top of page

2Q 2022 Client Letter

Updated: Oct 11, 2022

Dear Clients,

As most of you are likely aware, the second quarter brought market volatility with an overall downward trend. The equity markets continued to respond negatively to the Fed’s effort to tackle inflation, the geopolitical tensions tied to the Ukraine/Russia conflict, to ongoing supply chain challenges, and so on. Not since 1970 has a year begun with a worse start, from a market standpoint. One indication of the market sentiment is the CBOE Volatility Index which started at 19.63 and ended the quarter at 28.71, touching 34.75 in early May. Another is the unfortunately named CNN Fear Greed Index, comprised of seven market indicators, which points to “Extreme Fear” in the market. With “recession” on the tip of many economists’ tongues (but with the added and unusual caveat of low unemployment), we anticipate more short-term pain. Despite the downward trend of the equity markets, the S&P 500 has staged four rallies of at least 5% during the first half of 2022.

Index results were as follows:



Year to Date


S&P 500




Russell 1000 Value




Russell 2000




Barclay's Aggregate




*Source: Factset

As we head into corporate earnings season and another potential interest rate hike by the Fed, we anticipate continued volatility, i.e. more “fear” in the markets. We are likely to see some more decline. Regardless of whether this is defined as a recession, growth has slowed and we are in bear market territory. The fear factor has tugged at the valuation of solid companies as few sectors are immune from the effects of global supply issues, rising interest rates, and inflationary pressures. It can be hard to take a step back and remember that investing requires a long-term strategy. But that is precisely what we need to remind ourselves (and clients) to do.

It’s counterintuitive, but after a market decline when valuations are lower, risk is also lower, and opportunities present themselves. Fear in the markets has unfailingly provided opportunities for the long-term investor. This is when it pays to extend time horizons and think of the underlying businesses in the portfolio. We agree with Warren Buffett’s adage to “be greedy when others are fearful, and fearful when others are greedy”.

In times like this past six months, investors are often guided by emotion and make investment decisions that they later regret. A paper loss can be (psychologically) twice as painful as an equivalent gain, causing investors to sell in a declining market or increase their cash positions. Increased account activity during a downturn is often guided by fear, but market downturns offer considerable opportunity as well.

  • Tax loss harvesting – Market declines offer opportunities to harvest losses in taxable accounts, which can be used to offset gains. On the back end of a bull market where megacap technology companies drastically outperformed, we used this opportunity to right-size positions that had considerable gains by pairing with companies that had losses. Your quarterly packet highlights this activity in the Realized Gains and Losses section.

  • Gifting – Now may be the time for the creation of 529’s for children and grandchildren or consider gifting to those with longer investment horizons.

  • Roth conversion – You can potentially lower future taxes by converting taxable or tax deferred assets to tax exempt status. Retirees who don’t have high incomes can use low tax rates to convert a larger portion of their taxable assets to tax exempt status.

As active investment managers, we build portfolios of businesses that reflect our deep fundamental research. Our goal is to learn about businesses and understand them in order to make measured investments that balance opportunities ahead with the associated risks of the company, industry, sector, and economy. But timing those investments is clear only in hindsight. The following paragraphs summarize the investment research on Warner Brothers Discovery (WBD), a stock that is currently underperforming.

On April 8th, 2022, Discovery, Inc. merged with Warner Media LLC - previously owned by AT&T - and started trading under new ticker, WBD. As a result of the transaction, ~71% of the new WBD shares were owned by prior AT&T shareholders with the remaining owned by previous Discovery, Inc shareholders. AT&T is a mature business that focuses heavily on returning cash to shareholders via dividends and therefore attracts a shareholder base that is intensely focused on the same. Owing to the merger and the new entity opting not to pay a dividend, there has been a sell-down, which we believe is due to a large exodus of dividend-oriented shareholders. The result has been a severe price dislocation ($24.43 on April 8 to $14.12 on July 8). This price decline in no way reflects the underlying fundamentals of the business, and we strongly agree with WBD’s choice to allocate capital in a more efficient way than paying it out as a dividend (while they are popular with shareholders, they are not a very good investment of corporate capital and are doubly taxed).

As a company, the Discovery Inc. portion of Warner Brothers Discovery is competitively advantaged through its deep library of evergreen content (reality programs, cooking shows and nature documentaries). This has created an annuity-like structure to the business and provides extremely strong cash generation.

Warner Media is a competitive studio that generates profitable content through, among other entities, HBO MAX, news, documentaries, sports, movies, and other entertainment through strong franchises with proven monetization, all while generating strong cashflow. The impressive content vault harbored by the now combined company makes it a formidable force and provides operational flexibility while also introducing opportunities for cross-selling. We anticipate that management will need time to reduce the debt load accumulated by the merger, and expect that their stated 24-month time frame is attainable.

In conclusion, we acknowledge that these are fraught times, and the next quarter will likely bring more of the pain we have seen this year. But historically, almost all bear markets (>20% drop) are followed by 1-, 3-, and 5-year gains with strong returns. And in this way, opportunity lies.

As always, we are here to answer any questions you might have. Please feel free to call anytime.


Heron Bay Capital Management, LLC (“HBCM") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where HBCM and its representatives are properly licensed or exempt from licensure. For current HBCM information, please visit the Investment Adviser Public Disclosure website at by searching with HBCM’s CRD #305537.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of HBCM strategies are disclosed in the publicly available Form ADV Part 2A. Risk associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions.

The model performance shown was created by HBCM utilizing Portfolio Attribution within Factset for each investment portfolio listed. The model performance shown is not indicative of future performance, which could differ substantially. It does not reflect actual account performance for any specific client or a composite performance for a group of clients. Model results represent what an investor’s returns might have been, had they been invested in the exact investments using the exact same allocation for the exact same time period for the model portfolio reflected. This does not reflect the impact that material economic and market factors may have had on decision making. The results shown were achieved by means of a mathematical formula.

Actual returns will be reduced by investment advisory fees and other expenses that may be incurred in the management of the account. The collection of fees produces a compounding effect on the total rate of return net of management fees. The applicable fees are described in Part II of the Form ADV.

Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.


bottom of page