Page 34 - DIY Investor Magazine Issue 24

CHILDREN OF THE REVOLUTION
The outperformance of technology hints at an exciting possible future for the market when the virus is beaten
writes Thomas McMahon
‘Good luck to anyone that just tries to copy an old playbook in this crisis. We think we had the last crisis all figured out, retrospectively, and so we think we’re so smart in the next one. It just doesn’t work this way.’ – Mark Spitznagel, hedge fund manager
ONE OF THE WORST QUARTERS IN STOCK MARKET HISTORY
The corona virus pandemic is far from over, but perhaps we have seen the end of the first act; most of the developed world is in ‘lockdown’ after equity markets saw one of their worst ever quarters. It is a good moment to look at why certain trusts have outperformed, and
ask whether we can draw any conclusions about how to invest in the aftermath.
The FTSE 100 suffered its worst fall since 1987 when it fell 23.8% in Q1 2020 after the likely scale of the pandemic in the US and Europe became clearer; the sell-off has been brutal and indiscriminate.
‘WHY CERTAIN TRUSTS HAVE OUTPERFORMED, AND ASK WHETHER WE CAN DRAW ANY CONCLUSIONS ABOUT HOW TO INVEST IN THE AFTERMATH’
For equity trusts, sector and stock selection has had limited impact; the trusts which have done best in absolute terms are those which had built-in protection against sharp market falls or are set up to profit from volatility.
Star performers in the investment trust universe were Brevan Howard Macro (BHMG) and BH Global (BHGG); between 21th February and 27th March, FTSE All Share fell 24.7% but BHMG’s NAV rose an astonishing 25%, and BHGG 17.2%.
BHMG focuses fundamentally on rates (bonds and currencies) trading by a group of star traders; Alan Howard and his team look for trades with option-like payoffs, with minimal downside and huge upside. BH traders do not need to hold a particular view on the market, or the pandemic, to profit from the volatility; they look for trades with asymmetric payoffs, irrespective of market direction.
BHGG is a more diversified fund with an allocation to the same master fund into which BHMG feeds; it has just enjoyed the best first quarter in its history, with its rates portfolios paying off and major contributions by the volatility fund and the other asset classes invested in.
Ruffer Investment Company also generated positive returns in the sell-off, adding 3.5% to its NAV; its CDS position, the largest in the fund, returned 100% as a result of the sell-off. In addition Duncan MacInnes and Steve Russell have been picking up gold miners and cash, waiting for a better time to buy equities.
Pershing Square, the listed vehicle of Bill Ackman owns just ten stocks, all long, and so wouldn’t have been expected to do well in the crash.
DIY Investor Magazine | Apr 2020 34