When I replied to a new investor in our meeting that we do not promise any returns on an investment in the Sifter Fund, Sifter’s sales director nearly choked on his coffee.
Understandably, the investor wanted to know what kind of returns we could offer him in the future. He had looked into the history of the fund and was convinced of our strategy and returns.
While my response may have seemed harsh, it is the only thing I can say about future returns: we do not know them. And neither does anyone else.
In fact, most studies suggest that a fund’s past performance does not correlate with future performance.
However, there is evidence that a small group of investors can systematically identify excellent companies and earn excess returns from the market, for example, Peter Lynch and Warren Buffet have managed to do this.
We hope that the Sifter’s investment process, honed over 20 years, belongs to this small group.
What can we promise our investors?
Our customer promise at Sifter is that we seek, analyze, and invest in extremely high-quality companies worldwide.
Our customer promise can be easily understood when we look at the business metrics of the companies we own and compare them to the S&P 500 company numbers.
The S&P 500 index has historically provided strong returns, just like the Sifter Fund. But what differences do business quality metrics reveal?
The Sifter Fund’s companies are growing faster, with hefty margins, and more profit is left at the bottom line than with S&P 500 companies.
Sifter’s companies have successfully invested profitably in their own business. A high return on invested capital (ROIC) of 22% indicates that these companies have been able to make their profits produce better than the companies in the S&P 500 index on average (10%).
In addition, Sifter’s companies are on average debt-free, unlike S&P 500 companies, which have nearly 2x EBITDA’s worth of debt.
As a Sifter investor, you own slightly more expensive (15.1x vs 14.2x) but significantly higher quality operations than the average S&P 500 company.
The question is: Which group of companies do you think will perform better in the future?
Over shorter periods, the price of stocks will move above or below its business value, depending more on emotions than economics. Therefore, it is pointless to guess changes in the stock market.
However, we believe that in the long term, the price of a stock reflects its value, i.e., the ability to make money in the future, which is a result of quality and growing business.
That’s why we focus on finding quality companies for the Sifter portfolio that appear reasonably valued for their future cash flows.
This is our promise to our investors.
Santeri Korpinen
CEO, Sifter Capital
