Our April Commentary

April was a considerably better month than March.

Massive global fiscal and monetary responses fueled a strong market rebound in April despite macroeconomic data that showed the huge economic cost of the COVID-19 shutdowns.

Once again, we were reminded that markets look to the future. However, in March, with markets down 35% from their peak in February, the future looked very bleak indeed. We saw the exact opposite when markets rallied on the day when the worst unemployment numbers in US history were released. Crazy.

The price charts of many of our holdings look unbelievable. How could they have traded off so much? Why did we not sell everything we own and buy US equities in March? Why was I not telling everyone I know to buy, buy, buy? Well, I was, but the middle of a crisis threatening all of humanity is not when people tend towards bold decisions.

Now, looking back, I certainly wish that I had been more aggressively bullish, but things are not that simple. In order to be right, you first have to survive. This meant that we were actively freeing up funds and reallocating our investment capital into sectors and companies that we thought would not only survive the crisis, but emerge stronger than ever before. It meant selling positions we did not really want to sell in order to position ourselves in the sectors that we thought would see the first capital flows when markets started to regain their footing.

Prior to the crisis we held the thesis that the biotechnology sector was poised for massive secular growth based on the reasoning that the largest and richest generation in the history of mankind would be increasingly willing to trade money for time as they grow older. This crisis has lit a fire under the biotech and health sectors and we believe that larger flows of capital will continue to fund new medicines and healthcare innovations.

Here is how our chosen fund, The Polar Biotechnology Fund has performed up until the end of April:

(source: Polar Capital)

Major central banks had been massively expanding their balance sheets before the crisis, but the amount of monetary stimulus generated this year is without precedent and looks to have just begun. Since the summer of 2018, the European Central Bank and the US Federal Reserve have expanded their balance sheets by a combined value of 9.2 trillion USD. To give you a sense of how much money that actually is, the current value of all the gold that has been mined in the history of the world is currently worth 8.8 trillion USD. With interest rates at zero and governments printing as much money as possible while also trying weaken their currencies to increase exports, we believe that investors will start to shift assets into gold and gold related securities in a very big way. We have increased our investment in the gold sector and have done very well.

Our sentiment is that this crisis has finally discredited the experiment of negative interest rates and shown the limits of monetary policy. As such, we believe it is a matter of time before massive fiscal stimulus programs are enacted by the major world economies. There is a very high likelihood that unprecedented amounts of capital will be channeled into the transition to green energy and infrastructure renewal. This theme is possibly the only thing that Europeans agree on. All that remains is that they actually start to spend and put their money to work. We have targeted this theme by investing in companies that will provide the raw materials that will be needed for this new infrastructure as well as leaders in the green energy space.

Our equity funds focus on selecting companies that should continue to grow and compound shareholder wealth for the foreseeable future. They are concentrated, active portfolios, rather than broad collections of passive assets such as index based ETFs. Although they differ in terms of geographic exposure, they focus on finding and keeping winning companies.

In the current environment, we believe that being overweight any type of bonds has a negative skew in terms of opportunity cost. If financial conditions continue to deteriorate, we prefer gold to even the highest quality government bonds. If the stimulus works and the global economy recovers, investors are better off with the exponential, positive convexity of equities, rather than the limited up-side and default risk of non-investment grade bonds. This being said, US treasuries will continue to be the best risk free bonds, but the potential returns going forward are minimal. The issuance of a Pan-European ‘crisis bond’ should be a net negative for the safest European bonds due to the implied sharing of credit risk and spread contraction within the Eurozone. As such, we have chosen fixed income funds that can use additional levers (currencies, interest rates spreads, duration spreads, issuer spreads, etc…) to generate returns.

Yes – there is uncertainty. Yes – there has been grave economic damage cause by this crisis. But this is not the time to be passive or to sit on the sidelines. Capital must be channeled to enable positive change in the future and we are singularly focused on investing in the companies and sectors that stand to make the biggest positive impact for their investors.

In last month’s commentary I mentioned that I had tested positive for Covid-19. After 46 days of self-isolation, I received the result of my second negative test, and returned to the office at the start of May. I am very grateful for Latvia’s handling of this crisis and the excellent job done by our health care workers.

Throughout this crisis you have no doubt have heard the phrase “crisis creates opportunity”. We have outlined a few of these opportunities in this commentary, and would be happy to arrange a consultation to elaborate upon them and discuss some other interesting themes that we are focusing on. Every day is a good day to take steps towards attaining financial independence. Our mission is to help you on this journey.

Thank you for your continued trust and support!

Pauls