Large Cap Commentary – September 2010
September was a stellar month. The S&P 500® rose 8.9% and the Russell 1000 Growth® gained 10.7%, making last month the second best September on record. Those patient investors who waited all year for a breakout were well-rewarded. At Argent, we are patient investors and typically hold a stock for an average of three years. However, even as long-term investors, we pay attention to short-term performance. In the first six months of 2010, that performance was less than exciting. Even though there were compelling reasons we owned stocks in the companies we favored, they could not gain traction. That changed in the third quarter.
If you recall, we made significant adjustments to our portfolio during 2009. Anecdotal evidence of improvement in the economy drove our decision to make changes at a time when investors were not willing to pay a premium for an improvement. Our sources of improvement included macroeconomic data, consensus earnings estimate changes, historic valuation, as well as feedback from our Main Street contacts. In 2009, our portfolio turnover increased to 43%, implying an average holding period of a little over two years. Although 43% annual turnover is high for Argent, it is not high by industry standards. Morningstar states the average turnover for a managed domestic stock fund in 2009 was 130%. In other words, the average manager against whom we compete held an individual stock for only nine months.
As our portfolio evolved over the course of 2009, performance was strong. This lent credence to our decision to tilt the portfolio toward companies that would benefit disproportionately from a recovering economy. Once we completed the shift, portfolio turnover slowed. In fact, on an annualized basis, turnover for 2010 is running under 30%, implying a more conventional holding period of over three years for each stock we hold.
Coincident with our slowing turnover was an increased level of fear on the part of the market. Investors worried about the PIIGS (Portugal, Italy, Ireland, Greece and Spain). The oil gushing from the floor of the Gulf of Mexico caused concern. Leading Economic Indicators (LEI) declined on a month-over-month basis, also supporting concerns that the economic recovery was in peril. The stock market reacted with poor performance in May, June and August. However, as we analyzed the data and spoke with our Main Street contacts, we remained convinced that the economy was continuing to improve, albeit at a slow pace. Valuations, in our opinion, reflected a much worse scenario. Therefore, we concluded that if our analysis was incorrect, our downside risk was quite low. In other words, we were getting paid for the risk of holding our stocks – we had favorable odds.
June’s LEI, released in July, increased month-over-month. This same result followed suit in July and August. Suddenly, investors embraced a slow growing economy and realized that valuations were compelling. Risk levels for the market fell. This set the stage for the second best September since the 1930’s, one in which your Argent portfolio participated fully.
As always, we appreciate your interest in Argent Capital Management and hope you will mention our name to others. If you have any questions or comments, please visit us at www.argentcapital.com.
Sincerely,
Ken Crawford
Senior Portfolio Manager
Views expressed herein represent the opinion of the portfolio manager as of the date above and are subject to change. Past performance is no guarantee of future results. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. You should not assume that investments in any securities within these sectors were or will be profitable. A list of stocks recommended by Argent in the past year is available upon request.
