arlington value capital - wordpress.com · 2014-12-31 · from arlington value capital’s 2001...

A R L I N G T O N VA L U E C A P I TA L

I N V E S T M E N T P H I L O S O P H Y

We view stock as ownership in a business. We let volatility work to our advantage. Arlington strives to be conservative, and invest with a margin of safety. We exercise patience and discipline to only invest in exceptional opportunities.

Above all, we think vigilance towards risk is central to solid investment returns.

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We view stock as ownership in a business:

The over-arching principle of our investment discipline is to approach buying stock as though we were buying the whole business outright and retaining management.

Employing an owner’s mentality helps us tune out distracting noise, allowing us to focus on the long-term fundamentals of the business as opposed to the daily gyrations of the share price.

We let volatility work to our advantage:

On average, individual stock prices fluctuate more than 75% in a 52-week period.

We don’t believe volatility equates to risk.

We welcome volatility as volatile markets occasionally offer extraordinary opportunities.

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We exercise patience and discipline to only invest in exceptional opportunities:

Fiercely competitive markets combined with a limited mental aptitude makes it difficult to find attractive investments - where the risk/reward equation is extremely favorable.

Because exceptional opportunities are rare, we want to make meaningful investments when such opportunities are identified.

[Speaking about Berkshire Hathaway growing from 10 million to 120 billion over 40 years] “Success wasn’t based on hyperkinetic activity. It was achieved through nondiversification, a hell of a lot of patience, and intensely opportunistic behavior on a few occasions… If you took the top 15 decisions out, you would have a pretty modest record.” - Charlie Munger / Vice Chairman, Berkshire Hathaway

Arlington strives to be conservative and invest with a margin of safety:

When analyzing a business, we strive to be conservative and realistic in our assumptions.

We are disciplined investors, and purchase stocks only when favorably priced.

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I N V E S T M E N T C R I T E R I A A N D P R O C E S S

Our success depends on exercising patience and discipline to only invest in situations that meet our criteria:

Ability to understand the business: We focus on businesses we thoroughly understand. This eliminates a significant number of potential investments and results in Arlington owning many of the same companies numerous times.

Staying Power: We focus on companies with staying power. We look for long-term durability and low rates of change.

Quality Management Teams: We look for honest, intelligent management teams with proven track records.

Attractive Price: We only invest when the price is attractive, which provides both a margin of safety and favorable prospective returns.

Strictly adhering to our criteria often results in a concentrated portfolio.

Total universe of publicly traded companies.

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Cumulative Return Since Inception

In July 2008, Arlington Value Capital launched AVM Ranger Fund, LP. AVM Ranger Fund, LP is our primary fund has generated a 37.9% annualized return (before fees) and has outperformed the S&P 500 by approximately 28% per annum since inception.

*PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

P E R F O R M A N C EAVM Ranger, LP (as of 12/31/2014)

Calendar Year Gross Net S&P 5002008 ( July inception) 15.2% 13.0% -28.5%2009 91.2% 73.3% 26.5%2010 31.4% 25.6% 15.1%2011 3.0% 1.4% 2.1%2012 35.7% 29.2% 16.0%2013 51.5% 42.6% 32.4%2014 31.8% 25.9% 13.7%

AVM Ranger, LP Gross Net S&P 500Annualized Return 37.9% 31.0% 9.9%

Cumulative Return 707.5% 478.3% 85.0%

AVM Ranger

S&P 5000%

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40%Annualized Return Since Inception

AVM Ranger, LP

707.5%

85.0%9.9%

1 Performance reflects a July 24, 2008 inception

AVM Ranger, LP

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S&P 500 AVM Ranger

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37.9%

Prior to AVM Ranger LP, Arlington Value Management LLC (AVM) was our primary fund. From mid 2008 through mid 2011, AVM and AVM Ranger were managed side by side. After Q2 2011, AVM LLC was merged into AVM Ranger LP. The above chart shows the combined returns since inception.


