The fourth quarter was brutal and erased the gains we achieved throughout 2018. Even though it handily outperformed its benchmark index, the Global Opportunities Fund slipped into a loss for the full year. Nevertheless, we remain confident in our quality-growth strategy, and we welcome volatility as an opportunity to continue our never-ending quest to upgrade the portfolio.
U.S.-China trade tensions, rising domestic interest rates, and increasing global economic fears sent assets tumbling. Recession fears are on the rise worldwide – about three times stronger, according to Google search data – and markets are behaving as if a recession is imminent. In fact, all asset classes except for cash were down in 2018. There was no place to hide.
We don’t know whether a recession is imminent – although the data doesn’t suggest it – but we are confident that a well-constructed portfolio of quality growth businesses that are likely to be increasingly important to the world over time has a low likelihood of permanent loss. Such businesses aren’t immune to the macro environment, but they control their own destiny to a greater degree and, we believe, are likely to achieve wonderful returns over the long haul.
The best performing stock was one we purchased in mid-November and added to later in the month: Everbridge, the leader in critical-event management and threat detection. Its software, data, and tools help facilitate communication during times of chaos — think phone alerts for things like severe weather or an active shooter. They also help manage critical assets and infrastructure and predict likely future threats. The company has won business with the U.S. government and military institutions, opening new markets and making its market leadership even clearer.
Starbucks was another winner, increasing 13% and moving into our top 10 holdings, helped by a pair of positive developments during the quarter. First, in October, respected investor Bill Ackman announced a new position in the company and published his detailed investing case, which echoes what we’ve been saying about the famous coffee chain for some time. Then in November, Starbucks reported earnings that revealed a rebound in U.S. store sales and stabilization in China.
Our worst performing stocks had a significant impact on our results this quarter. XPO Logistics, which entered the quarter as our second largest position, fell 50%. The trucking and logistics company suffered a confluence of negative events. Investors began selling off the entire industry, fearing that the trucking cycle was turning down, and those fears were worsened when management modestly lowered its revenue guidance. On the back of that announcement, a notable short seller published a report calling into question the company’s leadership, accounting, and business strategy.
We didn’t brush off any of these events, but our assessment of the situation led us to sit tight and remain investors alongside CEO Bradley Jacobs. While the company’s industry is cyclical, we admire how it’s positioned for the continued rise of e-commerce. In short, our focus on cash flow and a critical review of each of the short seller’s claims renewed our belief in XPO’s prospects and positioning.
The other large drag on our portfolio was Align Technology, which started the quarter as our fourth largest holding and declined 46%. The maker of Invisalign clear aligners to straighten teeth has been a multi-year standout as dentists and orthodontists have adopted it and consumers have demanded it. Align has expanded geographically and in the dental cases it can address, and case volumes continue to grow. But for the first time, it’s seeing meaningful competition.
Many momentum investors headed for the exits in the face of pressured selling prices and slowing growth, though management still anticipates growth of greater than 20%. In any event, our thesis hasn’t changed. Demand remains robust, and management is making investments in the right places to support its growth. Although we trimmed our position in October, we remain happy investors in Align.
It was a busy quarter for transactions, with three new purchases and one sell. In October, we parted with Tupperware Brands. We had long admired the company’s direct selling model in foreign markets to offer gainful employment and upward mobility. But quarter after quarter, a new problem seemed to creep up. Persistent poor execution and a litany of excuses led us to reassess our judgment of the quality of the business, and we concluded there were better places to invest.
We used the proceeds from our Tupperware sale to start a position in Fastenal, which sells nuts, bolts, and other supplies to industrial and manufacturing companies, primarily in the United States. To complement its store base, Fastenal has been deepening client relationships by placing full stores on customer sites, or by placing vending machines directly on customer manufacturing floors. Fastenal has always had a wonderful reputation for customer service, and it has used that platform to literally embed itself with customers. Even after decades of steady growth, Fastenal only has a small share of the industrial distribution business, and we expect its reach will continue to expand every year.
In November, we purchased Everbridge and Axon Enterprise. Axon is the global leader in conducted electrical weapons and is best known for its Taser brand products. But it’s much more than a maker of stun guns. It also sells body cameras and other evidence-collection devices, as well as the software to store, process, and utilize captured evidence. Axon is quickly becoming the standard for using technology to make law enforcement more efficient, transparent, and effective.
Over the past few years, the company has transformed itself from just a Taser maker to a mission-critical workflow partner for law enforcement, public safety, and justice by creating its evidence.com cloud storage and evidence-sharing platform, developing easy-to-use integrated hardware, helping officers make more of their often increased time in the field. In the process, it’s aggressively capturing market share. The company’s mission is to “protect life,” and we think it’s well positioned to do so.
Performance in the fourth quarter was painful for us. However, your team at MFAM is rejuvenated by the opportunities we’re seeing in the market. In chaotic times we remain calm, knowing that our philosophy of quality-growth investing is proven, our process is reliable, and great future performance is established on the opportunities we encounter today. Thank you for your trust, and we wish you a happy and healthy 2019.