15 Jul Baggot Multi-Strategy (BMS) Update 13 July 2020
BMS posted a gain of 3.4%, including all charges, in Q2 2020 (based on an account size of roughly €500K, transaction costs can vary somewhat depending on the size of the account). We’ve seen a decent start to the third quarter; currently as of today (Monday July 13), including all charges, BMS has posted a year to date (YTD) gain of 1.73%.
In comparing BMS to peers, the largest risk profile 4 investment product in Ireland posted a loss of – 7.43% YTD in 2020, not including charges. Of the 14 largest risk profile 4 investment products in Ireland, avg returns YTD in 2020 came in at a loss of – 4.58% so far, again – not including all charges. BMS has outperformed every single one of them, including all charges YTD in 2020 so far.We highlight the charges factor in bold print because our returns include all charges and our peers do not, which only widens the outperformance of BMS in real terms.
The strategy was positioned in a very risk averse manner from the beginning of February until the end of May, in response to significant, negative changes in correlation and volatility. At one point in the first half of the year, the model carried less than 10% equity exposure heading into historic levels of volatility. At the beginning of June in response to lower correlation and volatility risk, the model adapted to those new conditions with a higher allocation to assets that would generally be perceived as more risky. Allocations to equities are still conservative, currently coming in at just over 30% in this risk profile. The model continues to hold a healthy allocation to Gold which has been the best performing safe haven this year. The model also has an allocation to Inflation Protected Government Bonds (also known as Inflation Linked Bonds or TIPS), which have recently outperformed most other types of Bonds (ex-Convertibles).
We continue to carry a currency hedge to our Dollar denominated positions. The hedge has performed well recently as interest rate differentials between the US and Europe have narrowed significantly in recent months. There are other factors at play that inform our view on EURUSD, such as the US deficit, US election uncertainty, Europe’s high current account surplus, Europe’s move toward debt mutualisation and Europe’s better response to Covid-19. We have a target of $1.18 – $1.20 in EURUSD later this year but we stand ready to re-asses our view should these factors change significantly. We understand that the hedge costs us purchasing power that could be directed at other assets, but we feel that our concerns around Dollar exposure currently justify the hedge.
Markets have been quieter and trading volumes have been a lot lower since the school year ended, which is normal. Many of us spent a lot of time on lockdown during the first half of the year and now that the restrictions have eased somewhat, many people are taking time off. We wouldn’t at all be surprised to see quieter markets until the school year begins again. Make no mistake though, there’s a lot of uncertainty going forward. Regardless, BMS is a balanced strategy that can adapt to changes in the economic environment more frequently than many other strategies, which is a benefit at this time.
David Flynn
Chief Investment Strategist and Director at Baggot Investment Partners