P E R F O R M A N C E

595.1%

11.7%

Arlington Value Management, LLC (AVM): Dec 19991 - June 2011

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2 AVM LLC did not charge a fee until Q1 of 20011 Performance reflects a December 23, 1999 inception

*Assumes client started with AVM and switched to AVM Ranger at fund’s inception in July 2008

15-Year Combined Return* Gross Net S&P 500

Cumulative Return 1,898.7% 1,101.7% 86.5%

Annualized Return 22.1% 18.0% 4.2%

AVM Calendar Rtrns (since inception) Gross Net S&P 5002000 58.5% 58.5% -8.4%2001 42.4% 39.9% -11.8%2002 -22.7% -24.6% -22.1%2003 56.6% 53.0% 28.7%2004 21.1% 18.2% 10.9%2005 -32.7% -34.4% 4.9%2006 12.5% 9.8% 15.8%2007 13.0% 10.3% 5.5%2008 13.3% 10.6% -37.0%2009 62.2% 58.4% 26.5%2010 23.4% 20.5% 15.1%2011 (Through June) 8.4% 7.1% 6.0%Annualized Return 18.4% 15.9% 1.0%

15-Year Combined Return: Dec 19991 - Dec 20141,898.7%

86.5%

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AVM AVM Ranger S&P 500

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AVM S&P 500

Top Performing Funds Since July 20081 ( July 20081 through Dec 2014)

Annualized return since July 2008

AVM RANGER FUND, LP 37.90%

PIMCO StocksPLUS Long Duration Institutional 19.83%

PRIMECAP Odyssey Aggressive Growth 18.57%

AllianzGI Ultra Micro Cap Instl 18.43%

Walthausen Small Cap Value 17.98%

Fidelity Small Cap Discovery 17.91%

Delaware Pooled Focus Smid-Cap Gr Eq 17.74%

PIMCO Fundamental IndexPLUS 17.70%

Hotchkis and Wiley Value Opps A 17.46%

Lord Abbett Micro Cap Growth I 17.39%

Reynolds Blue Chip Growth 17.13%

S&P 500 INDEX 9.93%

The two tables above demonstrate how Arlington has stacked up against the S&P 500 and the top 10 performing funds of the approximately 5,000 and 3,000 US equity funds tracked by Morningstar over the approximately 6.5 years since AVM Ranger Fund’s inception and the 11.5 year lifespan of Arlington Value Management LLC respectively. The average return for all funds is likely below the returns for the index as it is widely noted that most funds underperform the index over time. Performance for all funds is gross of management fees.

Arlington Value Management LLC was merged into AVM Ranger LP in Q3 2011. The 11.5-year data represents Arlington Value Management LLC’s return from its inception in December of 1999 through June 2011.

Data Source: Morningstar (as of Dec 31, 2013). AVM Ranger LP is a private offering and is NOT tracked by Morningstar


1 All performance comparisons above are from July 24, 2008 through Dec 31, 2014 2 All performance comparisons above are from December 23, 1999 through June 30, 2011

11.5-Year Top Performing Funds (December 19992 through June 2011) Arlington Value Management is closed

Annualized 11.5-Year

return

ARLINGTON VALUE MANAGEMENT, LLC 18.36%

Lord Abbett Micro Cap Value I 17.57%

CGM Focus 17.53%

Hotchkis and Wiley Small Cap Value I 17.34%

RS Partners A 16.51%

Robeco Small Cap Value II 15.9%

Wells Fargo Advantage Small Cap Value 15.65%

Pacific Advisors Small Cap Value A 15.56%

Wasatch Micro Cap 15.08%

America Century Small Cap Value Instl 14.78%

Lord Abbett Small Cap Value 14.71%

S&P 500 INDEX 0.97%

8 *PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

A stubborn adherence to our investment principles results in a high batting average. A high batting average is the key driver of strong long-term performance.

Batting Average:

The above graph displays the 3-year performance of each stock in which Arlington committed more than 3% of its capital relative to the 3-year performance of the S&P 500 over the first eight years of the fund. For perspective, the accompanying graph displays the 3-year performance of each company in the S&P 500 compared to the 3-year performance of the index average. Arlington may have held the investment for less or more than three years, but we feel a 3-year period accurately demonstrates the success of the initial investment decision.

“I was a good investor myself, but I couldn’t do what Warren and Charlie do so well – virtually never have any losers.” – Otis Booth, major Berkshire Hathaway shareholder


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Arlington Value Batting Average .800+ S&P 500 Batting Average .450


Above all, we think vigilance towards risk is central to solid investment returns.

