The Progressive Global Fund (PGF) returned 4.9% net of all fees for the month of April. This was achieved while the ASX200 was up 3.4% over the same period.
This was a great result given the funds conservative positioning at present (as has been discussed in the last few newsletters). Holding elevated levels of cash and having market hedges in place means our net exposure is significantly lower than it would normally be. As such, to outperform during a month where the market is up shows the positions, we allocated capital to significantly outperformed during the month. As the fund has been cashing up a lot of these gains are now realised gains. For incoming and existing investors, the risk of significant drawdown on returns we believe has continued to be mitigated – especially in the event of a market correction.
Should it continue to move ever higher, then our conservative positioning may lead to underperformance.
The Fund’s Performance & Market Review
Progressive Global Fund Positioning & Portfolio
The portfolio finished the month with net exposure of ~54%. We have cash holdings around 13% and a short hedge book that makes up 33% of the overall portfolio. Of the long exposures we hold ~9% in precious metals/gold, ~5% in physical uranium and ~7% in defensive positions. We have hedges and short positions to mitigate risks on the long strategies outside of these positions where we feel needed.
We have also cashed in profits across several event driven positions including some around copper, lumber and recent IPO/ECM deals. With the portfolio moving into a more ‘care and maintenance’ position we await a market correction before deploying any capital significantly on the long side. Valuations look very stretched, and it is difficult to find good longs to add into the portfolio (without paying record prices). As such, we believe the more prudent move is to pump the brakes and slow down into what can be a seasonally difficult period (sell in May).
Just this week the Federal Reserve has also cautioned investors that assets are trading at record valuations and have a lot of risk to the downside. We prefer to be cautious when we hear stories of our interns making 350 bag returns (3500% return) on crypto currencies with absolutely zero tangible value… although he hasn’t managed to receive the cash as yet… bubble anyone?
We continue to caution, these are the signs of excess and exuberance typically seen at the end of a cycle, not the beginning. While we continue to play – we remain extremely cautious and are dancing very close to the exits. When the punch bowl is taken away we can’t say… but we certainly feel like its way beyond midnight… and as a wise man once said – “nothing good ever happens after midnight”…
Market Views & Risks:
Our views on markets are that we are very late cycle. Although we feel like this has been something we have said in a number of these updates we continue hold this view. More and more signs of excess are presenting themselves. While this does not necessarily mean a huge correction is right around the corner. It does normally occur towards the end of a cycle and not the beginning.
Of particular concern is the very real threat of inflation. In daily life we are seeing more and more signs of inflationary pressures. There are record prices being paid for all sorts of goods from cars, commodities and in particular luxury noncash flow producing items like watches, jewellery and designer labels. COVID has caused bottlenecks in shipping, transport and traditional supplies. This has caused price pressures higher and the consumers are starting to feel it. There is also the added impact of newly minted millennial crypto traders and even property going crazy for the boomers – further adding to the wealth effect. With record levels of stimulus, low rates and a booming stock market it is the peak of good times.
While some of this wealth is very real (like the iron ore profits), some of it is unlikely to last (crypto). Regardless of what lasts and what doesn’t, the primary concern is that with rates low and exuberance high the inflationary pressures are eventually passed into real goods. As real prices rise there will be more need from policy makers to cool the inflationary pressures in the global financial markets by lifting rates.
Should rates be forced higher, then there is an absolute mountain of capital that will start to shift… unfortunately this shift will likely weigh on equity markets as capital moves back towards safer assets. That said, inflation is a scary thought and is a notoriously difficult period to allocate capital through as volatility elevates, currency moves and fear/greed are injected throughout capital markets.
At this current moment, we feel content in slowing ourselves down and regaining composure in what feels like a fever pitch of exuberance. In times like this we prefer to be more contrarian and rather begin to deliberate as to where our clients capital could be best allocated going forward. At this point in time, we continue to be patient and wait for opportunity. As always, they will present themselves and we plan to make sure we have preserved our capital should this unfold.
As always, if you would like to co-invest in the fund or learn more about what we do – please contact us through our website.