April 14, 2024

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The Sound Shore Fund Investor Class (MUTF:SSHFX) and Institutional Class (MUTF:SSHVX) superior 12.43% and 12.50%, respectively, within the fourth quarter of 2023, forward of the Russell 1000 Worth Index (Russell Worth) which superior 9.50%. As of December 31, 2023, the three 12 months annualized advances for SSHFX of 9.12% and for SSHVX of 9.34% had been additionally forward of the Russell Worth’s 8.86%. As long-term traders, we spotlight that Sound Shore’s 35 12 months annualized returns of 10.14% and 10.43%, for SSHFX and SSHVX, respectively, as of December 31, 2023, had been forward of the Russell Worth at 9.94%. For the Fund’s most up-to-date standardized efficiency info, click on right here.

It was a wonderful 12 months for Sound Shore’s portfolio, gaining 17.42% for SSHFX and 17.67% for SSHVX in 2023, each nicely forward of the Russell Worth’s return of 11.46%. We started the 12 months with numerous hand wringing on Wall Road as geopolitical tensions flared and the macro outlook was as unsure as ever. The Federal Reserve took traders on a curler coaster experience of recession fears that ebbed and flowed. All year long, inflationary strain on the economic system and markets remained entrance and middle and a few of us introduced this cartoon house on the holidays. Adults across the desk all appeared to get pleasure from a very good chortle out of it. The kids…not a lot.

Regardless of the market narrative usually dominated by fascination with the “Magnificent Seven” mega-cap development shares that led the Customary & Poor’s 500 Index (SP500, SPX) returns, below the hood there was loads of alternative. Given greater rates of interest and the adjustment to COVID’s growth and bust impression on numerous industries, there was numerous dispersion within the fairness market. And so, forty years after the discharge of The Police’s remaining studio album, Synchronicity, we discover ourselves in a interval of a-synchronicity. In different phrases, what we wish to seek advice from as “mini-cycles” inside and between industries and geographies, at totally different cut-off dates. As correlations got here down and with quite a lot of shares buying and selling for very engaging valuation ranges, the chance set for our basic worth technique improved, as evidenced by our robust return within the fourth quarter.

Attire maker PVH led all contributors for the quarter and was one among our greatest performers for 2023. As we mentioned in our letter on the finish of final 12 months, the inventory bought off within the second quarter of 2022 because it fell on shopper spending considerations and regardless of the corporate’s core enterprise persevering with to develop. We believed that with main manufacturers resembling Tommy Hilfiger and Calvin Klein, together with a robust steadiness sheet to face up to a gross sales slowdown, PVH was executing nicely in a difficult setting. We added to our place on the time and our conviction has been rewarded. This 12 months, margins have improved as the corporate targeted on enhancing the standard and price construction of their finest promoting merchandise. This has allowed earnings to develop in opposition to a difficult retail backdrop. PVH’s administration workforce has focused even greater margin enchancment which might result in earnings energy (‘EPS’) of greater than $18 per share, in comparison with the present EPS of $11.

Lengthy-term holding Capital One (COF) was additionally one among our higher performers this quarter. The corporate boasts a diversified deposits base with about 80% FDIC insured, nicely above {industry} common. It’s the solely main financial institution 100% within the cloud, which allows higher underwriting and faster response to modifications within the setting. This expertise additionally helps cut back working and fraud value whereas releasing up money move for reinvestment in advertising and marketing to develop merchandise (Enterprise X card) and construct its model. Intervals of stress, like we noticed within the banking sector throughout March, are a reminder of the underwriting acumen and top quality deposits of Capital One. We added to our place after the fallout, understanding that the corporate’s seasoned administration workforce had steered capably via earlier cycles. As we speak, as bank card delinquencies have risen to extra regular ranges, Capital One is already reporting a slowing in delinquency development. Conversely, some friends noticed prior underwriting missteps start to floor in 2023. At present buying and selling at 9 occasions 2024 consensus earnings and round e book worth, we stay enthusiastic concerning the funding.

Worth investing usually requires endurance, and the passing of legendary worth investor and Berkshire Hathaway’s Vice Chairman, Charlie Munger, reminded us of one among his extra insightful quotes…“It’s ready that helps you as an investor and lots of people simply can’t stand to attend.” Healthcare holding Organon supplies an analogous state of affairs at this time. The inventory lagged within the fourth quarter and for 2023 because of considerations about long-term income drivers. Non-operational components (foreign money, rates of interest and separation expenses) have masked development that has exceeded expectations. A by-product from Merck (MRK), Organon (OGN) has a really regular pharmaceutical enterprise and is investing to develop its girls’s well being franchise. Buying and selling for simply 4 occasions earnings, the corporate is rising steadily, investing in its analysis & improvement pipeline and producing ample money move to repay its debt. Regardless of near-term weak point, we predict Organon is a beautiful alternative for affected person, long-term traders like Sound Shore.

