Updated March 17, 2021 by Nikolaos Sismanis
Valley Forge Capital Management is one of the largest equity hedge fund managers in the Mid Atlantic with more than $ 1 billion in assets under management from Wayne, Pennsylvania. The fund has a long biased equity strategy and takes a rigorous bottom-up approach to find the highest quality companies. According to the most recent filing by 13F, the fund’s public equity portfolio consisted of 10 securities, currently valued at approximately $ 1.05 billion.
Investors who filed the company’s 13F filings over the past three years (from mid-February 2018 to mid-February 2021) would have earned an annualized total return of 23.6%. For comparison: the S&P 500 ETF (SPY) achieved an annualized total return of 12.50% over the same period.
Note: The 13F filing performance differs from the fund performance. See here how we calculate the 13F storage capacity.
You can download an Excel spreadsheet (with key financial metrics) of Valley Forge’s current 13F stock holdings:
Keep reading this article to learn more about Valley Forge.
Valley Forge’s investment philosophy
Valley Forge founder Dev Kantesaria believes that superior investment returns are achieved through patience and avoiding trading emotionally during volatile market fluctuations. That way, Valley Forge can take advantage of opportunities when the rest of the market is behaving irrationally or fearfully.
The fund’s philosophy is unique and focuses on some perennial beliefs. Valley Forge aims to buy industry-leading companies whose business models can thrive in a variety of economic conditions. By implementing this approach, the Fund does not need to adjust the market to macroeconomic factors or make short-term forecasts.
The fund’s investment rule is simple: buy “compounding machines” that are likely to rise in value over the long term and avoid “cigar butt” stocks that look cheap but are often value traps. In particular, Valley Forge aims to invest in public stocks that will benefit significantly from organic growth.
The fund’s portfolio is based on some compelling ideas that management believes are the only way to significantly outperform the broader indices over the long term. Since the fund typically holds around 10 positions and only adds one to three positions per year, new positions must meet strict criteria of business quality, financial metrics and operational standards.
Current portfolio holdings
The fund’s investment philosophy is reflected in its concentrated portfolio, which consists of only 10 market-leading positions with wide rifts in their respective industries.
Source: company files, author
S&P Global (SPGI) and Moody’s Corp. (MCO)
Both S&P Global and Moody’s Corp are leaders in providing ratings, benchmarks, analysis and data for the capital and commodities markets worldwide. The two companies have a wide moat and are widely trusted for the proprietary data that grows organically as the economy expands. VFCM is so confident of the two companies’ dominance and resilience that the two stocks account for 36.5% of the fund’s total portfolio. The fund increased both positions slightly in the fourth quarter by around 1% each.
In addition to meeting Valley Forge’s organic growth requirements, the two companies have an excellent history of dividend growth. S&P Global is a dividend aristocrat with 48 years of continuous annual dividend increases. Moody’s has also increased its dividend annually for the past 12 years and has never lowered it since it first paid out in 2000. Given the rapid earnings growth, both companies were also able to grow their dividends quickly while keeping payout ratios below 30%. Your 5-year DPS CAGR is currently 15.22% and 10.49%, respectively.
Visa & Mastercard: (V), (MA):
Another duo that meet Valley Forge’s investment criteria is Visa and Mastercard. The two companies have an unprecedented business model with an inaccessible barrier to entry. The two companies have close relationships with all of the world’s major banks and practically operate in a duopoly that dominates the payments industry. In addition, they act as a tollbooth for every transaction and will grow organically as the world economy goes cashless and all the boxes are checked by VFCM. Both stocks account for around 32.4% of total holdings after showing promising signs of recovery given the adverse impact COVID-19 has on card readers.
Although they have recently underperformed the entire tech sector due to their lagging performance, the two companies remain excellent long-term investments with a massive margin of security and AAA management teams. Returns on investment also remain attractive. Both companies have increased their dividends by double digits while pulling back significant amounts of their stocks every quarter, further fueling their EPS growth.
Valley Forge increased both its Visa and Mastercard positions by 11% and 52%, respectively, in the fourth quarter.
Fair Isaac & Aspen Technology (FICO), (AZPN):
Another pair that complements VFCM’s fintech and capital market oriented portfolio is Fair Isaac & Aspen Technology, which has around 20% of its stakes. The two companies offer software solutions for asset optimization and data management that companies can use to automate and improve their decision-making processes.
It is important to understand how Valley Forge’s portfolio is structured in order to capitalize on their favorable market trends by retaining two market leaders whose business models have proven to be impenetrable over the past decade. The management’s patience and confidence in their long-term work are remarkable. In the past two years, the only change to the portfolio was to swap Facebook with Autodesk and expand the existing positions.
Intuit accounts for around 4.6% of its total inventory. The company is a leader in providing services to consumers, small businesses, the self-employed and accountants worldwide. The inventor of Turbo-Tax has taken the industry by storm with series acquisitions. Intuit has bought more than 35 companies in the past few years. The most recent big deal was the purchase of Credit Karma for $ 7 billion to further expand the global moat.
The company recently ended its fiscal year again strongly and achieved quarterly sales of 1.58 billion US dollars. Sales were lower due to calendar mismatches, but increased year-on-year. Management also announced its guidance for fiscal year 2011 for revenue of $ 8.20 billion to $ 8.40 billion, a year-over-year growth rate of 4% to 7%. Given the steady growth, strong forecast, and recession-proof services, the company’s forward P / E of around 43.5 should be well founded.
Adobe (ADBE) and Autodesk (ADSK):
Both Adobe and Autodesk together account for almost 8% of their holdings and are the most trustworthy and widely used software suites in the field of digital art and technology. Adobe has effectively monopolized the sector through its Creative Cloud used by amateur developers to Hollywood blockbuster video and photo editors.
On the other hand, Autodesk takes the dominant position in designing and visualizing the infrastructure that surrounds us. Valley Forge has ensured its presence in the future software designers in both the digital and real world.
Valley Forge increased its Adobe position 12% in the quarter and held its Autodesk stake stable.
Amazon accounts for less than 1% of Valley Forge’s total inventory. The e-commerce and digital infrastructure giant is another example of the fund’s philosophy on action. The company has proven to be an unstoppable juggernaut, whose latest earnings report surprised investors with a record profit of $ 7.22 billion per quarter.
Based on Valley Forge’s previous investment behavior, we believe that management will continue to build on their current, rather tiny, position.
While the company’s portfolio has truly outperformed the market as a whole, it is extremely concentrated with no sector diversification.
Investors should not clearly copy Valley Forge’s holdings as the fund is likely to hold various other financial derivatives to protect itself from its diversification risks.
Source: company registrations, author
Valley Forge has a highly concentrated portfolio of stocks that are complementary to one another. The belief in industry-leading positions illustrates the fund’s investment philosophy. Despite its undiversified and arguably controversial asset allocation, Valley Forge has clearly outperformed the market. In recent years, the fund’s returns have been more than double those of the S & P500, demonstrating the management’s successful stock picking skills.
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