David Meier

Portfolio Manager

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Our Plan For 2019

January 10, 2019

Happy New Year, everyone!

The stock market ended 2018 in the red after a significant fall in the fourth quarter. And one question on many investors’ minds is whether the decline will continue in 2019. I am sorry to say that MFAM Funds is not in the index prediction game. We just don’t know what the market is going to do. So let’s look back at 2018, talk a bit about what’s happening in the world today, and use those topics to discuss how we plan to approach our investing this year.

Looking Back at 2018

They say a picture is worth a thousand words. So let’s look at a snapshot of the S&P 500 for 2018:

Source: Thomson Reuters Eikon.

After a rocky start to the year, the index climbed fairly steadily through the summer. But following third-quarter earnings, the S&P 500 turned down sharply and became even more volatile.

During the last three months of the year, interest-rate increases, escalating trade tensions between the United States and China, and less-than-stellar earnings reports combined to cause investor sentiment to shift negative, prompting increasing selloffs into the end of the year. As a result, the S&P 500 fell about 20% from its peak in September.

To see if that downward trend might continue, let’s look at where we are today.

3 Minutes of Macro

As stock pickers, we’ve always liked this quote from investing great Peter Lynch:

“If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”

We do think about and discuss the macroeconomic environment. It’s just not at the forefront of our investing approach. With that in mind, here are three macro trends that should continue to have the most influence on global stocks in 2019.

First, after a series of rate increases in 2018, the Federal Reserve is telling the markets that it will, as it always has, factor market data into its rate decisions. And right now, following a pickup in market volatility, further rate hikes seem to us to be less likely in the near future. Second, there are signs that the outlook for the global economy isn’t as rosy as it was in 2018, partly because the United States and China have raised tariffs as they hammer out a new trade agreement. Both countries plan to continue discussions in January, so perhaps they can move toward a favorable settlement. And finally, with so many stocks experiencing strong declines in the last three months of the year, some stocks prices are now more appealing for investors.

With all that in mind, I think the markets will remain volatile in 2019.

What We’re Doing in 2019

MFAM Funds will be doing the same thing we did for investors in 2018: investing in high-quality growth companies at reasonable to attractive prices. That’s our job, and it’s the long-term philosophy that we believe gives us the best chance to protect and grow shareholders’ precious capital.

Even in the face of increasing volatility in the markets, we remain committed to our long-term investment strategy. If we find a great business with a strong management team, an excellent business model, a competitive advantage in the marketplace, and a trajectory for long-term growth, we want to be a long-term owner of that business. In fact, if stock prices are bouncing around in 2019, it could present us with buying opportunities.

Mastercard is one of the largest positions in our Global Opportunities Fund. It’s a good candidate for showcasing our process. Consider the following.

Management

Ajay Banga has been CEO of Mastercard since 2010. He and the other executives have done an excellent job of managing the business and its “War on Cash” initiative, which is focused on facilitating more and more digital payment processes around the globe.

Business Economics

Mastercard’s payment processing platform is an incredible asset. As a result of its incredible growth in processing volume, the platform operates at scale and generated an amazing 35.9% profit margin over the 12-month period ended Sept. 30, 2018.

Competitive Advantage

Given the global reach of its payment processing network, Mastercard has a strong competitive advantage in the marketplace. What’s more, it would be difficult and very expensive to replicate that platform, let alone see a competitor generate an adequate return on that investment. Mastercard should therefore be able to maintain its attractive position in the marketplace.

Growth Trajectory

Although Mastercard is almost a $200 billion company generating close to $14.5 billion in sales, there’s still a tremendous amount of growth ahead of it. That’s because cash payments still make up more than 80% of global payment volumes. So the conversion to digital payments still has lots of runway. Analysts are projecting more than 13% annual revenue growth over the next five years.

Out With the Old

2018 was a volatile year in the stock market. I don’t see any reason that’s likely to change in 2019. But it won’t change the way we invest capital for our shareholders. Regardless of the environment, we believe buying the stocks of high-quality growth companies is an excellent long-term philosophy. And if the markets do stay volatile in 2019, we should see more opportunities to purchase those stocks at reasonable to attractive prices.

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Any discussion of individual companies on this page is not intended as a recommendation to buy, hold or sell securities issued by those companies. The holdings of MFAM Funds may change at any time and are subject to risk. Current and future portfolio holdings are subject to risk.