Using a Long-Term View to Navigate Quick Market Changes

MARKET COMMENTARY

Using a Long-Term View to Navigate Quick Market Changes

1st Quarter 2020

In the past few months, the world has experienced unprecedented disruption to families, communities, nations, and global economies. The pain and loss resulting from the COVID-19 pandemic cannot be minimized, but at Riverbridge we remain hopeful knowing extraordinary innovation and creativity will follow from this crisis.

During the first quarter of 2020, the novel coronavirus abruptly ended the longest bull market on record. In a stunning reversal, the market transitioned from record highs to a bear market in just 20 days. As investors sought direction, volatility spiked. During March, the S&P 500’s average daily percentage change was a breathtaking five percent. While adversely impacted, Riverbridge’s portfolio companies generally fared better than the market. We believe our companies possess many attributes that enable them to effectively traverse these uncertain times, support their customers, and strengthen their relative market positions.

Riverbridge deploys a long-term approach that centers around our investment philosophy seeking companies consistently building their earnings power. We invest in businesses with management teams strategically focusing on the next decade, as opposed to the next quarter or year. Our disciplines ensure that our portfolio companies are internally financed and possess strong balance sheets to sustain them through this period.

Furthermore, many of the Riverbridge portfolio companies deliver mission critical products or services, without which their customers literally cannot operate. A hallmark of these types of companies is high degrees of recurring revenue. Generally speaking, we expect the consumption of our portfolio companies’ products or services will continue in this reduced state of economic activity.

It is difficult to predict with a high degree of accuracy when a sense of “normalcy” will return. Unlike some economists, Riverbridge does not believe that our domestic economy will experience a so-called V-shaped economic recovery whereby the economy snaps back quickly. It will take time for businesses to fully restart following this unprecedented global economic shutdown. Recalling workers, mobilizing supply chains, and procuring orders will take time. Many businesses, and even some industries, simply will not recover. Investors will need to be patient as a full recovery will likely take two years or longer.

However, this “new normal” will present opportunities. Companies and employees are experiencing and refining the process of working remotely; this process demands agility and sophistication from information technology systems. How consumers shop will shift. The way in which we deliver healthcare will also be reimagined; medical innovations will accelerate, particularly the usage of in-home testing for viruses, infections and other maladies. These changes present many exciting opportunities for consumers and for investors.

Our investment team is spending considerable time analyzing which companies are prepared to navigate this changing environment. Companies best positioned to succeed are those with strategic customer relationships.

Riverbridge owns many portfolio companies that are helping to produce the creative reconstruction needed in the wake of the COVID-19 pandemic. Companies must also possess strong balance sheets allowing them to weather this storm. The common denominator for all these businesses is that they are led by management teams focused on shaping their companies to emerge from this crisis in a position to flourish – not simply to survive.

Riverbridge exists to invest in the people and the companies adding enduring value and building a world where more people can thrive. We take very seriously our obligations as stewards of your capital. Thank you for allowing us to serve you.

Rick Moulton

Rick Moulton

CFA, Portfolio Manager

Rick Moulton

Rick Moulton

CFA, Portfolio Manager