Nomura NGA Doesn't Buy Excuses; Trend Is Covenant's Friend

Updated on

The Nomura NGA Capital Fund doesn’t want to hear about excuses for October’s volatile market moves, while Covenant Capital Management thought the volatility suited it just fine.

Nomura NGA: Bond markets displaying a bullish tone

Saying it is “inappropriate” to attribute volatility to a litany of traditional excuses that include a “lack of liquidity,” “thin dealer balance-sheets” and “poor hedge-fund positioning/liquidation.”  The fact is the bond market has shown its hand since early in this year by displaying a bullish tone, and the intra-month move last month was nothing more than an exacerbation of that trend.

The same can be said of equities.  “Almost every investor had been talking about a potential 10 percent correction as a good buying opportunity and in fact the S&P 500 corrected almost exactly 10 percent,” the investor letter noted.  The fund wasn’t among those that bought on the drawdown, as it generated negative -0.34 returns for October and has delivered 4.59 percent positive returns year to date.


Nomura NGA: Volatility around the outlook for U.S. growth

The investor letter reviewed by ValueWalk said the increase in equity volatility can be attributed to volatility around the outlook for U.S. growth and inflation. As the Federal Reserve’s balance-sheet expansion has come to an end, cyclical volatility is on the rise, the letter to investors noted. “If the U.S. economy were to transition successfully to a growth driven economy (as we suspect it will), volatility will subside as well,” they projected.

The last day of the month was particularly important, the investor letter noted. This is when the Bank of Japan surprised the markets with additional easing, which the investor letter said was a clear positive for Japanese assets and towards weaker currency. They think the ECB will have to expand balance-sheet more before a reflation trade regains momentum. In like fashion, the U.S. Federal Reserve was more hawkish in their end-of-month meeting. “If growth does not show up as the Fed expects, there could still be another riot point in the market (like the mid -point of October).

All this movement from Asia, however, did not lead to any material changes to the portfolio.

The trend was the friend of Covenant Capital Management in October.  The fund’s original program, with a compounded annual return of 12.82 percent and a track record dating back to 1999, was up 5.30 percent. Its aggressive trend following program was higher by 4.98 percent and its new Optimal fund was up 10.54 percent on the month and – hold your breath – is up 176.31 percent year to date with only a nine month track record. In October the fund held positions in 32 markets, 20 of them short positions and only 12 long.

Leave a Comment