Investment Letters for the Value Contrarian Fund


2020 First Quarter
             Value Contrarian Equity Fund


Dear Partners,

“Simply stated, the Fed has a digital ice cream machine that never runs out of ice cream.”

Benjamin Horwood

Value Contrarian Fund

May 2020

There’s an old saying that “you can't fight the Fed” - that's it, the Fed [Central Banks] can accomplish whatever it wants - and investors are buying it. Thus, the S&P 500 has risen 23% since its bottom on March 23rd, and there's little concern about the retrenchments that typically have been part of past market rallies.

Howard Marks

Oaktree Capital

April 14, 2020

Investors are buying stocks in part because they have nowhere else to go. …Stocks are strong precisely because the economy as a whole is so weak. What, after all, is the main alternative to investing in stocks? Buying bonds. Yet these days bonds offer incredibly (ultra) low returns. [10-year U.S. Treasury bonds yield: 0.6%]

Paul Krugman

The New York Times

April 30/2020

What was different about this crisis?


From my understanding, the corona pandemic produced history’s fastest bear market, peak to trough. The pandemic initiated a bear market at “warp” speed.

From its February 19th peak, to its March 23rd bottom, this bear was a beast on steroids. (S&P500 – 34%, TSX – 37.5% - peak to trough)


This was not a “slow motion” train wreck, gradually building in severity over months or years, as in many past bear markets/recessions. No, this was an almost immediate, full speed ahead, no brakes, Lac Megantic, blockbuster train crash & panic!


The January to March 2020 period displayed investor “schizophrenia” at its best. During the January to February (bull phase), it was a case of, FOMO (fear of missing out), “buy buy buy”, “get me in”, Tesla optimism, “I’m no longer a full-time locksmith but now also a day -trader”, and finally T.I.N.A.- “there is no alternatives to stocks.”


This was followed by the “March madness” (bear phase). This was the phase when investors screamed, “get me out”, “sell, sell, sell”, “it’s like trying to catch a falling knife” and finally, “is this the great depression?”


On March 24th, 2020 the panic in the equity markets came to a screeching halt and a rebound commenced when the U.S. Federal Reserve and global central banks initiated a massive intervention in the financial markets. Fed “Santa” came armed with bucket loads of stimulus programs. The Fed put together an array of loans and other forms of credit, totalling over $3 trillion. This was intended to restore calm and liquidity to the financial markets.


Practically speaking, the Federal Reserve through its words and actions, put a stop to the immediate bleeding and fears of another depression. Experienced investors realized that as a result of the Feds actions, the markets would move higher, perhaps substantially, and well before either positive sentiment or the economy was showing any signs of a turnaround. This is typical stock market behaviour exiting a bear market.


Reserve Chairman Jerome Powell’s recent interview on 60 minutes said it all. Basically, he admitted that the Fed has an unlimited (unspoken) capacity to digitally print money. Simply stated, the Fed has a digital ice cream machine that never runs out of ice cream!


Moreover, Powell acknowledged having a lot more ammunition (stimulus programs) in his toolbox to counter the severe looming slowdown in economic growth. “We’re not out of ammunition by a long shot”. According to Powell, “the economy will recover, it may take a while…”


This brings us to the famous expression, “Don’t fight the Fed”. The stock markets fully understand the positive implications when the Fed deploys its expanding “mega” toolbox and puts on a stimulus “full court press”.


The Feds numerous economic packages have made March 23, 2020 the “line in the sand” and the bottom of the 2020 bear market. Our prediction, (until the next bear market strikes) stocks will move up over the coming years on the back of ultra low rates and anemic Fed induced economic growth.

Expect stocks to move forward in stages, as different business sectors have their own timeline for recovery. Oh, and don’t be surprised by the various corona vaccine hyped success claims and the inevitable 5% - 18% correction/market pullbacks.

At the end of the day, investors should not confuse market corrections (a bruise), with the real deal – a twenty percent plus bear market drop (the full monty).

Investors must expect ongoing volatility over the next 24 months and not allow these gyrations to flush them out of the equity markets!

First Quarter Performance

The market predicts the economy, the economy does not predict the market. All the economic news that we receive everyday measures the past and the market measures the future..

Bill Miller

Miller Value Partners

May 13, 2020

When people get the feeling that the government will protect them from unpleasant financial consequences of their action, it’s called “moral hazard”. [When] people and institutions are protected from pain, bad lessons are learned. …” Capitalism without bankruptcy is like Catholicism without hell.” …Markets work best when participants have a healthy fear of loss. It shouldn’t be the role of the Fed or the government to eradicate it.

