The world of global equities changed quite dramatically over the past few weeks, as markets corrected from record highs and investors look to weigh up the potential buying opportunities. In a recent discussion with our investors, a series of common questions are answered here.
1. How has the selloff impacted the performance of your funds?
The speed and severity of the selloff at the end of February and in March has negatively impacted the performance of our strategies. As at 26 March, the variable net funds* are -16% month to date and the long only funds* are -15% month to date.
*Variable net funds refers to the Montaka Global Fund, Montaka Global Access Fund and the Montaka Global Equities Fund; long only funds refers to the Montgomery Global Fund and Montgomery Global Equities Fund (MOGL.ASX).
2. How are the funds currently positioned?
The funds are more defensively positioned today than they ever have been before. This positioning reflects the current uncertain environment and the potential for further downside risk.
We have repositioned the long only funds to hold around 40 per cent cash. This means that should the market move down significantly from here, then these funds will protect against a substantial amount of the downside.
In the variable net funds we have significantly lowered the net market exposure of the fund which stands at around nil today. While the funds hold around 75 per cent exposure to stocks in the long portfolio, this is substantially all offset by around 75 per cent exposure in the short portfolio. This means that should the market move down significantly from here, then the fund will protect against substantially all the downside. In fact, we have already seen day to day losses on the long side offset by similar gains on the short side over the past few weeks.
3. What stock and sector changes have been made in the funds?
In the long portfolio we have pivoted exposure from financials and industrials to companies that will have resilient revenue streams in a protracted period of disruption from economic shutdown. These include technology businesses such as Vivendi (owner of Universal music) and Spotify for their exposure to music streaming, as well as Microsoft and Tencent.
In the short portfolio the most significant change has been the addition of a tactical short to the S&P500 Index. This is by far the largest short position. We have also added shorts to demand-sensitive sectors with companies that have high fixed costs and/or leverage. These include Carnival the cruise ship operator, retailer The Gap, and Dine Brands the owner of iHop and Applebee’s restaurant chains in the US.
4. What market indicators are you looking for to determine the right time to increase the funds’ equity exposures?
While we are clear about the indicators we want to see before we start to buy meaningfully again, the precise timing is almost unknowable.
We want to see that the root cause of the problem – the virus – is being contained. That means that the case curves are flattening, or bending, so critical care hospital capacity will not be overwhelmed, especially in large countries like the US, UK and parts of Europe. Ideally, we would have line of sight to a vaccine and anti-viral therapies.
We also want to see large-scale fiscal and monetary support packages remain in place and be increased over time. While the measures announced so far by governments and central banks amount to trillions of dollars, they are required to bridge households and businesses to the other side of this crisis. We think additional packages will turn relief into true economic stimulus.
Once we see this combination of conditions we will look to once again step into the market and buy high quality businesses, that will grow strongly, and are still trading cheaply. We think this environment will be conducive to strong investment returns for the funds over the years to come. We can’t promise we will exactly pick the bottom, but we continue preparing and positioning the funds to take advantage of opportunities as they present.
5. Have you increased your exposure to the AUD?
We have recently increased exposure to the Australian dollar in the funds to around 30 per cent. When the AUD sold off to below US56 cents in mid-March it was at a level not seen for almost two decades. We took advantage of this weakness to lock in some AUD gains for clients. On the other hand, this action also hedges against a potential rebound in AUD from such a low level. For example, if the Chinese stimulate their economy, we might see a repeat of 2016 when the AUD gained 14 per cent in just three months.
The Montgomery Global Funds and Montaka own shares in Vivendi, Spotify, Microsoft and Tencent. The Montaka Global Funds are short Carnival, The Gap and Dine Brands. This article was prepared 30 March with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.