With over $1 billion in firm assets under management, London-based Omni Partners Macro Fund ended 2013 down 4.87%, but was quickly on the road to recovery, with a 3.09% gain in January 2014, according to an investor letter reviewed by ValueWalk.
In its investor letter, the fund notes it was not the most auspicious start to the year for equity markets. On the first day of trading, “2014 saw an 18 handle pullback in the S&P500 and a 2.4% drop in the Nikkei, losses from which neither index recovered.” Emerging markets found difficulty again, the letter noted, “though this time US rates were going down and not up as shorts in US bonds were covered. Coming off a very strong December for risk assets, the turn of the year was notable in the continuity of themes and positions from the end of last year, such that the reversal was a painful one.”
Omni finds opportunity amidst stock market difficulties
While the stock market had difficulty, Omni found opportunity. “Against this backdrop we were especially pleased to post a positive return, with the portfolio as a whole performing strongly rather than a single trade delivering an outsized contribution,” the letter said. “Many of the longer-term themes we have been arguing for some time worked during the month. Moreover, as volatility picked up our trading activity increased, contributing to further positive P&L during the month.”
Divergent market indicators
Considering the Bank of America Corp (NYSE:BAC) – Merrill Lynch Contrarian Flow and Sentiment Model, Omni noted a divergence. The first week of February saw the largest equity outflow since August 2011, the letter noted, and the largest weekly bond fund inflow since April 2010. “Interestingly this was not enough to trigger BofA-ML’s contrarian flows-and-sentiment model into a buy signal, such was the lofty level of sentiment and positioning that existed at the turn of the year.” The letter went on to note that, despite the liquidation, the model BofA-ML model barely registered below neutral levels.
Looking at the probability tables, Omni notes a recent piece from Credit Suisse Group AG (NYSE:CS) on the Russell 2000 Index pointed out on a historical basis a forward P/E of over 19 was associated with negative returns 64% of the time, and a forward P/E of 20 had never been associated with a positive return in the following year:
“Inexplicably, given the current Russell forward P/E of 19.1 (and a peak of 19.6 on 31 December 2013), Credit Suisse Group AG (NYSE:CS) proceeded to reiterate its bullish forecast based on improving US economic outlook,” a sentiment that Omni was somewhat skeptical of. “This is testimony to the findings of Daniel Kahneman and Amos Tversky’s seminal 1973 paper, “On the Psychology of Prediction”, which showed that predictions are insensitive to the “prior probability” of an outcome (the historical study) but are instead entirely determined by what outcome is most “representative” of the evidence (in this case: strong economy = strong stock market). Put another way: never let the facts get in the way of a good story.”
Taking a look back, Omni noted its research at the end of last year highlighted the majority of the market’s themes going into 2014 were relatively mature and widespread consensus positioning existed. “This encouraged us to enter 2014 on a nimble footing and look for catalysts that could challenge the market’s thinking,” the report said. As concerns about emerging markets growth materialized, Omni executed a long USD/MXN position, “as Mexico had been an exception to the broad antipathy towards EM and was therefore most vulnerable to position liquidation.” The trade performed well and returned +24bps, the letter noted, but they also added a short in the S&P 500 as EM concerns re-emerged, returning +11bps on the month.