Mutoro Group Partners, LP
“What I’m saying to you this morning, my friends, even if it falls your lot to be a street sweeper, go on out and sweep streets like Michelangelo painted pictures; sweep streets like Handel and Beethoven composed music; sweep streets like Shakespeare wrote poetry; sweep streets so well that all the hosts of heaven and earth will have to pause and say, ‘Here lived a great street sweeper who swept his job well.’” – Martin Luther King Jr.
Dear Partner,
The Fund was up 28.08 per cent for the first nine months of 2016. Comparing these results to industry news, it is tempting to be ecstatic about our relative performance year- to-date. A recent article in The New York Times described 2016 thus far as “a bruising year for hedge funds”. Another in The Financial Times said this was “the worst period for the sector since the first quarter of 2009”. But it would not make much sense for me to caution against short-termism when our returns are down over a brief period, but then to encourage elation when we are up over a period of similar length. It is worth noting that our gains are largely unrealized. Moreover, we could give back some or add some between now and year end. Both of these points should be irrelevant though because we focus on long-term results. I think those results will end up being very attractive, but between now and then, there will be ups and downs. We should not worry about that. We should instead focus on how the businesses we own are operating. They are doing well.
Two in particular are worth mentioning briefly. Our largest holding, Company A, is paying off its debt ahead of schedule, while maintaining highly cash generative margins. This allows us to benefit from what is essentially the publicly-traded leveraged buyout of a regional monopoly. The 123 per cent rise in the price of its shares year-to-date was a positive for us, but it was not the sole contributor to our gains.
Our next largest holding, Company B, contributed greatly. In last year’s third quarter letter, I described it as “one of the global leaders in a small, oligopolistic software market”. Just before we took ownership, sales were up 30 per cent year-over-year and free cash flow margins were attractive and stable in the mid-teens. Yet its shares fell more than 30 per cent after management missed its quarterly revenue guidance by one per cent and then lowered its annual revenue guidance by three per cent. Looking at the situation carefully, I thought the fall in share price was probably a substantial overreaction by market participants: the company had zero debt, a strong history of cash generation, and showed no signs of slowing its impressive growth. Moreover, its principal competitor was on the ropes, restrained because of too much debt. On top of this, the company instituted a share repurchase program, and the founder and Chief Executive Officer of the business took advantage of the plunge in prices to purchase $7 million more in shares for himself. So I decided we should become an owner of the business, and year-to-date our shares have risen 97 per cent. I will evaluate selling in the near-term as it is approaching the top of the range I estimated for its intrinsic value.
I think one of the most important lessons from this year thus far in the investment management industry is, as one article described it, of “how quickly the fortunes of hedge fund titans can be reversed”. While I am not a titan of anything, I did pause and reflect on this statement. If I am being honest, the inherent turmoil of the public investment space is one of the reasons why I gravitated toward it initially and love my work. To be clear, this is not to say that I desire or even experience every-day market drama. My job on a day-to-day basis is principally just a lot of quiet reading and thinking. Other people do public markets investing differently, feeling a non-stop adrenaline rush every day. I do not. I happily ignore the everyday chatter and volatility in markets to learn more about an industry or particular company. I try to remember what Warren Buffett once observed: “The best way to think about investments is to be in a room with no one else and just think. And if that doesn’t work, nothing else is going to work.” What I am trying to say is that all investors eventually learn that the public markets do not care where you went to school, what your zip code is, or how much money you or your friends have. Nor will any of these help you. I have always welcomed this. The impersonality in the vicissitudes of markets can also be viewed as a lack of bias. To a young African-American man such as myself—living in a world where he is told on the one hand that his race does not matter, but confronted with more examples than he can count where it clearly does—trying to build a record of achievement through taking advantage of an environment truly disinterested in your background is inspiring.
The chart below depicts our holdings on September 30th.
Portfolio Holdings
Thank you for your continued partnership. If you have any questions or would like to make an additional investment, please let me know. I substantially increased my personal investment in the Fund at the beginning of this year and I expect to add to it at the end of it as well. I would be delighted if you decided to join me.
Sincerely,
Godfrey M. Bakuli
Managing Partner