2018 1st Quarter Memo for Vailshire Capital Management LLC

2018 1st Quarter Memo for Vailshire Capital Management LLC

5 months ago
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Dear clients and friends of Vailshire

I hope that all is well with you, wherever in the world this memo finds you!

2018 1st Quarter Investment Highlights

Volatility has (finally) returned.

Normally a staple in the marketplace, volatility was conspicuously absent for the vast majority of 2017. If you pay any attention to financial media or literature, I am sure you were aware of this curious fact.
Helped in no small part by President Trump and his already infamous tariffs, the markets are soaring and swooning every week… and sometimes doing so within individual trading days. Whether a savvy negotiation tactic or not, new and increasing tariff threats are causing significant turmoil within the equity and credit markets.

Meanwhile at Vailshire, we continue to calmly invest as planned.
In other news: cryptocurrencies, “altcoins,” and other cryptoassets were the rising and seemingly unstoppable stars of 2017. They have since crashed 50-90% in value from the their late-December highs. You may have noticed. Many latecomers who dreamed of massive and quick riches were once again painfully awoken to the fact that true and lasting wealth is built slowly, surely, diligently, and methodically.

I believe that blockchain technology is transformational and here to stay. However, the days of rapid 1,000 to 10,000% speculative gains may officially be a thing of the past. I will continue to follow this space with keen interest, and if legitimate investment opportunities arise in the blockchain application space, we may invest accordingly. Stay tuned.

The first quarter of 2018 was interesting for investors, to say the least. Vailshire Partners LP–the flagship hedge fund of Vailshire Capital Management LLC–achieved net returns of 3.54% for its investors. While not enormous, this compares to negative 1st quarter returns for the S&P 500 of -1.22% (according to Barron’s). For the fifth quarter in a row, we have outperformed our benchmark index, the S&P 500, and this time by 4.76%.

For your interest, the following chart depicts the trailing 12-month return of both Vailshire Partners (VP) and the S&P 500. Please notice the discrepancy.

**Returns of separately managed Vailshire accounts and individual VP clients may vary based on individual investment time, preferences, and strategies.**

Vailshire Partner’s market-beating returns can be attributed to regular access and copious review of some the world’s best investment analysis, a working knowledge of the ever-changing healthcare industry, an accurate vision of how technology is transforming our culture day by day, disciplined position sizing, a diversified investment portfolio, and strict adherence to trailing stop losses.
Our historical performance (as of March 31, 2018) is shown in the following table:

6-Month VP Returns 8.1%
6-Month S&P 500 Returns 2.8%
12-Month VP Returns 21.6%
12-Month S&P 500 Returns 9.7%
3-Year VP Returns 15.3%
3-Year S&P 500 Returns 25.4%

I am still not a fan of the eyesore that is our 3-Year under-performance of Vailshire Partners LP to the S&P 500 index, and am working harder than ever to ensure that this is remedied over the ensuing 3, 5, and 10-year periods. I trust that you will be cheering me on as well, since we are in this thing for the long-haul.

Our systematic long-short approach, which began in earnest in December 2016, has provided a wonderful marriage of conservative portfolio management techniques and my love for studying and choosing the greatest companies that are performing well throughout the healthcare, technology, and other promising sectors.
Current Holdings of Vailshire Partners LP
While primarily focused in the healthcare and transformative technology sectors, Vailshire’s willingness to diversify into the best investments across multiple asset classes is part of what distinguishes it from the competition. The following graph shows Vailshire Partners’ most recent asset allocation:

**Not included in the chart are Vailshire Partners’ short positions, which currently encompass 4% of the portfolio total. Net leverage as of 3/31/18: 19.6%**
Portfolio Notes


Transformative technology continues to occupy the largest portion of our portfolio at 47% of total holdings. The popular “FAANG” stocks–Facebook, Amazon, Apple, Netflix, and Alphabet (formerly Google)–have performed quite commendably over the past several years. However, we are seeing weakness in their upward trajectories for the first time in awhile, for multiple reasons that go beyond the scope of this memo. It will be interesting to see if they can remain market leaders for the remainder of the year. Personally, I am somewhat skeptical, although I still love each of their prospects over the longer-term.

When the market eventually reverts from a growth-loving cycle to a value-loving cycle, the “FAANGs” and other similar growth companies that are trading at blindingly high multiples to their sales and earnings will be hardest hit. At that point, we will accordingly revert to ownership of some beloved and under-priced “value” businesses while simultaneously searching for overpriced equities to short (bet against). I don’t know when that day will come, but it inevitably will come.
Of note, we recently sold out of Facebook (NYSE: FB) for some healthy gains following the well-publicized Cambridge Analytica scandal headlines. Under Mark Zuckerberg’s leadership, Facebook will remain a remarkable company that will treat shareholders well for years to come. In the short-term, however, we will be sitting on the sidelines until they can get their house in order, and FB finds a new and reasonable entry point.
In conclusion…
Market volatility is the new norm and predictions about future stock market highs or lows remain as unknowable as ever.

At Vailshire, we remain committed to our strategy of owning the greatest businesses that are trending ever higher, and occasionally short the worst or most problematic businesses that are heading lower. When coupled with cutting-edge portfolio management techniques, reasonable position sizes, shrewd usage of leverage, and diversified asset allocation, Vailshire Partners is well-positioned to perform beautifully in the coming years and decades.
If you remain on the sidelines, I believe that now is a great time to invest for the long-haul… especially given Vailshire’s diversified and systematic approach. This allows the best investments to grow for as long as possible, while cutting short losers before they significantly hurt overall portfolio performance.
Thank you again for the opportunity to serve you, your family, family office, or other investment vehicle this year and in the decades to come. I am truly honored by the trust that you have placed in me.

My ongoing goal is to delight my clients regularly via personalized service and wise, often-contrarian investment strategies. Vailshire continues to grow rapidly thanks to investors like you placing increasing trust and corresponding assets into its proven, alternative, long-term techniques. If you wish to increase your investment in Vailshire’s comprehensive portfolio management expertise, or know a friend or family member who might benefit, please let me know.

Opportunities are everywhere if you know where to look and how to invest wisely.
Thanks,
Jeff


Jeffrey W. Ross, MD

Founder and Managing Director
Vailshire Capital Management, LLC
Vailshire Partners, LP
(office) 719.358.7875
(mobile) 719.330.1640