Fall 2023

To our valued clients:

Magnificent 7 – 1999 Flashbacks?

While the AI driven hype of the ARM IPO is concerning, the performance of the what the pundits have dubbed the “Magnificent 7” gives us flashbacks to 1999. The Magnificent 7 (or, Mag 7) consists of Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla and Meta. These 7 stocks were up an average of nearly 88% through the end of the third quarter compared to less than 2% for the average stock in the S&P 500 and the Russell 1000 Value (an index of large value stocks).

Scharf Investments is proud to announce that we have been named to CNBC’s list of 100 top Financial Advisory Firms.

The CNBC FA 100 recognizes the advisory firms that best help clients navigate their financial lives. The search begins with the 40,646 RIA firms from the Securities and Exchange Commission regulatory database. Through a process, the list is narrowed to 100 firms who best meet the CNBC criteria. CNBC enlisted data provider AccuPoint Solutions to assist with the ranking of registered investment advisors for this year’s FA 100 list. The 2023 FA 100 list is as of September 12, 2023, based on the year prior to the ranking. CNBC does not charge any type of fee to advisors to be listed in the annual ranking.

Finding the right financial advisor to help with your financial needs and goals can be a very complicated process. The CNBC ranking is meant to be a starting point for individual investors who are looking for a financial advisor.

At Scharf Investments, we work to safeguard your future while helping you achieve your goals.​​​​ Our comprehensive wealth management approach aims to deliver long-term portfolio growth, downside protection, and lifelong financial guidance. We specialize in purchasing what we believe are undervalued companies with attractive growth potential, and we strive to find you the best investment allocation which allows you to enjoy your wealth.

Our highly developed investing methodology is designed to identify securities across asset classes and geographies that will outperform over the course of a market cycle. We believe Scharf’s time-tested approach also helps reduce volatility, and during our nearly 35-year history, we have found that reducing volatility adds to your investment returns over the long term.

We realize that our efforts on your behalf have real-life implications, and we take pride in being knowledgeable and responsive when needs arise. We focus on creating productive, long-term partnerships to serve your complete wealth management needs.

U-Haul is the leading truck and trailer rental company for do-it-yourself moving in North America. The company started in 1945 by renting moving trailers that customers hitched to their cars. By 1959, U-Haul rented trucks to customers through a network of independent dealers and opened its own retail locations in 1973. Today, U-Haul operates 2,100 company-owned stores and is partnered with 21,000 independent dealers. More recently, the company has expanded into self-storage. U-Haul owns and operates 82 million square feet of storage, which makes it the 5th largest competitor in the North America self-storage industry with ~4% market share.

While the company’s distinctive orange-and-white trucks are a common sight on roads throughout North America, U-Haul stock is relatively under the radar. The company is not included in most major public stock indexes because the founding family continues to own 50% of the voting shares so daily trading volume is below the threshold preferred by most public stock index providers. Despite being under-owned by institutional investors, since 2003 U-Haul’s book value per share has increased 16% annually and shares have outperformed the S&P 500 index over this two-decade period; 25% annualized for U-Haul, 10% annualized for the S&P 500 Index.

We believe U-Haul’s vast network of locations is a compelling value proposition for do-it-yourself moving customers. This is especially important during one-way moves. 57% of the U.S. population lives within 5 miles of a company-owned location, and 90% when U-Haul’s dealer network is included. Over the years, several competitors have tried to enter the moving rental business but have generally failed to take market share from U-Haul. Budget and Penske – the next largest competitors – have 2.8k and 2.5k locations respectively; compared to U-Haul’s 23k locations.

Today’s shares are cheap relative to the company’s trading history. Looking forward we believe higher margin business practices adopted during the Covid period are likely to continue – notably an increasing share of business conducted via the U-Haul mobile application. For much of summer 2023 U-Haul’s mobile application ranked in the top 10 downloaded apps, per Google analytics.

