To Our Investors and Friends,
The S&P 500 finished the second quarter up 3.8%, ending close to an all-time high as the trend towards global easing continued. Oil prices (WTI) fell 2.8% over the same time frame to approximately $58.50, as signs of a global slowdown increased in the face of trade tensions. The 10-year Treasury Bond continued to slide in the quarter to 2.01%, a 41 bp drop from the end of last quarter. The spread between the 2- and 10-year widened to 26 bps, and the short end of the yield curve has become even more severely inverted. Throughout the quarter, the stock market lurched in an 8% range as trade fears and signs of an economic slowdown were offset by anticipation of rate cuts and a continuation of easy monetary policies. The Russell 1000 Growth index expanded 4.6% and the Russell 2000 Growth index grew 2.8% in the quarter, both continuing to beat their respective Value indexes by about 1% each.
We believe a next generation of businesses is emerging that is making great use of the tools provided by the Fourth Industrial Revolution, such as Artificial Intelligence, the Internet of Things, and Next Generation Data Analytics, driven by the combination of expansive data sets and low-cost computational processing. These leading companies have new business models that are customer centric, instead of the product-centric business models of the previous industrial revolutions. Subscription-based models are often success-based revenue models – the value of the customer relationship grows as the customer benefits from the subscription-based technology. This close relationship between a business and its customer refocuses research and development efforts to be driven by customer feedback and need, instead of speculation. In the end, decision making is data driven and vastly more efficient than the guess work of the past.
We think that the more the economy is driven by customer-centric businesses, the less cyclical and capital-intensive the economy becomes. Stability and predictability replace the speculative behavior of the past and should ultimately lead to stronger businesses that the market values more. When a business moves from a single transaction with the customer to an ongoing relationship, the investor’s focus should move from unit economics to annual recurring revenue and customer relationship longevity. Leading businesses that are helping their customers succeed start the year with 90-95% of the previous year’s revenue and build from there, driving both high and predictable revenue growth rates.
Our previous studies have suggested that new businesses, those less than 25 years since their founding, are much more customer centric than ones that have existed for much longer. Our portfolio has an average age of about 22 to 23 years, but primarily consists of businesses that are between 10-20 years old. We will continue to focus on this part of the market and expect that high and predictable revenue growth will lead to larger businesses and stocks over time.
Kingsland Growth Advisor’s lead strategy, the Long-Term Growth strategy, continues to build on a successful start. The strategy seeks to identify and own the next generation blue chip companies, those businesses that have the ability to grow 500-1000% over the next ten years. The stock selection process we employ to successfully identify such companies is the result of 25 years of growth investing in the best opportunities available to the public markets. The strategy is up 41.4% YTD and compares favorably to the Russell 2000 Small Cap Growth index, which expanded 20.4% over the same time frame. Over the last year, the strategy is up 26.0% vs a decline of 40 bps for the Russell 2000 Growth Index. This strong beginning suggests to us that our focus on customer-centric business models may be a good focus. If our observations on the changing economy prove accurate, we would expect we can continue to deliver on our goal of meaningful capital appreciation. We welcome you to contact us to learn more about how we search for great growth companies that will emerge from the Fourth Industrial Revolution.
All the Best to You,
AKW