The H Fund (USD) lost 0.40% in February bringing the YTD return to 0.56% and the rolling annual return to 17.63%.
At the theme level, a solid positive return in February came from Credit Spreads in Transition, where our five managers each produced gains for the second month in succession, but in more challenging conditions. Credit markets reversed direction in mid February and High Yield Mutual Funds saw net outflows. The volatility of daily returns in High Yield has climbed fourfold since December. In the US, $300bn of securities at face value has been purged from the sector by restructurings and bankruptcies since the start of 2008, compared with $125bn at the peak of the last default cycle in 2001/2. But returns in the past year exceed those from the start of the last decade. So we may well have arrived at the point where the credit pickers prevail, getting paid for their ability to master the more awkward propositions.
Energy Market Opportunities produced a tiny gain while the Asian Consumer Power theme was neutral. Much effort is being expended on the selection of the letter of the alphabet that best describes the profile of the recovery commentators hope that the Global Economy is going to experience. Rather than a ‘U’ or a ‘W’, those positive on Asia are forecasting a ‘K’. The upstroke of the K depicts the trajectory that Asian growth will take. The down stroke reflects the outlook for the rest of us. In the event that there is no one to export to, Asian economies will need to make continuing adjustments to the balance of their economies and the role of domestic consumption will need to expand. But there is still a case for the ‘K’. The Government elected last year in India presented its first budget during February. India does not have the same reliance on exports as some of its regional neighbours, but it does have fiscal challenges, reflected in a projected 5.5% Budget deficit/GDP ratio. It also needs to continue structural reforms. Both priorities were reflected in the proposals tabled.
Two themes held the performance back. The weighting allocated to Global Financial Sector Dislocation is in the course of being reduced by a quarter and the number of managers reduced to two. In 2009, 140 US Banks closed; 20 more have closed this year and there are over 700 on the FDIC list of institutions at risk. Yet continuing weakness in the fundamental picture is not reflected in the valuation of bank stocks as the financials continue to outperform broader stock indices.
The role of politics in markets grew during February, but it did so without specific proposals for additional regulation. Talk of Sovereign CDS bans has alarmed participants to the point where, for the time being, the market in Greek risk has ceased to function as a liquid market. US Taxpayers might well ask why banning these instruments was not considered before they spent $170bn bailing out AIG, one of the leading actors in the CDS drama. The managers in the Relative Sovereign Opportunities theme produced mixed results individually, but a small loss in aggregate.