senior vice-president & portfolio manager, equities
Toronto-based Aurion Capital
Q) When did you know this was no ordinary stock market correction?
A) We first became aware that the collateral damage to equities would be a bigger issue than we had first thought when Ospraie’s flagship hedge fund was forced to shut down in September of ‘08. This fund had been promoted by Lehman Bros. and its demise added to the loss of confidence crisis that later took Lehman down itself. Although we were aware of the effect on the hedge fund industry of the redemptions by the hot money, we realized that these liquidations were not based on fundamentals but the quest for liquidity. It was that realization that kept us positive on the ultimate outcome of the process. Similar to the 1987 crash, the liquidity crunch that forced this mindless liquidation would be addressed and ultimately a process of repair would surface the “true” value of the equity market. We held firm to our belief that these assets had replacement costs that were multiples of the prices being realized by the sellers. The stocks most affected by the hedge fund liquidations were, perversely, the same ones that stood to benefit from long term trends that had been in place for years. How else does one explain the dive in Research in Motion (RIMM) from above $100 to $44 in less than 5 weeks, only to see it double less that 6 months later on the same information that had propelled it to the previous highs?
Q) How did your clients and others react?
A) Our clients were completely supportive of our views as they felt comfortable that we had managed money in down markets before. The luxury of having longer term clients is that level of trust that one develops prevents the “panic” approach that characterizes a minority of market participants. Nobody likes to lose money, but the equity market is sometimes the only source of liquidity available to investors so it tends to receive a disproportionate amount of the selling during liquidity crunches. In fact, one of our client’s investment committees increased its policy allocation to equities in November of last year in a perfectly timed contrary decision.
Q) What was the best move/trade you made during the initial sell off?
A) Our best decision was to increase our position in equities in late February of this year reflecting our view that the asset allocation of the portfolios had been skewed by the relative underperformance of risk assets. The overshoot to the downside was simply a self-fulfilling collapse of sentiment that provided us the ultimate lows. We believed these lows would last as the lows for the cycle, primarily as a result of the lack of confirmation by many of the indicators we have been using for over 25 years.
Q) What is your view of market now?
A) Our current view can be characterized by a relatively neutral view. The markets have deservedly recovered and many assets that were being “given” away earlier this year have recovered nicely. Investors, especially in the retail arena, have been reluctant to re-risk their portfolios and the have ample cash balances. However the massive stimulus that has been provided will take time to take effect and the hardest thing to do now is to stay patient. While the recovery will be half-speed there remain some major obstacles before economic growth is fully restored. Total return strategies such as balanced funds will be more and more popular as the risk tolerance of most individual investors will recovery only gradually.
Q) How are you playing it now?
A) We are optimistic that the current correction will be relatively shallow and we have been reluctant to revert to a defensive stance. We are playing it by being fully committed to the strong companies that have survived and in some cases prospered because of the stresses that have damaged their competitors. The current environment is suitable for a wave of consolidation that will allow for the creation of the market leaders of the future. Canada has many examples of this, especially in Energy, Materials and the Financial sectors. Foreign investors are becoming increasingly aware of the benefits of diversifying the portfolios by an increased allocation to the Canadian market and this will benefit us for many years to come.