Surf's Up

Surf's Up

by The Algonquin Team, Algonquin Capital

“Waves are not measured in feet or inches, they are measured in increments of fear” Buzzy Trent

Warren Buffet famously quipped that ‘only when the tide goes out do you discover who’s been swimming naked’. Given that the markets of late are more like a series of mammoth waves, we thought a surfing analogy was appropriate for February’s commentary.

As in the world of money management, when things are calm and the waves manageable, everyone is happy to stay in the water. It is in places like Mavericks, California, where waves have been known to reach 25 metres, that one’s hard work, skill and nerve are put to the test. The currents underlying the choppy markets of the past few quarters have been more like the latter, filled with more pounders than ripples.

Concerns about global economic fundamentals, declining confidence in central banks, the precipitous fall of oil and a myriad of geopolitical risks have all contributed to some gnarly conditions. Riding every wave leaves you at the mercy of the ocean and increases the odds of a wild wipe out. On the other hand, if you hide on the shore for too long, you risk not getting back into the water and missing out on some great opportunities.

Our preferred approach is to remain in the water but be selective, choosing which waves to sit out and which to catch. We constantly remind ourselves that when taking on big surf that we have to remain focussed, agile and ready to paddle ‘like hell’ to get out of the way if necessary.

The Fund

Since the latter half of December we have chosen to ride a few safer swells, but mainly watched from the line-up as things developed. Around the middle of February, with credit spreads generally wider by over 25 bps since year end, it seemed that the market was becoming too pessimistic and that conditions were right for more aggressive positioning. We took the opportunity to add a few short-dated oil bonds and increased the overall credit exposure of the portfolio. The rally in the second half of the month coupled with active trading opportunities generated a strong 1.49% return for the Fund.

At current levels, investment grade bonds compensate investors well on a risk adjusted basis, and with folks becoming receptive to new issues, we expect to be busy in March.

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