Update...
Last week, we wrote about volatility in equity markets. We noted that the financial press was focused on the potential for economic deterioration, while market participants identified several leveraged strategies deployed by large institutional investors that needed to be unwound. This was because of the change in approach to administered interest rates in Japan. These strategies, for example, where one borrows in a low-interest rate country and invests in another with higher interest rates (i.e. Japan vs. Mexico) and/or where one takes opposing positions in the volatility of an index and its underlying components (i.e. selling Nasdaq 100 options and buying options on individual components like NVIDIA Corp (NVDA:US) or Telsa Inc. (TSLA:US)) had become popular with large investors. When markets dropped, positions needed to be unwound quickly, causing forced selling. One of the more important investment topics that we discuss regularly at Pathfinder, is avoiding allocating our investment capital in a way that would require us to be a “forced seller”. Forced selling usually ends in no good…
- Last week, the financial press was laser focused on labour and economic data, as well as predictions with respect to the next FOMC meeting. The data came in constructive. Weekly Jobless were not as bad as feared, retail sales rebounded, and inflation was benign (Figure 1).
- While we noticed some significant volatility in the fixed income market, other risk measures began to normalize. Equity markets ultimately recovered (Figure 2).
- Japan appears to have walked back its hawkish currency commentary and the yen has begun to weaken again. By the end of the week, the financial press was reporting that the “carry trade was back on” and markets began to race back to essentially where we started 2 weeks ago.
“This means that” the speed at which the change occurred is some what shocking. We would have preferred a healthy correction coupled with good economic data. In our view, this would have provided a base through which we could collectively build. Unfortunately, quick trading has probably resulted in some investors being whipsawed. We remain comfortable with the companies that we own in our portfolios. While the path has been a little bit uncomfortable in the short-term, we continue to remain long-term investors in the business that we own in our portfolios and funds.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Conviction Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High 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 Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus 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.