Firsthand Research: We Know Our Banks

Firsthand Research: We Know Our Banks

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    Due to recent news about the collapse of Silicon Valley Bank and Signature Bank, we want to give you comfort about Fenimore’s bank holdings. A hallmark of our investment process is to personally know what we own, and the banks in which we invest are no different.

    Our research analysts meet with and know our banks’ management teams, tour their facilities, and have extensive experience in the industry. This gives us long-term confidence during short-term challenges.

    While the circumstances that led to the demise of these two banks are somewhat complex, their foundations were built with “hot deposits” whereas Fenimore’s banks are standing on primarily “core deposits.”

  • Andrew Boord

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    Andrew Boord
    Portfolio Manager, FAM Small Cap Fund

Here is a basic summary and what it means to you:

  • Transactional Business Model: Silicon Valley Bank, for example, relied on a multitude of deposits from venture capital funded companies. These are typically very large deposits that far exceed the $250,000 FDIC insurance limit. These hot deposits can leave quickly — and they did. Then, apparently, many depositors panicked and withdrew their money causing a cascading effect.

    It also appears that the bank did not have a solid risk management process in place. When the hot deposits left, they had to sell their large amount of bonds at big losses to meet deposit outflows and this burned up some of their capital — it spiraled downward from there.

  • Relational Business Model: Fenimore’s regional banks are in the relationship business. They receive deposits from the community primarily for consumer checking accounts, business accounts, and savings accounts. These banks then loan most of that money back into the same community. They keep a modest amount of the deposits in bonds to earn some money, yet diversify their risk intelligently in our opinion.

    By design, our banks rely almost entirely on core deposits that tend to be a vast collection of depositors with modest balances, so they are not dependent on a few customers or one industry of customers. 

  • Five Bank Holdings: While the banking industry has been facing various headwinds, we do not foresee a run on any of our banks. Additionally, across all portfolios and among our many holdings, Fenimore only owns stock in five banks as of 12/31/2022 — our exposure is limited.

The federal government has stepped in and declared that all Silicon Valley Bank and Signature Bank depositors will have access to all of their money immediately. The Federal Reserve also created a new program that will lend money to banks for up to one year. It’s probable that the government could continue to intervene, as necessary, to calm any fears.

Finally, as we’ve stated in several recent communications, Fenimore believes that we have a collection of quality investments that are positioned well for the long term.

We hope these insights are helpful. Please do not hesitate to contact us at 800.721.5391 with any questions.

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Q4 Earnings Takeaway: Strategic Capital Allocation is Key

Q4 Earnings Takeaway: Strategic Capital Allocation is Key

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    In an environment where significant free cash flow generation, strong balance sheets, and superior management teams are crucial to company performance (and even survival), we believe our focus on high-quality enterprises with solid financials is more important than ever.

    Strategic capital allocation is one of the most important activities management teams do based on our experience of nearly 50 years. We strive to invest in companies that, after paying business expenses, generate more cash than they need and in turn seek to increase shareholder value.

    With excess free cash, leadership has five capital allocation choices.

  • Capital Allocation is Key

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1. Invest in the Business

  • This includes building new plants, adding more stores, increasing inventory, and research and development.

2. Impact the Balance Sheet

  • Put cash on the balance sheet.
  • Pay down debt.

3. Conduct Mergers and Acquisitions

  • Companies can acquire businesses to accelerate their growth.
  • When they acquire another firm, this tends to increase sales, profits, and their stock price.

4. Pay a Dividend

  • We seek companies that pay a dividend and consistently increase that dividend over time. We believe dividend growth is important because only businesses that are growing their cash flow are able to consistently grow their dividends. We favor investing in businesses that are growing their dividends quickly because it means the underlying operation is expanding.

5. Buy Back Stock

  • A stock buyback is when a corporation purchases its own shares in the stock market and it demonstrates the management team’s confidence in their business.
  • A buyback reduces the number of shares outstanding and this increases earnings per share and, frequently, the stock’s value. 
  • All buybacks are not alike. Just as we seek to purchase shares at a discount to a company’s value, we prefer businesses that repurchase their shares at reasonable valuations as well.

Across Fenimore’s three mutual funds (FAM Funds), 100% of our holdings are employing one or more of these strategic tools. This bolsters our confidence in their leaders and business.

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Quality Investing Part 2: The Importance of Discipline

Quality Investing Part 2: The Importance of Discipline

As part of our Quality Investing series, William Preston, Portfolio Manager of the FAM Dividend Focus Fund, and Anne Putnam, Senior Vice President:

  • Review Fenimore’s approach of using quality in active management to structure portfolios
  • Help us understand what statistically reinforces investors need to be long-term focused and how to assist in managing emotion in a bear market
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Quality Investing Part 3: Risk Analysis at FAM

Quality Investing Part 3: Risk Analysis at FAM

As part of our Quality Investing series, William Preston, Portfolio Manager of the FAM Dividend Focus Fund, and Anne Putnam, Senior Vice President:

  • Define risk as it is considered at Fenimore
  • Discuss Fenimore’s investment approach from initial screening through allocation as we seek select, quality businesses
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Quality Investing: Its Impact During Down Markets

Quality Investing: Its Impact During Down Markets

Investment Insights: Fenimore’s Latest White Paper

William Preston, Portfolio Manager of the FAM Dividend Focus Fund, discusses how Fenimore’s mutual funds have performed in down markets over the decades and analyzes their quality characteristics.

Highlights Include:

  • Achieving long-term investment goals usually depends on staying invested during down markets and having an established risk management process.
  • The downside capture ratio of Fenimore’s three equity mutual funds helps quantify the benefits of our risk management approach.
  • Fenimore Asset Management conducts firsthand research and seeks to invest in select, quality businesses. We believe it is our holdings’ collective quality characteristics that have helped our mutual funds typically outperform during down markets.

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Thomas O. Putnam founded Fenimore in 1974 with two passions: conduct in-depth, firsthand, independent investment research and serve investors with excellence and integrity. Today Fenimore Asset Management, manager of the FAM Funds, is nationally recognized, yet locally rooted and independently owned. Decades have passed, but our approach endures.

Securities offered through Fenimore Securities, Inc. Member FINRA/SIPC,
and advisory services offered through Fenimore Asset Management, Inc.

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