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2018 140/40 Sir John Ross Hedge Fund Review

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The Long-Short 140/40 Strategy had a disappointing year in 2018 with a return of approximately -15.9% compared to the benchmark (50% Top 40 + 50% STEFI) of -1.89%.

The Strategy began the year at 99% long, 23% short and, at the end of June, was down -5.8% compared to the benchmark +0.96%.

At the end of June, after a detailed research investigation, we modified the Long-Short 140/40 Strategy (we changed the name from SJR to Long-Short 140/40 SJR). This strategy is no longer driven primarily by momentum but includes risk factors targeting value, quality, stability (and momentum). The strategy no longer targets individual stock short positions but rather targets overall market short positions to reduce overall portfolio risk (beta) to optimise risk adjusted return.

The impact of these changes was that we:

  • We increased our foreign exposure, predominately to US technology stocks
  • Once again geared the portfolio – positioned to 122% of long exposure made up of approximately 40% to offshore and 82% to local equities; we had 22% short exposure to local equities (net local equity exposure of 60%)
  • We were less exposed to momentum – most of momentum was taken offshore

By the beginning of September, the strategy was 4.3% up for the year, the benchmark was up 2.2% at that time. We had thus made up for our earlier underperformance.

We achieved this by being:

  • Underweight the Communication Services Sector with a 5% exposure to this sector compared to 27% for the Top 40. The only exposure we had to this sector was in Naspers, i.e. we had nothing invested in Vodacom or MTN
  • Overweight the Energy Sector in the form of Exxaro Resources which returned 18% over this period (we had a 5% holding)
  • 40% exposure offshore, mainly to US tech companies, that produced a 15.08% return

Thus, we arrived at the beginning of September having recouped our losses relative to the benchmark in the first 6 months of the year. The strategy was 122% long of which 43% was offshore exposure and 79% was local equity exposure. 22% of the portfolio was short, made up of local equities only so that our net local equity position was 57%. Additionally, our local equity exposure was quite conservative being overweight Consumer Staples while being very underweight in Consumer Discretionary, Financial and Real Estate.

This was at a time when South Africa was debating on the issue of land reform and expropriation (President Trump added to the storm earlier with tweets regarding SA farm murders). Additionally, local markets were hit on news regarding the fuel price and the spectre of zero growth inflation. Although US stocks had experienced a pullback, at this point the Nasdaq was up 25% for the year in ZAR with the S&P 500 and Top 40 having returned 17.9% and -10.5% respectively.

The strategy then experienced significant negative returns, we lost 19.6% from the start of September to the end of December. This compares to the benchmark return of -4.35%, -9.46% for the Top 40 and -18.53% for the NASDAQ (in ZAR).

This was due mainly to leveraged offshore exposure that was very technology focused. During the months of November and December the FANGS suffered heavy losses, Facebook lost 30%, Apple lost 10%, Alphabet Inc 7%. Facebook was in the news regarding the use of users’ data and the trade war was making headlines including US president Trump’s comments about issuing a tariff on Apple products produced in China. Additionally, commodity stocks, including Exxaro (down 18% in November), took a dive on trade concerns.

Our strategies continue to be conservatively positioned to SA Inc forgoing momentum and concentrating our exposure to those securities that exhibit quality, stability and value characteristics. Historically, these factors have outperformed during less bullish market cycles.

We continue with our momentum exposure to US markets although we have cut down on our position size and technology exposure.

Kind regards 

The Emperor Team 


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