• Angus Crennan

4Q20 Investor Update - Extracts

2020 at a glance

We fortified our strong 17% return from 2019 when the news came out that the Coronavirus had escaped China and was spreading. We sold our investments before markets panicked and positioned our fund very conservatively to protect our assets.

Consequently 2020 started fantastically for our Fund, the market collapsed 30% yet we gained 7% in the first three months due our positioning. From there markets started increasing after extreme stimulus from governments and central banks. Locally in Australia we commenced Job Keeper and Job Seeker, introduced a range of business support as well as legislated changes to the bankruptcy and tenancy laws. Across the world similar stimulatory actions occurred although the mechanisms to inject stimulus varied by country. Even in Australia, where our virus infection rate was less than others, our Central Bank printed money to influence financial markets. In the short term those policy maker actions have given the market confidence.

Our slow conservative approach to the market’s volatility, and thorough research into the businesses we invest in (we assess over 15 years of financial statements) has resulted in us gaining steadily over 2020. Balmoral is one of the few asset managers which achieved this, with pretty much every competitor caught up to varying degrees in the gut-wrenching 30% market fall earlier in 2020. Investors in those competitor funds are fortunate the crisis was averted by staggering amounts of stimulus in the short term. Due to all the policymaker interventions currency markets moved in a contradictory manner to fundamental drivers resulting in the Fund’s usual calculated growth rate slowing down in the second half of 2020.

We are not in the business of speculating so investing when the global economy is under so much pressure, and whole industries were stopped from operating overnight, required us to be patient and await quality information on the impact on business, families and the financial system, so we could make rational decisions. Over 29 major retail businesses in the US, including famous names like Century 21, G-Star Raw, Brooks Brothers, GNC and Neiman Marcus, ceased to exist in 2020. These were successful businesses destroyed by the Coronavirus impacts on their customers. Over calendar 2020 our weighted average cash holding was 54%, a second consecutive year of conservative positioning, reflecting the historically expensive valuations demanded in an environment with very high levels of systemic risk. Throw in Coronavirus and 2020 for rational investors was about capital preservation rather than capital growth.

The good news is that the health emergency side of this pandemic will progressively diminish over 2021. The Pfizer, Moderna and Oxford/AstraZeneca vaccines approved towards the end of 2020 have each been very positive developments and together they offer us redundancy which is especially welcome. The ‘less-good’ part is these vaccines do not stop the virus spreading, only addressing the symptoms. This means restrictions on socializing and mass movements of people, and the associated economic impacts, will remain for a while yet. As at end December the vaccines had started being administered to Americans however in the first month less than 1% of the US population has been vaccinated suggesting it will take quite some time to vaccinate the world against this virus. Australia is in a fortunate position and administering the vaccine will commence here sometime between February and March coinciding with the removal of various stimulus payments.

How will we make money in these conditions?

The Balmoral Fund is structured for these market conditions. Investors all around the world are saving and growing capital for good reasons like helping their kids buy a property, pay for their own retirement and/or leave a legacy of some sort. The tiny yields now available from bank term deposits and bonds will not contribute to achieving those objectives. Increasing investment allocations to growth assets is the answer yet increasing those exposures comes with increased risk of permanent capital losses. As we have consistently shown managing the investment risks associated with growth assets is Balmoral’s forte.

For two years now we have been waiting for a really good opportunity to invest aggressively. Viewed historically financial assets have been expensive for a while. My view is that we will continue to have expensive assets in 2021 and I no longer expect an environment where assets go on sale. With vaccines progressively allowing economies to reopen over 2021 and governments continuing to underwrite their economies we have stepped up our investment program. Our approach to maximising opportunities will continue to focus on well understood and researched cash generative businesses.

Balmoral continues to grow

The Balmoral Fund nearly doubled in assets under management over 2020 because investors recognized the strong returns available in growth assets need to be paired with the rigorous risk management used in our Fund. I can share with you that some newly onboarded clients are some of the most sophisticated investors in Australia. Those new clients agree with our approach – which is to take risks only when those risks are compensated.

Recall that in 2019 we made 17% even though our portfolio’s weighted average cash position over that year was 52%. We don’t need to always be swinging for the fence – as an old cricket coach used to say ‘Play the ball on its merits’.

Most importantly, when a market calamity hit, we were perfectly positioned. Because investors need to grow their capital while risks remain elevated, and valuations generally full, Balmoral’s risk management remains a necessity for clients planning over multi-year horizons.

Please reach out to me if you would like additional information. I wish you a healthy and prosperous 2021.



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