Geopolitical Events & Fear

Michael Rudd | CFA, President, CEO & Portfolio Manager

Welcome back to the Pathfinder Investment Outlook. We are now in our 10th year writing for Pathfinder. We have been writing this note in various formats since 2007 (13 full years!). By now, you have received our year-end mandate reports. Regular readers will note that we did not make any mention of the geopolitical events that have been taking headlines in the regular and the financial press (presidential impeachment, middle east crisis, pandemic risk). While we definitely paid attention, we do not let these narratives drive our investment process. Over the years, we have learned that the fear that comes from these extreme events is usually over exaggerated in financial markets. Nevertheless, we do have a number of clients that reached out to discuss this with our Portfolio Managers and Investment Counsellors, so we thought it prudent to make note of it in our first Investment Outlook of the year. Please see the table and discussion points below:

  • Figure 1 presents a table complied by LPL Research. It is a list of geopolitical events in chronological order along with the market impact the day that it happened. The interesting data is the drawdown and the subsequent days to recovery.
  • The aggregate statistics are interesting, but we also like to consider the extremes (i.e. maximum drawdown is essentially between -11 to -20%).
  • On average, after an “event”, there is a 5% drop in the market that lasts just under a month and subsequently recovers in about 6 weeks. In the worst case, the event would trigger a bear market that lasts between 6 months to 1 year.

“This means that” we do not spend much energy trying to manage our portfolios for this type of risk. The opportunity cost from mistiming the events could be very large. Instead, we use the panic to look for opportunities to add to our good quality companies. Over the past couple of weeks, we have built and analyzed a large data set of all of these types of geopolitical events. In the coming weeks we look forward sharing our results and conclusions.

Pathfinder Asset Management Ltd. | Equally Invested™
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*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Pathfidner Real Fund are presented based on the masters series of each fund. The Pathfinder North American Equity Portfolio and The Pathfinder North American Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder North American Equity Portfolio (January 2011), Pathfinder North American High Income Portfolio (October 2012) Pathfinder Partners’ Fund (April 2011), Pathfinder Real Fund (April, 2013), and Pathfinder International Fund (November 2014).

Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.