INTRODUCTION

First of all, we wish to express our deep appreciation for our clients and sponsors. Our hearts go out to those for whom the corona-related hardship is severe. Thanks to our partners at Baird, we are safe, properly supported and fully functioning.

For the first half of the quarter, global markets progressed sideways to slightly up. Then as the full weight of the spread of the COVID-19 virus spread around the globe, financial assets were battered. We experienced history-making selloffs and rallies netting in substantial (greater than 20%) declines which, by definition, means that we are in a bear market. Late in the quarter, “Big Bazooka” fiscal and monetary stimulus deployed around the world buoyed the market to some extent. This was an extraordinarily tough quarter for all market participants.

It is very difficult for us to come to grips with losing client’s assets. These precious investments are used to secure retirement savings, fund scholarships and carry out important research, so in the face of significant absolute loss it may be cold comfort to know that we were successful in providing some downside protection.

MARKET UPDATE

We are often asked, “under what market conditions does your approach do best and under what market conditions does your approach do worst?” Our surprising answer is the same for both, “in times of great volatility.” As focused and disciplined managers of concentrated portfolios we know a select universe of stocks very well. This enables us to exploit what we believe are mispricings stemming from indiscriminate selling or buying in a volatile environment, like right now. The portfolios generally are richly rewarded for these adjustments. In some cases, however, it can take a while before the markets adjust prices to what we have determined to be the intrinsic value. This makes it the best of times. Alternatively, when investors are piling in and storming out of the market based on headline news, it is hard to distinguish yourself. As active managers, charged with remaining mostly fully invested, we cannot sidestep a market crash. The emotional battle between bargain hunters and breakeven sellers in the face of a novel and deadly virus has made this the worst of times.

Every economic sector and country sold off. Neither growth nor value, large capitalization nor small, developed or developing economy was spared. Quality sold off a little less. Healthcare companies, which were the perceived “bad guys” in the heat of election year rhetoric at the beginning of the quarter, became the “heroes” who might be able to develop better test kits, inhalers and potentially an effective vaccine. Healthcare was the best performing sector. The energy sector plummeted as demand for gasoline contracted in the “shelter at home” environment and as the Saudis and Russia ramped up crude oil production. By country, performance was a quality issue. Denmark, Switzerland, China, Japan, Taiwan then the U.S. did the best. Most of the worst performing countries were in the emerging markets universe. China, where the COVID-19 virus began, applied draconian containment rules then ramped up testing and treatment and was able to stem the spread and as a result at quarter end had reported economic data that demonstrates China has quickly come through the other side. Until the extraordinary monetary and fiscal measures were announced late in the quarter, quality growth out-performed economically sensitive and deep value stocks. The balance sheet strength and consistency of earnings of the quality growth firms were expected to fare better than businesses that must service high levels of debt and are dependent on economic strength to be profitable in this unprecedented crisis.