Clareville Capital Pegasus Fund manager David Yarrow is unduly apologetic about the performance of the fund during April, a month that inflicted a 10.8% cut on the fund’s performance and steered year-to-date returns deeply into negative territory (-7.2%), according to a letter to investors, a copy of which was reviewed by ValueWalk. The tough month follows a fantastic year, in which the hedge fund returned 63%.
Should investors in the fund be worried?
Perhaps not, and the chart below, which compares the fund’s performance relative to benchmarks, should help soothe ruffled nerves.
A profit cushion to ride over speed-breakers, as well as an opportunity
Clearly, the fund’s solid outperformance during 2013 creates a not insignificant cushion that can help ride out the kind of market gyrations seen in April, and which roiled returns at hedge funds pretty much across the board. “With very few exceptions, the better a fund did in 2013, the worse it did in April 2014,” remarks Yarrow intuitively.
In his April letter to investors, a copy of which was reviewed to ValueWalk, Yarrow attributes the April turmoil to a rotation within the stock market out of winning stocks into underperforming investments. This rotation was likely sparked by a confluence of three factors: panicked hedge fund managers, excessive long-only fund positions and the geo-political repercussions from Ukraine.
“We must be brave and not doubt our core convictions just because profits are being taken by some with perhaps less strong hands than we have, after 2013,” he advises.
Indeed, Pegasus’ core investments are none the worse, and some are doing even better than anticipated by the fund’s managers.
“Pegasus is setup for an improving UK economy and that is exactly what is happening… I would see the pullback in the fund as the opportunity that many have been waiting for during the last 15 months to invest in Pegasus.”
Pegasus Fund letter: Addressing investor concerns
Yarrow’s letter exemplifies the investment adage that sometimes doing nothing is the smartest investing strategy.
Beyond a 10% tweak to long positions, the Pegasus managers simply went back to first principles, inspected their investing thesis and found:
- No bad news out of specific holdings
- Solid macro-economic environment evidenced by rising consumer and business confidence and a dovish BoE stance
- The fall had already served to significantly reduce risk within the portfolio (“some of our holdings have de-rated by 20% in 2014, which implicitly reduces their value at risk by 20%”)
- Pegasus was not exposed to “consensual positioning” or “crowded longs” – in fact it was long of quality, not popularity
In the ultimate analysis, the fund managers emerged confident on their understanding of the earnings potential of the companies they had invested in, and were “emboldened by the rapidly improving economic situation in the UK.”
Pegasus Fund data
The fund’s top 5 positive and negative contributors to performance are tabled below.
The following are the top 10 holdings of the fund as a percentage of its AUM:
The break-down analysis of the performance on fund’s long-short positions, for April as well as year to date, are shown below:
Yarrow’s letter
In closing, this writer would recommend that all traders/investors read Yarrow’s letter for an object lesson in how to manage the emotional turbulence arising from a losing streak.
Of particular interest is the test on page 10 (in italics) that proves the point that emotionally robust managers must take a down period in their stride, if they intend to generate above-average returns in the long run.
“This is the time to be brave and not to let the tail wag the dog. It is an uncomfortable time to do nothing, but that is exactly what should be done. It is the ability to have confidence in ourselves and not listen to noise that is pivotal to our offering.”