Howard Marks

Oaktree Capital

April 14, 2020

New York Stock Exchange is a big supermarket of companies and you're going to be buying stocks. What do you want to happen? You want those stocks to go down, way down. And you will make better buys. And later on – 20 years from now …when you’re in a period when you’re dissaving…then you may care about higher stock prices

Buffett Lecture

University of Florida 1998

Your Fund ended the first quarter with a net asset value of $2,923.96 per unit, a decrease of $ 305.60 from the December 31, 2019 net asset value of $3,229.56 per unit (after distributions). Your Fund returned – (9.46%) year to date.


The unemployment data has been going through the roof with horrific numbers not seen since the great depression. The pain in the economy is staggering. Yet the stock markets rally over the past sixty days is almost beyond belief.


Why in the world would stocks rally in the face of the worst economic data since the great depression of the 1930’s? History has shown that these rallies are not out of the ordinary during such uncertain times and coming out of a bear market.


Simply stated, economic data is backward - looking and the stock markets are forward – looking. When the mass stay-at-home orders went into effect, this was the easiest (most telegraphed) recession to predict in history. The stock markets 35% plunge during those 4-5 weeks in February and March constituted the fastest repricing in history.


Now we are experiencing a massive rally after much of the expected bad news has come to fruition. Yes, this crisis is unique – one that we have never experienced in our lifetime.

At the end of the day, as one market commentator wisely mused, “the market is likely to continue confounding investors of all shapes and sizes so its best to keep an open mind from here.”


The February/March market selloff certainly facilitated the deployment of your funds 30% cash position. By early April, your Fund was 95% invested.


With respect to individual stock selection, perhaps now is a good time to briefly review out general strategy. More specifically, we prefer to focus on “quality” businesses where there is wide gap between price paid and value received. Key attributes include simplicity, durability and predictability. Importantly, the quality businesses we seek generate predictable free cash flow.


Many new quality names have been added to the Fund’s portfolio as result of the March pandemic selloff. In the travel sector this included: Disney, Hilton, (formerly Priceline), Wyndham Destinations and Pacific Airport Group. The later group has 11 airport concessions on Mexico’s Pacific Coast.

We also added to existing old favorites, such as defence contractor General Dynamics, Paypal, and insurance broker AON.


In order to gain exposure to healthcare and pharma stocks, sectors largely absent from the public Canadian markets, your manager invested in three specialized ETF’s listed on the NYSE. Obviously with Covid in the air and resilient earnings power, these sectors have done well over the past few months. The March panic enabled us to invest in these quality businesses at reasonable valuations.


A top 10 position, Pershing Square Holdings, is also a new name to the Fund’s portfolio. Pershing Square is a closed-end Fund invested primarily in U.S. equities and managed by Bill Ackman, a noted hedge Fund manager. Between 2015 and 2018 Bill produced 5 consecutive years of negative returns for his Pershing Sq. Fund investors. The guy lost focus for a period, but in 2019 he turned his life and his Fund around (+58%).


We have been following Bill for a few years. By late 2018 his reputation lay in tatters and his book of business (other than his closed-end Fund vehicule Pershing Sq.) basically evaporated. During the height of the March panic we invested into Pershing Sq. for the following reasons:


  1. Concentrated quality portfolio – high free cash flow businesses that represent simplicity, durability and predictability. (Starbucks, Lowe’s, Restaurant Brands, Agilent, Hilton, etc. …)

  2. Although the Fund has high fees – including a 20% performance fee, we felt this was significantly offset by the Funds huge discount to its net asset value. Our purchases were made when the Fund was trading at a +35% -

      + 39% discount to its net asset value It was as if your manager was able to buy a dollar bill for .62 cents.

  1. The icing on the cake was Ackman’s low risk February purchase of Credit Default Swap (CDS) hedges. The March panic enabled Ackman to sell his CDS hedges and book a $2.6 billion-dollar gain (original cost - $27 million). In reality, Pershing was on the hook for an annual payment of $500 million x5 years for this hedge. But since he sold the hedge well before the first full year, the Fund was only liable for $27 million. This has to be one of the greatest financial trades of all time! (As of May 26, 2020, Perishing’s year-to-date return was 26.8%)


On the Canadian side of our portfolio, we added to some of our existing favorites – IT provider CGI, and Knight Therapeutics. We also re-established our position in SNC Lavalin. Although a turnaround story, SNC is now moving in the right direction after years of, to put it delicately, many missteps. Under a new management, SNC will de-risk by moving away from public tenders and focus on cash flow generating, low capex businesses.  


We love A&W, eat at A&W and admire their healthy marketing strategy. When they announced a temporary elimination of the dividend, this provided your manager with a unique opportunity and a plunging stock price. We also doubled our position in Canadian Natural Resources when oil prices temporarily dipped into negative territory. Technically, there was a period of a few days whereby Canadian oil companies would have to pay the buyers to have their oil removed! This was certainly one of the most bizarre episodes of the March panic.


