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)
Background
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.
Investment Case
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.
Risks
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).
Important Disclosures:
Investments highlighted were selected based on objective, non-performance-based selection criteria. Names are subject to change.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from City Different Investments. To the extent that a reader has any questions regarding the applicability above to his/her individual situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing.
Opinions and statements of financial market trends that are based on market conditions constitute our judgment and are subject to change without notice. Historic market trends are not reliable indicators of actual future market behavior. This material may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that shown here. The information presented, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Although the assumptions underlying the forward-looking statements that may be contained herein are believed to be reasonable, they can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. The Firm assumes no duty to provide updates to any analysis contained herein.
The objective of the SMID Cap Core strategy is to generate strong risk-adjusted returns in a focused portfolio of small and mid-cap stocks invested across the business life cycle. Portfolios invest primarily in U.S. stocks with greater than $100 million in market cap. Portfolios typically hold between 20-35 positions, with no position representing more than 10% of the portfolio. Not less than 80% of portfolio assets will be invested in companies whose market cap is within the market cap range of the Russell 2500 Index. The strategy may take on international exposure up to 25% of portfolio assets. An investment in the strategy is subject to certain risks. The value of an investment may fall as well as rise and is not guaranteed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. The strategy could be more volatile than the performance of more diversified portfolios.
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