Benefits of Concentration

Recurve seeks and owns Builders. Builders that meet all our criteria are difficult to find and most publicly traded companies do not meet our rigorous standards on business quality, and among those that do, valuations are another gating factor. Our investable universe is rather narrow, but that's not the only reason we have a small portfolio - we want a concentrated portfolio. Why? Because concentration allows us to generate more returns from our best ideas.

Let's walk through some examples.

Our goal is to beat the S&P 500 over a long period of time. There are many approaches to achieving this goal. Some investment managers own all the S&P 500 constituents but re-weight them based on their sector and company analyses. The cumulative impact of all those different sizing disparities would create deviations from the index, but those deviations likely would be relatively small because the manager still owns all the constituents in the index.

Let's look at the other extreme with an investment manager that put all its eggs in one basket and owns a single stock. If the stock were Apple or Amazon - great, they would've walloped the S&P 500 over the last 20+ years! Apple produced a total return of 22,164%, while Amazon produced a total return of 2,860%. But what if the single-stock manager had chosen a blue chip like IBM at the beginning of 2000? This would have produced a career of underperformance. Owning just IBM would have produced a total return, including reinvested dividends, of 109% through today's prices. It's not a terrible outcome since it's still positive, but it is far below the 337% offered by the index.

Owning a single stock is highly likely to cause performance to deviate significantly from the overall index's performance. Getting it right is world-changing; getting it wrong is career-ending. Most investment managers find comfort with index-like returns and care a lot about staying in business, and therefore choose a relatively more diversified approach.

Recurve's approach is to own a select group of companies that we believe have the characteristics to be long-term winners. Most will not work out precisely as planned - some will turn out much better, and some will turn out worse. I have found that owning about ten industry-leading companies which operate across a variety of industries allows us to maximize the impact of our business selection, while also providing benefits of diversification in end markets, customers, and business models.

Suppose we take 10 companies and evaluate them over 20 years, with annualized performance outlined below:

After 20 years, an equally-weighted portfolio of these companies would yield a CAGR of 12.5% per year. A $1,000 investment would turn into over $10,500 by the end of year 20, compared to the market's return of $3,870 at a 7% CAGR. There are some interesting observations that can be derived from this.

· Excluding Company A, the top performer, the CAGR would be 10.6%. Still significantly better than the market.

· Excluding company J, the worst performer, the CAGR would be 13.1%. Even better still.

· The CAGR of the top 5 is 16.1%, while the CAGR of the bottom 5 is just 1.7%.

· The CAGR of the middle 6 (excluding two best and two worst) is 9.9%.

Of course, all investors try their hardest to capture the best performers and avoid the underperformers. One important consideration is the correlation of the positions to each other. If all ten companies are oil & gas companies, how likely are they to have this type of performance dispersion? More likely than not, over long enough time frames, the performance of an industry-specific portfolio will trend toward the performance of that specific industry.

Our goal is to create a portfolio consisting of Builders that is concentrated into our best ideas, but diversified across different industries, demand pools, demand patterns, and growth rates. We may own companies growing 30% y/y and others growing 8% y/y. Some may be very profitable today, while others may be scaling their way to significant profitability in the medium- to long-term. In all cases, we look for very attractive growth in normalized FCF/share over our investment horizon. We believe owning a select group of companies that share these characteristics will achieve our performance goals over the long-term.

Disclaimer

No Offer or Solicitation. These documents do not constitute an offer to sell any securities of the Fund. Such an offer may only be made after you have received the Fund’s offering documents. Any decision to invest in a Fund must be based solely on the information in the Fund’s offering documents, regardless of any information investors may have been otherwise furnished. All of the information herein is subject to, and qualified in its entirety by, the terms described in the Fund’s offering documents. Before you make an investment in the Fund, you should carefully and thoroughly review those offering documents. Recurve cannot assure investors that the Fund will achieve its investment objectives. Further, many of the investment techniques and activities described in this document are high risk activities that could result in substantial or complete losses.

No Duty to Update. The statements herein are subject to change at any time in Recurve’s sole discretion. Recurve is not obligated to revise or update any such statements for any reason or to notify you of any such change, revision or update. For example, the discussions regarding investment objectives, processes, typical or ideal portfolio construction, gross or net exposure, position sizing, other portfolio limitations, other investment characteristics and team composition represent Recurve’s current focus and intentions and are subject to change at any time without notice. Depending on conditions and trends in securities markets and the economy generally, Recurve may pursue any objective, employ any technique or purchase any type of security that it considers appropriate and in the best interest of the Fund.

Forward Looking Statements. These documents contain forward-looking statements based on Recurve’s expectations and projections about its future investment methods and techniques and its team. Those statements are sometimes indicated by words such as “targets,” “expects,” “believes,” “will,” “ideal” and similar expressions. In addition, any statements that refer to expectations, annual returns, projections or characterizations of future portfolio composition, events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance or approach and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Prospective investors are cautioned not to invest based on these forward-looking statements and projections. Recurve’s investment approach and an investor’s returns could differ materially and adversely from those expressed or implied in any forward-looking statements as a result of various factors.

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