For the 12 months, we had quite a lot of shares up 50% or extra and the listing features a various set of industries resembling homebuilding, heavy truck manufacturing, and semiconductor capital tools. We wish to spotlight one excellent contributor for the 12 months, electrical energy generator and marketer Vistra Corp. (VST), a low-cost supplier with a wholesome steadiness between era and retail. Demand for electrical energy is rising and notably, load peaks are altering as nicely. Because the nation brings on extra renewables and adjusts to better demand later within the day because of elevated use of electrical warmth pumps and electrical automobile charging, dependable clear energy is at a premium. Vistra is nicely positioned with diversified gas sources together with photo voltaic, pure gasoline, coal, nuclear and battery energy storage amenities, together with a advertising and marketing division to handle worth volatility. The corporate will quickly be closing its accretive acquisition of service provider energy generator, Power Harbor, and the deal will make Vistra the second largest carbon free, nuclear electrical energy supplier behind Constellation Power, one other portfolio holding. Vistra CEO Jim Burke, leads a veteran utility administration workforce that’s dedicated to transitioning the corporate’s portfolio to a sustainable footprint by closing older fossil gas crops and rising the renewables portfolio. They’ve additionally been an essential voice to advocate for modifications that may speed up the worldwide transition to a clear, renewable vitality future, whereas sustaining enough near-term provide. Vistra has a robust steadiness sheet that permits the corporate to put money into innovation and operational enhancements. Moreover, administration is utilizing extra money move to purchase 40% of the excellent shares over a 5 12 months interval and they’re greater than half method via that course of. At present valued at 9 occasions earnings with a 17% free money move yield and a 2.3% dividend, the inventory stays a full place. As you’ll be able to see from the chart under, Vistra’s efficiency was fairly totally different than many different electrical energy suppliers and supplies additional proof of the disparate efficiency that may usually be discovered inside a sector.



Detractors for the 12 months included a few of our healthcare holdings, which underperformed together with the sector as the joy for weight reduction medication appeared to siphon numerous capital away from different components of the healthcare {industry}. One instance is healthcare options supplier Centene; one other place we initiated earlier this 12 months when it was buying and selling at a under regular 9 occasions earnings. Whereas the inventory is up from buy, it has underperformed the general market. To date, the corporate’s Medicaid enterprise is performing as anticipated. In the meantime, a brand new administration workforce, led by Sarah London, previously of United Healthcare, is in its second 12 months of turning across the enterprise. We now have been impressed with the preliminary success the corporate has proven streamlining its enterprise and enhancing working efficiency and the inventory stays a full place.

Over 45 years and quite a few market cycles and durations of uncertainty, we’ve realized that conviction, judgement and inventory selecting are what ship outcomes. This 12 months once more supplied affirmation that our technique doesn’t want a value-driven market to supply engaging returns. Sound Shore’s portfolio holdings responded nicely to company-specific drivers of efficiency, signaling a extra balanced market with decrease correlations. In the meantime, we’re repeatedly researching shares which can be low cost versus their historic norms and the market, the place worth is constructing forward of expectations. Within the present setting, our emphasis on stock-specific sources of outperformance ought to show as related as ever, regardless of an extended listing of considerations concerning the economic system and market volatility.

We notice that as of December 31, 2023, Sound Shore’s portfolio had a ahead price-earnings a number of of 11.1 occasions consensus estimates, a significant low cost to the S&P 500 Index at 19.5 occasions and the Russell 1000 Worth Index at 14.7 occasions. It’s our perception that the Sound Shore portfolio has large worth.

We’ve just lately participated in interviews on in style, investment-focused digital platforms, together with a podcast discussing Vistra Corp., participation in a Worth Equities panel, and a short interview about what we see in at this time’s market. Please click on right here for the interviews.

Thanks to your funding alongside ours in Sound Shore.

Necessary Info

An funding within the Fund is topic to danger, together with the potential lack of principal quantity invested. Mid Cap Threat: Securities of medium sized corporations could also be extra risky and harder to liquidate throughout market downturns than securities of huge, extra extensively traded corporations. Overseas Securities Threat: The Fund could put money into international securities primarily within the type of American Depositary Receipts. Investing within the securities of international issuers additionally entails sure particular dangers, which aren’t usually related to investing in U.S. dollar-denominated securities or quoted securities of U.S. issuers together with elevated dangers of hostile issuer, political, regulatory, market or financial developments, modifications in foreign money charges and in trade management rules. The Fund can also be topic to different dangers, together with, however not restricted to, dangers related to worth investing.

The Adviser analyzes danger on a company-by-company foundation. The Adviser considers governance in addition to environmental and social components (ESG) as applicable. Whereas valuation, governance, environmental and social components are analyzed, the analysis of all key funding concerns is industry- and company-specific. Consequently, nobody challenge essentially disqualifies an organization from funding and no particular person attribute should be current previous to funding.

Diversification doesn’t guarantee a revenue or shield in opposition to a loss in a declining market. The Dow Jones U.S. Utility Index, a member of the Dow Jones World Indices® household, is designed to measure the inventory efficiency of U.S. corporations within the utilities {industry}.

Efficiency information quoted represents previous efficiency and isn’t any assure of future outcomes. Present efficiency could also be decrease or greater than the efficiency information quoted. Funding return and principal worth will fluctuate in order that an investor’s shares, when redeemed, could also be value roughly than their authentic value.

The views on this letter had been these of the Fund managers as of 12/31/23 and will not essentially replicate their views on the date this letter is first revealed or anytime thereafter.

This commentary could comprise discussions about sure investments each held and never held within the portfolio. Present and future portfolio holdings are topic to danger. For the Fund’s High 10 Holdings click on right here.

It is best to contemplate the Fund’s funding goal, dangers, expenses and bills rigorously earlier than investing. The abstract prospectus and/or the prospectus comprise this and different details about the Fund and can be found out of your monetary middleman or www.soundshorefund.com. The abstract prospectus and/or prospectus needs to be learn rigorously earlier than investing.

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Editor’s Word: The abstract bullets for this text had been chosen by Searching for Alpha editors.