Chip Rewey's Rewey Asset Management 3rd-Quarter Letter

Dear Friends and Clients,
The third quarter provided yet another coaster ride. Although the Russell 2500 Value index increased by a nominal 0.13% for the quarter, it fell to a quarterly low 6.84% on August 27th, then rallied sharply by 7.48% to finish out the period. This market pattern was similar for the Russel 2000 Value index (smallcap), which fell 0.57%, and the S&P 500, which increased by 1.70% in the quarter.1 Our RAM composite index increased 2.4% for 3Q19 net of fees, and remains ahead of the Russell 2500 Value and 2000 Value year-to-date up 18.9%, still slightly trailing the S&P 500 for the year, which is up 20.55% year-to-date.2

The Value Comeback

The intra-quarter volatility was even more interesting when you compare value to growth indices. Following the market bottom on August 27th, the Russell 2500 Value index returned 7.48% compared to a modest 0.05% for the Russell 2500 Growth index. While this short period of outperformance does not dramatically impact the trailing 5-year performance of the Russel 2500 Growth index (up 62.5%) versus the Russell 2500 Value (40.0%)3, in our opinion it does reflect our view of the market in general. We see a bi-furcated market fueled by low interest rates that have propelled growth stocks to valuation premiums, while many value names remain out of favor and attractively priced.

We believe there is another message behind the dramatic market move post August 27th, and that is that the current growth paradigm cracked. Of course, we are not anti-growth; in fact, the second tenet of our investment philosophy is that we will not own a company that cannot grow over time. However, today’s growth valuation parameters seem to be anti-valuation. The paradigm of lower rates and monetary easing that has encouraged ever higher valuation premiums, will, in

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