Excerpted from our 2022 Annual Shareholder Letter
At Eventide, it is our strong conviction that high-quality companies that excel at creating value for others and trade at a discount to intrinsic value offer superior long-term risk-adjusted returns. We call this our investment philosophy because it is the thesis that drives our actions. We developed this philosophy through thorough historical research and a deep understanding of how financial markets function over long periods of time.
The purpose of our written philosophy is to both form our process and hold our actions accountable. Our actions have to remain consistent with our philosophy. If we are ever inclined to act in a way that is inconsistent with our philosophy, we have to ask, do we no longer believe the thesis?
We have experienced a number of testing points over the last twelve months. Rising inflation, rising interest rates, the ongoing war in Ukraine and continued supply chain disruptions have each contributed to fearful responses from investors, leading much of the market to sell out of companies with long-term resilient qualities and gravitate to stocks that quantifiably appear to be safer in the short-term. On the other side of the same coin, fear of missing out has led a subset of investors to buy into short-lived manias in hopes of realizing a quick gain and selling out before the euphoria is brought back to reality.
A common adage in investing is to “be fearful when others are greedy and greedy when others are fearful.” I would contend that this adage is helpful because it gives you the confidence to deviate from the madness of crowds. But there is a better way to respond to fear than with greed. As Aristotle explains, there are two opposite vices for each virtue. Cowardice and rashness or fear and greed do not become virtues when confronted with the opposite vice. So, in a market environment dominated by fear, what posture should investors take if not one of greed?
As in any area of life, it is easy to remain committed to your beliefs when your actions are reinforced by immediate gratification. It’s not until you go through a season of testing, though, that you discover whether you have the overarching virtue that drives you to act consistently with your beliefs despite the lack of immediate reinforcement.
This overarching virtue is courage.
C.S. Lewis once wrote that “courage is not simply one of the virtues, but the form of every virtue at the testing point, which means at the point of highest reality.”1
Looking at the historical performance of our funds for numerous multi-year periods shows us that our thesis has been reinforced through times of fear and greed. Past results, however, do not guarantee future performance. If future performance was guaranteed, investors wouldn’t need courage.
During times of extreme volatility and future uncertainty, we ask ourselves if we still believe our investment philosophy, namely that high-quality companies that excel at creating value for others and trade at a discount to intrinsic value offer superior long-term risk-adjusted returns.
The answer is an emphatic yes. Our portfolio team is actively considering the shifts taking place in the macro environment and projecting the potential headwinds and tailwinds to each of the companies within our portfolios and prospective companies in the investable universe. We then ask, Does this company still meet our rigorous financial and qualitative standards of being “high-quality”? Do we believe this company will still excel at creating value for others? If the answers to those first two questions remain positive, a fear-driven market often reveals great opportunities to invest in companies that meet the third requirement—the stock trading at a discount to intrinsic value.
In this report, you’ll find our assessments of how each of our funds performed over the past twelve months, including detail on our understanding of the impetus for outperformance in some instances and underperformance in others. Some of the companies’ fundamentals have indeed been hampered by the daunting macroeconomic factors, but many companies have suffered stock sell-offs as a result of fearful investing behavior rather than any underlying change in fundamentals. As an active investment manager, we are actively discerning between the factors that will impact the performance of the companies in our portfolios over the next 3, 5, and 10 years and adding to positions or reallocating based on our own convictions, even if those convictions are currently out of favor.
We seek to remain courageously committed to our philosophy-driven process when others are fearful or greedy.
Thank you for taking the time to read Eventide’s Annual Shareholder Letter. We understand the importance of your capital, and we seek to allocate it to what we believe to be its best use— investing in companies that create value for (1) you, the beneficial owners of the company; (2) the company’s stakeholders who are impacted by the business and have a reciprocal impact on the business; and (3) for the global common good, meeting the needs of our neighbors near and far.
Thank you for your trust.
Finny Kuruvilla, MD, PhD
Dolores Bamford, CFA
Andrew Singer, CFA