Grey Owl Capital Management commentary for the third quarter ended September 30, 2016.
“Nobody but cattle know why they stampede, and they ain’t talking.” — Cowboy Saying
Dov Gertzulin's DG Capital has had a rough start to the year. According to a copy of the firm's second-quarter investor update, which highlights the performance figures for its two main strategies, the flagship value strategy and the concentrated strategy, during the first half of 2022, both funds have underperformed their benchmarks this year. The Read More
- Q3 2016 hedge fund letters
- Q2 2016 hedge fund letters
Overall market, economic, and investor sentiment conditions are similar to where they were in late July when we wrote our second quarter letter. We will not spend much time repeating those details or offering new proof. It suffices to say, historically accurate indicators continue to show that asset values in general and US equities in particular are overvalued. The median US stock trades at the highest price to sales ratio in the history of the S&P 500 index; and it is not even close. Research Affiliates projects an annualized real return for a domestic 60/40 stock/bond portfolio of just 86bps1 (!) annualized over the next 10 years.2
The economic situation is no better. Global debt levels relative to global gross domestic product are well beyond the point where they have historically led to stagnant growth and we are seeing it in GDP growth rates – the Conference Board now expects US real GDP to grow at just 1.5% in 2016. Central Bank intervention has pushed over $10 trillion dollars of sovereign debt into negative yield territory. Large European banks such as Deutsche Bank are levered over 25-1 and could easily prove insolvent absent a government intervention. (Remember Lehman, etc. were levered over 25-1.)
Despite this backdrop, we continue to operate in a non-binary fashion. We do not want to bet on a stock market collapse or massive inflation or deflation. We try and tilt the portfolio (and/or client asset allocation) with a mind toward magnitude, probability, and likely timeliness of potential outcome based on fundamental, technical, and sentiment indicators. This year, our fixed income strategy has been the star. It has benefited most from exposure to long-dated US Treasury bonds that performed very well in the first half of the year. Our equity (or risk) strategy has plodded along (up slightly). Our limited partnership, which is far more hedged than our separate account strategies, is down a few percentage points for the year. Any form of “insurance” has been wasted money for the past few years, but we refu