Kestrel’s portfolio is set up for distance rather than speed. This past quarter was a sprint for the Russell 2000® Value Index and we did not keep pace. However, given our investment approach and what has transpired in 2020, we are extremely pleased to have finished the year in positive territory and significantly ahead of our benchmark R2V Index.

Our strategy is based upon use of management signals combined with risk avoidance. Given the absence of signals in the pandemic’s wake (virtually all of our portfolio companies discontinued their buyback programs), we focused on the risk control aspect of our process. We sold the most leveraged companies, and also those which appeared to have relatively weak prospects in a “new normal” economy. We felt the leveraged companies at worst presented a significant bankruptcy risk, and at best would be forced to divert a significant portion of their recovery earnings to debt paydown, not to buybacks. Of course, in the market surge which characterized the second half of 2020, some of these stocks performed extremely well. We are confident that we made the right fundamental decisions for the long term, and believe the increased emphasis on our risk discipline in this frothy environment will ultimately be rewarded.

Man does not live by bread alone. Two of our weaker Q4 performers are involved in either retailing or producing food products. Since these companies had both more than doubled off their pandemic bottom, a quarter of relatively flat performance in a sharply rising market was not tremendously upsetting. On the other hand, two of our best performing stocks are involved in the production or distribution of entertainment software, and they nearly doubled in value. Clearly Q4 favored our investments which fed the soul rather than the body. Perhaps this was the appropriate coda to a year when emotional and psychological well-being were critical to successfully navigating through a difficult period.

Given the bandwidth COVID-19 has occupied in the investment world, it would not be surprising to find that non-COVID-19 issues are being underestimated. We have an eclectic mix of companies in the portfolio - a blend of cyclicals and non-economically sensitive companies. We feel that this will serve us well when the current market euphoria cools down.

                                                                                                                                                 Abbott J. Keller, CFA
                                                                                                                                            Chief Investment Officer