In addition to the company’s market leading self-moving segment, U-Haul operates an under-appreciated self-storage business. Self-storage is a natural extension of the moving business with many synergies between the two. Customers of U-Haul’s moving rental equipment can conveniently store excess home goods at a U-Haul storage unit. Concurrently, trucks can be returned at storage locations. The company believes one out of every four customers that use U-Haul storage are using rental equipment from U-Haul for a move. As of June 2023, the company owned and operated 82M square feet of rentable storage space. Over the past decade, the company has increased its self-storage square footage by 13% annually. Revenues in the self-storage segment are growing faster than the equipment rental segment, increasing 17% annually since 2012. In 2024, self-storage revenues at U-Haul are projected to be 14% of total company sales, up from 5% in 2012. This is significant because the market has historically valued U-Haul as a lower return-on-equity, more cyclical truck rental business. In contrast, storage peers, such Public Storage, Extra Space Storage, and Life Storage, trade at significantly higher earnings multiples, with recent transactions implying U-Haul shares are currently undervalued. Specifically, in April 2023 Extra Space Storage announced it was paying $16.3B to acquire competitor Life Storage, which equates to $185 per square foot. A few months later, in July 2023, Public Storage announced a deal to purchase Simply Self Storage for $2.2B from the private equity firm Blackstone. With 152 properties and 11.2M rentable square feet (9.4M owned, 1.8M managed), the Simply Self Storage transaction implies a price of $196 per square foot. If we use $196 per square foot to estimate the value of U-Haul’s self-storage business, it implies U-Haul’s 82M square feet of self-storage is worth ~$16.1B, which is slightly above the company’s current enterprise value of ~$15B (market cap ~$11B).  We believe over time investors will recognize the increasing contribution of U-Haul’s growing self-storage business, resulting in shares trading at a higher earnings multiple. In the interim, we are happy to partner with the founding family and their multi-decade track record of consistently growing book value while maintaining market leading positions in the do-it-yourself moving and self-storage businesses.

For many people, their wages from employers or profits from their business is a large driver of tax rates before retirement.  After retirement tax rates can be influenced by several factors and understanding the taxability of distributions from various sources can help in developing strategies to manage tax burdens year to year.  Below we will touch on some common cash flow sources in retirement and how they are treated with regard to taxes.

Social Security income

If you are eligible for and begin receiving income from Social Security in retirement, much of the income your receive from Social Security could be taxed at ordinary income rates depending on your overall taxable income.

For single filers, if your combined income in 2023 (your adjusted gross income, plus nontaxable interest, plus half of your Social Security benefits) is between $25,000 and $34,000 (or $32,000 and $44,000 for married people filing jointly), you may have to pay taxes on 50% of your Social Security benefits.

If your combined income in 2023 is more than $34,000 (or $44,000 for married people filing jointly), you may have to pay taxes on up to 85% of your benefits. The IRS will not tax more than 85% of your Social Security benefits.

Distributions from taxable accounts

If you are drawing cash flow from taxable accounts (i.e. trusts, individual or joint accounts), typically the amount distributed is not considered taxable income.  Those distributions are not treated as taxable events, similar to withdrawing funds from a checking or savings account.  Income earned in those accounts, such as dividends, interest or realized capital gains are taxable items in the year they occur.

Distributions from tax-deferred retirement accounts

For non-Roth tax deferred retirement accounts (i.e. IRA, 401k or 403b accounts), any amount distributed is considered taxable income in the year of distribution.  This applies to amounts taken due to required minimum distributions as well as distributions taken simply for cash needs.  The one caveat to this is amounts gifted to charity through Qualified Charitable Distributions (QCD).  Under QCD rules the IRS allows that donations to 501c3 US based charitable organizations from tax deferred retirement accounts are not counted as taxable income, however the amounts do count toward satisfying any required minimum distributions due. Currently the maximum amount allowed under QCD rules is $100,000 per year.

For Roth retirement accounts (i.e. Roth IRA or Roth 401k), any amounts distributed are not counted as taxable income.  Also, there are no required minimum distributions from Roth accounts.

Capital Gains

Capital gains are taxed in the year they are realized, and tax rates vary depending on how long you owned the investment and your overall adjusted gross income.  Short term gains are gains on investments held less than a year, and those are taxed at your ordinary income rate.  Long term gains are gains on investments held over 1 year and are taxed at 0%, 15% or 20% federally based on your overall adjusted gross income (AGI).  In 2023, for those filing as married, the 0% rate applies if AGI is below $83,350 ($41,675 if filing single).  For those filing as married, the 15% rate applies if AGI is between $83,351 – $517,200 ($41,676 – $459,750 if filing single).  In 2023, for those filing as married, the 20% rate applies if AGI is above $517,201 ($459,751 if filing single).