The fear and panic that took hold for a few weeks in March was beyond belief. On the bright side, those nerve-wracking times helped your manager shed five pounds. Whoever said that extreme stress doesn’t provide some side benefits!


Our prior prediction of the existence of a “phoney” bull market has come true. Here is why. From 2016 until the March 23/2020 bottom, the major U.S. index’s (S&P 500 & Dow) were in a “Phoney Bull Market”. The index’s rose in most of those years (2016 – 2020), only to give back all the gains by March 23/2020. The TSX was worse.


In other words, on March 23/2020, the Dow dropped to a level seen in July 2016. The S&P500 dropped to a level seen in August 2016. While most shocking, the TSX Composite index dropped to a level seen in October 2011. Thus, the Value Contrarian term: “Phoney Bull Market”.


Most interestingly, the recent March 23/2020 bear bottom dropped nowhere close to the March 2009 Great Recession bear bottom. March 2009, in retrospect, was a true bear bottom in the sense that the major index’s will likely never again drop to the levels of 2009. Only time will tell if the same will be said about March 23/2020.


We think Buffett is not wholly convinced that March 2020 was a true bear bottom. (not long enough, not cheap enough, & not enough investor behaviour fear). It’s likely that his sixty plus years of experiencing bull & bear markets, which tell him otherwise.

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2016 Value Contrarian Asset Management




I never think of the future – it comes soon enough.


Albert Einstein


Everybody talks as if they know what's going to happen, and nobody knows what's going to happen…Of course, we're having a recession, the only question is how big its going to be and how long it's going to last…I do think, sooner or later, we’ll have an economy back, which will be a moderate economy. 


Charlie Munger

Vice Chairman-Berkshire Hathaway

Wall St Journal – April 2020


One of the thorniest questions remains how society and its leaders will make the trade-off between minimizing deaths from the virus and restarting the economy.


Howard Marks

Oaktree Capital

April 14, 2020


As always, the investing future remains uncertain. The only certainty is uncertainty.


Going forward, three questions need clarification:


  1. How long will it take to discover and produce, in quantity, a vaccine or therapy? Many are hoping for results within twelve months. Perhaps, more realistic, is a 3-5 year period. However, the stock markets are always forward looking. By the time a vaccine break through has been announced, the markets could be up 50% or more from the bottom.

  2. To what extent will the re-opening of businesses bring back robust, as opposed to anemic economic activity. Come the flu season this fall/winter, will there be a renewal of state mandated self isolation with the accompanying negative consequences?

  3. Will the trillions of Fed/Central Bank stimulus programs, loans, grants, and credit market interventions, offset the enormous damage done to the economy by the fight against Covid-19? Certainly it is a key component to the economic recovery. But at the same time there will be many large & small business bankruptcies. Retailing is especially vulnerable. (Aldo, Neiman Marcus, J. Crew, JC Penney, Reitman’s etc.… have all recently filed for creditor protection)  


Was March 23/2020 the bottom?


  1. In the short to medium term, our answer is yes. The trillions of Fed programs combined with ultra low interest rates are certainly propping up the stock markets. However, until now, it has been more of a tech dominated market and not a broad-based recovery. The Nasdaq is within 5% of its February peak.

  2. Over the longer term, only time will tell if March 23/2020 was the real bottom.

It’s our predication, that the next future bear market, in two, three- or five-years time, will define whether the ultimate bottom was made on March 23, 2020. And perhaps, that’s part of the reason why Warren Buffett has not been particularly bullish of late. He understands bear market history, and when markets are truly cheap, and stocks truly washed – out. History has shown, that bear markets are not one month/30-day wonders! Typical, bear markets take time-duration (12-24-36 months) to reach a trough bottom. Moreover, unlike today, at the bottom of a secular bear market, retail investor “account openings” would not be booming!

For history buffs, in the late 1960’s and early 1970’s, there were two consecutive bear markets (1968-70 + 1973-74). It was the second (1973-74) bear market that finally crushed all stocks. Moreover, the lows of October -1974 dipped well below the lows of the preceding 1968-70 bear market. Today, no one knows if March 23, 2020 or the next future bear market will represent the final bottom.

It may well take the next bear market for a true secular bottom to be reached and a rotation out of tech stocks into new market leaders. Its that rotation out of tech which might signal the true bottom of the business and stock market cycle.

In the meantime, here is the positive news. Ultra low interest rates and the “Don’t fight the Fed” mantra allow us to anticipate the next few years bringing positive stock returns. Under the pressure of ultra low rates, investors will, by default, be pulled into the orbit of T.I.N.A. (there is no alternative to stocks).



Respectfully yours, **  


Benjamin D. Horwood

Portfolio Manager

May 29, 2020

Value Contrarian Equity Fund

Next Fund purchase date: June 25, 2020

Call today: 514 – 398-0808

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