Randall Abramson, CFA, is CEO and Portfolio Manager of Trapeze Asset Management Inc., a firm he co-founded in 1999 shortly after founding its affiliate broker/dealer, Trapeze Capital Corp. He was named as one of Canada’s “Stock Market Superstars” in Bob Thompson’s book Stock Market Superstars: Secrets of Canada’s Top Stock Pickers, Insomniac Press, 2008. Trapeze Asset Management Inc.’s separately managed accounts are long/short or long-only and have either an all-cap orientation or large-cap-only mandate via its Global Insight model as Trapeze Asset Management Inc. selects securities which meet strict value criteria. Randall Abramson
graduated with a Bachelor of Commerce from the University of Toronto in 1989, and his career has spanned investment banking, investment analysis and portfolio management.
Sector – General Investing
TWST: I’d like to begin with an overview of Trapeze’s investment philosophy and strategy.
Randall Abramson: Everything we do at Trapeze, whether for the Trapeze Value Class mutual fund or our Global Insight separately managed accounts, is covered under a four-pillared approach. Our four pillars, all of which we had in place in one way or another for many years, were all refined post the 2008/2009 debacle, for obvious reasons. Our first two pillars are macro, and the second two are micro pillars.
Of the first two, one is called the Trapeze Economic Composite, TEC, and it is designed to predict a recession. It’s designed to do so because typically when you have economic weakness, you have a stock market that’s falling for usually a 24-month period in and around that economic malaise. And obviously it’s going to dictate — not just to hold some cash, which one might want to do for dry powder to buy when the markets are coming down — but also to re-characterize the types of things that you’re buying. You may want to hold more contracyclical stocks and certainly avoid cyclical stocks in a recession. And at the same time, with the Trapeze Value Class being an alternative fund, we can engage in short selling there as well. We want to hedge during times of upheaval. So those are the reasons one would obviously want to be paying attention to which way the economy is going.
The economic composite was not rocket science on our behalf. It is simply the Fed model, which is predominantly based on the inversion of the yield curve. So when short-term interest rates start spiking up versus longer-term interest rates, meaning the difference between the T-bill and 10-year rate are such that it’s inverted as opposed to what we have today, which is a very positively sloped yield curve, then that is indicative of the central banks taking the punch bowl away from the party, as they say, and almost invariably a business cycle peak follows.
We have added to that some other factors including some unemployment figures, consumer confidence, manufacturing statistics, and we mix that all together to form a scale from one to 10, and when it is a one that indicates to us that a recession is coming. And not only does it tell you when the economy is going to be in rough shape, it also tells you when you should ignore those soothsayers that are arguing for an economic malaise. Currently, we don’t see one coming, because our red flags are not in place, and it allows us to be bullish when we need to be bullish, which is most of the time. So that’s one tool.
You do not always have an economic decline when you have a market decline. The issue is that the economy can do one thing and the stock market can often do something else altogether different. So the second thing we want to look for is a market panic or a bear market, and we define that as a market decline of 20% or more, which is the typical definition.
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