Source Capital, Inc. Q4 FY2022 earnings call

Key Points

• Objective: To outperform the Russell 2000 Value over full market cycles with less risk, defined as peak-to-peak or trough-to-trough. Uses a bottom-up, fundamental-based approach.
• Investment Process: Four pillars: 1) Balance sheet strength for staying power through crises. 2) Valuation with margin of safety using free cash flow discount models. 3) Strong management with calculated risks and long-term focus. 4) Sector/industry analysis to avoid value traps in secular decline industries. 5) Performance during market weakness: Protects capital better than benchmark and peer group; outperforms in down markets, trails in robust markets.
• Specific Holding: Discussion of IAC, bought after a 65%+ decline. Reasons include ownership in Angi and MGM, integration issues resolved, and undervalued Dotdash Meredith unit with growth potential.

There are no distinct product segments discussed. As of December 31st, the AUM of the strategy was about $500 million.

Forward-Looking Statements

• Aims to outperform the Russell 2000 Value over full market cycles with a consistent, long-term process. Focuses on compounding money steadily. Confident in continuing to meet objectives due to disciplined, bottom-up approach and long-term view.

Risks Identified

• Past mistake of buying cheap companies in secular decline industries (leading to value traps).
• Market overreacts to quarterly earnings, creating opportunities but also risks.
• Uncertainty in near-term economic environment and recessions, managed through long-term perspective.

Q: What has to happen for small-cap to outperform large-cap companies over a sustained period of time?

A: Better valuations for small-caps relative to large-caps; historically rising rates have helped small-caps vs large-caps; coming out of recessions, small-caps have led the way in 8 out of the last 10 recessions.