Prescient RECM Global Feeder Fund has closed and merged into Counterpoint SCI Global Equity Feeder Fund.

The fourth quarter of 2019 dramatically reversed the trend of the previous quarter, with strong equity advances to record highs. The US maintained strong positive momentum while emerging market equities led global markets, buoyed by the strength of EM currencies relative to the US dollar.

Increasing risk-appetite fuelled a sustained rally across most asset classes, as market participants responded to narratives of de-escalating trade tensions and continued stimulus. The US Fed has continued to act in line with a reversal in policy stance and obliged the market with aggressive repo operations since September. The Fed’s pivot in January ushered in a ‘risk-on’ rally and the fourth quarter was the culmination of an exceptional year for risk-taking. Central banks across the world are responding aggressively to stave off an economic slowdown. Market participants are positioned for a melt-up and they have not been disappointed.

The CBOE Volatility Index (VIX) spiked in May and has stabilised since then. For the moment, the market appears willing to disregard macro headwinds and extreme valuations. Central bank support remains the overriding narrative and US equities remain close to all-time highs.

An additional feature of the quarter was the marginal rise in developed market bond yields. Global Bonds declined by 0.50% as market participants started to price in a Fed stalemate and a resumption in synchronised global growth. Emerging market bonds advanced in line with the rally in emerging currencies and a renewed search for yield. The signal from the bond market remains unclear and the weakness in trend suggests a low level of conviction.
For the quarter, most major asset classes advanced, with relatively few losers. Gold surged by 3.04%, in line with US Dollar weakness and despite rising yields. Gold appears to be trading in line with real yields and the increasing demand for safe havens, in an environment of rising uncertainty. It is rare for Gold to be correlated with risk assets and time will tell which asset class is providing the correct signal.

The MSCI World Index surged by 8.7% in US Dollars. MSCI Emerging Market Index advanced by 11.9% over the quarter, aided by an explosive rally of EM currencies relative to the dollar.

Global property, as measured by the iShares Developed Market Property Yield ETF which tracks the FTSE EPRA / NAREIT Developed Index advanced by 1.96% over the quarter. Global Property was relatively resilient during the market drawdown in late 2018 and displayed the same resilience in 2019.

Portfolio overview

The Fund had a positive quarter, with a 6.4% advance, which lagged the MSCI World Index return of 8.5%.

Global Equities were led higher by EM Equities, as less restrictive monetary policy and lower fears of a hostile trade war, buoyed risk assets and weakened the US Dollar.

Stock selection was good and marginally lagged the broader market. Cash drag and lack of exposure to specific sectors explain the overall lag at the fund level. Market leadership has been very narrow and sector specific. Our lack of exposure to the winning sectors explain most of the performance lag. Our stock selection and defensive positioning protected capital in the fourth quarter of 2018 and briefly in May 2019 but has struggled to keep pace since the start of the second quarter of 2019.

For the majority of the fourth quarter, Technology, Healthcare and Financials led the market higher. Narrow price leadership has been mirrored in terms of valuations with the Technology & Healthcare closing off the calendar year at significant premiums to the market. The risk-on sentiment has favoured mega caps and sectors with price momentum.

Sector selection has been the most significant detractor and stock selection has been a net detractor as well. Dollar weakness provided a mild tailwind to non-US listed stocks. The fund has lower direct EM exposure, which detracted significantly in the fourth quarter as EM Equities surged strongly. Stock-picking within Tobacco and Precious Metals contributed significantly, despite the fund being under-exposed to Consumer Staples and Materials.

At the sector level, lower exposure to Materials, Technology and Healthcare were the biggest detractors. On the other hand, our significant underweight position in Utilities, Industrial and Energy contributed at the margin.

We have an intentional bias towards stocks with strong balance sheets and cheaper valuations. We anticipate an environment where excessive debt and high valuations will become significant headwinds for equities. Since April 2019, this bias has not worked well and the fourth quarter was particularly acute. Equity market participants appear willing to disregard high valuations and excessive debt, in the current regime of easy monetary policy.
The Fund is focused on stock-picking and accordingly, stock selection will always be the primary driver of returns. Over the quarter, selected tobacco and retail stocks contributed significantly.

The Fund has maintained above-average liquidity, since mid-year 2017. As a consequence, cash drag has been a perennial feature of our return profile and the fourth quarter was no exception.

Portfolio positioning

We are patient and the Fund positioning remains virtually unchanged. The recent surge has enabled us to reposition our exposure, but the overall slant of the portfolio remains intact.
During the quarter we sold all non-tobacco consumer staples on valuation considerations. The current obsession with low volatility stocks like consumer staples will revert at some point in the future.

We continue to hold high quality businesses, with resilient earnings prospects, solid balance sheets and cheap valuations.