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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"Small-cap value manager sees opportunity in current market dislocation, adding to electrical distributor Wesco positioned for infrastructure spending tailwinds. Despite Q1 underperformance, maintains conviction that quality small-caps will outperform when market conditions improve, citing historical recovery patterns."
Aaron Sallen's small-cap fund declined 1.6% in Q1 2023 while his long-only portfolio gained 14% as higher-quality growth names recovered on expectations of pausing rate hikes. The manager added to Wesco, a $23bn electrical distributor that completed a successful Anixter acquisition in 2020, achieving over $700mm in cross-selling synergies versus $170mm targeted. WCC is positioned to benefit from federal infrastructure spending including the Infrastructure Investment & Jobs Act and Inflation Reduction Act across its communications, utility, and electrical segments. The fund's RF Industries position fell 14% despite the company's profitable RF connector business generating 10% EBITDA margins, as losses in specialized products weighed on valuation. Sallen highlights that smaller companies historically underperform in bear markets but recover faster when conditions improve, noting significant performance divergence by market cap in 2023. He views current small-cap bearishness as creating attractive opportunities for future returns, maintaining conviction in quality businesses with strong management teams trading at reasonable valuations.
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Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.
Market Conviction
Manager names specific positions with detailed analysis, continued adding to WCC making it mid-level position, and provides specific financial metrics and catalysts. Shows moderate-high conviction through position sizing and detailed fundamental analysis, though hedged language around RFIL execution risks prevents higher score.
Growth Outlook
Manager acknowledges economic outlook is more daunting but expects small-caps to benefit when market conditions improve, citing historical recovery patterns. Constructive but cautious tone with recognition of current challenges.
Risk Appetite
Manager continued adding to WCC position and made it mid-level holding, showing selective risk-taking. Maintains positions in challenged names like RFIL, demonstrating willingness to hold through volatility but not aggressively deploying across the board.
Capital Deployment
Manager continued adding to WCC position during the quarter, showing selective deployment activity. No cash level changes mentioned, but active position building in specific names indicates modest net deployment bias.
Forward Guidance
Manager expects current small-cap bearishness to provide good opportunities for attractive prospective returns, showing mild optimism about future deployment opportunities while acknowledging current challenging environment.
Language Signal
Language includes both opportunity-focused terms (attractive, positioned to benefit, good opportunities) and risk acknowledgment (daunting, challenging, beaten up). Slightly more constructive than cautious overall.
Perceived Risk
Manager acknowledges economic outlook is more daunting and notes smaller companies' exposure to economic changes and credit access challenges. Risk discussion is present but not central to the letter, focusing more on opportunities.
Opportunity Density
Manager sees current small-cap bearishness as providing good opportunities for attractive prospective returns and actively added to positions. Views market dislocation as creating selective opportunities in quality names.
Time Horizon
Manager emphasizes patience with RFIL position and expects multi-year infrastructure spending benefits for WCC. References historical recovery patterns and willingness to hold through volatility, indicating 2-3 year investment horizon for thesis realization.
