On December 31, 2019, Oelschlager Investments launched the Towpath Focus Fund (TOWFX). The fund invests in 25-40 home shares no matter market capitalization. The fund is managed by Mark Oelschlager.
Towpath is a concentrated, all-cap fairness fund. The portfolio at present holds 41 securities. About 15% of the portfolio is invested in non-US shares and 12% in money. In comparison with its Morningstar friends, the fund has additional cash, extra worldwide, and extra small-cap publicity. The portfolio shares are larger progress firms (measured by gross sales, cash-flow, and e book worth progress) that promote for decrease costs (measured by price-to-book, price-to-earnings, and price-to-sales) with larger returns than both their friends or their index.
Portfolio building begins with macro-level assessments of the economic system, proceeds to analyses of industries and sectors, then ends by shopping for and holding essentially the most enticing shares in essentially the most enticing sectors. Mr. Oelschlager has a protracted and adamant custom in favor of shopping for and holding just some best-of-class shares in order that one may anticipate turnover within the single digits. Whereas the reported turnover is larger than that, virtually the entire portfolio’s largest holdings had been first bought within the fund’s opening months. In 2022, only a handful of recent names appeared, together with Novartis, Hillenbrand (a producer most identified for its funeral merchandise subsidiary, Batesville), and on-line journey company Reserving Holdings.
The portfolio will not be static however is aware of long-term dynamics moderately than short-term frenzies.
We handle our portfolios in a manner that respects the potential for change. In actual fact, we frequently attempt to discover alternatives in shares that will be positively impacted by the potential change. Oftentimes, the market costs securities as if prevailing circumstances can be in place for a very long time, however historical past reveals that change is regular. Understanding this helps us not solely discover enticing investments however keep away from doubtlessly damaging ones as properly. (2022 Q3 shareholder letter)
Generally, folks matter
We first started monitoring Mr. Oelschlager about 15 years in the past throughout his time at Oak Associates. Mr. Oelschlager served as supervisor of Pin Oak Fairness Fund (POGSX) from 2005-2019, initially as a co-manager, then starting in June 2006, as sole supervisor. Mr. Oelschlager additionally managed or co-managed 5 different funds, served because the co-CIO for Oak Associates, and was answerable for about 700 million {dollars} in individually managed accounts.
His efficiency at Pin Oak Fairness was constantly exceptional. Over a 10-year stretch within the coronary heart of his time as supervisor, Pin Oak returned 11.3% yearly and beat its peer group, and the S&P 500, by 400-500 bps. It was a bit extra unstable than both, however its returns had been up to now superior that it beat its benchmark and friends by each risk-return metric we adopted: Sharpe, Sortino, and Martin Ratio, in addition to Ulcer Index. Our 2017 profile of Pin Oak Fairness pointed to the truth that within the years following Morningstar’s resolution to eradicate analyst protection of the fund, it continued to membership its peer group.
Then, in 2019, Mr. Oelschlager and his spouse, Tina, who served as a Relationship Supervisor for Oak Associates, left Oak Associates and launched Oelschlager Investments collectively. The Oelschlagers demonstrated to the SEC that the technique he pursued at Pin Oak is equivalent to the Towpath Focus technique; because of this, they had been in a position to embrace Pin Oak’s efficiency file of their preliminary prospectus.
The efficiency of the 2 funds since his departure highlights the purpose: typically folks matter.
Similar technique, comparable bills, 5000 bps distinction in returns.
Particularly, it seems that Mr. Oelschlager issues. Towpath Focus has accrued a exceptional file. Earlier in his profession, Mr. Oelschlager generated considerably larger returns on the value of modestly larger volatility. For the reason that launch of Towpath, he’s had the uncommon distinction of upper returns plus decrease volatility, mirrored in dramatically stronger risk-adjusted efficiency.
