Five Years Ago
Five years ago, we established Pacific Ridge Capital Partners. In that year, both the Affordable Care Act and the Dodd-Frank Act were signed into law, and the world economy was gripped with concerns about an economic bubble in China and the Greek debt problems.
Five years on, we reflect with a few observations.
The economy in the United States has continued to plod along with fits and starts, and there appears to be a major shift in the employment participation rate. Whether these low levels can be sustained remains to be seen. However, if the labor pool continues to contract, our nation will need an improvement in productivity and new immigration policies to ensure economic growth.
The economic growth of China is clearly slowing, and the ripple effects are being felt worldwide. While the reported Chinese GDP growth rate is in the 7% range, analyses of its trading partner activities suggest that the growth is much lower—and may be in recession. We have seen this impact in the demand for all commodities, particularly steel and oil, both of which are significant to production in China.
The Greek debt crisis began in October 2009, when the nation announced that its reported financials were a sham. However, the seeds of the problem were sown much earlier and were tied to a combination of poor demographic trends and a growing welfare state. In fact, this is still the issue in many nation members of the EU, and will be very difficult to overcome. Losses will be taken, and the economic effects will continue to be felt for decades.
The Dodd-Frank Act has had an impact on the banking and financial system in the US. Some large players, such as GE, have opted to get out of it entirely. Combined with international banking standards, the Act has added a "tax" on being big, while improving the competitive positioning of smaller institutions. However, it is not clear that the increased regulatory costs imposed on the industry will change the inherent nature of risk taking that is required to run a financial system. If anything, it will inspire a new generation of business school and law school graduates to find ways around it.
The same can be said for the Affordable Care Act. The results of the Act, both intended and unintended, are causing significant and sometimes painful changes in medical care and the insurance that pays for it. In the land-rush to capture customers, many of the government subsidized co-ops have failed, and the insurance industry has been forced to consolidate in order to absorb mounting losses associated with mandated coverage.
All of this provided for a back-drop of significant earnings growth for US companies through the early part of this year. Greater productivity, stable labor costs, low interest rates, and lower commodity costs all fueled earnings growth that reached record levels here in the US. Only during the last two quarters has growth cooled.
Our strategies have worked well over the last five years, doing, for the most part, what we expected them to do. Our Small Cap Value strategy posted an annualized return of 11.5% (net of fees) over the five year period. This compares to a net return of 10.2% for the Russell 2000 Value Index. Our Micro Cap Value strategy posted a five year annualized return of 15.6%, net of fees. This compares to 11.4% for the Russell Microcap Value Index.
These efforts would not be possible without the hard work and dedicated effort of the entire staff at Pacific Ridge. Nor would it be possible without the support of our clients and partners who have entrusted us with the management of their assets.
We look forward to the next five years, and continued success in finding good companies selling for cheap prices.
Pacific Ridge Capital Partners
About Pacific Ridge Capital Partners
Pacific Ridge Capital Partners is an employee-owned firm. We generate our own investment ideas using fundamental analysis and bottom-up stock picking. The investment team applies a consistent, patient and disciplined process that results in low turnover and stability. Our proven philosophy has performed well over many investment cycles and it is the consistent application of this strategy that makes Pacific Ridge unique.
The principals of Pacific Ridge Capital Partners are invested along with our clients in each of our strategies.
PRCP Small Cap Value – Our Small Cap Value strategy generally purchases stocks in the bottom three-quarters of the Russell 2000® Index. This smaller capitalization segment has a large number of underfollowed companies, providing us the greatest opportunity to exploit market inefficiencies. The typical range of holdings is between 100 and 150.
PRCP Micro Cap Value – Our Micro Cap Value strategy generally purchases stocks in the Russell Microcap® Index. This segment is widely underfollowed, providing us the greatest opportunity to exploit market inefficiencies. The typical range of holdings is between 50 and 80.
We believe these market cap segments offer great potential returns and additional diversification for our clients. For further information about Pacific Ridge Capital Partners and our investment strat- egies, we invite you to contact Tammy Wood via email at Tammy.Wood@PacificRidgeCapital.com or by phone at (503) 878-8502.
Pacific Ridge Capital Partners, LLC (“Pacific Ridge”, “PRCP”, or “the Firm”) is an employee-owned investment advisor registered with the Securities and Exchange Commission under the Investment Advisor Act of 1940. The Firm was established in June 2010, and has one office located in Lake Oswego, Oregon. Pacific Ridge claims compliance with the Global Investment Performance Standards (GIPS®).
Sources: Pacific Ridge; FactSet Research Systems (“FactSet”); and Russell Investment Group (“Russell”) who is the source and owner of the Russell Index data.
The current annual investment advisory fees for the portfolios managed in the Firm’s Small and Micro Cap Value strategies are 1.00% and 1.50% of assets, respectively. Returns for the composites are presented gross and net of management fees and other expenses and includes realized and unrealized gains and losses, cash and cash equivalents and related interest income, and accrued based dividends. The Firm calculates time weighted rates of return by geometrically linking portfolio simple rates of return at least monthly, with adjustments made for significant external cash flows. The composite returns are calculated by asset weighting the individual portfolio returns using beginning of the period values. All returns are calculated after the deduction of the actual trading expenses incurred during the period.
The information provided should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in our strategy at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any of the holdings discussed herein were or will be profitable or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Past performance is no guarantee of future results.
Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
The Russell 2000® Value Index measures the performance of the Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. For comparison purposes, the index is fully invested, which includes the reinvestment of income. The return for the index does not include any transaction costs, management fees or other costs.
The Russell Microcap® Value Index measures the performance of the microcap segment of the U.S. equity market. For comparison purposes, the index is fully invested, which includes the reinvestment of income. The return for the index does not include any transaction costs, management fees or other costs.
Returns and asset values are stated in US dollars.