October was an exciting month for investors. By various reckonings, it was the worst month since September, 2011. US stocks declined by $2 trillion in value, with Amazon alone dropping $250 billion. It was so bad that Jeff Bezos reportedly had to postpone plans to buy several small countries. Global markets, equity and fixed-income together, shrank by $5 trillion. Unless you ask The Guardian, which tallies the global equity loss at $8 trillion. That seems unnecessarily depressing (and unattributed), so I resolved not to ask The Guardian.
I felt badly that Mr. Market had somehow lost so much and checked dutifully under the couch cushions just in case it had dropped out of his pockets when he was over for dinner and Parcheesi Thursday night. No such luck.
He seemed quite depressed but that seems part of his nature. The other part is his natural mania which bubbled up a bit on Halloween. That might explain how he managed to lose a different $5 trillion back in February of this year, but promptly forgot all about it.
Headline writers have dutifully assured us that it’s “a bloodbath” that reaches into the bond, currency, emerging equity and cryptocurrency markets.
Ummm … it wasn’t. Let’s agree, on principle, to reserve horrified language for actual horrific events. Tossing terms like “massacre” and “bloodbath” into the air when we merely mean “noticeable decline in the tallies on my portfolio spreadsheet” cheapens the term and impoverishes us when it comes time to describe, decry and remedy actual acts of horror.
My own portfolio dropped about 4% during the month, with RiverPark Short Term High Yield (RPHIX) gaining a few cents and funds with global equity exposure off 5.5-8.5%. Several of those same funds returned over 30% last year, so I’m reluctant to whine.
Excluding bear market funds and trading funds that are structurally short (for example, an inverse S&P 500 fund), about 300 funds made money in October out of a universe of over 7000. A few dozen more broke even.
So, what won in October?
Sixty-two ultra-short bond funds were in the black in October. Only seven lost money, and six of those were long-term under-performers. In contrast, half of all short term bond funds lost money in October.
Similarly, cash-rich funds won. The impact of cash on a portfolio is best illustrated in the small cap value category where a number of experienced value investors have been adamantly holding cash in the face of irrational valuations. The categories four best performing funds, three of which we’ve profiled, held double-digit cash stakes. Those are Intrepid Endurance (ICMAX), Aegis Value (AVALX), Pinnacle Value (PVFIX) and Royce Special Equity (RYSEX).
One sad illustration of the power of cash is that several liquidating funds had chart-topping performances because, in the process of liquidating, their portfolios are transitioning to cash. The best traditional balanced fund? AMG Montag & Caldwell Balanced (MOBAX), which disappeared at the end of October. The best large value fund? Snow Capital Focused Value (SFOAX), now deceased.
Market neutral won.
As a category, the average fund exactly broke even on the month. Twenty-five of the 49 funds made money and three more simply broke even. As we warned last month, a number of market neutral funds have been cheating: they’ve maintained substantial positive correlations with the US stock market, which undercut their ability to hedge. Based on their success in October and their ability to produce respectable longer-term returns, Causeway Global Absolute Return (CGAVX) and Cognios Market Neutral Large Cap (COGMX) continue to recommend themselves to cautious investors.
There was a cluster of low beta or low vol portfolios near the top of the large cap core category, with almost none in the lower tiers. In general, though, for both low vol and low beta, active funds tended to perform better than passive.
Portfolio diversification won.
When you look at the list of funds that won in October, you’re struck by the number of categories that might have helped you weather the squall: 13 floating rate bond funds, five emerging markets bond funds, a couple of my favorite short-term high-yield funds (RiverPark and Zeo Short Duration Income ZEOIX), a handful of long-short equity funds (including the young Balter Invenomics BIVIX), a bunch of multi-alternative, nontraditional and multi-sector bond funds, and about 20 world bond funds.
Latin American stocks went wild during the month, up 16.3% on average, but that’s a whole other story.
At the very least, you won if you spent October celebrating (or lamenting) the Red Sox baseball championship, or if you finally put your garden to bed and got some canning done (I did), or listened to your child’s impassioned, if slightly odd, rant about the theology of St. Thomas Aquinas (did that, too).
In short, you won if you resisted the temptation to make long-term decisions based on short-term anxiety. There are two ways to maximize your chances for more wins in the future: (1) don’t take on more risk than you can accommodate, which might mean recalibrating your equity exposure and monthly investments and (2) develop healthy passions that take you away from the incessant yammer that threatens to overwhelm us all.
Bottom line: the US stock market was, and is, substantially and broadly overvalued. Profound political, environmental and economic changes continue to play out. Regulators have fewer tools to curtail excesses or intervene as circuit-breakers. As Paul Volcker recently commented, “We’re in a hell of a mess in every direction.”
All of that is bad, but none of that predicts whether the next market move will be sharply higher or sharply lower. It does not predict whether the markets six months hence are mired in despair or swept by mania. It does suggest two things: (1) on whole, down is likelier than up in the years ahead and (2) sharp is likelier than smooth.
That’s a problem, but that’s not the end of the world. Your challenge is to begin thoughtful problem-solving now. We’re here. We’ll help if we can.