Ranger Fund

We were disappointed with the performance of Ranger over the quarter. While our cash and option portfolio provided some protection, the fund was still materially down. The share market panicked in March and decided that no out-of-favour small- or mid-cap companies would survive this crisis. The ferocity of the panic selling did surprise us. As a result, Ranger fell over the quarter, largely due to that theme, until the market hit a level where the full protection of the put options1 kicked in.

Coventry Group, Retail Food Group and IVE Group were the worst contributors, all more than halving over the quarter. In our opinion, all they need to do is survive to be worth substantially more than their current share prices. We have been in contact with management of most of our holdings to confirm that they have adequate financial resources and strategies in place.

The only company providing a positive contribution to performance for the quarter was Afterpay, and that was because we exited it in January at close to a price high. While the timing was good, our reason for selling was based on a more long-term consideration of the upside given the substantial price appreciation over the previous year. We concluded that while there might be further upside, there was not enough to justify our strict investment criteria so it was sold.

We invested in some new stocks over the quarter. One of these, Retail Food Group is a multi-brand food and beverage franchiser. Although the share price has been volatile since we bought in, we believe it has the financial resources to survive the COVID-19 disruption and will be an excellent performer in the long-run. The others we are still building a position in and will talk about more in due course, but suffice to say they are businesses that are trading strongly in the current environment, have attractive longer-term opportunities and the recent sell-off has given improved entry points – a nice trifecta in our view.

Counterintuitively, Corporate Travel, our most direct exposure to COVID-19, finished the quarter as the largest equity position in the fund. That was largely because we had purchased more shares at extremely low levels shortly before the company updated the market on its strong financial position. It confirmed that it can survive for 2 years without any revenues, which resulted in a sharp rally and an increase in the position held by Ranger. Corporate Travel is a good example of the opportunities that arise from fear-based selling in times like these.

Our disappointment regarding March quarter performance is countered by our excitement about the potential future performance. Many of our companies are, in our opinion, at crazy low prices and only need to survive to double or triple. We have been selectively accumulating during panic selling. See our article “A time to get excited” for more detail on the positioning of Ranger.

5 Oceans Fund

Overall, we were pleased with the capital preservation elements that 5 Oceans displayed over the quarter. It has been without a doubt a very stringent test of portfolios, with both equities and many bonds selling off viciously. Bond markets essentially froze up during the quarter. We have long been concerned that investors who were relying solely on bonds for diversification could be sadly disappointed. Many sophisticated hedge funds and other strategies that focused on risk parity essentially blew up during the quarter as volatility hit markets and they scrambled to unwind leveraged positions.

T.Rowe Price did their job and produced strong performance in a period when many other bond managers struggled and importantly when equities were going down (which is one of their core objectives). We had been bearing gradual Kohinoor losses over recent years as markets were very benign. This all changed in 2020 and Kohinoor’s 2 tail-risk strategies are up about 125% year-to-date. Kohinoor has locked in some of these gains by cashing up many of the June equity options they held, though they still have plenty of longer dated cover if things continue to unravel from here.

Not all was perfect but then it very rarely is. Our Ranger Fund suffered from value stocks taking an outsized impact early in the sell-off (as noted in write-up above), and the Schroder strategy suffered from the same effect globally. Normally, we would expect value stocks to outperform through a sell-off due to their greater margin-of-safety. We are still strongly of this view and think the worst is behind us for both of these strategies and, in our opinion, future returns look highly attractive.

In summary, the underlying strategies are performing their intended roles in a crisis period. We are confident 5 Oceans is positioned to weather further volatility if that is what eventuates and is also well placed to take advantage of any rebound or re-pricing that occurs in equites.

Trans-Tasman Fund

The Trans-Tasman Fund underperformed the S&P NZX50 over the quarter. The share market panicked in March and decided that no out-of-favour small- or mid-cap companies would survive this crisis. The ferocity of the panic selling did surprise us. As a result, many of our overweight positions fell substantially over the quarter, largely due to that theme.

Performance relative to benchmark was insulated from the most direct overweight exposure to COVID-19, Corporate Travel, by its underweight positions in Air New Zealand, Auckland Airport and Sky City. The positive contribution from these underweights more than compensated for the negative contribution of Corporate Travel. Being underweight the retirement sector also helped.

Counterintuitively, Corporate Travel, our most direct exposure to COVID-19, finished the quarter as the largest overweight position in the fund. That was largely because we had purchased more shares at extremely low levels shortly before the company updated the market on its strong financial position. It confirmed that it can survive for two years without any revenues, which resulted in a sharp rally and an increase in the position. Corporate Travel is a good example of the opportunities that arise from fear-based selling in times like these.

The only active overweight that contributed positively to performance for the quarter was Afterpay, and that was because we exited it in January at close to a price high. While the timing was good, our reason for selling was based on a more long-term consideration of the upside given the substantial price appreciation over the previous year. We concluded that while there might be further upside, there was not enough to justify our strict investment criteria so it was sold.

Retail Food Group and IVE Group were the worst contributors, both more than halving over the quarter. In our opinion, all they need to do is survive to be worth substantially more than their current share prices. We have been in contact with management of most of our holdings to confirm that they have adequate financial resources and strategies in place.

We invested in some new stocks over the quarter. One of these, Retail Food Group is a multi-brand food and beverage franchiser. While the share price has been volatile, in our opinion, it has the financial resources to survive the COVID-19 disruption and will be an excellent performer in the long-run. The others we are still building a position in and will talk more in due course, but suffice to say they are businesses that are both trading strongly in current environment, have attractive longer-term opportunities and the recent sell-off has given improved entry points – a nice trifecta in our view.

Our disappointment regarding March quarter performance is countered by our excitement about the potential future performance. Many of our companies are, in our opinion, at crazy low prices and only need to survive to double or triple. We have been selectively accumulating during panic selling.