Jack Bogle of Vanguard once said, “Half the time, I wonder why I have so much in stocks, and other times I wonder why I have so little.” The quotation rather neatly sums up the past year, but also investment decisions in general.
Managing money is not easy. We are putting a year behind us in which we cannot be satisfied. As we have seen so many times before, the year was tinged with uncertainty. As it began, the markets were extremely shaky and volatility hit the roof. This was followed by a period of gradual recovery and the index hit the peak for the year by summer's end, in spite of both macroeconomic and political unrest in several places in the world. As the autumn storms rolled in, things happened very fast. Even though neither business nor the real economy showed any signs of weakness, the market outlook went from optimistic to pessimistic, resulting in a relatively massive dip in which cyclical and energy companies in particular took a beating.
We, who had for quite some time been advocating the "modern portfolio" with a larger element of more market-neutral strategies, were hoist with our own petard when we did not manage to deliver a positive return during the most difficult months. A taxing period of brief dips that had started by spring and summer and attracted new buyers every time, also made the market difficult for a group of fund managers inclined to scepticism. The cost of staying outside turned out to be too high, and several were pulled along with the prevailing trend. "Buy the dips..." There are many lessons to be learnt, and we will use this experience to enter 2019 stronger.
In this context, it is a real comfort that our flagship product, Catella Hedgefond, had already undergone several changes in recent years. The product is managed in a more diversified manner than it used to be and the correlation against the equity market has gone down significantly. Likewise, the total risk was low, which mitigated the product's loss in spite of several investments that did not turn out as expected. The fund is composed of several different strategies, where the more successful were able to compensate for the poorer performers to a certain extent. We are definitely not satisfied with the outcome, even though it was not statistically unreasonable for a bad year, considering the risk level of the product.
As I write this, the market remains turbulent and even though we are still reeling a bit, our absolute faith in the asset class is unshaken. We are in a market where the stock exchanges have delivered growth during one of the longest periods in memory, interest rates seem to have hit bottom after decades of downturns and the riskless alternatives are offering zero return. Like Bogle implied in the quotation above, you can lose sleep over having too much in stocks one day and over having too little in stocks the next. In this kind of environment, an absolute return strategy is supposed to help you sleep better through lower volatility than the equities in the portfolio while offering higher return than the interest rates that have been pushed so low. I am convinced that we are headed for a brighter 2019, and we look forward to continuing to work with you.