Towpath Focus: Adventures of a Development Supervisor in Valueland


By David Snowball

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 presently 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 corporations (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 development 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 an extended and adamant custom in favor of shopping for and holding only a few best-of-class shares in order that one would possibly anticipate turnover within the single digits. Whereas the reported turnover is larger than that, nearly all the portfolio’s largest holdings had been first bought within the fund’s opening months. In 2022, only a handful of latest 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 is just not static however is attentive to long-term dynamics relatively than short-term frenzies.

We handle our portfolios in a means that respects the potential for change.  Actually, we frequently attempt to discover alternatives in shares that may be positively impacted by the potential change.  Oftentimes, the market costs securities as if prevailing situations will likely be in place for a very long time, however historical past exhibits that change is regular.  Understanding this helps us not solely discover enticing investments however keep away from probably damaging ones as nicely. (2022 Q3 shareholder letter)

Typically, individuals 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 outstanding. 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 risky than both, however its returns had been to date 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 remove 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; consequently, they had been capable of embody Pin Oak’s efficiency document of their preliminary prospectus.

The efficiency of the 2 funds since his departure highlights the purpose: typically individuals matter.

Similar technique, related bills, 5000 bps distinction in returns.

Particularly, it seems that Mr. Oelschlager issues. Towpath Focus has collected a outstanding document.  Earlier in his profession, Mr. Oelschlager generated considerably larger returns on the worth of modestly larger volatility. Because the 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 means of 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 Danger Danger-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., greatest fall), normal deviation (day-to-day volatility), and draw back deviation (aka “unhealthy volatility”). Lastly, 5 measures that seize the steadiness between return and threat: the Ulcer Index (a measure that mixes the depth and length of an funding’s worst declines, whimsically anticipating how unhealthy an ulcer you would possibly from it), the three normal risk-return measures so as of accelerating risk-aversion (when you actually dislike dropping cash, deal with Martin relatively than Sharpe) and at last MFO’s synthesis.

The fund exhibits the identical sample of outperformance in opposition to the Russell 3000, Lipper Multi-cap Core, and Morningstar Massive Worth benchmarks and peer teams.

Why are Towpath’s traders successful?

Our greatest guess: they’ve obtained an excellent supervisor who has thrived by means of three bear markets, seven corrections, a number of intervals of delusional investor exuberance, rates of interest crashing to under zero, and Fed funds charges rising 10-fold in a yr. If we study from adversity, Mr. Oelschlager appears to have taken the chance to study relatively loads.

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 obtained higher impulse management than the remainder of us. Whereas the Robinhood traders 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 traditional high quality progress shares which were (briefly) relegated to the dusty world of worth investments.

Reflecting on what he’s realized in 28 years as knowledgeable investor, a interval that concerned a wide range of methods and a wide range of markets, he famous:

We handle portfolios in a different 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 about how different persons are behaving. I get extra nervous when issues are going nicely than once they’re not.

We acknowledge that we’re not infallible; we now have to guard ourselves and shield our shareholders from the likelihood that we may be improper.

The yr forward guarantees to be difficult (“the near-term image is bleak,” he admits), and the last decade forward would possibly nicely be nothing to write down 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 provides that. You must go study extra.

The executive stuff

The institutional shares carry a $2,000 minimal. That’s diminished to $1,000 for accounts arrange with an automated 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’ll provide proof of ample investor curiosity, they’re keen to pursue the burdensome job of getting on different platforms as nicely.



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