InvestNow News – 9th April – Pie Funds – CIO Report: Defensive positioning during Mad March
8th March
DEFENSIVE POSITIONING DURING MAD MARCH
We positioned defensively during March and cash levels finished the month between 26% and 45%. We have started to deploy the cash opportunistically, especially in situations where companies raise capital at large discounts. Having cash when others don’t, provides an opportunity to buy assets at attractive prices.
On top of the cash, we have deployed an active hedging strategy. We hedge market exposure equivalent to between 0 and 30% of each fund’s assets, typically by shorting the ASX 200 and S&P 500, using futures contracts. When we close these contracts any profit we have realised increases our cash balances.
March was a month you will only experience once or twice in a lifetime. On March 16, the Dow lost an astonishing 2,997 points — the most for a single day. That 13% drop was the steepest since the Black Monday crash of October 1987. During the month of March we saw heightened levels of activity with an average absolute daily change of an incredible 5.3%. The next highest month (October 2008) only had an average absolute daily change of 3.8%.
The risk-off environment has meant the New Zealand Dollar has fallen against the US dollar quite significantly reaching the lowest level since the global financial crisis of 55c briefly.
Predictably during this sell-off, companies with leveraged balance sheets have fared relatively worse. During the period of low-interest rates and stable economic conditions, there was a significant opportunity to increase debt levels and buyback company stock effectively replacing equity with cheap debt. As Warren Buffett says “You only find out who is swimming naked when the tide goes out”, and now many of these companies are either having to raise equity or ask for government bailouts as the tide has gone out and their financial strength has been undermined from the lockdowns in place.