Below is Tom Bradley's letter to clients from our Quarterly Report.

Long-time clients will know that I’m prone to using analogies. My hope is that by relating investing to sports and music, it will be more understandable, and a bit more fun. This time I’ve picked a passion of many of our clients – gardening. Investment cycles equate well to horticultural cycles. As investors, we sow seeds, water the plants, and eventually harvest. Along the way, we prune, fertilize and guard against predators, but mostly we leave the plants alone to grow.

As you may recall, we went crazy planting seeds last March. We meaningfully increased the equity weighting in the Founders Fund, with our managers using the money to buy stocks at distressed prices. We planted not knowing which ones would sprout, or when, just that growing conditions were optimal.

Since then, we’ve stayed out of the way and let things grow. Our managers have kept a close watch on things, pruning and harvesting securities that got expensive (Zimmer Biomet; Cerved; Franco-Nevada; Discovery), adding to ones that have been slow to get going (Nutrien; Bayer; Premium Brands) and making hard decisions on a few that didn’t take the way we’d hoped (Novartis; Alimentation Couche-Tard; Challenger Financial). They also introduced new stocks to the mix (Aon; Ibstock; Raytheon; Grifols; Rotork).

There’s one predator we’re keeping an eye out for — inflation. We’re experiencing higher prices across a broad range of goods and services. The jump in the Consumer Price Index (CPI) was to be expected given the depressed state of the economy last year, the recovery this year, low inventories and a stubbornly sticky supply chain. The question is, will the new level be transitory or persistent.

The answer is anything but clear. There are passionate arguments on both sides of the debate pointing to powerful inflationary and deflationary forces in the world economy. What we do know is that higher inflation would put a damper on asset valuations. Bond yields would rise with increased inflation expectations and high stock multiples would be harder to justify.

Patience is a key attribute of successful gardeners and investors. A year ago, our clients were being tested by two of our funds. The Global Equity and Small-Cap Equity Funds were both hit hard during the March meltdown and were slow to bounce back. We encouraged our clients to stay in these funds as they had their roots in fertile ground. As it turned out, they were our best performers over the last year.

Today, the soil is much less fertile. The extra yield you get from owning riskier bonds, known as the spread, is near historic lows (i.e. little reward for more risk). The stocks that benefited from the lockdowns are still trading at rich valuations and to quote one of our managers, “the recovery stocks are pretty much discounting a recovery.” And despite the increased risk of inflation, investor sentiment remains bullish (a contrarian indicator), with speculation rife in some parts of the market.

We don’t think it’s the time to stick your neck out. Rather, manage the inflation and recovery uncertainty by being diversified, keep debt levels contained, and if you need money for an upcoming project or trip, set it aside now. We can never be sure, but it seems like a better time to be harvesting than planting.

We encourage you to read the rest of our Q2 Report, where we provide more details on our specific strategies and what we've been doing in each of our funds.