How much longer can the bull market run?
The U.S. is now in its tenth year of economic recovery and looks set to top the longest prior economic expansion that took place between 1991 and 2001. In our view, the severity of the last recession and an unusually slow economic recovery help to explain why this cycle has lasted so long. While we do not know when the current expansion will end, the odds, based on the length of prior economic cycles, suggest that we are now in the late innings.
Nevertheless, our priority as long-term investors, is to continue with our “bottom up” investment strategy of owning companies with a wide “margin of safety” regardless of where we are in the economic cycle. We seek companies with business models and balance sheets that are able to thrive in many economic environments, purchased at attractive valuations, so that we should be better insulated from both company specific and macroeconomic risks.
Can you discuss Brookfield Asset Management and its recently announced proposed acquisition of 62% of Oaktree Capital Group?
Brookfield Asset Management is a leading global investment management company with expertise in infrastructure and real estate. These asset classes tend to be long-lived and competitively protected, with stable and growing cash flow characteristics. Brookfield takes a contrarian, value-oriented investment approach to these markets, looking for out-of-favor assets that can be repositioned or improved to enhance value. The growth of infrastructure as an asset class and demand from institutional investors seeking exposure to high-quality assets have been key factors behind the growth in the company’s assets under management (AUM). Combined with Oaktree’s AUM, primarily in credit strategies, Brookfield will have about $475Bn in AUM and will be able to provide institutional investors with one of the most comprehensive product offerings in the marketplace.
In a world of increasingly indebted governments, we see a big opportunity resulting from the transfer of government owned infrastructure assets to the private sector. We believe that the global economy is only about ten years into a 50-year transformation of the ownership of infrastructure assets and out of $100 trillion that could transfer to private ownership, only about 10% has transferred so far. We believe that Brookfield Asset Management is particularly well positioned to capitalize on this trend.
Can you discuss CarMax and their move into online sales?
CarMax has grown to become the largest used car retailer in the U.S. by offering a consumer-friendly car buying experience, a wide selection of high-quality, late-model used cars, no-haggle pricing, and a generous return policy. The company provides a transparent vehicle financing process, attractive extended warranty options, and they will buy your car from you even if they do not sell you a car.
Today, with about 200 stores across the country, CarMax has about 4% of the late-model used car market with room to add at least another 100 stores. The company has plans to further transform the car market by allowing customers to move the car buying experience online. Prospective car-buyers will be able to select a vehicle, finance that vehicle, and arrange a trade in of their existing vehicle, all from the comfort of their living room sofa. They will be able to pick up their new purchase at a CarMax store, or have it delivered to their door.
This innovation should not only enhance the customer experience, but also increase CarMax’s operational efficiency, distinguish CarMax from its competition, and enable it to accelerate sales growth and market share gains.
What are the primary forces driving the rebound in the Fund’s housing related stocks, NVR Inc. & American Woodmark, in Q1 2019?
In 2018, a rise in mortgage rates and rising home prices led to a dip in housing affordability that caused growth in the homebuilding market to slow. Prices of all homebuilding-related stocks were affected, including the Fund’s two holdings, NVR and American Woodmark.
In 2019, mortgage rates have declined materially and home buyer activity appears to be picking up, driving a recovery in the stock prices.
We believe the outlook for the home construction market is bright as the industry catches up after years of below average building rates. Housing starts have increased every year for the last 9 years, yet they were just about 1.25 million units in 2018, still about 20% below the 60-year average. In addition, because starts were so far below normal for so long, we estimate the country has under-produced by about 5 million housing units over the last 15 years, implying starts may need to exceed the long-term average for an extended period of time to get back to equilibrium. Even more importantly, economic growth, job growth, and household formation remain robust while the next significant generation, the Millennials, are poised to enter their home-buying years.