The Progressive Global Fund (PGF) returned -3.6% net of all fees for the month of June, ending FY2021 with our best year yet with a return of 31%.
The month was characterised by our largest long holdings retracing following strong rallies and the market rotation away from value and into growth. This unfortunately reduced the appeal of our broader positioning in defensive stocks, inflation plays and short book hedges. The fund remains conservatively positioned with respect to its core positions but reduced the short book and added some shorter-term trading opportunities given the more favourable market conditions. As we await more favourable setups, we will seek to close out our short-term positions and redeploy capital into higher conviction names.
The Fund’s Performance & Market Review
FY2021 was in many respects a year of numerous improvements and achievements for the Fund. We capped off our best year yet with net exposure averaging a relatively low 62% (average long and short exposure of 75% and 13% respectively). While the broader market has also had a strong year, it masks significant moves underneath that have been devastating for many of our peers. Giddy retail investors (speculators) interest in meme stocks were all the rage in the early part of CY2021 which led to massive losses at some of the world’s most esteemed hedge funds. Excessive risk-taking was perhaps best demonstrated by the downfall of family office Archegos Capital which lost a $20bn fortune in a matter of days.
Our learnings from prior mistakes and much improved risk management and monitoring allowed us to sidestep these traps. Distribution of performance returns was also far more broad-based compared to previous years. Winners came from a range of industries, geographies and market capitalisation size while the impact of losers were mitigated. We expect this to be a continuing feature as the Fund invests in additional capabilities to the investment team and ongoing improvements to our internal invest and risk management processes.
Progressive Global Fund Positioning & Portfolio
Portfolio activity was muted this month as we finished the month with net exposure of 71%. Net exposure crept up as we reduced our short book and added some shorter-term opportunistic trading positions. We have cash holdings around 15% and a short hedge book that makes up 14% of the overall portfolio. The drawdown during the month was driven by losses in the long book and the short book to a lesser extent.
At the risk of sounding like a broken record, we continue to be patient in waiting for the market to deliver us the right opportunities to take advantage of.
June 2021 provided several indications that our view on inflation is playing out. While the debate remains whether inflation is ‘transitory’ or more permanent, it is nonetheless having an impact on markets and positioning. The US treasury 10-year yield declined by 8% in June, following the Federal Reserve meeting which signalled no changes to asset purchases and two possible rate hikes in 2023. A net dovish outcome in our opinion.
This triggered a shift out of cyclicals back into growth. The ‘push & pull’ between rates and growth vs value is nothing new in this environment, yet it’s something we monitor very closely. Given our view that inflation is here and may be higher for longer, we expect yields to bottom and move higher in the coming months which will allow for a rebound in commodity and cyclical sectors. At the same time, until central banks send a clear message of ending QE, investors will continue to find comfort in technology stocks.
So, the rotation between value and growth is expected to continue at a time where investor positioning and valuations are mostly elevated. The positioning of market participants concerns us with hedge fund gross and net leverage just shy of 10-year highs, or in the 98th percentile. And while we acknowledge valuations can remain elevated for long periods of time, multiples like Price to Sales on the S&P500 breaking out to the highest level ever is a reminder why we remain conservatively positioned at current levels.
One key thought, and perhaps a simpler way to think about things is that if inflation remains elevated (say 4% for example) and the risk-free rate (US Federal Debt) is only yielding sub 1.4%, the negative purchasing power makes holding such investments very unappealing. If the US is then unable to fund its deficit (which is blowing out significantly due to the ongoing stimulus/spending and interest costs) there is potentially a very negative, and potentially very significant event on the horizon.
In the short term, if inflation is elevated, rates must rise to slow the economy. If they do not, the appeal of holding US dollars will also fall due to the erosion of purchasing power in the dollar. These all can have very negative impacts to global equity and finance markets in the near term and something we are watching and considering very closely. In essence, it seems the central bank is painting themselves into a corner where either higher rates pop the bubble, or the currency does.
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.