Gnostic Portfolio Return for the Quarter Ended 06/30/24

For the Q2 2024 fiscal quarter, the DJIA produced a return of -1.7%. The S&P 500 index appreciated by 3.9%. The NASDAQ composite index appreciated by 8.2%.

In contrast, the Gnostic Capital Portfolio declined from $1,009.14 to $1,004.40, a fall of .5%

Solid investment performance in the quarter from Microsoft (+6.2%), Taiwan Semiconductor (+27.2%), Eli Lilly (+16.4%), Novo Nordisk (+11.1%), BJ’s Wholesale (+16.1%) and Palantir (+10%) were more than fully offset by share price declines in Adyen (-29%), ASR (-6%), Mastercard (-8.4%), Visa (-6.2%), Cigna (-9%). Canadian Pacific (-10.7%) and Grupo Chedraui (-14.1%).

Exogenous events, with one exception, largely accounted for the share price declines in the aforementioned equities.

Mastercard and Visa, some years back, had proposed a long-standing financial settlement, to put a close to a merchant lawsuit, regarding interchange charges. The proposed $30+ billion settlement, largely in the form of a reduction in future charges rather than upfront cash, was tossed by the presiding judge, who argued that both Visa and Mastercard are financially capable of increasing that proposal amount without impairing their business model.

For Grupo Chedaui and Grupo Aeroportuario Del Sureste, the massive victory by the highly leftist ruling party of Mexico (Morena) was such that constitutional changes deemed potentially highly detrimental to larger business interests in Mexico are, more likely than not, able to be passed within the coming quarters. Institutional investors divined a less favorable economic environment for private business, in general, to be the outcome of the proposed constitutional amendments. As a result, the withdrawal of foreign capital from the Mexican public markets led to a significant decline in the value of the Mexican Peso against the US dollar, which is the currency of settlement and reporting for the portfolio.

Canadian Pacific faces a labor strike from the major union in their Canadian operations, which may pose a revenue risk if/as/when if would take place. The leftist Canadian government routinely forces binding arbitration in the event of important transportation sectors, but has recently failed to impose a labor stoppage, in a related sector, while arbitration takes place. This places a gun to the head of any employer to settle with labor and largely defeats the concept of a negotiated settlement with unions.

About the only share price decline of any substance due to actual business conditions under the control of a company held within the portfolio, was evidenced with Adyen. The company noted that net margin capture in their processing declined by almost 16%. Secondly, management at Adyen lost some credibility by engaging in actions contrary to their declaration of largely capping employment growth. Now it is true that the company has tailed off on the hiring of US staff, but they did so by engaging in a workaround, the opening a Canadian division and immediately embarking upon a hiring initiative in that jurisdiction. This announcement did not sit well with institutional investors, who rely upon executive at any company to act on the spirit of their word as much as the statement; it was assumed that Adyen would be finishing their multiyear hiring spree, not just ending it in one country while increasing it in another.

The practice of a limited transaction equity portfolio is quite similar to an important trend in farming called “zero-till”.

Zero till farming relies upon the planting of productive agricultural crops in largely undisturbed soil and letting the crop grow with as little external activity as possible until the time of harvest. The benefits of zero till are a significant reduction in actual farming expense while maintaining comparable, or in some cases, improved yields. This produces an improved net margin for the farmer. A transaction-light investment portfolio intends to achieve the same ends, so exogenous events, while important to note (there is ALWAYS a legitimate reason for an investment decline, even in the short term) are of limited longer term consequence for a portfolio unless the company in question is unable to overcome the external impact.