February Commentary

In February, our net weighted average return in was +2.67%. Our net average return for the month by strategy:

  • Conservative: +0.54%;
  • Balanced: +2.53%
  • Growth: +4.34%.

Since 2015, we have generated a net weighted average return of +61.10%.

In last month’s commentary we spoke about how an increase in vaccinations, economic reflation and fiscal spending by major economies are having a positive impact on markets. These trends continued to gather strength in February. Although there is still trepidation about current and future virus mutations, countries that have been leaders in vaccination numbers are showing lower transmission rates and lower fatalities. These are very good things for the continued global recovery.

On the macroeconomic front all of this good news has finally started to impact bond yields. The rise in yields in the middle and long end of the curve are very much due to the market pricing in higher inflation expectations. While this has had a negative price effect on long bonds with high duration (duration represents the price sensitivity of bonds to the underlying movement in interest rates), the current rates are still very accommodative to economic growth and real yields (yield minus inflation) for high quality government bonds are still in negative territory. As we approach the anniversary of Covid-19’s brutal impact on financial markets, inflationary data should be even more pronounced on a year-over-year basis due to considerably lower base rates caused by the economic fallout that we saw last year.

We have been positioned to benefit from inflationary forces and will continue to hold this stance until something changes.

While volatility in the bond markets necessitates adjustments in the calculation of discounted future cash flows based on higher risk-free rates, we have very little exposure to both duration in bonds and overvalued companies whose valuations have been exaggerated due to low risk-free rates.

Our focus on buying reasonably priced companies that will benefit from strong cyclical tailwinds has been paying off very well and we believe there is much room left to run, especially for companies in the commodity space.

Here is a chart that shows how the iShares 20+ Year Treasury Bond ETF (long bonds) has performed since the start of this year compared to copper miner FreeportMcMoRan (FCX US):

Source: Bloomberg

While fiascos such as Gamestop occupy the headlines, there are several under-owned sectors such as miners, forestry and fertilizer companies that are making strong recoveries and should create sizeable gains for investors as the real economy continues to recover. As we teeter on the precipice of struggling to define the virtual from the real, we believe that the media infatuation with the digital realm such as crypto and NFT (non-fungible tokens) have caused considerable attention drift from the constraints and resulting opportunities in real asset markets.

Let’s take a look at FreeportMcMoRan versus the Greyscale Bitcoin Trust from the bottom of the crisis until the end of February:

Source: Bloomberg

They are neck and neck in terms of total return, but no one is talking about FreeportMcMoRan and they actually have earnings. They are also set to be one of the prime beneficiaries from the largest wave of capital investment that the world have ever known: the transition to green energy.

Despite the conditioned boredom of Covid-19 lockdowns, very are living in exceptionally interesting times. Especially if you look beyod the headlines.

On behalf of our client portfolio management team, I thank you for your trust and support!

Pauls