Managing Taxes in Retirement

Many retirees will have income or cash flow from several sources in retirement.  At times there may be a choice in where to take needed cash from, for example distributing from an IRA vs. taking cash from a trust or joint account.  It can be helpful to understand how various retirement cash flow sources are taxed as you make these decisions and plan for subsequent tax years.

Please contact your wealth advisor at Scharf Investments if you have questions related to your Scharf managed account and personal tax situation.  We are happy to discuss strategies to manage your tax burden as well as work directly with your CPA in an effort to minimize taxes over the long run.

Scharf Quality Value (Equity)

The Scharf Quality Value Strategy seeks to invest in high quality, enduring franchises priced at substantial discounts to fair value. The team seeks to identify companies with low valuations combined with consistent and sustainable earnings, cash flow and/or book value. The goal is to provide capital appreciation over the course of an entire market cycle while losing notably less than relevant benchmarks in falling markets.

For the third quarter of 2023, Scharf Quality Value (Equity) account returned -1.3% (net). As short-term market and economic activity can be volatile, we encourage investors to take a long-term view. That said, we are pleased with the long-term performance of the Strategy. Since December 31, 1990, the Strategy returned 12.24% (net of fees) annualized compared with 9.37% for the Russell 1000 Value Index and 10.34% for the S&P 500. In other words, $1 million invested in the Strategy on December 31, 1990, grew to $43.9 million as of September 30, 2023, compared to $25.1 million and $19.9 million for the same $1 million invested in the S&P 500 and Russell 1000 Value, respectively.

Scharf Multi-Asset Opportunity (Balanced)

The Scharf Multi-Asset portfolio seeks to combine the appreciation potential of equities with the capital preservation and income generation qualities of fixed income and alternative investments. In the equity allocation, the team maintains a strict focus on valuation, margin of safety and sustainable earnings growth, but maintains investment flexibility towards market capitalization and domicile. On the non-equity allocation, the team emphasizes credit quality and capital preservation. We seek to deliver a compelling risk-adjusted absolute return.

During the third quarter of 2023, Scharf Multi-Asset (Balanced) Strategy returned -0.67% (net). We believe a balanced portfolio can provide investors with peace of mind during adverse market conditions and is ideal for clients near or in retirement. As short-term market and economic activity can be volatile, we encourage investors to take a long-term view. That said, our balanced accounts have delivered favorable results over the long term. Since December 31, 1993, we are delighted to report that balanced account returns centered on 10.11% (net of fees) annualized compared with 6.7% for the Lipper Balanced Index. In other words, a $1 million investment in a balanced account on December 31, 1993, grew to $17.6 million as of June 30, 2023, compared to only $16.2 million and $6.9 million for the same $1 million invested in the S&P 500 or the Lipper Balanced Index, respectively.

Scharf Global Opportunity (Equity)

The Scharf Global Opportunity Strategy seeks to invest in high quality, enduring franchises priced at substantial discounts to fair value. It is an extension of our flagship Quality Value (Equity) Strategy with greater flexibility to invest globally. The investment team seeks to identify companies in the U.S. and abroad (developed and emerging markets) with low valuations combined with consistent and sustainable earnings, cash flow and/or book value.

During the second quarter of 2023, the Scharf Global Opportunity Strategy returned -2.44% (net). As short-term market and economic activity can be volatile, particularly in a global strategy, it is essential to take a long-term view. That said, the Strategy has outperformed over the long term, with an annualized return of 9.49% (net of fees) since its inception in 2014, compared to 8.32% for the MSCI ACWI benchmark. In other words, a $1 million investment in the Strategy on October 14, 2014, grew to $2.0 million as of June 30, 2023, whereas the same amount invested in the MSCI ACWI Index would have grown to only $1.9 million. The current mountain chart illustrates how the Scharf Global Opportunity Strategy has increased significantly over time and outperformed the benchmark MSCI ACWI Index.