To Our Investors and Friends,
Last May, we launched our Long Term Growth Strategy. Over that time frame, the strategy has owned between 35 and 38 names that we believe are next generation blue chip companies -- those businesses we think can advance 500-1000% or more in a 10+ year time frame. We won’t be right on all of them, but we think the strategy itself is poised to deliver on its intended purpose: to grow capital by several hundred percent over an appropriate long-term horizon. Since inception, our Long Term Growth Strategy has advanced 18.6%, which compares favorably to all the major indexes. During the same time frame, the major indexes advanced between +7.6% (R1000G) and -6.3% (R2000V). The strategy ended its first quarter of the year up 30.9%, and we are excited to see where we go from here.
The S&P 500 finished its first full quarter of 2019 up 13.1%, the best start to the year we have seen in 25 years in the industry. But even so, the index remains 3.3% below the highs achieved last September. For the quarter, oil prices (WTI) rebounded 31% to just over $59 a barrel. The 10-year Treasury Bond fell 28 basis points to 2.4%. The spread between the 2- and 10-year narrowed 4 bps to 14 bps and remains modestly inverted at the short end of the curve. Although a concern for the market, we do not think that it indicates a recession is near. The new economy, represented by the Russell 1000 Growth and Russell 2000 Growth indexes, jumped out of the gate up 16.1% and 17.1% for the quarter, respectively. Both continue to advance faster than the Russell 1000 and 2000 Value indexes. Why is that? Technology dominates growth, and the S&P Technology components grew 19.8%, while Financials dominates value, and the S&P Financial components increased at a less robust 8.5% rate.
We believe the economy is undergoing tremendous change as the Fourth Industrial Revolution begins to take shape. Massive computing power and fantastic amounts of data are now available to all, allowing individuals to make vastly better decisions and for creative thinkers to give life to their ideas faster and cheaper than has ever been possible before.
We believe there is a reason why many passive firms are offering index funds for almost zero cost. The index is a great representation of what the economy was, but a poor one of what it is becoming. Those owning S&P 500 index funds in an attempt to gain exposure to the best America has to offer are being left behind. We examined the largest 250 stocks in the S&P 500, representing 87% of the total index weight. We compared age of business to cumulative revenue growth and cumulative stock appreciation over the last 5 years. As can be seen in the chart below, companies 25 years or younger are growing dramatically faster than older members of the index, yet their stocks are not expanding as fast as the underlying revenue. Much older companies with slower growing businesses are experiencing much greater stock appreciation relative to the actual growth the companies are experiencing. This runs counter to popular opinion that growth companies are overvalued vs mature businesses. In fact, the opposite may be the case.
We think this is supportive of our strategy to search out the next generation blue chips. The fastest growing businesses are early in their development, and have the opportunity to expand into much larger entities. Our 37-stock portfolio has an average age of 23 years since their founding, and the vast majority are between 10 and 20 years old. These businesses are in their prime growth years. We will continue to make sure they remain on the right path, making adjustments to the portfolio as needed. Many things can go right and wrong in the young life of these businesses. Every quarter is a report card on the development of these businesses. We will remain vigilant on making sure only those businesses that are executing continue to earn their position in the portfolio.
All the Best to You,
AKW