Sound Shore Fund fell 3.45% in Q1, trailing the Russell Value but beating the S&P 500. The managers argue higher tracking error is a feature, not a bug, as volatility creates stock-picking opportunities.
The Sound Shore Fund's Investor Class (SSHFX) and Institutional Class (SSHVX) fell 3.45% and 3.43% in the first quarter of 2026, trailing the Russell 1000 Value Index's 2.10% gain but beating the S&P 500's 4.33% decline. The three-year annualized numbers tell a different story: SSHFX returned 17.45% and SSHVX 17.68%, ahead of the Russell Value's 14.31% and behind the S&P 500's 18.32%. Over 35 years, the fund's annualized returns of 10.43% and 10.69% for the two share classes edged the Russell Value's 10.05% and came close to the S&P 500's 10.65%.
The quarter was ugly for US equities broadly. The S&P 500 suffered its worst opening three months since 2022. The Iran war, a spike in oil prices, and the AI disruption narrative drove a sharp rotation out of technology and AI leaders. Energy stocks surged. Sound Shore's portfolio felt the whipsaw. Qualcomm, Check Point Software Technologies, and Kyndryl all sold off as the market priced in long-term AI risk to their businesses. The fund's managers acknowledge the uncertainty but argue the selloff creates opportunity. Qualcomm, for instance, is diversifying beyond mobile chips into automotive, internet of things, and data centers, with a strong balance sheet to fund the pivot.
Disney and Southwest Airlines also gave back gains on fears a protracted war would hit consumer spending and travel. Both companies are in the middle of multiyear restructurings that the fund sees driving higher earnings and returns on capital. They remain full positions.
The energy holdings were the bright spot. Coterra Energy, EQT, and BP each returned close to 20% or more. The fund's managers point to low-cost reserves and fortress-like balance sheets as the attributes that make these names valuable even if oil prices normalize.
Marvell Technology was the standout in tech. The fund bought the stock at 10 times its estimate of long-term earnings power. Marvell's custom silicon division co-develops chips for hyperscalers like Amazon and Google. The managers believe the business will double earnings over three years.
The letter spends unusual space on tracking error, the measure of how much a fund's returns deviate from its benchmark. During the low-rate 2015-2019 period, Sound Shore's tracking error was low. Over the last five years, with higher rates and more volatility, tracking error has risen sharply. The managers frame this as a positive. "You can't beat the index if you are the index," they write, quoting Charlie Munger. The willingness to look different from the benchmark, even when it makes the fund look "a little silly" in a given quarter, is central to the strategy.
The portfolio trades at a twelve-month forward P/E of 12.8 times, against 19.4 for the S&P 500 and 16.0 for the Russell 1000 Value. That discount is the bet. The fund is betting that narrative-driven volatility, amplified by quantitative and trend-following strategies, will create entry points in names the market has sold indiscriminately.
Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the data quoted. Investment return and principal value fluctuate. For the most recent month-end performance, visit the fund's website.
An investment in the fund is subject to risk, including possible loss of principal. Mid-cap stocks may be more volatile and harder to liquidate. Foreign securities carry additional risks from currency changes, political developments, and regulatory shifts. The fund also faces risks associated with value investing.
The views in this letter were those of the fund managers as of March 31, 2026, and may not reflect their views at the time of publication.
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