FGCU’s Eagle Fund closes out a challenging 2024

Despite generating strong / positive absolute returns, FGCU’s Student Managed portfolios fell short of their benchmark indexes in 2024.

Legendary investor, Sir John Templeton, once remarked “There are two types of investors: those who have been humbled…. and those who are about to be humbled."??

Unfortunately, my Fall 2024 Eagle Fund students learned firsthand how difficult and humbling active management can be.?Through mid-October 2024, our Large Cap portfolio was up 25% year to date and 50 basis points ahead of its S&P 500 benchmark as our fundamentally based, bottoms-up strategy emphasizing low valuation, high quality, strong growth and momentum appeared to be very much in favor. But market dynamics shifted quickly post the 2024 US presidential election, giving way to top-down, macro and a thematic driven market over the final two months of the year.

No better example of this shifting dynamic was S&P 500 component Tesla (which we didn’t and don’t own due to high valuation).?? Tesla shares, which had underperformed the S&P 500 by 3500 basis points year to date through mid-October, doubled post-election based upon improving investor sentiment around the CEO’s involvement with the incoming administration. The entire gain was driven by valuation multiple expansion, as EPS and Free Cash Flow estimate revisions for future years remain flat to down over the past several months. ?Currently trading at 120x 2025 estimated earnings, 65x trailing EV/Ebitda, and 11x Sales, with a mere 0.3% FCF Yield, Tesla doesn’t currently meet our bottoms-up investment strategy that emphasizes 'growth at a reasonable price'. ?Our decision not to own Tesla alone accounted for a good chunk of our Large Cap strategy's underperformance over the final 2 months of the year.

Again, quoting Templeton "If you want to have a better performance than the crowd, you must do things differently from the crowd."?? I take this to mean, if you want to beat the index over the long term.. you must construct and manage your portfolio differently (and better) than the index. ?These portfolio differences (eg. lower valuations, stronger growth, higher quality) will inevitably lead to “tracking error” or periods of both outperformance AND underperformance.? Templeton’s viewed periods of inevitable underperformance as an opportunity for reflection, patience, and further conviction in one’s approach, rather than as reasons for abandoning a time-tested discipline and principles.

With that being said, we shift focus to the Eagle Fund’s longer-term results (3-5-7 years), which remain favorable on an absolute, relative and risk adjusted basis…. and are particularly impressive when compared the track records of professional money managers over the same periods of time. ?According to Standard and Poor’s, less than 15% of active managers have outperformed their benchmarks over the past 3, 5 and 10 years ( https://www.spglobal.com/spdji/en/research-insights/spiva/ ).?