The Federal Reserve is lowering interest rates to address softness in the labor market and taking the view that tariff-related inflation is likely to be transitory. The prospect of lower interest rates in combination with more policy certainty out of Washington D.C. (or just less noise) has led to market euphoria in the most volatile and speculative assets while offering discounted valuations to assets outside of the Technology sector. Portfolio performance in the quarter was led by our Technology and Housing investments with no material offsets from other sector-level allocations. Considering we have little-to-no allocation to the speculative assets that have buoyed the market this year, I am pleased with our performance and have taken actions to increase our allocations to the most discounted, high-quality franchises with lower volatility characteristics. I believe these portfolio actions position our Partnership for attractive multiple-of-money risk-adjusted returns while accelerating the dividend yield of our portfolio.
Consistent with last quarter, the table below shows the widening dispersion between the least and most volatile sectors. In total, the S&P trades at a +16% premium while our portfolio trades at a -16% discount to historical valuations as we have proactively rotated out of expensive areas and allocated to investments that I believe offer significantly better future return profiles and valuation.
Portfolio Update
During the quarter I reduced our investments in ALPHABET and HCA. Both are phenomenal businesses and I would happily buy them back at more attractive valuations. The proceeds from these sales were allocated to S&P Global, Moody’s, Waste Connections, and Waste Management – all of which are among the highest quality businesses that are trading at significant absolute and relative discounts. As a reminder, I believe our investments in dominant franchises with pricing power are ultimately the greatest beneficiaries of Artificial Intelligence adoption. Considering the significant discount in our portfolio assets today combined with the potential benefits from A.I. – I believe the risk-adjusted return potential is very exciting.
On a consolidated basis, our portfolio of diverse, dominant, and resilient franchises offers an attractive 4.8% earnings yield, 1.5% dividend yield and beta of 0.8. Considering these factors, I believe the expected return profile of our partnership is very exciting and is significantly more favorable than alternative investment opportunities. My family balance sheet remains fully invested with you and I am excited about our future. Thank you for your trust and please feel free to reach out anytime.
Your partner and fiduciary,
Faris Jafar, Chief Executive Officer
Phone: (734) 678-8562
Email: fsj@jafarmanagement.com