You are reading: Progressive Global Fund – January 2022

The Progressive Global Fund (PGF) had a strong start to the new year, returning 3.9% for the month of January. In contrast, the ASX All Ordinaries Index fell hard to return -6.6% and the MSCI ACWI Index returned -1.9%.

The Progressive Global Fund

January 2022

January has historically been a positive month for global markets, but this year was anything but. Many global indices experienced corrections (-10% drawdown from peak) while some markets experienced what could be described as a crash (-20% drawdown from peak). We have previously talked about relatively benign upwards movement in major indices masking turbulent moves underneath the surface. In January, this switched into another gear. Hardest hit were covid-beneficiaries and high growth names which experienced phenomenal returns in 2020 and 2021, but which have now come under pressure. The reality though is that they have in aggregate been on a downwards trend since peaking about a year ago. It is just that the last ones holding up – mostly the larger, higher quality names such as Facebook and Netflix – are now also faltering.  To the extent this continues, it will create pressure on the broader indices. The trigger for the increased volatility has been concerns around inflation being more persistent than anticipated and the Fed turning hawkish. This drove the 10-year US government yield up sharply from 1.5% at the start of the month to beyond 1.9% at the time of writing.

In recent months, we had reduced our long exposures and continued our rotation towards higher quality and more value-orientated type stocks. These moves set up the portfolio to mitigate potential losses. The long book ended the month almost breakeven despite the sell-off. This highlighted the strong fundamental backing of our long book.  Our largest contributors came from holdings in the energy sector, which was the only major sector that managed to finish positive for the month. Also of note in our long book was our recently reinitiated position in Activision which received a blockbuster $95bn takeover bid from software giant Microsoft. While our thesis was not predicated on a takeover bid, we recognised that it would be a compelling takeover candidate considering the quality of its portfolio of games and its attractive valuation. The main detractor in our long book was from exposure to a basket of small cap stocks which fell on no fundamental news. The largest single stock detractor was SoFi. After positive news of receiving its bank charter, the corresponding bounce was short-lived as it fell along with the general sell-down in high growth names.

Also in recent months, we had increased our short book. To a significant extent, the short book is focused around benefiting from the air taken out of the bubble in high growth, overly valued concept stocks. The short book drove most of the portfolio gains for the month. Favourable FX movements also provided a tailwind, including an opportunistic conversion of our foreign cash holdings near the AUD lows for the month adding to performance.

At one point during the month, our net exposure approached 30%. We were able to opportunistically reduce shorts and add to select long positions around the lows for the month. The upshot is that the net exposure of the portfolio now sits up at 53%.

We believe that 2022 will require extra vigilance, not least because of rising geopolitical risks and tightening financial conditions. Following the sharp sell-off in January, we remain constructive that some of the moves are likely overdone, at least in the short term. Despite yields turning sharply higher, they are still in fact very low and equities as an asset class remains attractive at least on a relative basis.

PROGRESSIVE GLOBAL FUND UPDATE

Given the uncertainty in markets at present, we thought it would be timely to reiterate PGF’s purpose.

What do we stand for?

PGF is all about looking after our clients’ wealth.

To this end, our priorities are to preserve capital, with the aim being to mitigate against the large losses that might befall markets from time to time, and then to build clients’ wealth up by seeking to generate decent returns over time.

Note here that it is not our goal to post sky-high returns that invariably entail untold risk; nor is it our goal to beat an index, where we would be pleased if the fund falls just 20% when the market is down 25%. Our goal over time is to achieve decent absolute returns with limited and manageable losses, and to do so regardless of the market, economic or other conditions that might prevail.

Our track-record

Our track-record shows we have so far been successful in achieving our goal.

Firstly, we have managed to generate decent double-digit per annum returns since inception.

Secondly, and just as importantly, we have avoided or materially limited losses, most importantly during the toughest market downturns.

The Fund has a downside capture ratio of 15%, as calculated since inception. This means the Fund has fallen just 15% of what the market has in any downturn. Thus, clients have been saved from 85% of any losses. For example, if the market had crashed to fall 20%, the Fund would have been expected to fall just 3%.

There is no overriding strategy we employed in successfully managing the fund through these market downturns. The strategy depends on the circumstances at the time. What allows such a multi-strategy approach is versatility in our investment approach – specifically, in the investment tools at our disposal and how we can use those tools.

How have we managed to preserve capital and seek out decent absolute returns?

  • We can freely invest long and bet short against stocks. This means we have the means to profit from stocks going up or down, and it means we can hedge and otherwise manage risk across the portfolio.
  • We can invest across very different geographies, albeit that we tend to focus on developed markets where we can better understand the risks.
  • We are willing to invest in a style that is appropriate for the relevant trade, whether that be value, growth, momentum or otherwise. We are agnostic to the style we favour at any particular or in any situation.
  • We can invest for the long term or trade for a short-term move. This allows us to hedge out short term risk, trade catalysts or other temporary opportunities, or invest behind secular growth stories.
  • We can invest in derivatives, futures and other instruments as a means of better managing market and other risks.
  • We will rely on fundamental, technical and quantitative techniques in making investment decisions, as appropriate.
  • We can access off-market raisings and other opportunities through relationships with brokers, bankers and the companies themselves.

The investment team is assembled with a diversity that includes skills, experience and styles that traverse the range of strategies we have at our disposal.

This is not all to say we get everything correct. Indeed, we review our positioning on a regular basis and will actively cut or trim losses, as appropriate, and otherwise manage stock-specific and portfolio-wide risks. A drawback of our risk management framework is that we can often cut positions too early which may go on to perform very well over time, but we are prepared to sacrifice that upside in return for less downside risk. Ultimately, in the ongoing balancing of risk and return in our portfolio, our approach is to look down before we look up.

We hope this provides some additional colour on our goals and how we manage your capital to achieve those goals.

As always if you would like to learn more about investing in our fund please contact us – investor@fiftyonecapital.com