Towpath Focus, efficiency from inception by 11/2022
| APR | APR vs friends | Max DD | Std Dev | DS Dev | Ulcer Index | Sharpe ratio | Sortino ratio | Martin ratio | MFO ranking | |
| Towpath | 13.2 | – | -18.7 | 19.4 | 11.0 | 5.5 | 0.65 | 1.15 | 2.31 | 5 |
| Multi-cap worth group | 6.9 | +6.3 | -27.7 | 22.6 | 15.7 | 10.0 | 0.28 | 0.41 | 0.67 | 3 |
| S&P 500 | 8.3 | +4.9 | -23.8 | 21.2 | 14.2 | 9.1 | 0.36 | 0.54 | 0.85 | 4 |
| Return | Threat | Threat-return metrics | ||||||||
The primary two columns measure Towpath’s common annualized returns in comparison with each its friends and the S&P 500. The subsequent three columns spotlight volatility, typically abbreviated as “threat.” These report the utmost drawdown (i.e., largest fall), customary deviation (day-to-day volatility), and draw back deviation (aka “dangerous volatility”). Lastly, 5 measures that seize the steadiness between return and threat: the Ulcer Index (a measure that mixes the depth and period of an funding’s worst declines, whimsically anticipating how dangerous an ulcer you may from it), the three customary risk-return measures so as of accelerating risk-aversion (if you happen to actually dislike dropping cash, deal with Martin moderately than Sharpe) and at last MFO’s synthesis.
The fund reveals the identical sample of outperformance in opposition to the Russell 3000, Lipper Multi-cap Core, and Morningstar Giant Worth benchmarks and peer teams.
Why are Towpath’s buyers successful?
Our greatest guess: they’ve bought an excellent supervisor who has thrived by three bear markets, seven corrections, a number of intervals of delusional investor exuberance, rates of interest crashing to beneath zero, and Fed funds charges growing 10-fold in a yr. If we be taught from adversity, Mr. Oelschlager appears to have taken the chance to be taught moderately quite a bit.
He argues that Towpath has three structural benefits: a longer-term perspective than most, extra expertise than most, and a extra affected person technique than most. They encapsulate that declare in a pleasant graphic:
One of many good issues about good, skilled managers is that they’ve bought higher impulse management than the remainder of us. Whereas the Robinhood buyers are getting buzzed on Tesla inventory, bored apes, and crypto exchanges (he notes that $2 trillion in crypto property have evaporated in two years and “we largely prevented these traps”), Mr. Oelschlager was shopping for basic high quality progress shares which were (briefly) relegated to the dusty world of worth investments.
Reflecting on what he’s discovered in 28 years as an expert investor, a interval that concerned quite a lot of methods and quite a lot of markets, he famous:
We handle portfolios in another way than we did a very long time in the past, and with every cycle, we get a bit of bit higher at limiting draw back threat. I’m continually fascinated by how different individuals are behaving. I get extra nervous when issues are going properly than once they’re not.
We acknowledge that we’re not infallible; we’ve got to guard ourselves and defend our shareholders from the likelihood that we is likely to be incorrect.
The yr forward guarantees to be difficult (“the near-term image is bleak,” he admits), and the last decade forward may properly be nothing to put in writing residence about: Vanguard is forecasting 10-year US fairness returns of 4.7-6.7%, Analysis Associates tasks it at 2.3%, Morningstar sees 5.5% – all earlier than adjusting for inflation).
The important thing to thriving in unsure occasions is, we’ve argued, having a gradual and rational technique executed by a confirmed supervisor. Towpath presents that. It’s best to go be taught extra.
The executive stuff
The institutional shares carry a $2,000 minimal. That’s lowered to $1,000 for accounts arrange with an computerized investing plan. The expense ratio, after waivers, is capped at 1.10%. The fund is out there for direct buy and thru Schwab. If they will supply proof of ample investor curiosity, they’re prepared to pursue the burdensome process of getting on different platforms as properly.