Hedge Clippings | Thursday 09 April, 2020

It doesn't take a genius to know, or for that matter to write, that markets have been unbelievably volatile, not only over the past two months, but weekly, daily, and intraday as well. However, making sense of markets, or for that matter the longer-term effects of the unprecedented disruption and dislocation caused by COVID-19, is a whole different matter.

There are obviously varying views in this regard. On the one hand, the market is speaking, rallying sharply off the lows reached on the 23rd of March. At a recent presentation by Longview Economics, CEO Chris Watling quoted Benjamin Graham who said that "In the short run the market is a voting machine, but in the long run the market is a weighing machine".

So, having rallied almost 1,000 points, the market is clearly suggesting that it was oversold. However, as Watling also points out, this merely reflects a voter-registration test that requires only money, not intelligence or emotional stability. In the longer term, the market as a weighing machine will determine how much damage has been done to the global economy, and specifically to individual sectors and companies.

The unprecedented level of government and central bank support is obviously influencing the market's short-term voting machine characteristics. However, this is also influencing its longer-term weighing machine characteristics, which is a trend that is simply continuing (albeit to an even greater degree) the distortions which exceptionally low interest rates have had on markets over the past 3 to 4 years.

While certainly supporting what governments globally have been doing to ensure there is no repeat of a 1930's type depression, the risk is that the capitalist system which should let companies sink or swim based on their merits - both management and balance sheet - won't operate efficiently, at least in the short to medium term.

Eventually, the question will have to be answered whether capitalism in its pure form still exists. In the meantime, we should all be thankful for government intervention.

Turning for a moment to the performance of funds where the range of returns remains extreme. As might be expected (although forgotten by many during the flood of investors and their capital into low cost, low fee index tracking ETFs), Absolute Return funds as a group have outperformed the index after fees by 13% YTD since December 31, and by 11% over 12 months to the end of March.

There will always be an argument about fees, and value, but the old adage that quality is remembered long after cost is forgotten would seem to hold true.

On that note, have a safe, if somewhat unusual, Easter long weekend.

Hedge Clippings | Friday 03 April, 2020

"Only when the tide goes out do you discover who's been swimming naked"

Hedge Clippings is happy to credit the above quote to Warren Buffett, as, amongst all the wise words he has spoken over the years, this seems the most appropriate one for these extraordinary times. If you want more, here's a link to them courtesy of "Brainy Quote" - the only problem being you'll have to put up with a whole bunch of people advertising on the back of his wisdom.

We're not quite sure of his view on the current market, but as one of his pearls was/is "our favourite holding period is forever" we can probably guess. However, having a long-term view when markets are as volatile as they are now requires nerve, and probably a strong balance sheet to boot.

He also said, "let blockheads read what blockheads wrote", so we will leave it to the reader to decide if we qualify!

Everyone is, however, aware (we presume) that the ASX200 fell over 20% in March, with daily and intraday volatility at unprecedented levels, making the role of portfolio managers doubly difficult. As we recently wrote, these are difficult and disorderly markets, and managers that previously rode the bull markets - or as Buffett might say, rose on the flood tide - are going to be found wanting to various degrees.

That was certainly the case in February when the ASX200 fell by 8%, while the average absolute return fund on www.fundmonitors.com fell by half that amount, but with performances ranging from -30% through to +20%. On early indications March will have a similar pattern, with some already reporting falls of around 30%.

On the positive side, those managers and strategies we would expect to excel have been doing just that. Again, reports are still sparse after just three days, but Gyrostat's Absolute Return Fund rose +5.8%, while preliminary returns from the likes of Levitas (+15%), ARK (+5%), and Arnott (+7%) are hopefully an indication of those to come.

Positive is one thing, but in our view any manager protecting capital is worth looking at. So, with the ASX down almost 18% over 12 months (what a difference a couple of months make), even half that figure is something to crow about.

Meanwhile, Hedge Clippings has pleasingly seen an increase in manager "Insights" articles focusing on the potential long-term effects of the current pandemic. Included below are two worth reading - "How bad will the COVID-19 recession be" from Arminius Capital (whose author Marcel von Pfyffer admits to now knowing why he studied what he did at university), and the interestingly titled "Love in the time of COVID-19" from Delft Partners.

The latter provides the following advice: Invest, Don't Speculate; Be Patient - think long term, and finally, Diversify to spread risk.

Wise words indeed, but it takes nerve. Both Insights are worth reading, and as you can't (or shouldn't) go anywhere on the weekend, spend a little time doing so - even with a well-earned glass in hand!