Market Commentary
The second quarter was relatively uneventful across markets, with both bonds and commodities largely unchanged according to the +0.07% and +0.55% performances from the Bloomberg Agg and the Commodities Research Bureau indices, respectively. The bond market anticipated a respite from inflationary pressures in the US, correctly for now, with expectations for inflation over the next two years falling from 3% in April to just over 2% at quarter-end. This dynamic has historically benefitted large capitalization stocks to the detriment of small caps, and last quarter proved no exception – the more economically sensitive S&P Small Cap 600 index generated a -3.11% return while the S&P Large Cap 100 index advanced 7.07%. Equity volatility remained low, especially so in June, which saw realized equity market volatility approach that of bonds, a rare dynamic which has historically not lasted long.
The other dynamic that has historically not lasted indefinitely is the extent to which large cap stocks have beaten smaller cap stocks. Over the past two calendar quarters, the aforementioned large cap index has outperformed the small cap index by a cumulative 19.9%. Markets have not seen this level of calendar quarter outperformance in twenty-five years, since just prior to the tech bubble bursting. Clearly, there is no causal driver preventing large caps from continuing to outperform small caps by another 19% over the next two quarters. However, history often rhymes, and large caps now trade at their biggest valuation premium to the small cap index since 2001, with small caps producing aggregate outperformance of 78.4% versus large caps from the end of 2001 through 2010. The premium valuations placed on some of the largest companies now require the highest levels of sustained growth to generate a return for investors, even though scale and sustainable growth potential do not always correlate. Increasingly narrow constituencies benefit from mega-cap stocks with huge revenues per employee growing at above-market rates, a trend that likely cannot continue indefinitely.
Of course, none of this changes what we do every day – turn over rocks to find attractive prospective investments and compare them to what we own in an effort to construct a portfolio of good businesses that have a high probability of trading at better prices in the future. At the margin, we are finding some of the most compelling opportunities in energy and financials, whose prices appear to discount a much worse future than we anticipate. Many names in the space are well-run, growing with improving returns on capital while breaking out to new multi-year highs despite mid-single-digit multiples of earnings power.
Our portfolios are very different from their benchmarks (with the exception of MVPL). Names and sector weights are a by-product of our bottom-up process, which means that our performance will differ meaningfully from the benchmarks’, especially over short periods of time. That is a feature, not a bug. We look to concentrate in securities tied to aligned capital allocators who we think are likely to enhance equity value per share over the long term. In light of the aforementioned dynamics, we find our portfolios to be an especially compelling opportunity today for investors looking to diversify away from the market’s concentrated skew towards growth, technology, and elevated expectations for sustained growth from some of the world’s largest entities.
As always, we remain the largest investors in our funds and appreciate your partnership.
Bill Miller IV, CFA, CMT
July 1, 2024
Fund Highlights
The Miller Value Partners Leverage fund returned 6.29% in the second quarter versus 4.28% for the S&P 500 index. The fund remained in a levered position for the entire quarter. Our systematic risk model was within hours of hitting its “de-lever” signal in April but did not trigger, nor did our signal appear likely to flip in the near future as of quarter-end.
Click to view quarter end performance. Performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the original cost. Returns for periods of less than one year are not annualized.
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The Miller Value Partners Leverage ETF (the “Fund”) will seek its investment objective by investing in either a leveraged position or unleveraged position as described under Principal Investment Strategies. If the holdings for today are PROSHARES ULTRA S&P 500 (SSO), then the Fund is in a 2x leveraged position. If the holdings for today are SPDR S&P 500 ETF Trust SPY, then the Fund is not in a leveraged position. Principal Investment Strategies: When the Fund is in a leveraged position, the Fund invests in Leveraged ETFs that seek daily leveraged exposure equal to 200% of the S&P 500® Index (the “S&P 500 Index,” or the “Index”). As a result, when the Fund is in a leveraged position, the Fund may be riskier than alternatives that do not use leverage because the objective of the Leveraged ETFs in which the Fund invests is to magnify the daily performance of the Index. When the Fund is in a leveraged position, the return of the Fund for periods longer than a single day will be the result of the Leveraged ETFs’ return for each day compounded over the period. The Fund expects that it will be invested in a Leveraged ETF for periods greater than one day when the Adviser’s trading signals so indicate. As a result, the Fund will be subject to the risks of compounding that affect investments in Leveraged ETFs, and the Fund’s returns during such a period are consequently expected to differ from 200% of the daily return of the Leveraged ETF. For periods longer than a single day, the Fund will lose money if the Underlying ETF’s performance is flat, and it is possible that the Fund will lose money even if the value of the Index rises. This effect can be magnified in volatile markets. Consequently, these investment vehicles may be extremely volatile and can potentially expose the Fund to complete loss of its investment. Longer holding periods, higher volatility of the Index, and leveraged exposure each increase the impact of compounding on an investor’s returns. During periods in which the Index experiences higher volatility, that volatility may affect the Leveraged ETFs’ returns, and the Fund’s return as a result, as much as or more than the return of the Index. Although the Fund, when in a leveraged position, invests in Leveraged ETFs that seek daily leveraged exposure equal to 200% of the Index, the Fund does not target a specific level of leverage over any time period that is more than a single day. Rather, the Fund opportunistically uses leverage in seeking to achieve its objective of capital appreciation over a multi-year horizon. On a daily basis, Investors may check the Fund’s holdings on this website to see whether the Fund is in a leveraged or unleveraged position.