V I G I L A N C E T O WA R D S R I S K

“It is very easy to generate performance by taking on more risk. And so what you need to do is compensate for risk-adjusted performance... and that is where all the bodies are buried.” – Ragharum G. Rajan, IMF Chief Economist (2003 - 2007)

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A Consistent Vigilance Toward Risk:

From Arlington Value Capital’s 2001 Annual Letter: “. . . a big portion of our assets are invested in companies that should thrive in a period of declining equity markets and tight capital markets in general.”

From Arlington Value Capital’s 2003 Annual Letter: “Junk bond spreads over treasuries have narrowed sharply. It seems as though institutional investors are focusing solely on returns and forgetting about risk. . . our top three holdings are defensively positioned.”

From Arlington Value Capital’s 2004 Annual Letter: “Going into 2005 we continue to have the portfolio positioned defensively. . . Given the high prices and significant risks in the market, we believe our positioning is prudent for the long term.”

From Arlington Value Capital’s 2005 Annual Letter: “The current market environment reminds me of the crocodile pond my brother described to me after returning home from Australia: What looks calm and inviting to jump into is fraught with potential danger just below the surface. I think it’s a mistake to equate the low volatility in the market to a low risk environment in which to invest.”


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A Consistent Vigilance Toward Risk:

From Arlington Value Capital’s 2006 Annual Letter: “Wall Street tends to overweight, and extrapolate the most recent past performance - which has been favorable and without any serious gyrations or shocks. As a result, financial markets are pricing in tranquility as far as the eye can see.

. . . Many take comfort in the derivatives market to hedge risk. The number and amount of derivative products have proliferated at an incredible rate over the past few years. In normal times these innovations help to spread out risk. However, it’s times of unusual shocks and distress when one needs these products the most. Unfortunately, this is likely to be the time when these products add to the instability as large-scale liquidations take place between a small number of counterparties. I can’t pretend to know how derivatives will play out in the next shock to the system. My worry is that it exacerbates the problem instead of dampening it - which is why the products were created in the first place.

. . . The most dangerous environment is oftentimes at the cusp of euphoria; combining maximum leverage with rosy outlooks, on the heels of record profit growth and low interest rates, is a recipe for disaster in my opinion. . . The common theme for managers investing for others is a seemingly blissful willingness to ignore risks and lever up in order to achieve their desired returns. This is manifested in the narrow credit spreads across virtually all types of securities, which in my opinion have gone to crazy levels.”

From Arlington Value Capital’s 2007 Annual letter: “The common theme running through the veins of Wall Street, and what is largely responsible for much of the anxiety, is leverage. The insane amount of leverage being employed is all the more perilous when considering the interconnected nature of the financial system. Having dry powder and financial flexibility in this environment, as we do, and FFH does, is a very favorable position to occupy in a market of forced asset sales and massive de-leveraging.

. . . I must sound like a broken record, as my overall tone of caution hasn’t changed much over the years. . . Our portfolio continues to be positioned somewhat defensively.”


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Protecting Capital during Down Markets:

Arlington’s keen focus on risk has protected capital during the two worst peak-to-trough periods for the S&P 500 over the last 15 years.

Period: Jan 00 - Sep 02 Return

Arlington Value Management +54.46%S&P 500 -44.52%

Period: Sep 07- Mar 09 Return

Arlington Value Management -5.11%S&P 500 -47.74%

AVM vs. S&P 500

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54.6%

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Period 1: (5 Years: Dec 1999 - Dec 2004): Arlington’s primary founding partner was responsible for all investment activity.

Period 2: (1.5 Years: Jan 2005 - June 2006): In January 2005, Arlington took on two new active partners which resulted in material changes to Arlington’s investment process. The altered investment process resulted in significant internal conflicts. The fund’s performance during this period was extremely poor.

Period 3: (8 Years: July 2006 - Current): In July 2006, Arlington went back to its original investment process and structure.

