Our 2017 third quarter performance for the Institutional share class was +10.02% compared with S&P 500 Total Return at +4.48%. For calendar 2017 year-to-date ending September 30, 2017, performance for the Institutional share class was +22.28% compared with S&P 500 Total Return at +14.24%. For the 1-year period ended September 30, 2017, the performance for the Institutional share class was +22.55% compared with the S&P 500 Total Return at +18.61%.
The fund’s increased concentration in our top-10 names—undertaken in the weeks following last year’s presidential election when, in our view, some of our best businesses were simultaneously our most attractive stocks—continues to be the driver of the fund’s performance in 2017. Consider that on December 31, 2016, the top-10 positions totaled 61% of fund assets. At September 30, 2017, that concentration had increased to 76% thanks to post-election purchases and particularly relative outperformance of our top holdings.
During the third quarter, our top-5 return contributors were, in descending order, Moody’s, MasterCard, Dollar Tree, CarMax, and Visa. Moody’s, MasterCard, and Visa were the top recipients of cash following the election and all three have been consistently strong performers this year. Dollar Tree and CarMax got “into gear” this past quarter as widespread concerns about the integration of Family Dollar and of used vehicle prices, respectively, diminished.
Speaking of retail businesses, note that O’Reilly Automotive (ORLY, Financial) joined the top-10 positions at quarter end. We have owned O’Reilly since the 2009 inception of the fund. Until this year, our last substantial purchase of O’Reilly shares was in July 2012 when the company suffered a periodic slump in comp store sales. Such has been the case again in 2017, accompanied this time by pervasive investor concern about Amazon and online competitive incursion into auto parts. This Amazon narrative has weighed heavily and broadly on retail shares in 2017. During the second quarter and more so in the third, we purchased more than 1 million shares of O’Reilly, tripling the number of shares owned in what we consider a truly world-class retailer. While we never say never, especially when it comes to Amazon, we believe that auto parts generally, and O’Reilly in particular, are relatively insulated from material online disruption.
As to performance detractors in the third quarter, there were literally none worth mentioning. The biggest offender accounted for a total of -0.05%.
The final observation we would make relates to our cash holdings. They are at or near an all-time low of 0.1% of assets as of September 30th compared with 4.3% as of June 30th and 9.0% a year ago. While our heavy purchases of O’Reilly during 3Q account for part of the decline in cash, we have also had moderate net withdrawals. We suppose this may reflect investor concerns about the durability of what has, after all, been a protracted bull market. Fair enough. While increasing concentration in our top-10 ideas, we have trimmed certain other positions to maintain adequate cash. But know that we, in managing the fund, make no attempt to raise cash tactically or with a broad macro- or market-view. We have no faith in our ability to create value for investors that way.
We thank you for your interest and support of the fund and look forward to providing you with another update in early 2018.
Chuck, Tom, & John
