Partners in WMK Group’s Strategic Opportunities portfolio earned a strong return in 2023. On an absolute basis, the group of companies that make up our portfolio delivered solid operational results, generated strong free cash flow, and made disciplined capital allocation decisions. We remain confident that the management teams to whom we have entrusted capital are acting with intelligence and intention on our behalf.
Our portfolio remained nearly fully invested throughout the quarter, and no positions were exited. We did add one new investment: Crown Castle International (CCI), which we discuss further below.
Market Environment
The year 2023 was heavily skewed in favor of a small group of technology-focused companies—commonly referred to as the “Magnificent Seven.” These businesses drove a significant portion of total equity market returns. While these companies are primarily U.S.-based, their outsized performance notably impacted global equity benchmarks, many of which are intended to reflect diversified exposure across developed markets.
This high concentration in market cap weighted indices has led to increased scrutiny of passive investing structures. For example, in widely followed U.S.-focused benchmarks, the top few companies now account for a disproportionately large portion of both index composition and return contribution. As a result, active managers are increasingly judged based on their exposure to this narrow group of stocks, regardless of their underlying investment philosophy or the broader health of the remaining market.
One illustrative contrast is the gap in annual performance between market cap weighted indices and their equal-weighted counterparts. The latter, which give each constituent the same influence regardless of size, lagged significantly. This speaks to how concentrated the market’s recent gains have been.
Our portfolio remains structurally underweight in this select group of companies. While we recognize their strength and relevance, we are focused on building long-term ownership in businesses we believe we can hold for many years—ideally decades. That requires durable economic moats, strong management, and sensible entry valuations.
Sometimes, the emphasis on valuation can limit exposure to the year’s top performers. Take Nvidia, a company widely acknowledged for its leadership in AI. Its stock delivered extraordinary returns in recent periods and continues to attract strong investor enthusiasm.
A thoughtful investor, however, must look beyond price movement to assess a company’s long-term potential. The basic analytical exercise compares market expectations—implied by the current share price—to the investor’s own assessment of the company’s fundamentals. If the market is underestimating the company’s potential, it may be an attractive buy. If the market is overly optimistic, prudence might dictate restraint.
To better understand expected returns, we consider a simple framework:
- Earnings yield: A measure of how much earnings an investor receives relative to the share price.
- Shareholder yield: The combination of dividends and share repurchases (net of dilution), reflecting the cash flow returned to shareholders.
- Growth rate: The anticipated growth in earnings over time.
- Change in earnings yield: How much the market’s valuation multiple is expected to shift over time.
Applying this lens to Nvidia, one could conclude that achieving even modest long-term returns from today’s prices requires extraordinary earnings growth over several years. While such growth is possible, it has historically been exceedingly rare. Based on extensive research spanning multiple decades and tens of thousands of public companies, very few businesses have sustained such high growth rates over even a medium-term period.
Nvidia is certainly a remarkable company, and at the right price, we would be interested in owning it. However, we are not comfortable putting client capital at risk when a highly optimistic growth scenario must play out just to achieve a standard return profile.
Portfolio Update
As noted, we added Crown Castle International (CCI) to the portfolio. CCI is one of the leading operators of wireless infrastructure, including cell towers, and is a close peer to American Tower. Unlike some of its peers, CCI has also made significant investments in fiber infrastructure across the U.S.
Despite being a stable cash-generative business, the market has been disappointed in CCI’s recent performance. Investor concerns include:
- Sensitivity of tower valuations to interest rates, given the steady, utility-like nature of cash flows.
- The lower returns associated with CCI’s fiber investments relative to its tower assets.
- A perceived slowdown in wireless carrier spending and potential for customer turnover.
These concerns attracted the attention of activist investors, leading to a shake-up in management and board composition. We view these developments positively and believe they could help unlock value.
We also hold the view that:
- Organic revenue growth from tower leases may prove more stable than the market expects.
- The fiber segment is beginning to show signs of becoming a more constructive contributor to results.
- The overall valuation of CCI provides a meaningful margin of safety, particularly for a business with a high proportion of contracted, inflation-linked revenue.
From a return perspective, the stock’s valuation implies an attractive long-term opportunity with solid downside protection—an ideal profile for a long-duration holding in our portfolio.
CFC Required Reserves Portfolio Update
Some of our investors—including myself—maintain conservative fixed income portfolios within reinsurance entities, which are governed by strict investment policies requiring a high proportion of investment-grade bonds.
Throughout much of the prior two years, we maintained shorter portfolio duration relative to broad bond market benchmarks, reflecting our view that interest rates would remain elevated. In the fourth quarter, we modestly extended duration to take advantage of the rebound in bonds, though we remained more conservatively positioned than the market.
Our fixed income portfolio continues to offer attractive yield relative to its risk profile and remains substantially less exposed to interest rate movements than broader indices. The conservative positioning—shorter duration, high credit quality—has resulted in consistent income generation without taking on excessive risk.
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. Investments 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.