Insights

In the following commentary, the Portfolio Managers discuss the market volatility in the first quarter of 2025, their risk management process, and two new portfolio holdings.

As a risk-minded portfolio management team, what is your view of the market in the first quarter of 2025?

In the first quarter and continuing in April, markets reacted to the headline news about the presidential administration’s changing tariff plans. U.S. investors faced increased market volatility, with the Russell 1000 Index falling 4% in the first three months of 2025.

For the Cromwell Long Short Fund, we seek to achieve capital appreciation with lower volatility than the overall equity market. During this period, we remained steadfast in our investment process to find high-quality large and mid-cap companies that appear to be undervalued or have attractive growth potential. These companies generally possess attractive business lines, strong balance sheets, and are led by experienced management teams. Short positions are held in companies where the opposite is true, or to capture a specific risk identified in the market.

Importantly, risk management is embedded across our investment process in an effort to minimize volatility, especially in unfavorable markets.

Would you please discuss your risk management process?

Our risk management process involves maintaining a diversified portfolio across the Russell 1000 sectors. We also avoid stock-specific concentration. In terms of short positions, we monitor momentum screens and short interest to avoid those securities experiencing buying pressure from short sellers who are trying to cover their positions.

One of the more important metrics we analyze is free cash flow. Our quantitative model is heavily weighted toward a company’s level of free cash flow and the health of the balance sheet. We believe free cash flow helps us find those that have more capacity (or a lack of capacity for a short position) to buy back stock particularly in times of volatility.

We’re pleased to report that from July 2024 when Mutual of America began managing the portfolio to the end of March 2025, the Fund’s standard deviation was 9.7% compared with 12.6% for the Russell 1000 Index.

How does increased volatility affect your buying activity in the Fund?

When the market has a broad-based decline for a specific macroeconomic reason, such as a change in the implementation of tariffs, it generally is a good environment to generate new long and short ideas.

In the first quarter, the volatility gave us the opportunity to invest in several new holdings, including the following two mid-cap companies:

One is Ametek, a $40 billion conglomerate in the Industrials sector. Ametek is a well-managed business that has effectively used its free cash flow. The company produces equipment for specialty applications in the metals and mining, aerospace and defense industries. Ametek also makes visual inspectiion equipment for factory automation robotics. It has underperformed over past year and represents a high-quality portfolio addition at an attractive price.

The other company is IDEXX Laboratories, a $34 billion pet diagnostic and software company with approximately a 60% market share. The company is founder-led, customer centric and well run with an attractive return-on-invested capital. The stock underperformed after its run-up during the Covid period when pet adoptions rose as people spent more time at home. Along with the compelling buying opportunity on a valuation basis, we are excited about IDEXX’s growth prospects as the company begins to introduce a new product that holds promising future applications in human health.

These companies are examples of long positions we seek that tend to be more defensive and less sensitive to the overall economic environment.