In volatile times like these, it’s easy to get caught up in extreme headlines. You may feel yourself obsessing over the big day-to-day jumps in the market or your own investment portfolio. But trust us — in our view, short-term moves do a lousy job of reflecting the actual value of the businesses you own.
We agree with Graham and Buffet — “The stock market is a voting machine, not a weighing machine. In the short run, the market acts like a voting machine, (reflecting all kinds of irrational attitudes and expectations), while functioning in the long run more like a weighing machine (reflecting a firm’s true value).”
So, to help ease your mind from the short-term antics of the market, we’re sharing our long-term focus and decision-making process by profiling the largest holdings in our SMID Cap Core Strategy.
Assured Guaranty (AGO)
AGO is a municipal bond insurer. Municipalities borrow AGO’s high credit rating for a fee, thereby lowering the yield on issued bonds. AGO currently holds more than 50% of the market share of municipal bond insurance written.
In the recent low-rate environment, fewer municipalities are seeking bond insurance. But AGO management has created additional value through capital allocation (such as buybacks and buying peers at a discount). For example, in each of the last four years, the company bought back more than 10% of outstanding shares at a big discount to book value.
As interest rates rise and credit spreads widen, more municipalities will seek bond insurance. This means AGO will likely see an opportunity for increasing business with a higher fee per bond. Currently, the stock trades at ~0.65x Price/Book Value. In a better environment, however, we believe that multiple could get closer to book value. If the environment stays the same, we expect the company will continue to aggressively buy back shares at a discount.
If interest rates stay low, there might not be much insurance business to write. Pricing might be poor for whatever business does exist. Furthermore, credit concerns are inherent to municipal bond insurers; municipalities seem to be prone to defaults. AGO insures the income stream for bondholders and it must pay if the municipality does not.
If you have additional questions about Assured Guaranty (AGO) or our SMID Cap Core Strategy, please contact us. Next time, we’ll profile our holding Carlisle Companies (CSL).
Investments highlighted were selected based on objective, non-performance-based selection criteria. Names are subject to change.
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