March concentrated in a single month the most common stages of a recession (denial, reaction, panic and rebound). Whether we have reached the bottom or not, and how the recovery will develop is an open discussion and opinions vary widely. To keep matters in perspective, we must bear in mind that the economy is in a temporary induced coma to avoid the collapse of the health system and that extraordinary (and until now, unimaginable) economic measures have been adopted to protect industrial infrastructure and consumption from long term damage. The coma has been induced, and the lifting of these measures will also be arbitrary. Just as speculating about the timing of such a recovery is dangerous, assuming an unwonted and exaggerated pessimism is dangerous too. The unexpectedly quick expansion of the COVID-19 pandemic has taken even the most pessimistic by surprise, but a fast restraint of such expansion may be another welcome surprise: for the first time in history simultaneous and coordinated measures have been adopted worldwide. Comparing the current crisis with previous crises and recoveries is useless. Never before –the 2008 crisis included– have fiscal and monetary authorities reacted so quickly and firmly. Magnifying past crises data is natural: it is the only known information available and we need to hold on to real facts to feel secure; but one thing is certain: global growth has resumed after every crisis and healthy economies always reach their maximums, sooner or later. Believing this will not happen again can trigger gross investment errors.
The scenario we are contemplating is that economic reactivation will take place in 1 to 3 months, at most, with a wide dispersion at an industry and company level in the initial recovery phases. Markets always anticipate reality and it may be that we have already reached the floor, even if the crisis lasts some months more. The lifting of the current restrictive controls will probably include new safety and social distancing measures such as limiting seating capacities and postponing large social gatherings, to allow a gradual resumption of business activity. The renewal of domestic consumption and business activity will be faster than cross border consumption and activity; by industries, it will be quicker in technology and staples than in tourism and transportation.
We are therefore positioning our portfolios regardless of when and at what level markets will bottom. In equity portfolios, we began the crisis with 20% of the portfolio in cash which we have lowered to 7%. We have dynamically managed our hedged funds, gradually reducing hedges as markets fell and combining them with option sales to avoid the cost of hedging outrageously catastrophist scenarios. We held long positions in USD until the US adopted ultra-expansive measures that could flood markets with USD, as happened in 2009. We are currently neutral in currencies.
Our outlook is, overall, prudent and constructive for the expansive phase that will follow the current induced recession. We are concentrating our portfolios in quality assets, while maintaining a prudent amount of hedges and cash considering current market levels.
In March, Sigma Fund Real Return (SFRR) fell -4.93%, Sigma Fund Prudent Growth (SFPG) was down -2.43%, and Sigma Fund Quality Stocks (SFQS) posted -11.82%. The Eurostoxx 50 fell -16.29%, the S&P 500 was down -12.51%, and the Nasdaq posted -10.12%. Our shares average YTD performance is -13.85%, whereas the average performance of the three indices is -19.71%.
What worked for us in March?
- Equity: 75.4% exposure to two of the best performing sectors (healthcare -3.82%; technology -8.64%). Zero exposure to the worst performing sectors (financial -21.31%; energy -34.79%).
- Hedges: 100% hedges in Eurostoxx50. In February, our belief was that the US would suffer less and would recover earlier than Europe, and we concentrated all hedges in a single index. The Eurostoxx50 has lost 3.78% more than the S&P500 this month.
- Cash: we held a high percentage of all three portfolios in cash.
What have we changed during the health crisis?
- Equity: On January 22, China shut down Wuhan to contain virus expansion. That same day we started a slight rotation of the portfolio and by the end of January we had exited all companies that would clearly be hit by the crisis, e.g. auto components (most factories are located in China). In February, the virus began its expansion to Europe and we continued rotating the portfolios, eliminating the risk attached to companies most affected by the incipient health crisis in the continent (consumer discretionary, tourism and entertainment). In March, the number of COVID-19 cases rose sharply and economy began to slow down, upon which we closed out risk in companies most hurt in the USA. We have also been increasing our exposure to companies that had posted high losses in the stock markets, but whose income will not be so affected by this health crisis.
- Hedges: we are maintaining hedge levels at 45.7% for SFRR and at 44.4% for SFPG. We continue to actively manage hedges, closely monitoring possible market rebounds. Additionally, we exited our long position in USD in SFRR and SFPG posting gains; while in SFQS we did not hedge currencies, and hold a 73.6% exposure. We closed our long position in USDJPY and our short position in US Treasury in SFRR, in both cases to lower the portfolio’s risk.
Managed portfolios positioning
We invest in leading growth companies, with healthy balance sheets and low debt. We have a high exposure in the technology and healthcare sectors, with a strong diversification among subsectors. Not only do we feel that these sectors are the best performing ones, but that they also will be the first ones to recover once the crisis is over. None of the companies in our portfolios have lowered their long term estimates; in other words, these companies’ sales figures will have a V-shaped recovery rather than a U shaped one, once all is back to normal.
The following chart shows the strong growth estimates published by our portfolio companies for the next three years, coupled with extremely high margins and net cash figures in their balance sheets: while 59% of the companies held in SFRR have positive net cash balances, this percentage reaches 73% in SFPG and 46% in SFQS. The average Net Debt/EBITDA for SFRR is -0.8, -1.3 for SFPG and -0.3 for SFQS:
3 year Estimated annual growth
Net Profit Margin
Sigma Fund Real Return
Sigma Fund Prudent Growth
Sigma Fund Quality Stocks