The fund returned a loss of 2.46% in September as trend reversals in currencies and equities detracted from performance.
U.S. equities made new record highs in September, but the market’s breadth suffered a notable deterioration heading into the back half of the month. The divergence between new record highs in equity indexes and a growing percentage of stocks making new 52-week lows reached its most extreme level since December 1999. Historically, this kind of divergence has preceded major market corrections, including the bursting of the Dot Com mania. These weakening internals eventually rippled across the broader market. Tightening global monetary conditions were also cited as the primary cause for the recent weakness in risk assets.
Currencies were a drag on the portfolio due to underperformance of the U.S. dollar versus its major counterparts. This was despite the third interest rate hike of 2018 from the U.S. Federal Reserve; historically a positive signal for dollar strength.
Commodities posted mixed returns during September. Gains from long positions in the energy sector were offset by losses in agricultural commodities such as meats and grains. Despite ongoing market uncertainties, gold continued to fall during September adding to the disjointed nature of markets.Performance (as of 9/30/2018)
Markets shifted in September as some of the macro themes seemed to change course. 2018 has been built on U.S. outperformance as the U.S. equity markets dominated, the U.S. dollar strengthened, and the Federal Reserve set the standard for interest rate normalization. We have witnessed emerging market turbulence as of late, but domestic markets have remained unphased until recently. Looking ahead, this may signal an important change. The U.S. is not insulated from turbulence elsewhere and geopolitical tensions have the potential to shake the U.S. growth story.
A month of underperformance is not necessarily a start of broad macro reversals, but the health of markets may be challenged in the fourth quarter. If this evolution continues, investors’ commitment to equities will be tested. Amidst this backdrop, a commitment to robust risk management will be key and we believe our portfolio of diverse uncorrelated stocks, bonds, commodities, and currencies will provide key differentiation.
Global equities were dynamic during the month. After making new highs, cracks began to emerge, and the U.S. markets ultimately underperformed other developed markets. Japan was a clear outperformer, as a weaker yen boosted the Japanese stock market. At the sector level, the energy and material sectors outperformed while the real estate sector fell by more than 2%.
Our global equity sector expanded by adding new short positions in the Spanish Ibex and Chinese A50 during the month, a foreshadowing of weakness seeping into the asset class.
Bonds are a key focus to macro markets at the moment with US yields breaking out of a range and continuing to rise. The knock-on effects remain unknown for the time being but the ability of markets to absorb higher yields may provide insight to the equity markets. Global bonds continue their lackluster performance, particularly in Europe where concerns over Brexit and the Italian budget have impacted performance abroad.
Our number of positions in fixed income remained unchanged as an initiation in US Utlra bonds was offset by a liquidation in German two-year Schatz.
Although yields continued to rise in the U.S. and economic data pointed towards continued domestic strength, the U.S. dollar stalled in an uptrend during the month of September. The Canadian dollar benefited from NAFTA negotiations and ultimately ended the month nearly 1% higher versus the greenback. The Japanese yen was the worst performing G10 currency and weakened by 6% during the month.
We added to our portfolio with a new short position in Australian dollar vs the Japanese yen as well as a new long position in the US dollar vs the South African rand.
Commodities were relatively unchanged for the month with the biggest move coming from gains in energies. Global oil prices were supported by a weaker US dollar in September as well as concerns that US sanctions on Iran scheduled for November will hamper global supplies.
Losses were concentrated primarily in the meats were rising prices in cattle and hogs adversely effected our portfolio. Metals were little changed as profits from our short gold and silver positions were offset by rising platinum prices.
Trading activity for the month was one sided as we closed long positions in nickel, lumber, and orange juice and short positions in London sugar and live cattle.