Dear friends and family,
2020 shall be remembered as one of the most unique years in investment history, with a Covid pandemic that halted the economic wheels of the world in a few short months, triggered an unprecedented global stimulus response, resulting in soaring markets from the lows in March 2020. Against this backdrop, despite a -26% drawdown in March, we managed to reverse those losses and close the year up +21.1% for 2020.
I appreciate everyone for their understanding and patience while we navigated troubled waters. For me personally, 2020 shall rank with 2008 as one of the most intense, especially in the depths of it all. I would review the key events and actions taken and give an outlook on 2021.
All Clear for a Bull Market in Dec 2019….and then Covid
December 2019 saw a strong market rally with the conclusion of the US-China Trade War deal. Most investors, including us, added risk aggressively then and were bullish coming into 2020. Moving gears then to sell at the first signs of Covid in Wuhan back in mid Jan’20 was challenging.
First Volley
Nevertheless, as the situation was getting worse, we took defensive measures before CNY by selling most of our China holdings and shorted the US market in early Feb which were good actions to manage risk. But that benefit was offset by buying REITs which were normally defensive but was subject to reckless force selling, even as much as -50% by highly leveraged private bank investors. Nevertheless, we stuck to our REITs positions and added at the lows which contributed significantly to our returns later.
A Long Term View helped us to add risk at the right time
Unprecedented stimulus from global governments then began at the end of March’20 which was a trigger for us to put capital back to work from a 25% risk allocation to 50-75%, with the analysis that markets typically rebound strongly after bear markets and that the combined force of unlimited stimulus + slowing case growth due to quarantines + medical advances towards a vaccine should ultimately mean a win.
I have attached a link below to the March 2020 Month End commentary which was sent to investors in the thick of the action. Trust that it would be a good read and shows how Acre’s investment philosophy helped us navigate a difficult situation then.
A Bull Run that climbed the Wall of Worry
There is a common saying that “Bull Markets climb a Wall of Worry, but Bear Markets slide down a Slope of Hope”. This is proven true as markets never looked back from April onwards, with the Fund rallying 60% until the end of the year. This happened despite many loud concerns on how the situation is getting worse and we are staring down the barrel of the worst recession since 2008. Many were hesitant to add capital then but for the brave few who did, the returns were stellar and would have exceeded 40% for the year.
We gradually added risk back up to 100% by June as the situation was stabilising, broke even in August and rode the clear path up after Biden’s victory in October to close at +21%.
Outlook for 2021
It’s interesting how those who missed out on the run in 2020 are seeing the rally as reckless and the market overvalued, while those who made it big see more upside. We perhaps are somewhere in the middle with a bullish slant.
The positive forces at work in 2020 continue to be active in 2021; governments are still providing stimulus support and the vaccine rollout is providing hope that normality would soon come. Short term interest rates continue to be low and Asia is experiencing strong structural growth. More money flow into equities is expected to continue as alternatives are not attractive (except for Bitcoin).
However, there are also reasons to be cautious as inflation expectations and longer term interest rates are going up, while valuations seem stretched for select tech sectors and the bullish sentiment is bordering on euphoria as witnessed by the WallStreetBets Reddit threads.
Our goal is a +15% p.a average return which we have done so for the last 5 years. Our strategy in 2021 seeks to achieve that goal and to account for the above forces by focusing on:
A) Structural growth sectors where earnings can grow by >15% p.a (software, streaming, electrification, gaming, payments, Ecommerce, crypto infrastructure etc)
B) Macro theme of Covid Recovery, earnings recovery from badly hit sectors (theme parks, energy, automakers, banks, hospitality etc)
C) Moonshots and asymmetric return: companies whose share prices have the potential to more than double, but with limited downside
D) Defensive active management: to be ready to take off market risk if technical and fundamental signs hint at more downside than up
Finally, while we need to make hay when the bull market shines, vigilance is needed to spot when the tide turns. Also moving forward, commentaries shall be sent each quarter instead as I would like to spend more time on research and clients .
Here’s to good health and a joyous and prosperous Year of the Ox!
Regards,
Vincent