End of Year 2018 Family Fund Letter - Acre Capital

Dear Investors,

The Family Fund is down -2.9% for 2018 vs the MSCI Asia Ex Japan Index (SGD) which is down -17.8%. Even though the Fund lost much less than the market (in fact beating it by 15%), the year has been a challenging one. We came into 2018 after a fantastic 2017 (+25%) and entered January cautious that the market had risen too far too fast. Surprisingly, the market rallied nearly 9% in January alone. This set a bullish tone for 1H’18 as company earnings and economic fundamentals continued to impress while the risk of a US-China trade dispute was not being taken seriously.

Bearish Turn on China-US Trade War in 2H’18

2H’18 marked the bearish turn in markets with China-US implementing tariffs on each other in July. This created a marked downward shift in business and consumer sentiment in China. Asian markets were plagued by concerns around China’s slowing economic growth and investors retreating back to a higher yielding USD. Earnings of stalwart tech stocks such as Facebook/Tencent are also starting to slow. By Q4’18, the gap between a sky-high US market vs a retreating emerging markets was too large, and along with risks of higher interest rates and no resolution to the China-US trade war, the US market collapsed -13.5% in Q4 alone.

Quick Return to a Defensive Position

The main reason for our outperformance is the decision to cut losses and switch to a strong defensive position in June as well as going short the US market in October. Being short means that we profit when markets go down. This decision is driven by our investment process which is signalling slower earnings as well as negative momentum building. Our nimble approach allowed us to do so decisively, where many other larger funds would not be able to.

Volatile 1H’19 on Trade War Uncertainties

Looking forward, the first half of 2019 looks to be volatile as we approach the trade war truce deadline at end Feb. Given the unpredictable nature of politics, I would rather assume the worst and be proven wrong, which means giving up potential gains in order to protect against losses. That being said, valuations of some stocks that would be long-term winners are increasingly undervalued. We are working hard to identify and quantify the risks/rewards of these stocks. 2H’19 would subsequently be ripe for a small recovery as markets digest the trade war news and governments offer fresh stimulus.

As I’ve said in my 2013 Year End Letter, “Good offence win games; Good defence win championships”. I believe that 2018 is another case study of that. Thank you all for your continued support and to old and new investors who have decided to increase their investments even in a down year.

Here’s to a New Year of joy, peace and prosperity, and may the markets do better in 2019!