Partners in WMK Group’s Strategic Opportunities portfolio weathered a challenging third quarter for global equities. We made no significant allocation adjustments during the quarter, and our collective portfolio proved more resilient than the broader market.
Although our transaction activity was minimal, we diligently assessed numerous opportunities. Our portfolio consists of robust companies capable of withstanding diverse economic conditions. We continue to uphold a high standard for business quality and valuation before incorporating new assets into our conglomerate—a prudent approach given the current macroeconomic challenges.
In addition to our equity investments, several clients (myself included) have unique requirements related to captive reinsurance businesses. These Controlled Foreign Corporations (CFCs) hold premiums related to operating business activities. The CFCs operate under restrictive investment policies that require most capital to be held in investment-grade fixed income for their “required reserves.” It is relevant to discuss these returns in the context of broader equity markets, particularly given the sharp movement in treasury bonds during the third quarter.
WMK’s approach to the Required Reserves portfolio has been to remain conservatively positioned in terms of duration risk, with the expectation that rates would remain higher for longer. During the quarter, our fixed income portfolio remained shorter in duration than broad indices and carried a higher yield—an intentional positioning in the face of persistent rate volatility.
Market Environment
“It’s not about predicting the future, it’s about positioning yourself to thrive in any future.”
— Peter Drucker
The quote above from Peter Drucker—renowned management scholar and author of The Effective Executive—resonates deeply with our philosophy. We aim to be positioned for a range of possible outcomes, rather than dependent on any single macroeconomic forecast. Accurately predicting events like interest rate movements, inflation trends, or global growth is exceedingly difficult, even for the most sophisticated investors or institutions.
The last few years have provided a clear illustration of the limits of forecasting. The third quarter was challenging for both fixed income and equity markets. Investors began to accept that interest rates are likely to remain elevated for longer than previously expected. According to industry research, global government bonds are on track for one of their worst annual performances in modern history, driven by widespread outflows from fixed income.
Meanwhile, equity indices remain positive for the year, but nearly all of those gains are concentrated in a handful of mega cap technology companies often referred to as the “Magnificent Seven.” These businesses—ranging from consumer technology to AI and hardware—now comprise a substantial portion of major indices. Their collective market capitalization has increased dramatically, even as the remainder of the global equity market has experienced overall declines.
Our Strategic Equities portfolios are materially less concentrated in this group of companies. While we own a portion of two of these businesses, the portfolio remains broadly diversified across high-quality enterprises.
The best approach for long-term business safety, in our view, is to own durable, cash-generative companies that require limited outside capital to grow. A high-quality business is typically characterized by a strong management team, a favorable industry structure, and a long runway for reinvestment at attractive returns. The companies we own collectively embody these characteristics. If a business can only succeed in a narrow range of economic outcomes, its risk profile is substantially higher.
Portfolio Updates
The top contributor to our portfolio during the third quarter was Charter Communications, a leading provider of cable and broadband services. Despite a high-profile dispute with Disney over programming fees—which led to a temporary removal of Disney content—Charter’s stock performed well. The resolution of this disagreement shed light on a key truth: Charter is increasingly a broadband-first business, not a traditional cable provider.
In today’s world, Charter’s infrastructure powers everything from remote work to streaming entertainment. Over the past several years, the company has seen declines in traditional video customers, but has continued to grow its total customer base thanks to internet and mobile service adoption. At the same time, revenue and margins have both improved meaningfully.
That said, Charter is a volatile stock and not without risks. The company faces ongoing pressure from a slower pace of customer acquisition this year, as well as competition from alternative technologies like satellite and fiber. However, the cost and complexity of replicating Charter’s infrastructure creates a meaningful competitive moat.
A detractor this quarter was Waste Management (WM), which declined in market value. WM has been one of our core holdings since the inception of the portfolio and remains a business we hold in high regard. It is the leading provider of environmental and waste solutions in North America and has demonstrated a consistent ability to raise prices in line with inflation while maintaining strong, and in many cases improving, margin performance. Like Charter, WM offers a critical utility-like service that society depends upon.
Public markets can be fickle, and short-term price movements are often disconnected from long-term business value. Charter was not suddenly worth more at the end of the quarter than it was before the Disney dispute, just as WM’s fundamentals did not materially deteriorate in recent months. These pricing shifts reflect market sentiment—not intrinsic value.
As long-term business owners, our focus remains on what matters: the underlying earning power of the businesses we own and their ability to compound value over time. In both Charter and WM, we continue to see the potential for attractive, long-term equity returns.
Disclosures:
The views expressed above are those of WMK Investment Partners. These views are subject to change at any time based on market and other conditions, and WMK disclaims any responsibility to update such views.
Past performance is not indicative of future performance. Principal value and investment return will fluctuate. There are no implied guarantees or assurances that the target returns will be achieved, or objectives will be met. Future returns may differ significantly from past returns due to many different factors. nvestments involve risk and the possibility of loss of principal. The values and performance numbers represented in this report do not reflect management fees.
WMK may discuss and display, charts, graphs, formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. To the extent that certain of the information contained herein has been obtained from third-party sources, such sources will be cited, and are believed to be reliable, but WMK has not independently verified the accuracy of such information.