Fourth Quarter of 2021

Happy New Year! As we turn the page to 2022, we are bringing back our annual dinner, which will be at the Briar Club on February 3rd from 5:30pm to 8:00pm, with the program beginning at 6:30 PM. Our guest speaker this year will be Dr. Laurie Santos, Professor of Psychology at Yale University. Dr. Santos teaches the most popular class in the 300 year history of Yale. For the first time we will be live streaming the event. If you would like to RSVP for the dinner, or be included on the live stream list, please contact Jennifer Taylor.

2021 was a great year for the US stock market and a great year for all of our equity strategies. The S&P 500 had a record 70 closing highs, the Dow Jones Industrial Average had 45 and the Nasdaq had 46. Most of our accounts that were invested for the full year in equities were up over 20%. The performance was driven by strong corporate earnings, and accommodative Federal Reserve, and $1 trillion in stock buybacks. This occurred in spite of the highest inflation numbers since 1982, supply chain issues, labor shortages, talk of rising interest rates, and numerous Covid waves.

The S&P 500 has been up double digits for three years in a row. In fact 2019 to 2021 was the best three year period since 1999. 2020 and 2021 benefited from zero interest rate policies and government stimulus. The passage of the Build Back Better Plan failed, but a smaller version could be passed this year. It seems like tax increases are off the table for now.

The Fed is going to stop purchasing bonds by March of 2022, and they are likely to raise interest rates at that time. They are expected to raise interest rates two to three times in 2022. The market will now be up against a Fed that is tightening for the first time since late 2018. The Fed is now a negative for stocks until we near the end of the tightening cycle. However, interest rates are too low, and it’s healthy to raise rates to a more normal level. With the economy so strong this policy change is overdue.

2022 is a Midterm Election Year. We expect the Republicans to take back the House of Representatives. The stock market has a history of being more volatile in Midterm Election Years, but usually finishes the year strong once the election is over. The market has gone straight up since April of 2020. There was only one correction of more than 5% in 2021. We expect to see an above average amount of volatility in 2022. This expected volatility should create investment opportunities for us. We will do our best in 2022, but we do not expect to generate the returns of 2021. We believe that time in the market is more important than timing the market, and we are optimistic on the companies that we are invested in over a multiyear period.

We would like you to know that Jeff Friedberg has decided to retire and did so at the end of 2021. It has been almost 5 years since Brasada merged with Friedberg Investments. Jeff remains our friend and a friend of the firm. Jeff started Friedberg Investment Management in 1979. He made a lot of people a lot of money by doing things differently than Wall Street. When picking stocks, Jeff looked for those that he could hold for a long time that had the following characteristics:

1. Companies with great management teams
2. Companies that dominate a niche
3. Companies that are not well known by mainstream investors
4. Companies that have tailwinds and not headwinds
5. Companies with minimal or no leverage

He also avoided industries where it is difficult to differentiate the company for long periods of time. That led him to focus on companies in the following industries: healthcare, technology, industrials, business services, and energy until recently.

For more risk averse investors, the same criteria were applied to companies with recession resistant businesses that paid dividends such as Utilities and Real Estate. For these companies, he looked for those that had a history of raising their dividend annually.

Jeff combined this with the idea that you should invest in your top 20 or 30 ideas as opposed to your top 100 ideas. Most mutual funds own over 100 stocks. Most investment advisors and stock brokers own hundreds and, many times, thousands of different stocks for their clients through various investments in ETFs and mutual funds. If you own that many stocks you will be “diworsified”, and never do better than the market. We believe that by spending a lot of time researching each company, you can achieve superior risk adjusted returns. Finally, Jeff was always resistant to selling or trimming his winners, and he was usually quick to sell his losers. Many other investors reduce their holdings of their best performing stocks when they become too large of a position in their portfolio. Peter Lynch, who is maybe the greatest mutual fund portfolio manager of all time, refers to this as cutting your flowers and watering your weeds.

I have been lucky enough to work with Jeff for over 15 years. The Friedberg philosophy has worked exceptionally well for a long period of time, and we will continue to abide by it.

Sincerely,

Jonathan Reichek

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.