small Cap Growth Outlook

Over the last several months, the stock market has been acting as though a bottom in stock prices is already in place and we are headed towards a more optimistic economic outcome. Although many pundits have discussed a “soft landing,” we do not know if this will be the case.

What we do know is we are focused on finding great companies, with earnings growing faster than peers, with strong balance sheets.   Last year, a great deal of negativity was priced in for company outlooks and valuations became meaningfully cheaper. There is room for upside if company results are better than expected. This is especially true for smaller growth stocks, which peaked twenty-three months ago in February of 2021. Small cap growth stock prices bottomed in June of 2022 and have moved 17% off that low but are still 32% below the peak.  We now find an increasing number of stocks with compelling valuations and attractive fundamentals that are likely to continue to improve even if we suffer a mild recession and have additional upside when the outlook improves.

While we believe 2023 may be a difficult year for the global economy, we are optimistic in terms of company-specific opportunities to generate favorable investment returns. We have always tried to use downturns to better position our portfolios to take advantage of the investment climate that emerges. We expect numerous opportunities to do exactly that this year.

We appreciate your investment alongside ours and look forward to updating you on our views and performance in the future.

Sincerely,

The Shaker Investment Team

 

Disclosure: Past performance is not indicative of future performance. It should not be assumed that any investment or strategy discussed in this publication will be equally profitable in the future. Investment in this strategy carries risks, including loss of principal. There is no guarantee that any specific investment strategy will be suitable or profitable. Investments in smaller companies may be riskier, less liquid, more volatile and more vulnerable to economic, market and industry changes than investments in larger, more established companies. The strategy’s overall return is a composite of clients’ separately managed account returns. Some clients’ investment returns were more or less than the overall strategy return. Not all our client’s returns surpassed the benchmark and the strategy is more concentrated than the benchmark. The index performance information in the table is based on public information which we believe to be accurate but have not been verified.

The specific securities identified in this report does not represent all of the securities purchased or sold or recommended to clients. Holdings / sector weightings in any strategy are subject to change and should not be considered investment advice or a recommendation to buy or sell a particular security. Actual holdings may vary by client. A list of all the stocks selected for any of our strategies during the trailing twelve months is available upon request. This document is confidential and for the sole use of the intended original recipient. It is not intended as investment advice or recommendation, nor is it an offer to sell or a solicitation of an offer to buy any interest in any fund or product.