Investments Overview
1693 Partners Fund
The zeitgeist within the equity markets over the past 24 months has centered around the divergence of returns between a few U.S. mega-cap growth stocks, the so-called “Magnificent Seven” (Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla), and the rest of the equity market. This concentration of market performance has led these seven stocks to comprise more than 30% of the S&P 500 market capitalization as of June 30, 2024, a level of concentration market participants have seen only a few times in history. It would be healthy and a long-term bullish indicator if the market were to broaden in terms of market performance. One catalyst for that broadening could be the lowering of interest rates by the Federal Reserve.
The MSCI All Country World Index, an index that measures global equity returns, returned a positive 19.9% for the fiscal year. Fixed income, as measured by the Bloomberg Barclays Aggregate Index, produced a modest return of 2.6% during the 12-month period.
As mentioned and as was the case last fiscal year, the strong overall returns in the equity markets masked the underlying narrowness of the market in terms of the number of companies participating in that strong performance. For example, the S&P 500 (a market capitalization-based index) returned 24.6% while the equally weighted S&P 500 produced an 11.8% return. The Russell 2000, an index of smaller capitalization stocks, returned 10.1% for the fiscal year.
Within this macro environment, the 1693 Partners Fund produced a 9.1% return for the fiscal year, trailing the Policy Benchmark’s return of 14.1% over the same one-year period. In times of exaggerated short-term public market performance, the Partners Fund generally lags the policy portfolio benchmark due to its relatively healthy allocation to private investments, which tend to adjust slower to market events.
As I pointed out in last year’s letter, it is not what happens in any specific one-year period that defines a successful (or unsuccessful) investments strategy; the best gauge is longer-term results. I am pleased to report that longer-term performance numbers for the Partners Fund continue to be strong and comfortably ahead of the policy benchmark. Over the last 10 and 15 years, the Partners Fund (and its predecessor fund) has generated returns of 7.42% and 8.46%, exceeding the benchmark policy returns by 1.15% and 0.29% per year, respectively. As of June 30, 2024, the Partners Fund had net assets of $1.1 billion.
The exhibit below highlights the Partners Fund asset allocation as of June 30, 2024. On balance, the Partners Fund is hovering around the target allocations among the various broad asset classes with an overweight to Global Public Equities and an underweight to Private Equity relative to a static policy portfolio weighting.
Investments Performance
The portfolio’s investments in Global Public Equities returned a positive 15.6% for the fiscal year, compared to the MSCI All Country World Index, its benchmark, which produced a positive 19.9%. As of June 30, 2024, Global Public Equities represented 50.0% of the aggregate portfolio. In terms of geography, the best performing sub-asset class was Developed International Equities.
The portfolio’s U.S.-focused public equity investments, with a weighting of 27.6%, returned a positive 19.2%, trailing the 23.1% return for the Russell 3000 Index.
Performance was negatively affected from the narrowness in market returns, as previously mentioned, as well as the portfolio’s exposure to small capitalization stocks.
Developed International Equities accounted for 20.2% of the portfolio and returned 12.3%, outperforming the MSCI EAFE benchmark by 74 basis points. The Emerging Markets allocation continued to be the most challenging from an absolute and relative return point of view and underperformed its benchmark during the fiscal year. We made one manager change during the fiscal year.
Private Equity, which includes venture capital, buyout and growth equity investments in private companies, had the second largest allocation in the portfolio at 18.9%. Private equity valuations continued to show a negative bias throughout the year, which was particularly acute within the venture capital space.
Long duration assets like private equity should be evaluated over a longer time horizon, allowing for investment managers to effectuate value-add business enhancements and efficiencies to their portfolio companies as well as capture the fullness of the market cycle. With that in mind, the portfolio’s investments in private equity remain quite strong on an absolute basis, and excess returns of private equity relative to public equity are compelling. If history is a guide, then given the pullback in valuations, the industry’s lack of distributions to their LPs, and investors’ appetite for the asset class waning given those two issues, the next few vintage years should be strong years with disciplined allocations to private equity. As a result, the Investment Office is actively but carefully evaluating new opportunities with the private equity space.
Diversifying Strategies, which include investments in private credit, specialty finance, hedge funds and non-correlated strategies including cash flow-based royalty investments, produced strong results returns in the fiscal year at 13.4%, besting its benchmark by 493 basis points. The Partner Fund’s exposure to these types of investments summed to 12.6% of the portfolio.
Fixed Income assets within the portfolio remained modest at 3.1%. Interest rate sensitive markets were still grappling with higher policy rates throughout the year although inflation was moderating. Given the incoming data from the economy, it appears that central bankers are at the end of their tightening cycle and the markets have started to anticipate an interest rate cutting cycle prior to the end of the year.
Finally, Real Assets, with an 11.6% weighting in the portfolio, was up 2.1% for the fiscal year, with strong performance from the portfolio’s investments in energy infrastructure offset by losses in commercial real estate. We are optimistic about opportunities with real assets and made one significant commitment to a power infrastructure fund in the fiscal year.
Brian Hiestand
Chief Executive Officer/Chief Investment Officer
1693 Management Company, LLC
