First Quarter of 2020

We hope this letter finds you and family in good health and safely at home.

The first quarter of 2020 marks one of the worst quarterly performances for the broader markets since the fourth quarter of 2008, and one of the fifth worst quarters in the last 75 years. For the first three months of the year, the S&P 500 Index lost 20%, the Russell 2000 Index declined 30.6%, and the MSCI EAFE Index of international stocks dropped 23.3%.

Underneath those numbers are record volatility and velocity. For the month of March, the average daily move was 4.8%. For a sense of perspective, average daily moves during prior turbulent periods in 1929, 1932, 1987 and 2008 were all below 4%. Further magnifying the volatility was the speed at which the markets declined. The S&P 500 was up roughly 5% through February 19th at an all-time high of 3,386 and just 33 days later, the index declined approximately 34% to 2,237. This marked the fastest decline in modern market history, including 1929 and 1987 (as shown below).

Image Source: BofA & Bloomberg

To mitigate the effects of the economic slowdown, the Federal Reserve quickly and massively expanded its market operations by providing $1.5 trillion to the banking system and restarted its quantitative easing program by vowing to purchase $700 billion in assets while also cutting interest rates to 0.00%-0.25%. The Fed also introduced several new programs to preserve liquidity in the financial markets and expanded its quantitative easing program by $625 billion.

On the fiscal side, the federal government passed a massive fiscal stimulus bill which included $300 billion in direct payments to U.S. adults earning less than $100K per year, $500 billion in lending capacity to corporations, $367 billion in small business loans, $250 billion for unemployment, $220 billion in business tax cuts, as well as over $350 billion for states, hospitals and other public necessities.

While the Fed and Congress acted, so did we. Our fundamental approach is to invest in great businesses for the long term, and the market volatility gave us an unexpected opportunity to reposition the portfolios. We exited the companies for which we feared the economic impact would be too great, and we added to companies that we believe will best be able to weather this storm. We are holding more money in cash and treasury bills than normal, and we are also beginning to establish positions in a few new companies that we have been following.

The news flow will continue to get worse as more people contract COVID-19, companies go out of business, and millions more lose their jobs. However, the stock market is a discounting mechanism and is pricing in some continued negative news flow. Historically, when coming out of bear markets, the stock market has turned, on average, three months before the economy has. Nobody knows when the market will bottom or if it has already bottomed. However, we believe now is a good time to invest, even though we don’t know if it’s the best time to invest. Going forward, we plan on patiently redeploying cash into stocks as risks to the downside dissipate. For instance, there are several new regulated utilities that are defensive and have solid growth prospects that we would like to buy. We are also looking at several software companies that benefit from the transition to the cloud and a number of healthcare companies that could benefit from an aging population and new products. We believe the remainder of 2020 will bring continued volatility, but good companies bounce back, and we expect that some may even come back stronger from this crisis.

Shown below is a chart detailing the five-year return on investments made during recessions. For these four examples, investing during the depths of recessions or financial crises have yielded returns the following five years of over 250%, on average.

Image Source: New Focus Financial

While not guaranteed, this chart illustrates that investments made during crises may set the stage for strong performance in the future. We entered the first quarter of 2020 with a statistically expensive equity market and leave the quarter with a market where even the best companies are on sale. While the sell-off has been precipitous and very difficult to endure, it has created long-term investment opportunities. At Brasada we are aligned with our clients, having most of our own liquid net worth invested in the same companies that we invest in for you.

If you have questions or would like to discuss your accounts please call or email us.

All the Best,

Daniel Prather, CFA

This quarterly update is being furnished by Brasada Capital Management, LP (“Brasada”) on a confidential basis and is intended solely for the use of the person to whom it is provided. It may not be modified, reproduced or redistributed in whole or in part without the prior written consent of Brasada. This document does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services or to participate in any trading strategy.

The net performance results are stated net of all management fees and expenses and are estimated and unaudited. These returns reflect the reinvestment of any dividends and interest and include returns on any uninvested cash. In addition to management fees, the managed accounts will also bear its share of expenses and fees charged by underlying investments. The fees deducted herein represent the highest fee incurred by any managed account during the relevant period. Past performance is no guarantee of future results. Certain market and economic events having a positive impact on performance may not repeat themselves. The actual performance results experienced by an investor may vary significantly from the results shown or contemplated for a number of reasons, including, without limitation, changes in economic and market conditions.

References to indices or benchmarks are for informational and general comparative purposes only. There are significant differences between such indices and the investment program of the managed accounts. The managed accounts do not necessarily invest in all or any significant portion of the securities, industries or strategies represented by such indices and performance calculation may not be entirely comparable. Indices are unmanaged and have no fees or expenses. An investment cannot be made directly in an index and such index may reinvest dividends and income. References to indices do not suggest that the managed accounts will, or is likely to achieve returns, volatility or other results similar to such indices. Accordingly, comparing results shown to those of an index or
benchmark are subject to inherent limitations and may be of limited use.

Certain information contained herein constitutes forward looking statements and projections that are based on the current beliefs and assumptions of Brasada and on information currently available that Brasada believes to be reasonable. However, such statements necessarily involve risks, uncertainties and assumptions, and prospective investors may not put undue reliance on any of these statements. Due to various risks and uncertainties, actual events or results or the actual performance of any entity or transaction may differ materially from those reflected or contemplated in such forward-looking statements. The information contained herein is believed to be reliable but no representation, warranty or undertaking, expressed or implied, is given to the accuracy or completeness of such information by Brasada.