GTLB - Bireme Capital December 2023 Investor Letter

2024-02-11 08:50:00 ET

Summary

• Bireme Capital is a Registered Investment Advisor located in the Commonwealth of Pennsylvania and the State of Connecticut. Bireme provides investment advisory and related services for clients nationally.
• Fundamental Value finished the year up 21.3% net of fees, underperforming the S&P 500’s 26.2% performance.
• Last May, this Goldilocks scenario was an upside risk, but now an immaculate landing is fully priced in, and only downside risks remain.
• The market may be underestimating the stickiness of inflation - we view this as the most likely scenario.

Fundamental Value finished the year up 21.3% net of fees, underperforming the S&P 500’s 26.2% performance. FV is now up 448% net since inception in 2016 vs the S&P at 161%, an annual outperformance of 11.7%. ¹ For monthly performance see our tearsheet .

Market commentary

Last year was only the second calendar year we’ve underperformed the S&P, and the first since 2019. Nevertheless, we are particularly proud of last year’s returns, as 2023 was an exceptionally difficult year for the relative performance of active value managers. More than half of the gains of the S&P came from just seven stocks – the so-called “Magnificent 7.” These mega-cap tech stocks climbed an astounding 75.8% during 2023, while the remaining 493 stocks in the S&P were up a much more pedestrian 12.3%. ²

We were unsurprised by the strength of mega-cap tech. Though we have been very bearish the market as a whole and the tech sector in particular, we have been consistently pointing out the business strength and relatively reasonable valuations of mega-cap tech for the past three years. In our 4Q20 letter, Part II: Anatomy of a Bubble , years before “Magnificent 7” was coined, we called Apple ( AAPL ), Amazon ( AMZN ), Microsoft ( MSFT ), Facebook ( META ) and Alphabet ( GOOG , GOOGL ) “the transcenders” (we’ll stop trying to make that a thing):

The five mega-cap tech companies are truly transcendent businesses. They dominate huge markets and earn enormous – and growing – profits… Four of the five trade at lower earnings multiples than the Nasdaq 100… At times, some have traded at even lower valuations, valuations more appropriate for troubled companies than transcendent ones. When they did, we were thrilled to have big positions in them (see our Apple thesis from 2017 and our Facebook thesis from 2019)... These companies seem neither especially cheap nor outrageously expensive to us today. Instead, their size, quality, and relatively reasonable valuations have obfuscated the true extent of the bubble in more speculative securities.

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