Notes from the Kitchen

Notes From the Kitchen – Special Edition

  • Aug 26, 2020
  • Craig Farley

Anyone can be a Fund Manager. Right?

With the nights almost imperceptibly starting to draw in, a young man’s thoughts start to turn towards rustling leaves on country walks, pints of ale around roaring fires in the pub, and, for those so afflicted, third quarter valuation reports.

Things have obviously turned out a little, err, different than we forecast, so with another month before we go into writing in any official capacity, a few observations from the year so far (and perhaps a few lessons on why, just when you think you’ve got a handle on things, you once again learn how much you’ve got to learn!)

The top performing S&P 500 Index sectors year to date:

Internet Retailing 68%
Tech Hardware and Storage 64%
Gold 49%
Wireless Services 47%
Trucking 40%

So far so good. Everyone’s at home hammering the Amazon account, stretching their storage and bandwidth to wafer thin levels. Gold ? Bond yields of virtually zero, protection against inflation spurred by flood of government liquidity. All sort of makes sense.

But Trucking ? In 2020 ? I guess that ‘nice Rose from Provence we all like’ has to get from A to Waitrose somehow, but everything else ? 5th Best US Equity Industry sector?

The remainder.

Internet Home Entertainment 37%
Application Software 37%
Systems Software 35%
Air Freight & Logistics 34%
Home Improvement Retail 32%

Internet Home Entertainment (whatever that might be), Software, more Software, check. Air Freight? If everyone and his brother is spending two weeks in a muddy field in Dorset rather than jetting off to Disney, Freight has free reign. Home Improvement. From personal experience, depressingly obvious.

With one or two possible exceptions, not much of that should be surprising. The basic approach of investing in companies which were still able to make money when the majority of the population were sat on their couch in their joggers, eating chocolate biscuits, sorry, working, paid handsome dividends.

Even more obvious perhaps (and the reason why, despite what your TV tells you, the stock market might actually reflect the reality of the underlying economy more accurately than that overpaid expert might be telling you), the worst performing sectors over the same period:

Integrated Oil -38%
Apparel & Accessories -38%
Resorts -40%
Retail Property -40%
Oil & Gas Exploration -42%
Oil & Gas Refining -43%
Hotels -43%
Airlines -47%
Oil & Gas Equipment -42%
Department Stores -60%

Oil price down 27% ytd, Environmental considerations accelerating, Dividend cuts. If things weren’t so bad for the leisure and tourism sectors, we might have seen oil’s other sub sectors pack out more of the bottom 10. As it was, are there still such things as ‘Department Stores’ ?

So collectively, year to date, with the usual hindsight, stuff to buy and stuff to avoid looks fairly obvious.

Except of course, it never is. Most stock markets bottomed during the third week of March, once Central Banks around the world went public with their plans to flood the system with liquidity to combat the economic effects of the COVID virus.

Top 10 S&P 500 sectors since the market bottom?

Copper 174%
Auto Parts 139%
Homebuilders 134%
Computer & Electronic Retail 107%
Household Appliances 101%
Technology Hardware 99%
Home Improvement 99%
Chemicals 92%
Healthcare Facilities 87%
Food Distribution 86%

Copper ? In the sharpest economic downturn in history. Auto Parts ? Chemicals ? These are sectors that are up 174%, 139% and 92% respectively since late March.

Bottom 10 sectors during the same period? Easy?

Supercentres 8%
Utilities 6%
Food Retail 6%
Advertising 4%
Residential REITS 1%
Integrated Telecom -1%
Special Consumer Services -1%
Gas Utilities -5%
Brewers -6%
Drug Retail -26%

Utilities when everybody was locked in their house with the air conditioning on, cooking, netflixing? Food Retail ? One of the few participatory sports available during lockdown? Integrated Telecoms ? All difficult to fathom, and all, give or take, virtually unchanged in a market up around 43%.

But the real shirt loser during the recovery phase? The locked on, can’t lose, flying off the shelves commodity, you love through thick and thin?


Still want to be a fund manager?

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.