Introduction

Markets grinded higher in the third quarter. Gains were exceptionally strong in July and August, though there was a modest pullback in September. Strength was broad-based amongst sectors and geographic regions. In this environment, growth stocks outperformed substantially relative to value stocks.

We were able to again outperform in the third quarter, aided by the significant repositioning we had done in portfolios amidst the sell-off in March. However, we are wary of the risks to the market rally, including elevated valuation multiples, over-reliance on central banks, an uneven or stagnant economic recovery, resurgences in coronavirus cases, unresolved trade tensions, and uncertainty in the U.S. election. As markets have climbed higher, we have grown more concerned with the disconnect between stock prices and fundamentals.

Accordingly, we made changes in portfolios this past quarter, including taking proceeds from some high valuation “winners”, redeploying to lower valuation holdings, and raising cash levels so we have more dry powder. On the margin, these changes should help mitigate some downside if markets become less hospitable, and we continue to contemplate further adjustments for a more conservative balance of growth, profitability, and valuation in the portfolios.

We thank you for entrusting us with your precious capital. This is an unprecedented market environment, and we are hard at work navigating the near-term uncertainty. Our investment process is selective and identifies durable and high-quality growth companies, which we believe can ride out and, in many cases, grow through difficult times such as this.