COVID-19: 36ONE Performance and Positioning.

The financial markets have been under extreme pressure since the outbreak of COVID-19. We are living through extraordinary times and as a result, financial markets have come under extreme pressure. In light of this, we thought we would share our thoughts on the recent market collapse as well as how our funds are positioned during this difficult time.

COVID-19 MARKET COMMENTARY

The impact of Coronavirus is devastating for all. Unemployment is expected to rise as more economies lockdown in order to slow the spread of the virus. This will help us save lives. The faster we implement strict social-distancing measures, the shorter we will have to live with such measures. As a result, the recovery would arrive sooner and be more robust despite the short-term pain. We cannot predict with certainty the path of the virus, but we must do our best to assess a range of possible outcomes. We are constantly evaluating the economic impact on individual companies and we position the portfolios accordingly. It’s important to emphasise that our main aim during these uncertain times is to protect capital, so that we can take advantage of investing in great companies at reasonable valuations once the global economy starts to recover. Our investment process is unchanged: we continue to search for strong quality businesses that offer a great customer proposition which are trading at below their intrinsic value and have strong balance sheets which can withstand the current economic environment.

We feel confident that, at some point, markets will recover, recuperate their losses and go on to make new highs. We are following a gradual approach and picking our entry points with careful consideration. Picking the bottom is next to impossible, but in the coming months it will be important to start deploying capital into attractive opportunities. Furthermore, this is not a market to buy indiscriminately and we need to make sure that we have the right stocks in the portfolio and are not exposing the fund to undue risk and exposure. For example, tourism and discretionary retail are the obvious casualties, as people and businesses reconsider their travel plans and spend.

The good thing about the negativity and extreme panic is that massive buying opportunities are created as the market sells off indiscriminately. Some sectors may benefit from the Coronavirus outbreak as people shift from activities such as going to the mall to online entertainment. Furthermore, face-to-face education will be disrupted by online ed-tools and this trend may not revert once quarantines and lockdowns come to an end. One beneficiary from the Coronavirus-triggered disruption is online gaming. Many people who had never played video games until now, may be long-term customers in the future.

PERFORMANCE AND POSITIONING 

HEDGE FUNDS

The 36ONE hedge funds have performed exceptionally well during these testing times. Capital preservation has been front of mind for us and, as a result, we have managed the fund very conservatively with a low net equity exposure. As at the close of business on 26 March 2020, the local hedge funds were down less than 1% for the month, thereby protecting historical gains. By protecting capital in bear markets, the hedge fund is ideally positioned to take advantage of exciting valuations and opportunities in the future.

LONG ONLY

MULTI-ASSET FUND

Our multi-asset fund is conservatively positioned and is currently focused on providing clients with downside protection.

The 36ONE BCI Flexible Opportunity Fund’s agile mandate has proven to be a valuable tool in this environment. It provides us with the flexibility required to deploy capital in a prudent, disciplined manner and allows us to act in the best interest of our clients. This is particularly useful during volatile times.

We have reduced the equity exposure in the 36ONE BCI Flexible Opportunity Fund. As per the asset allocation chart below, we are largely invested in cash and floating rate notes, while the equity exposure remains low. The fund has maintained maximum offshore exposure, in predominately US dollar cash. Readers of our monthly newsletter will know that we have been concerned about the South African equity market for some time. Therefore, our local equity component is predominately comprised of rand hedges and companies that exhibit strong balance sheets and minimal gearing.

Our fixed income portfolio has been well positioned as credit spreads continued to widen. Our flexible fund has corporate bond exposure from diversified industries, high credit quality securities and an overall low duration given the high proportion of floating rate notes.

It’s important to mention that having a large cash allocation in a falling market provides us with the “dry powder” needed to take advantage of opportunities when they arise. We believe that in the current environment, our conservative positioning is the appropriate way to fulfil our objective of protecting and growing our clients’ capital over the long-term.

 

Although the effects of COVID-19 have impacted short-term performance, the 36ONE BCI Flexible Opportunity Fund has provided clients with significantly more downside protection than the market. While the fund is down 4.99% for the year to date, the category average is down 16.03%.
EQUITY FUNDS

Managing a pure equity mandate in this environment has not been an easy task.  Having said that, the 36ONE BCI Equity Fund has done a pleasing job at defending capital. Both the 36ONE BCI Equity Fund and the 36ONE BCI SA Equity Fund have significantly outperformed their peers and the benchmark. These funds are positioned as conservatively as possible and are currently holding rand-hedge stocks, an overweight position in gold shares and maximum levels of cash.

Keeping a cool, rational mindset during a market sell-off is never easy. Emotions can negatively influence decision-making and stressing about the state of your portfolio can lead you astray. We encourage clients to keep a level head to avoid financial mistakes and to think about investments using a long-term time horizon. During 2008, many people believed that the financial system was going to collapse and thereby permanently damage their investment portfolio. Nothing could have been further from the truth. The world did not come to an end. Those brave enough to stay the course and keep their investments were handsomely rewarded in the bull market that followed. The future is extremely uncertain, but we continue to work hard to protect and grow investor capital during these unsettling times. Our size, together with a hedge fund mindset, is the ideal combination for navigating such a volatile market.BUSINESS CONTINUITY

We have implemented a broad range of measures to protect our employees and ensure business continuity. Our infrastructure is designed to enable staff to work from off-site locations, with full access to the required systems. This enables the seamless continuity of our investment and business operations. We will be fully operational and contactable during the lockdown. We believe that we are well positioned to deal with the situation and are in a state of business readiness to respond as appropriate.

We understand that these are unsettling circumstances but please be assured of our duty of care to you, and of our commitment to the safe stewardship of your assets.

Our thoughts are with those who have been affected personally by the outbreak of Coronavirus as well as the many communities around the world that are facing extreme measures in an attempt to curb its spread. Stay safe and take care of yourself and those around you.

Source: MoneyMate, Bloomberg.