Cayside Review: 2023 Q2
Our quarterly newsletter including 2nd quarter review, global market update and outlook, key numbers, and announcements .
Q2 2023 Review & Outlook
US Equity Markets extended their gains in the second quarter of 2023 with a +8.7% return (S&P 500) and +3.9% (Dow Jones Industrial Average). Technology companies have led the way with the Nasdaq Composite up +13.1% in the second quarter.
As we approach the halfway mark of 2023, the global economy continues to demonstrate remarkable resilience despite facing geopolitical concerns and global central bank tightening. The equity markets have experienced positive performance, driven by various factors, including rotation into US Mega Caps, technological advancements and evolving investor sentiment.
We remain highly selective in US equity markets with a preference for high-quality businesses in both growth and value sectors. We are highly focused on businesses with strong pricing power and operational efficiency to protect against inflation and consumer weakness. In Fixed Income, we remain focused on liquidity and minimizing exposure to credit and duration risk with a preference for U.S. Treasury Bills. Federal Reserve Chair, Jerome Powell, most recently said at least two interest rate increases are likely necessary this year to bring the inflation rate down to the US central bank's 2% target.
Major investment themes for the quarter: Artificial Intelligence and Advanced Chip Making have attracted investors with the promise of technology advancement and increased operational efficiency.
2nd Quarter Global Market Performance (data as of 6/30/2023)
Important Considerations
Liquidity and Cash Management
For the past several quarters, we have encouraged clients with excess cash balances to hold US Treasury Bills (specifically 3-6 month maturity). In some circumstances, we have recommended the 1-2 year Treasury depending on risk and liquidity preferences.
We have discouraged the use of money market funds or lower credit quality instruments as we believe they do not currently reward investors relative to Treasuries. Many issuers, banks and advisory firms offer treasury-like products or funds which often contain a high ownership of repurchase agreements. A repurchase agreement is a derivative contract to facilitate short-term borrowing between banks and dealers of government securities. Repurchase agreements are commonly used to secure money market rates of interest and are a contract, not a typical asset.
As an important component of our portfolio management process, we are utilizing an active Treasury management program. We believe it is advantageous for our clients to own US Treasury securities directly and diversify by maturity. As a result, we are often able to eliminate unnecessary costs and product fees, and ultimately provide direct ownership of Treasuries with better yields. At Cayside, we take pride in our ability to openly source more favorable options for our clients. The ability to provide direct access to Treasuries is yet another benefit that we offer clients as opposed to firms being limited to in-house money market products or treasury-linked solutions.
2nd Quarter Investment Activity
During the quarter, we were very active deploying capital in several opportunities for our long-term investors. While we provide a few examples of our investment process and portfolio construction, it is by no means inclusive of our entire activity for clients.
Below are a few highlights:
A mid to large cap software and technology company:
The company has traditionally built and deployed software platforms for US government agencies to assist in data analytics and operations. The company has recently offered commercial products which have seen traction amongst private sectors such as healthcare, logistics and industrial applications
The company has made tremendous advancements in artificial intelligence and has turned profitable over the past several quarters
We decided to take a position in the company after share prices hit near all-time lows, further indicating one of the cheapest valuations in the company’s history based on our relative valuation metrics.
Core Equity Management:
Our core equity allocation to high quality, large and mega cap stocks performed well during the quarter as investors continue to see advantages in economic scale and innovation. On average, our underlying holdings reported very good earnings results and improved their guidance. In multi-asset portfolios, we believe our core equity portfolio remains attractively valued for long term investors
A global multi-strategy manager that has been hard closed to new investors:
A global asset management firm that invests across multiple asset classes and strategies worldwide
We have followed the manager for over a decade and find they are a leader in hedge fund strategies including global macro investing, systematic investing and special situations
In a global market of heightened rates, volatility and uncertainty in global risk assets, we believe this manager’s skill and process of active management can produce very attractive returns relative to benchmarks and serve as a diversifier in client portfolios
A Healthcare manager to gain exposure to major themes and opportunities in global health care sectors:
We have been sourcing opportunities in public and private healthcare sectors due to the longer-term trends and opportunities in the space
During the quarter, we started allocating to an active manager in the space that invests, globally, across the major subsectors of healthcare including biotech, life sciences, pharma, and healthcare equipment
The manager uses robust hedging processes to reduce or add directional market exposure in the sector depending on opportunity and risk
Real Estate, Private Equity and Venture Capital:
We utilize our network of investment professionals and clients to source and diligence interesting opportunities in the private market. Most recently, we have been more active doing diligence on private equity and venture capital backed opportunities, which are often seeing a down round in fundraising or seeking bridge financing. This has provided an opportunistic period to look at some private companies at more attractive valuations than we have seen in private markets in recent times
We are seeking opportunities in real estate, primarily in agriculture and raw land, as we anticipate increased inventory and a more opportunistic period for strategic buyers with liquidity. We believe real estate is a core holding for long-term investors and being prepared to take advantage of buying opportunities during this stage of the cycle is an important consideration
Business Updates and Personnel
Office Renovation
We have been very focused on providing a collaborative environment for our clients and employees. During the quarter, we finished phase one of our office renovation. We are excited about our office renovation being complete and hope to see you soon in our new and improved conference room and client lounge.
Community and Charitable Engagement
During the second quarter we sponsored and participated in the Leukemia and Lymphoma Society’s annual golf classic at the Floridian Golf Club and The Benjamin School’s alumni golf classic. Both events were successful in achieving their purpose to raise awareness for great causes in the local community. Tod and TJ have also been very active with the Golden Cub Ambassador Club which helps the mission of the Nicklaus Children’s Healthcare Foundation.
Colin serves as a Board of Trustee on the Nature Foundation which is the endowment for Macarthur Beach State Park (Singer Island, FL) which provides resources and education to support our local marine ecosystem, specifically toward protecting the sea turtle hatcheries along the Florida coast. This time of year is nesting and hatching season with over a thousand protected sea turtle nests at the Park! We encourage you to check it out sometime - John D. MacArthur Beach State Park Welcome.
Our firm will participate in these events and serve these charitable organizations to strengthen the impact we can have in our community and provide support for worthwhile endeavors both locally and broadly.
Black Diamond Reporting
We are constantly improving our ability to provide transparent and real-time reporting for clients in addition to delivering a very tailored approach for the management of assets. We believe our boutique investment management and independent advisory business model will set us apart by creating a more adaptable, reachable, and client-centric focus. After our first full quarter reporting cycle, we are getting great feedback from clients about the simplicity, transparency, and display of our quarterly reports. We invite you to see examples of our reporting and our client portal that we deliver to our clients via mobile app and web-based versions.
Contact Us
Please do not hesitate to reach out to us with questions or comments. You can reach us directly here.
Disclosures:
Cayside Partners, LLC ("Cayside") makes no warranty as to the accuracy or completeness of any data herein. Information presented in this report is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Past performance is not indicative of future results. This report is intended for the recipient(s) only and not for further distribution without written consent.