I N V E S T M E N T H I S T O R Y


Period 1 (5 Years) Annualized Return

Arlington Value Management 27.03%S&P 500 -2.15%

Period 2 (1.5 Years) Annualized Return

Arlington Value Management -28.10%S&P 500 5.10%

Period 3 (8.5 Years) Annualized Return

Arlington / AVM Ranger LP 30.96%S&P 500 8.13%

Three Periods of Arlington Value Capital:

Arlington Value Capital Historical Timeline

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We strive to avoid the deadly sins of portfolio management:

Accepting Unsuitable Capital

Groupthink – Lack of Independent Thinking

Overconfidence – Self-Deception

Overactivity – Insufficient Patience and Discipline

“All I want to know is where I’m going to die, so I’ll never go there” – unknown

AV O I D T H E D E A D LY S I N S

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Accepting Unsuitable Capital:

Unsuitable capital misaligns interests and expectations, interfering with one’s ability to execute the strategy.

Incompatible investors distort one’s investment mentality and can cause one to focus on short-term fluctuations rather than long-term values.

“The single greatest edge an investor can have is a long-term orientation. In a world where performance comparisons are made not only annually and quarterly but even monthly and daily, it is more crucial than ever to take the long view. In order to avoid a mismatch between the time horizon of the investments and that of the investors, one's clients must share this orientation. Ours do." – Seth Klarman


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Groupthink – Lack of Independent Thinking:

Relying on others’ analysis results in paralysis or panic under volatile conditions.

Groups have a tendency to reinforce preconceptions and suppress critical thinking.

Seeking consensus results in making decisions with the heart rather than the brain.

“Madness is rare in individuals – but in groups, parties, peoples and ages it is the rule.” – Gustave Le Bon


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Overconfidence – Self-Deception:

Inability to say ‘I don’t know.’

Investors own too many stocks, ignoring the boundaries of their mental capacity, resulting in excessive mistakes and harmful frictional costs.

Average holding period on NYSE: 6-months!

“The awareness of ignorance is the dawning of wisdom.” – Socrates

“Never fool yourself, and remember you are the easiest person to fool.” – Richard Feyman


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Overactivity – Insufficient Patience and Discipline:

Unable to sit still without tiring of sitting still.

Act too often, think too little.

Relaxing investment standards after a drought of ideas.

Average holding period on NYSE: 6-months!

“The enemy of investment success is activity.” – Warren Buffett

“The big money is not in the buying and selling, but in the waiting.” – Jesse Livermore


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Summary of Terms Minimum Investment $5,000,000 Management Fee: 1.0% (Annual) Performance Fee: 15% High Water Mark: Yes Hurdle Rate: No Fixed Fee Option (2.4%) Yes

Firm Management Allan Mecham (801) 979-0655 [email protected] Prior Experience: Wasatch Funds

Subscriptions: Monthly Withdrawals: Monthly w/30-day notice Reporting Quarterly Lock-up: Soft Withdrawal fee: 3%, 2%,1%, for first three years Offshore Option BVI Company Ltd by Shares

Ben Raybould (801) 792-9590 [email protected] Prior Experience: Leucadia National

Service Providers Prime Broker Jefferies & Co Contact: Evan Gevarter (212) 707-6491 [email protected]

Administrator NAV Consulting Contact: Prem Jacob (630) 954-1919 [email protected] Auditor KPMG Contact: Marc Wolf (310) 273-2770 [email protected]

G E N E R A L I N F O R M AT I O N

The information in this document has been furnished by the general partner of the fund and not all information has been independently reviewed or audited. Past performance is not indicative of future performance. Inherent in any investment is the possibility of loss. This does not constitute an offer or a solicitation of an offer to buy a security. Any offer or solicitation must be made only by means of a delivery of a private placement memorandum. This document is for information purposes only and its contents may not be reproduced or distributed in any manner without prior approval from Arlington Value Capital, LLC. Indices are provided as market indicators only. It should not be assumed that holdings, volatility or management style of any Arlington investment vehicle will, or is intended to, resemble that of the mentioned indices. The comparison of this performance data to a single market index or other index is imperfect because the former may contain options and other derivative securities, may include margin trading and other leverage, and may not be as diversified as the S&P 500 Index or other indices. Index returns supplied by various sources are believed to be accurate and reliable.

Custodian J.P. Morgan One Metro Tech Center North Brooklyn NY 11201-3859

Legal Counsel Ragghianti Freitas LLP Contact: Jack Martel (415) 453-8269 [email protected] Offshore Counsel Harneys Contact: Philip Graham (284) 852-2551 [email protected]

mailto:[email protected]







arlington value capital - wordpress.com · 2014-12-31 · from arlington value capital’s 2001...

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